SINGAPORE (Nov 5): For more than two years, ISR Capital has attracted intense scrutiny from regulators and unflattering media headlines in its bid to acquire a stake in a rare-earth mining asset in Madagascar. Following the go-ahead from the Singapore Exchange, the deal was approved unanimously by shareholders present at an extraordinary general meeting on Oct 30.
ISR will now have to obtain renewal of the licence held by Tantalum Rare Earth Malagasy (TREM) for the exploration of a Madagascar concession. Only then can ISR go ahead and pay $3 million for a 60% stake in Tantalum Holdings (Mauritius) (THM), which fully owns TREM. ISR will pay for this acquisition by issuing 747.3 million new shares at 0.4 cent each to REO Magnetic, the vendor. Even if renewed, the exploration licence will need to be converted into a mining licence before actual production can begin.
Of some 20 attendees at the EGM, just one, Bonaventure Lim, a 54-year-old retiree, had questions for the board led by executive chairman Chen Tong. Lim asked: When can ISR expect earnings to roll in?
Chen’s interpreter at the EGM translated part of his reply as follows: “When we [have] got the mining licence, we can go into immediate production. This is unlike [an] iron ore or coal mine, where it might need three years of construction. For rare earths, the technology is very fast, once the licence is in place. So, the plan is in three years’ time, we should be profitable.”
On Oct 31, however, ISR clarified that Chen had instead meant that the acquisition would be able to achieve “certain milestones” within three years, subject to licence renewal and other conditions.
The mistranslation could be just a hiccup, but some questions remain. For example, under the original 2016 terms of the acquisition, ISR was to pay $40 million for the same 60% stake in THM. REO is now willing to sell at just $3 million. By selling at this price, REO is making a loss. It bought the stake from Tantalus Rare Earths (TRE) — which, according to its website, was listed on the Dusseldorf Stock Exchange until May last year — for €3.7 million cash in August 2016.
Upon completion of the deal, REO will own some 19% of ISR’s enlarged share capital. From the time the deal was first announced, REO’s shareholder composition has changed. Are all parties on the same page?
Penny stock mastermind
ISR first announced the THM deal on May 20, 2016 — less than two weeks after Australian David Rigoll bought a 28.5% stake in ISR at 0.5 cent apiece from Value Capital Asset Management, which has an ongoing convertible bond lending arrangement with ISR. Rigoll was introduced by Poon Seng Fatt, who runs VCAM. Poon, following a series of conversions, is currently ISR’s largest shareholder, with a 13.5% stake.
Before REO, THM was owned by TRE, where Rigoll was previously an executive director and substantial shareholder. Upon taking the stake in ISR, Rigoll became its non-executive director on May 16, 2016 and, a month later, re-designated as executive director.
To support the acquisition, ISR released two valuation reports — one in July and another in October 2016. Both reports valued the Madagascar asset at more than US$1 billion. From the time ISR announced the deal in May, the shares started surging. By its peak in October 2016, the company’s share price had gained some 4,900% since the start of the year, giving a company with essentially no operating business nor significant assets a market value well over $500 million. As the share price surged, ISR drew a series of queries from SGX, which, among others, questioned the validity of the two valuation reports.
The music finally stopped on Nov 24, 2016, when John Soh Chee Wen, the alleged penny stock saga mastermind, was arrested. Later that day, ISR shares slid and, within two hours, had crashed by half. Besides the three penny stocks — Blumont Corp, LionGold Corp and Asiasons Capital (renamed Attilan Group) — prosecutors alleged that Soh manipulated ISR shares too.
Quah Su-Yin, then CEO of ISR, denied any links to the penny stock saga except that she was the sister of Quah Su-Ling, Soh’s alleged co-conspirator. According to court documents, a trading account used to manipulate the shares belongs to Chan Sing En, former CEO of ISR subsidiary Dynamic Return (Singapore). The stock was suspended by SGX and, when trading resumed in March 2017, the share price plummeted to less than a cent. Rigoll quit and later sold most of his shares.
Chen, who took on the role of executive chairman three days before the crash, pressed ahead with the acquisition. A third valuation report was commissioned and Behre Dolbear, which produced the report, assessed that the Madagascar asset was worth just US$44.5 million — a pale shadow of the more than US$1 billion valuation given by the two earlier Australian mining consultants, who were later suspended temporarily by their industry association.
Chen, who invested in ISR via a placement, increased his stake significantly via open market purchases. With 11.2%, he is now the second-largest shareholder of ISR.
