Eager to develop, actions at some London-listed mining companies are leaving the door open to corporate governance issues
City fears missing out
Nothing is hotter in mining this year than central Asia with many firms vying to get a piece of the untapped resources in the region.
Firms are springing up around good geology, firms that have been able until recently to list on the London Stock Exchange (LSE) in a move that gives them very good access to capital.
But the “Mongolian gold rush” has played havoc with corporate governance rules. These firms, established quickly to enable rapid access to resources, are not all necessarily managed according to best practice.
One firm that gained a London listing was Eurasian Natural Resources Corporation (ENRC), a Kazakhstan-based producer of metals including iron ore, aluminium and ferrochrome. The UK Listings Authority waived the usual requirement that 25 per cent of total shares be available for purchase when it gave ENRC a listing.
Diamond in the rough
Model: Nathaniel Rothschild
A number of such listings took place, based on the so-called “Rothschild model”, named after Nathaniel Rothschild who used it to take Indonesian miner Bumi public. Whether it was accomplished through a reverse merger (in which a shell company takes over the miner and gives it the qualifications for a listing), or through a different arrangement, the Rothschild idea was to take a diamond in the rough such as Bumi or ENRC and use the imposition of western corporate structure to polish it.
“Reverse mergers or similar procedures speed up the listing process,” says John Auerbach of Ernst & Young. “But they also impose risks. One hazard related to reverse mergers is that many companies that would benefit from the added scrutiny and transparency typical of the pre-IPO experience are not subject to such a process.”
But there was concern at the UK Listing Authority that London might miss out on these listings if the strict criteria were applied, so the authority issued waivers.
But all has not worked out as intended. Under the “Rothschild model”, these companies should have improved corporate governance after being listed. Instead, at Bumi, Rothschild fell into a squabble with the company’s majority owners over corporate governance, and this has led to a dispute in which Rothschild was nearly ousted.
Using the back door
At ENRC, the company was listed in 2008, but in 2011 the owners decided to throw out the three non-executive directors whose job was to protect minority shareholders.
These corporate governance issues have hurt the prestige of the LSE, and the Financial Services Authority (FSA) has come up with proposals to change some of the rules.
Jonathan Angell, of the London law firm Dechert’s securities group, says: “The proposals clarify the FSA’s approach to reverse takeovers. The concern is that reverse takeovers may be used as a ‘back door’ to secure a listing of ?a business which would otherwise be ineligible.
“The FSA will require issuers to contact the FSA as soon as possible after a reverse takeover is agreed or in contemplation.”
Closing that back door to listings, or at least keeping a closer watch on it, can only be good for the London market. And it leaves the door open a fraction of an inch so that such companies can still list when they qualify.
