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The mining sector has enough problems of its own without the publicity that BUMI (LSE:BUMI) and Eurasian Natural Resources Corporation (LSE:ENRC) have been providing lately.
BUMI, conceived by Nathaniel Rothschild, has captured more in the way of headlines than in the way of investor confidence in the last 12 months. A very public battle with his partners, the Bakrie family, over operational and management practices has led, not only to Rothschild’s departure, but to investigations of his allegations. Trading of BUMI shares has been suspended on the London exchange whilst it investigates £25 million in missing funds. Internal and independent auditing of the Berau coal mining operation in Borneo has been “unable to fully verify transactions relating to a number of landowner payments.”
Adding insult to injury, the auditors have discovered that there is “not sufficient evidence to support” another £36 million allegedly spent on pre-operational infrastructure improvements. Each of these issues, in and of themselves, are sufficient reason to suspend trading. Exacerbating the problem is the fact, until BUMI can get it’s balance sheet in order, it cannot file its financial results with the LSE, and its shares cannot, therefore, be traded.
ENRC has been unable to keep directors, executives and advisers in place, a sure indication of corporate instability that should be a major concern to investors. It’s not so much that ENRC’s share price has dropped by 6.1% to 271.50 today, as it is that has been in a near-steady decline for the entire past 12 months. Its share price was 568.50 on 01 May 2012.
ENRC is managed by several partners, including three Kazakh oligarchs. Whilst the group stated publicly that it is “committed to a full and transparent investigation of its procedures and conduct,” this scenario is somewhat reminiscent of BP’s recent problems with independently minded oligarchs involved in its major joint venture in Russia.
Now comes the news that Pensions Investment Research Consultants (PIRC) has petitioned Vince Cable for an official investigation into the operations of both BUMI and ENRC. PIRC pulled no punches when it described both companies as being “in the ludicrous position of commissioning investigations into themselves, when the directors of the parent companies themselves may well have cases to answer.”
PIRC said that both companies “fall short of the standard of UK listed companies.” It is calling for suspension of trading of ENRC shares. Yesterday, 25 April, the Serious Fraud Office (SFO), launched a criminal investigation of alleged fraud, bribery, and corruption at ENRC. PIRC noted its concern that ENRC had terminated its law firm just two weeks prior to the law firm’s planned report of its own investigations into £65 million of “potentially fraudulent” payments in Kazakhstan.
PIRC has expressed concerns that go beyond the activities of the two mining groups. It has laid a substantial amount of blame on the LSE itself for “pulling in lower quality companies on a volume and fee driven basis,” claiming that the exchange has been far “too enthusiastic” and not nearly cautious enough when attracting new foreign-controlled companies.
It appears thus far that investigations will be digging up a lot of dirt, which is more than BUMI and ENRC has been bringing out of the ground. This also has the potential of becoming one of the biggest scandals in UK financial history if PIRC pushes the issue of the culpability of the London exchange. It is already pushing for the LSE to bear a portion of the costs of these investigations, saying that the LSE “was responsible for, and profited from, bringing such companies to the London market.”
