The Great Iron Ore Swindle

There’s an old adage about taxi drivers and share tips. When the talk of potential sharemarket gains overwhelms the stench of B.O. in a taxi, it’s a sign market madness has taken hold - every idiot thinking he’s certain to make bank, signals it’s time to run.

That level of stupid isn’t readily apparent at the moment; well, unless you’re a local shareholder in Brockman Resources. Brockman is a Western Australian mining company subject to a hostile takeover, from, wait for it - a bunch of taxi drivers. For Brockman, the ignominy doesn’t end there, while their Hong Kong taxi-driving-suitors forget the lube and pound away, Brockman looks for help and finds no one in Australia gives a damn.

It doesn’t take much to get shareholders in junior mining companies frothing at the mouth. A mention of “the Chinese” is usually the tonic that sends share market forums into overdrive. With fortunes made on the back of Chinese deals over the past decade, shareholders find themselves hoping “the Chinese” will ask their company to dance. There’s some legitimacy it brings; no longer will the company just be a pile of dirt in a godforsaken 45 degree shithole. With a Chinaman sniffing around, it feels like that dirt might actually go somewhere.

For Brockman, a junior iron ore explorer, that sense of legitimacy came in early 2009. Brockman was recovering from the arse whipping its share price had taken in the midst of the financial crisis. It had fallen from an intra-day peak of $3.21, off the back of announcing a 1.1 billion tonne resource in March 2008, to an intra-day low of 40 cents in November later that year. By January 19 2009, it had climbed back to 90 cents. That same day, a limousine and airport shuttle company, known as Wah Nam International, began buying a stake in Brockman.

Vulnerable was an apt description of Brockman at the time. In what now seems like a move of ultra-genius, only seven months earlier the board raised $112.5 million in an oversubscribed share placement to fund development of its Marillana mine. If it was your only reference point, you might assume Satan himself had missed a taste of that action and decided to exact some revenge – from the time of the placement, Brockman, and the wider all ordinaries, plummeted. Brockman lost over 80% of its value, the all-ords nearly 40%.

To highlight how ridiculously fucking insane investor psychology can get during a market panic, Brockman found its market capitalisation lower than the cash it had in the bank. In fact, at one stage, the company was a mere two cents away from being worth 50% less than its cash reserves. Shareholders, at least the ones venting on share market forums, were going ballistic – to the negative and positive. Those still in control of their faculties saw the deal of a lifetime. It was essentially a two-for-one sale – how often do you get to buy a share that’s backed to twice its value in cash? If the company was broken up, you get paid out double the amount of the share. A completely ridiculous idea that would never happen, but of course, to some, this was the preferred option – break up the company. The world was imploding, zombie hordes would soon rise up and they’d need the cash to buy guns and a shitload of baked beans.

As tasty as Brockman appeared in late 2008, there was a collective lack of appetite as the financial world lost control of its bowel function.  However, there were exceptions.  Oil executive, Wong Sio Kuan, was a guy with a tighter sphincter than most. Through the auspices of his former company, Yencon, Wong started buying Brockman, just before its lowest ebb, in October 2008. Wong got so hog-wild over Brockman he then started buying in his own name. Going so far, that between himself and Yencon, he’d breached the substantial shareholding limit of 5% by January 2009 - and without ever issuing notice of the combined holdings. Wong later transferred Yencon to his sister and sold his shares, but got back into the Brockman business, mid that year, through another company named Platinum. Ten days after Wong’s initial breach, Wah Nam started buying.

Wah Nam is a curious case. If you were thinking of a predator, you might assume strength, power, maybe a leader – even being successful at something would be a bonus. Wah Nam is none of these things. It’s dabbled in plastics and electrical manufacturing, and before its latest reimagining as a part mining company/part airport taxi service, it was a toll road operator. Oh, and it hasn’t turned a profit since 2006.  In the most knee-slapping detail of all, Wah Nam also owns a copper mine in China – but they haven’t been able to operate it lately because the government has re-directed their electricity! However, Wah Nam is successful at one thing – raising capital. It has repeatedly issued shares and convertible notes over the past few years and it’s not backward in screaming about its ability to do so.

Despite Wah Nam’s ongoing loss-making ventures, one of its selling points to Brockman shareholders is the ability to raise cash in Hong Kong to fund the development of a rail line to the Marillana mine. This sounds fantastic, if you ignore the billions of shares Wah Nam already has on issue and the further billions of shares Wah Nam will need to issue to compensate Brockman shareholders. That’s right, if I forgot to mention it up to this point, Wah Nam isn’t offering a cent to buy Brockman – they’re issuing more shares. And the current value of Wah Nam’s share price is hugely inflated by its stake in Brockman and their other takeover target, FerrAus.

