[miningmx.com] — NO SHAREHOLDER should have to attend an AGM to question the board of directors on whether the company actually has physical and legal ownership of its operating assets. But such was the lot of Luigi Barberini, a minority shareholder in Good Hope Diamonds (GHD). Earlier this month at GHD’s AGM in Sandton, Barberini asked the board whether the company actually owned the Loxton and Frank Smith diamond mines.
Unfortunately, Barberini never received the full explanation his simple – but very pertinent – enquiry deserved. After being told the mines belonged to GHD he was advised by Hilda Podlas, a representative of GHD’s majority shareholder – Sky Channel Development – that the AGM was “not the forum to decide who owns the mines”.
If a meeting of shareholders isn’t the forum to raise critical corporate questions then one wonders what exactly Podlas would regard as an appropriate forum? After all, Barberini’s enquiry was more than warranted because GHD – which readers may remember was built on the old Oakfields shell – has been a ball of confusion over the past few years.
Roughly four years ago, Sky Channel Development acquired the Frank Smith and Loxton mines – housed in Diamond Land Mining (DLM) – from the Regal Foundation for R36m. Sky aimed to vend both mines into the Oakfields shell in a R100m deal, settled by the issue of new scrip at 100c/share. However, Regal never received the agreed cash settlement of R36m and consequently took legal action with related party Anglo South African Consolidated Diamond Investments, applying for the liquidation of DLM over an outstanding loan of R13.8m.
They remain unshaken in their belief that ownership resides within GHD
Matters then became a little murky. GHD claimed it had “unbundled” the mining assets (initially held in a holding company called Don Diamonds & Estates) out of DLM. But the unbundling ploy was shot down in the High Court in Cape Town when Judge Surita Snyders ruled the alleged agreements that gave rise to the transfer of shares in Don Diamonds & Estates were “simulated transactions concluded in fraud of creditors”.
The matter seemed fairly cut and dry when Judge Snyders deemed the transfer of shares legally impossible and slammed GHD CEO Emmanuel Cambouris’s explanations as “opportunistic, superficial, unconvincing and far-fetched”.
GHD initially appeared to accede to the court ruling. In May 2006, GHD confirmed DLM had been placed into liquidation as a result of the claim by Anglo SA Consolidated.
The advisory to shareholders read: “The judgment has transferred ownership of Don and GHD&E to DLM, which effectively removes from Good Hope control and ownership of the company’s major assets.”
But Sky also hinted at settling up with the Regal Foundation for the acquisition of the Frank Smith and Loxton Mines – a development Sky reckoned would see DLM “taken out of liquidation, thereby effectively restoring ownership and control of the company’s major assets to GHD”.
However, the hinted settlement was never made to the Regal Foundation.
But one presumed the Regal Foundation would be first in the queue for the proceeds from a proposed transaction in 2008 to sell the Loxton and Frank Smith mines to Irish miner KMG Diamond Resources. But the proposed deal with KMG fell through last month (not terribly surprising, considering the state of the diamond market and the plethora of funding options).
It appears the failed sale of the mines seems to have reignited tensions about the ownership of the Loxton and Frank Smith mines.
GHD’s latest annual report notes the group continues to be dependent on the support of a shareholder and director (CEO Cambouris) in the form of Agglomerate Investments to fund its working capital. Where Agglomerate comes from is anyone’s guess, as the last time we looked a shareholder and director (again Cambouris) was providing the working capital via the El Shaddai Trust.
If working capital is being provided to GHD it certainly suggests the company is maintaining its claim on ownership of the Loxton and Frank Smith mines. What’s more, the annual report also states majority shareholder – Sky Channel Development- has decided to recapitalise GHD “in order to provide sufficient finance to allow the mining subsidiaries to commence full-scale mining operations”.
Either Sky is completely deluded or we’re missing some key facts with regard to legal developments at GHD.
Bowman Gilfillan’s James McKinnell – who represents the Regal Foundation, Anglo and the liquidators of DLM – says the ownership of the Loxton and Frank Smith mines isn’t open to debate. He stresses both mines – housed under DLM – are owned by and in the possession of the liquidators of DLM.
