SM1, page-405

On reflection my post above wasnt very helpful. The court action is very technical and dull so I will leave it to that other thread for interested posters to look at the specific issues in depth over there.

However, it does explain why the SP is in the doldrums and why this is currently a very high risk stock. I'l try to summarize briefly the problems which came out of the Supreme Court hearing on this thread as it relates to SML as a whole, rather than the technicalities.

Firstly the issue of "reckless" conduct by Synlait CEO Clements was raised by Synlaits counsel. They say he wasn't. I disagree. By seeking advice Clements knew the covenant was problematic. Knowing it was problematic he decided to proceed with the build in total disregard of the known covenant obligations. He did it purely for commercial reasons. And most importantly he failed to get a second opinion. I am now taking bets, on the basis that Synlait loose, that Clements will be gone by Christmas. Losing a CEO is not good for an SP. (Clements, and the Auditors have also said they do not see any material impact on the accounts coming from this covenant issue - if they are wrong I don't see how he could possibly keep his job)

Secondly the Supreme Court judges appeared to be unmoved by the "new" evidence - that is Synlaits offer to not hinder, and indeed support Mr Ye in any resource consent application he may make. This helps explain why the agreement often touted by Clements has not come to pass. If the Supreme Court is unmoved, then why should Mr Ye be. Clements confidence in securing an agreement is totally misplaced and misguided.

Thirdly a Supreme Court Judge showed his level of thinking. He asked why Synlait could not dismantle the plant that is on the covented land and build elsewhere on the site. (The answer appears to be it is impracticable to do so as the land is too steep). This signals there are options (including dismantling) to assure compliance with a covenant. (That said, while dismantling the boilers does appear to be an option - which would essentially close the whole plant, I don't think it will come to this).

In addition one of the judges was clever enough to think about the dust issue - and what impact a quarry may have on processing. Fonterrra and Danone was raised (as an example of contamination) so this may help explain the delay in getting audit sign off. (The auditors will really need to look at dust contamination remediation management very, very carefully). Also worth noting that Yashili wernt particularly bothered by dust.

Fourthly is the issue of compensation. This has now been ratcheted up, in my estimates 10 fold. I am on record saying I reckon, on an objective basis, the sum of $10m is what was on the table when Mr Ye was trying to settle with Stonehill. Now that Synlait are "filling Stonhills shoes" the compensation issue now falls on their shoulders, not Stonhills. This is a whole new kettle of fish. I don't yet have the data to form an objective view but a quick back of the envelope assessment could put compensation closer to $50m

I don't think the oral hearing went at all well for Synlait - their Counsel was even told off for essentially wasting time.

There is no way SML could currently be considered a "Buy". It is a very risky "hold". A "sell" is a much more rational position at the moment until the covenant issue is settled - which I don't think it will be even after the Supreme Court decision comes out.