Admittedly this is nothing strange, but usually if company were offering its shares as part of a takeover, those shares would want to have some appeal. Wah Nam bought Brockman cheap; Brockman management quadrupled the Brockman share price which in turn increased the value of Wah Nam. Now it’s essentially saying, “my shares have doubled in value as a result of owning 20% of your company; I’m now going to issue a shittonne more of my shares to buy the rest of yours.” Only a total goober could fall for it.

Now how did Wah Nam manage to buy a stake in Brockman? In 2008 they were compensated by Hangzhou City in China, in relation to the end of their toll road business. While there’s no indication this funded their initial foray into Brockman (it can only be assumed), the roots of their next purchase were clear – they raised capital, of course. Immediately before its second and third raid on Brockman, Wah Nam raised capital through share placements to virtually anonymous entities. One named Parklane International (although the name Parklane does relate to Wah Nam’s limousine business), and the other, the appropriately named, Gracious Fortune. 

Not that any of this appeared to bother the Brockman board. Managing Director, Wayne Richards, noted the arrival of Wah Nam’s first substantial shareholder filing with glee. He released a statement to the ASX, which included the fact Brockman had met with Wah Nam during visits to China over that past year. The celebratory release, noting Wah Nam as a ‘Hong Kong based investment group’, underlined the legitimacy Brockman was craving. Brockman was like the fat chick who’d finally turned a man’s head and despite that man’s faults, she wanted to trumpet the good news.

While having substantial deposits of iron ore – ore that could possibly have made Brockman Australia’s 4th biggest iron ore producer – its Marilana project was often derided as being low grade waste. At 43% Fe (iron), companies like BHP and Rio Tinto would rather spend their time mining massive piles of dogshit in the hope of finding some yet discovered mineral than bother with such a low grade ore body. The fact that Brockman spent so long wide open to attack from BHP, Rio Tinto or Fortescue and none of them swooped, only underlined the lack of appeal.  

The saving grace was a process known as beneficiation, in short, sorting the wheat from the chaff. This process showed Brockman could upgrade its ore to a grade more palatable to an off-take partner. By September 2010, Brockman had delivered a definitive feasibility study showing an ability to produce 17 million tonnes per annum at higher than 60.5% Fe. It looked great, but it was a stranded resource without transportation to port. That same month, Brockman MD, Wayne Richards, disposed of one million of his shares to Wah Nam, seemingly oblivious to the coming storm. If Richards couldn’t see it, some shareholders clearly could. The speculation on the forums suggested there was a takeover in the wind. Wah Nam wanted in and was about to reveal it had been tickling Brockman’s balls with one hand, while getting ready to punch it in the face with the other.

Anyone with an interest in investor psychology could hardly find a better study point than share market forums. Sure, in the present they might appear crazy and unhinged, with a lot of people speculating on ‘what ifs’. That’s not to dismiss the genuine research and work many posters engage in, but even the most informed can be prone to manic depressive swings based on the fortunes of their share portfolios. And this is what makes them a psychological gold mine.

A comparison of Brockman’s 2008 share price destruction against concurrent discussion on several forums is a window into the torment a mind can face as asset values fall. When perceived value is poolside in Hawaii and current value is under sustained mortar fire in Afghanistan, Yemen begins to look a halfway good proposition. Similarly as information about a company and its apparent value continues to flow, shareholders revise their expectations upwards – the current price might look Hyundai Getz, but the potential value says Mercedes SLK, meaning shareholders would be filthy if they drove away in anything less than a Toyota Celica.

So when Wah Nam launched all script bids for Brockman and fellow stranded junior FerrAus in November 2010, the response from Brockman shareholders was, “who are these idiots kidding?” Quick calculations showed Brockman’s $4 share price was 80% undervalued against the potential of the Marillana project – albeit still a stranded deposit without a choo-choo ride to port. The sniggering was relentless, only a reprobate devoid of his senses could accept this offer. It would blow over and Brockman’s board would continue unabated. That was until early January, when Brockman shareholders found out what Brockman’s management already knew – shit had gotten real. Wah Nam had formed a beachhead and were preparing to strike.

