(Aug 14): The price at which ISR Capital will acquire a major stake in a rare earth mining concession in Madagascar has been slashed by more than 88% to $4.52 million, which is less than what the vendor paid for it in late 2015. And, a third independent valuation of the mining concession, commissioned following queries from the Singapore Exchange, is likely to be “much lower” than the last two valuations.
Did something terrible happen in the rare earth sector? Or, were the first two valuations faulty? Does the reduced price that ISR is now paying have anything to do with a key player in the deal falling out with the company, and its market capitalisation collapsing?
Last year, ISR said it would buy a 60% stake in the rare earth concession in Madagascar for $40 million by issuing new shares at 10 cents each. The vendor of the asset was REO Magnetic, a Singapore company linked to Jonathan Lim Keng Hock, who was in the news recently after claiming a major stake in Alliance Mineral Assets, another locally listed mining company. Interestingly, REO Magnetic had acquired the 60% stake in the rare earth concession only in late 2015 for just €3.7 million ($5.9 million) from a company called Tantalus Rare Earths AG, whose shares traded over-the-counter in Germany.
David Rigoll, a former director of TRE, amassed a major stake in ISR ahead of the listed company’s announcement of plans to acquire the rare earth concession. After Rigoll appeared on the scene, shares in ISR rocketed.
The stock hit a peak of 34 cents in late October, valuing the company at more than $500 million.
On Nov 24, shares in ISR suddenly lost half their value. Trading in the stock was halted and later suspended. On Nov 25, John Soh Chee Wen and two other individuals were charged with orchestrating a massive fraud through the manipulation of shares in Blumont Group, LionGold Corp and Asiasons Capital (now called Attilan Group). Prosecutors later said Soh was involved in the manipulation of shares in ISR too.
Trading in ISR resumed on March 6, and its market value has now shrivelled to $14 million.
The same day ISR shares resumed trading, Rigoll resigned from the board of ISR. He also sold some of his shares. Among the reasons cited for his departure was that ISR had not paid his salary for February.
Amid this turmoil, ISR was dealing with a volley of queries from SGX. Among other things, SGX had flagged that the first valuation report on the rare earth concession, dated July 15, 2016, was done by Geologica Pty Ltd, which is operated by a sole proprietor.
This was against listing rules. This report valued the rare earth concession at US$1.08 billion ($1.47 billion).
ISR then obtained another valuation report, by Al Maynard & Associates and dated Sept 30, 2016, which valued the concession at US$1.1 billion. However, SGX pointed out that the valuation was produced without a site visit and using data that had been provided. SGX also noted that several portions of the Al Maynard report were similar to the one by Geologica.
Yet, ISR did not give up. On April 28, at the company’s annual general meeting, its executive chairman Chen Tong said he was pressing ahead with the acquisition, and that a third valuation report was in the works. On Aug 6, in an announcement addressing a query from SGX on why the price tag for the 60% stake in the Madagascan rare earth concession had been slashed to $4.52 million, ISR provided a glimpse into what is in the third report. “The company has since engaged a third independent valuer who is in the midst of finalising the draft valuation report, which ascribes a much lower fair value to the project in Madagascar,” the company said.
Under the revised terms that were announced on Aug 1, ISR said it will pay REO Magnetic by issuing nearly 674.8 million new shares at 0.67 cent each. ISR currently has just over 2.3 billion shares in issue. This would inflate to just below three billion with the issue of new shares. It would leave REO Magnetic owning 22.6% of ISR’s expanded number of shares. A clause in the new terms of the deal caps the proportion of number of shares to be issued to REO Magnetic at 29% of its total number of shares upon completion of the deal.
As at Aug 10, Rigoll held 389.9 million shares, equivalent to 16.85% of the current outstanding number of shares. That makes him the single-largest shareholder. Once the acquisition is completed on the new terms, his stake will shrink to just over 13% and he will be the second-largest shareholder behind REO Magnetic.
Under the original terms of the deal, where ISR would have issued 400 million new shares to REO Magnetic, Rigoll would still remain the largest shareholder. On July 1, Rigoll’s stake was 28.67%. If the deal had been completed under the original terms, his stake would have been reduced to 22.6%, while REO Magnetic would be a close second with a stake of 21.1% — assuming the share base at the time was enlarged to 1.89 billion following the addition of 400 million new shares.
With the collapse in ISR’s share price, Rigoll’s exit from the board and the imminent release of a new valuation report, it looks like the dynamics of the company’s rare earth deal have changed considerably. Will REO Magnetic’s Lim be the key driver of ISR? Or, is the stage set for a new controlling shareholder to emerge?
This article appears in Issue 792 (Aug 14) of The Edge Singapore which is out this week