Now, even with SGX’s approval in principle and shareholders’ go-ahead, it is not a given that ISR shareholders will enjoy returns from mining rare earths such as tantalum, which is in demand as a crucial material used to build electronic devices. For one, the acquisition requires Madagascar’s government to renew the exploration permit for TREM. Chen, speaking to The Edge Singapore after the Oct 30 EGM, explains that if the licence is not granted, the company will then explore “next steps”.
Chen maintains that while it takes time for the asset to go into full production, it will be cheaper than buying an existing asset in production. “The purpose is to explore the potential of the project and the kind of resources it [has],” he says.
REO collection
The acquisition of THM, which will be paid via new ISR shares, will dilute the existing stakes of ISR shareholders — including Chen himself. Based on current terms of the deal, REO shareholders will collectively become the controlling shareholder of ISR.
Incidentally, since May 2016, when the deal was first announced, the composition of REO’s shareholders has changed. According to a July 2016 SGX filing by ISR, REO used to have 12 shareholders. Its sole director, Jonathan Lim, held the majority 38.1% stake, as The Edge Singapore reported in June 2016.
According to REO’s Oct 31 Accounting and Corporate Regulatory Authority filing, Lim remains its director, but his stake has dropped to just 11.2% (see chart). The total number of shareholders has grown to 21. Instead of Lim, the single-largest REO shareholder now is a Singapore company called Universal Coal Resources, which holds 24.1%. According to ACRA filings, Universal Coal’s sole shareholder is an Indonesian, Boelio Muliadi. REO’s second-largest shareholder is an Irish national called Barry John Richard O’Connell, who owns 23.2%.
Now, even though Rigoll has distanced himself from the deal, an entity that used to own the second-largest stake in TRE after him has surfaced in REO. The third-largest shareholder of REO, with 15.8%, is a Luxembourg company called Penham SARL. This entity is also cited in the 2014 and 2015 consolidated financial reports of TRE as a major shareholder. In the report for FY2014 ended Dec 31, Penham is indicated to own 27.1% of TRE, while Hong Kong company Aston Nash, an entity in which Rigoll was “direct majority ow-ner”, held 33.7%.
Likewise, the FY2015 report indicates that Penham owned 24.82% of TRE. That year, Aston Nash owned 30.9% of TRE. The FY2015 report does not indicate whether Rigoll was still a shareholder of Aston Nash, though. The Edge Singapore was unable to determine whether Penham and Aston Nash are still TRE shareholders. A filing with the Hong Kong companies registry indicates that Aston Nash ceased to exist in March 2017.
According to a filing on the Luxembourg Trade and Companies Register, Penham acquired its REO stake in 2016 by selling 362,600 shares in TRE for 2.2 million REO shares. A Sept 26 filing indicates that Penham has been merged with its sole shareholder, another Luxembourg entity called Partners.
Asked about this issue, Chen says he does not know who the beneficial owner of Penham is. Vincent Lee, ISR’s financial controller, says Rigoll had been asked in June 2016 whether there were any relations, but he did not disclose anything further. “We wanted to get a shareholder list [of] TRE, but were informed by TRE that they wouldn’t be able to pass us the list,” Lee adds.
Another name that has emerged in REO’s shareholder list is lawyer Tan Poh Chye Allan, a former partner at Virtus Law. Tan, who holds 4.46% of REO, is an independent director at CNMC Goldmine Holdings and Nico Steel Holdings. In June 2016, Virtus became ISR’s legal counsel. Tan advised ISR on the THM acquisition.
In its Oct 15 circular, ISR says it was aware that Virtus had also acted for REO in its purchase of the THM stake from TRE. In fact, Virtus told ISR that REO had “specifically allowed” it to act for ISR, the circular notes. Tan became a member of REO in March 2017, when ISR no longer engaged Virtus. In its circular, ISR states it does not know who sold the REO shares to Tan.
Rigoll and Tan are not the only individuals with multiple roles in the whole episode. In May 2016, an entity called Empire Capital Partners was engaged by ISR to advise the acquisition of THM. Its directors include Tim Morrison and Ashley Paul D’Sylva. After ISR was queried by SGX, Morrison was found to be also a director of REO, the seller, thereby setting up a potential conflict of interest. ISR did not renew its appointment of ECP. Morrison quit REO as director on Aug 10. Interestingly, Morrison and Paul D’Sylva are shareholders of REO via an entity called Plengkung Capital, which owns a 2.4% stake.
Chen remains unfazed by the motley group of REO shareholders who are poised to gain a controlling stake in ISR. “I believe that what is presented with the board of directors now — the next steps, what we intend to do, the development — will be in the best interest of all the shareholders,” he says.
This story appears in The Edge Singapore (Issue 855, week of Nov 5) which is on sale now. Subscribe here