In a submission to the Australian Government Takeovers Panel, Brockman alleged a conspiracy by Wah Nam and its ‘associates’ to warehouse shares.  At the time the takeover was launched, Wah Nam held 22.63% of Brockman; it clearly couldn’t continue to creep that number up without raising suspicion. Having a group of associates buy on its behalf in anticipation of a takeover would seem a pretty useful way to subvert any restrictions. Even better, those shares could be tipped straight into the takeover making it appear there was a groundswell of support.

The investigation revealed there was another 17.25% being held by a group of offshore investors, all with a large or small connection to Wah Nam. The great majority, including the previously mentioned Mr Wong, all happened to be using the same address at 7500A Beach Road, Singapore. The most eye-raising of these associates happened to be China’s number one ranked golfer, Liang Wenchong. Despite his sharp golf game, Liang’s memory couldn’t be considered on the same level. He couldn’t remember if he’d played golf with Wah Nam Chairman, Peter Luk, yet could remember playing with Mr Wong and another associate. Liang, a state trained golfer, was equally vague on why he invested in Brockman – despite mortgaging a family property to buy nearly 3% of the company. It appeared an obscene amount of risk to take on, especially as Liang’s stake constituted his whole share portfolio.

While the board found no unacceptable circumstances, despite a myriad of weirdo links and coincidences, it did note, “there may be new circumstances if some or all of the shareholders identified in the application accept Wah Nam's bid such that it enables further inferences to be drawn and they support an association.” This was the snooker clause. While a whole scheme appeared in place to warehouse and transfer shares into the bid, this seemingly rendered that scheme useless. There was cautious optimism from Brockman shareholders. Wah Nam continued to extend the takeover - without any acceptances – and continued to look retarded in doing so. Well, that’s if you thought this snooker clause was actually going to work.

From December 2010 till early March 2011, trade in Brockman’s shares was virtually negligible. In that whole time there was only one day when volume surpassed 500,000 shares. On a significant number of days, the trade didn’t breach 100,000 shares. Brockman had become a cemetery of uncertainly, but what would you do if your cunning plan was dealt a blow from a toothless government panel that you had nothing but contempt for? Drop your pants and moon the fuck out of it, of course.

On March 4, trade spiked up, then again the next day and the day after that. For the first time in four months, Brockman traded more than a million shares in a day. In this March period of abnormal trading Brockman churned through 7.58 million shares, before suddenly dropping back to a 9063 shares being traded in a day. On April 1, things kicked off again. Over a nine day trading period, 16.62 million shares changed hands. When this period stopped, the next trading day was 39,634 shares. The combined total of shares traded during these unusually high volume periods? 24.2 million. Coincidently, when Brockman approached the Takeover Panel, Wah Nam’s associates held a total of 25.4 million shares. 25.4 million shares, that if accepted into Wah Nam’s takeover bid, would illustrate these guys were in cahoots.

What’s the next move if those associates had laundered their seemingly snookered shares to new entities? Those new entities immediately start accepting the takeover. Beginning on the last day of the trading spike, acceptances began to roll in. Wah Nam’s 22.63% stake in Brockman has increased to 45.39% and virtually all of those acceptances have washed in from offshore – a measly 0.12% of Australian shareholders had accepted the takeover. Yet you wouldn’t know it listening to Wah Nam honcho, Peter Luk, “I am especially encouraged to see that a broad section of shareholders are responding positively to our offer now it has gone unconditional…” I won’t let the arrogance continue, see in Pete’s mind, a ‘broad section’ equals Singapore and Hong Kong and that ‘positive response’ he speaks of is little more than an orchestrated campaign to dispirit local shareholders.

At this point, Wah Nam appears to have the numbers to get to 50.1%. They’re now merely fudging around the edges to make their wave of anticipated acceptances look good for the regulatory bodies. No shareholder expects a response from the ASX or the Takeovers Panel, while the suspicion appears this is too complicated and involved for ASIC – it's easier to continue pistol whipping financial advisors who forgot to roll over a client’s term deposit. And that’s the problem; it’s not dealing with a portly and forgetful financial advisor from Bendigo. It’s regulating a relentless entity that spans international borders and one that may have the spectre of something larger behind it, something that wants to shore up a long term supply of an in demand resource – and on its own terms. For regulators dealing with it, it may prove too complicated, too involved and too much of a mess.

The author bought Yilgarn Mining shares in 2007. That company was later renamed Brockman Resources. It afforded him a window to view the ongoing drama.