KMG Diamond Resources also said recently that when negotiations to buy the mines fell through, the “keys” to both were handed to the liquidator. Strange, then, that GHD’s annual report makes mention of a settlement agreement – dated June 2007 – claiming all litigation had been suspended.
McKinnell notes it’s correct an overarching settlement agreement was reached between the parties in June 2007. But although the agreement was made a court order he says various parties – including GHD – breached the settlement in the September 2007 agreement, resulting in further execution and attachments.
While admitting that not all details of the settlement agreement have yet been fulfilled, Cambouris wrote that the settlement – together with the settlement of all other group creditors – will be made within the next few weeks. But the report by Cambouris doesn’t mention the claims of Anglo, Regal or the liquidators – which might be deemed a tad disconcerting considering those collectively top R45m.
Cambouris also wrote that in July 2007 the group’s subsidiaries, Don Diamonds and Good Hope Diamonds and Estates (the owners of the Loxton and Frank Smith mines) respectively entered into mining leases with Agglomerate Investments. Agglomerate was identified as the “new financier of the mining companies” even though it seems Agglomerate – of which Cambouris is a director – looks suspiciously like the old arrangement with the El Shaddai Trust (in which Cambouris was also a director).
What’s also striking about the emergence of Agglomerate is that High Court papers filed in December 2008 show Sky’s Podlas deposed an affidavit on behalf of El Shaddai claiming that El Shaddai was funding the mines. The affidavit also claimed El Shaddai was owed in excess of R55m.
The annual report claims GHD is already in debt to Agglomerate to the tune of R42,6m – an amount secured by up to R25m by mortgages over the group’s properties and mining equipment. Interest paid by GHD to Agglomerate is already more than R5m, but exactly how profitably the loan funding is being applied is debatable, with diamond production hardly at what one might deem commercial levels.
Who owns what?
In light of the funding claims, Barberini – who represents a handful of minority shareholders – is determined to find out whether the JSE has been advised the companies cited in the annual report are actually under the control of the liquidators of DLM.
Liquidator Chris van Zyl, of Progressive Administration, says the mines are legally owned by DLM. “On 17 December I went up to the mines and installed our own security guards on the premises.”
Podlas – who is well known as a charismatic evangelist – remains unshaken in her belief that ownership of the mines resides within GHD. She told shareholders: “If they wish to bring court action, as has been done, these will be vigorously defended and Agglomerate Investments has leases up to the year 2012. So, legally, Agglomerate Investments is in control of the mines.”
The proposed agreement with potential buyer KMG Diamond Resources had made no mention of the purported leases – which surely would have been material to its buying the mines?
Podlas also dangled a carrot to shareholders, suggesting to the AGM that Sky was set to invest R100m into GHD. It might be worth pointing out that an investment of R100m into two small diamond mines sounds excessive in the current dour diamond market – being roughly equivalent to 80% of well-known diamond group Trans Hex’s market capitalisation.
Podlas continued: “The old creditor has been settled in full and guarantees are being issued to the benefit of everybody in GHD. The money (R100m) has been raised and these people (Barberini) are just trying to break the company.”
Referring to the purported settlement agreement, Cambouris said the court order was settled unbeknown to him (Barberini). “We’re now fighting the court case against (liquidator) Van Zyl and Regal Foundation attorney McKinnell. And we will win. We had undisturbed possession of the mine for five and a half years and a lot of the minorities know about it.”
McKinnell was taken aback by Cambouris’s claims. “There are currently no proceedings relating to possession of the mines. The only extant proceedings are for the winding up of GHD.”
While the travails of GHD are amusing (in a surreal sort of way) there are minority shareholders who stand to lose substantial investments if matters aren’t straightened out pronto. Gut feel is that Sky Channel Development’s claims of ownership and fresh investment are (to borrow from Judge Snyders’s earlier judgment) opportunistic, superficial, unconvincing and far-fetched.
The JSE – which has suspended GHD’s shares – probably can’t do much more. But perhaps GHD’s sponsoring brokers – Arcay Moela – need to step up to the plate to help shareholders sift fact from fiction.
