HK watchdogs stay in dark over mining risks

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Junior mining companies are lining up to join the Hong Kong stock exchange, but whether the bourse is ready for them is another issue. The overriding motivation to seek a Hong Kong listing is that it is a proxy for China and its seemingly inexhaustible resources needs. A second reason is that Hong Kong is sparsely populated in terms of mining companies – only about 15 have listed there – which makes it easier to stand out than on more crowded Canadian or Australian exchanges.

Indeed, Asian funds are diversifying their holdings and have rewarded Hong Kong mining listings with high valuations. The exchange is keen not to miss out on miners’ interest at a time when its regular IPO clients, notably Chinese property developers, are struggling in anticipation of further monetary tightening. Hong Kong is already playing catch-up to Shanghai in the gold futures market. But the flip side for the exchange is launching into uncharted waters by waiving its normal listing requirements and welcoming explorers that often have little history, let alone any earnings. Rating such companies is difficult. As Matthew Wood, an Australian venture capitalist, notes: “Hong Kong is an extremely mature financial centre but doesn’t have a whole lot of people with a real understanding of resources.” Risk-taking is inherent in the mining world, but perhaps not for Hong Kong regulators.

Waiver leaves bitter taste

The infinite variation of coffee orders (“double-shot, half-decaf, skinny mocha latte to go” and so on) is an abhorrent American innovation. But US coffee chains, in their wisdom, have decided that such tailored service is worth providing. You can bet, however, if other coffee-drinkers were inconvenienced by choosy customers’ complicated requirements, Starbucks and its rivals would switch to a “no substitution, no variation” menu pretty swiftly.

For roughly the same reason, British shareholders in Bradford & Bingley, the UK bank, are right to raise objections to the bespoke investment terms being offered to TPG Capital, the US private equity group. TPG stands to receive a 23 per cent stake in B&B, which shocked London markets last week by scrapping its original rights issue, making a profit warning and announcing the TPG placing and a new capital-raising at a lower price.

The TPG investment already flouts UK guidelines on pre-emption rights that protect existing shareholders from forced dilution when large stakes are placed with outside investors. Now it has become clear that TPG has won special protection from dilution if B&B raises additional capital from an external investor in future.

The alternative to the package deal organised for B&B was dire – which is why shareholders are certain to hold their noses and vote in favour of the capital-raising at next month’s shareholder meeting. The bank’s chief executive was forced to step down because of ill health and its ropey systems only revealed steeply rising losses from mortgage arrears after the original rights issue was launched.

But it still offends natural justice that TPG negotiated the same protection that B&B more or less waived for its existing shareholders when it agreed to sell shares direct to the American group. It makes the precedent all the more worrying.

Who will blink first?

The stakes are high and neither EDF nor British Energy is blinking. But someone will eventually have to show their cards if Britain’s nuclear future is not to be compromised. The French state-controlled electricity behemoth appears to be the only credible bidder left for British Energy. Spain’s Iberdrola finally admitted Thursday it was not interested. Suez has pulled out long ago. And only Germany’s RWE is keeping quiet about its intentions. However, its chances have been severely damaged by the withdrawal of its Swedish bid partner.

EDF made its all-cash offer early last month just north of 680p according to market sources. But this week British Energy appeared to reject it as too low by suggesting the bids it had received were less than its current share price of 735p.

The question is whether EDF is now prepared to sweeten its offer a bit, or will walk away. The French group seems determined not to be the one that blinks first, and has been sending strong signals it does not intend to increase what it considers a full and fair offer.

So in the face of British Energy’s recent comments, there appears to be little other possible outcome than the deal collapsing. But is this only the usual bluff and counterbluff process of corporate auctions? If the deal does ultimately fall apart, it is hard to see who would be the winner.

Under the circumstances, it seems a good bet that a compromise on the price will have to be reached between the two sides.

world.view@ft.com

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