In part 2 of today's look at Global Green Tech (0274), we'll show you how it bought a gold mine for 5.83 times what an AIM-traded company sold it for 3 months earlier, and that one of the middlemen also controls miner Lumena Resources (0067), so we take a look at that too.

Global Green Tech goes mining
25 May 2010

We continue to examine the dealings of Global Green Tech Group Ltd (GGT, 0274), following our article today, Cosmetic Appearances. We'll show you how GGT bought a gold mine for 5.83 times what an AIM-traded company sold it for 3 months earlier, and that one of the middlemen also controls miner Lumena Resources Corp (Lumena, 0067).

Westralian Resources

On 25-Sep-2009, the shareholdings of Mr R D Lau (21.97%) Mr Choi (4.09%) and Jim Lau (0.18%) in GGT were all acquired by Double Chance Investments Ltd (Double Chance) at a total cost of HK$80m, or $0.140586 per share, which was a 51.5% discount to market. All of the directors of GGT resigned on the same date, proving that you can take control of a company with less than 30%; just 26.24% in this case. The announcement did not say who owns Double Chance. Disclosure of interest filings show that Double Chance is owned 49% by a Li Yongqiang (not to be confused with INED Li Yongxiang) and 51% by Chen Ganqiao. We know nothing about them and, unusually for such large shareholders, they did not join the board. We also note that their interests in the shares were not included in the 2009 annual report as they should have been. Given their apparent disinterest in running the company, we can't help wondering whether they are just nominees for someone else.

Now under new management, GGT's most recent acquisition is Westralian Resources Pty Ltd (Westralian), incorporated in Australia on 26-Nov-2003. It owns 80% of a Sino-foreign co-operative joint venture called Hunan Westralian Mining Co Ltd, established on 6-Jul-2005, which owns gold mines located at Guangzhuang Township, Yuanling County, Hunan Province.

On 1-Dec-2009, supplemented on 9-Dec-2009, GGT agreed to buy Westralian from Cosmos Castle Management Ltd (Cosmos, BVI), for HK$1,200m in shares and convertible bonds, based on a preliminary valuation of the mines from BMI Appraisals Ltd, which has featured in our articles before. The vendor, Cosmos, was owned by "seven corporate shareholders" whose names were not disclosed in the announcement, nor were the names of their owners, apart from one, Wang Chun Lin (Mr Wang), who was "an acquaintance" of David Yip Chung Wai, the CEO of GGT.

Another thing not mentioned in the announcement was that Cosmos had acquired Westralian only 3 months earlier from China Goldmines plc (China Goldmines, AIM:CGM), for just US$26.35m (HK$205.5m), so it was now being flipped to GGT for a 484% gain. They got around to this on 11-Dec-2009 after media reports pointed it out. A circular was dated 1-Feb-2010. We did some digging on China Goldmines. In its announcement on 27-Aug-2009 of the sale of Westralian, it said that "Mr Cheng Ziazhong (sic) is the sole director and sole shareholder of Cosmos and additionally holds the beneficial interest in the sole issued share of Cosmos". In the next paragraph, it states that Mr Cheng Zaizhong is a registered foreign lawyer at Li & Partners, the solicitors to Cosmos. So this would be him. There was also a "Financing Party" in the acquisition from China Goldmines whose identity remained confidential.

There was no mention of Mr Wang. So sometime between the purchase from China Goldmines and the sale to GGT, the shareholdings in Cosmos changed. China Goldmines put out a circular dated 1-Sep-2009, and the sale was approved by its shareholders on 21-Sep-2009, just over 2 months before Cosmos agreed to flip Westralian into GGT.

The GGT circular was dated 1-Feb-2010, and the deal completed on 31-Mar-2010. The consideration comprised 762.022m shares and $895.1912m of bonds convertible at $0.40. So, who was it that benefitted from Cosmos's huge gain on flipping Westralian? From disclosure filings, we can see that all of the shares and $139.1912m of the bonds went to a person called Suo Lang Duo Ji (Mr Suolang), and $120m of the bonds went to Mr Wang. We don't know who got the remaining $636m of bonds. So, what do we know about Mr Suolang and Mr Wang? That brings us on to...

Lumena Resources

Mr Suolang is the founder, Chairman and controlling shareholder of Lumena, which was listed on 16-Jun-2009 and mines and refines various forms of sodium sulphate. Mr Wang is an NED of Lumena, having received a pre-IPO stake of 5% in 2007. Mr Suolang was formerly known by the French-Irish-sounding name of "Dominique Shannon" and "Li Yan". We don't know why he has changed his name, twice. It would have been odd to register the name "Dominique Shannon" in China - so perhaps he has or had a foreign passport in that name.

Mr Don't-call-me-Dominique Suolang was also involved in Oct-2009 as a proposed 20% shareholder in the vehicle to purchase the General Motors Hummer brand, with 80% to be owned by privately-held Sichuan Tengzhong Heavy Industrial Machinery Co Ltd (Tengzhong). However, that deal was aborted in Feb-2010.

Tengzhong was a substantial supplier of equipment to Lumena, selling it RMB343.4m of gear in 2007. The Lumena prospectus of 4-Jun-2009 is self-contradictory. It states (p26) that Tengzhong was 90% owned by Mr Li Xudong, one of Lumena's executive directors, until he sold it on 30-Jan-2008, making Tengzhong an independent third party after that date. But on p120, it states that Tengzhong "is controlled by Mr Li Xudong". It also states that on 1-Jan-2008, a Lumena subsidiary cancelled a supply agreement it had entered into in 2007 with Tengzhong, because "it later became apparent that the performance of this equipment supply agreement would extend beyond the Listing Date and therefore would constitute a continuing connected transactions (sic)". But of course, if Li Xudong had sold his stake, then he would not still control Tengzhong and there would be no ongoing connected transactions.

According to a Lumena announcement on 9-Jun-2009, Tengzhong was once a subsidiary of Sichuan Huatuo Industry & Commerce Development Co Ltd (Huatuo). In 2004 this was 50.2% owned by Sichuan Huatong Investment Holding Co Ltd (Huatong), which was 98.5% owned by Mr Suolang. By the IPO date, Huatong had increased its stake to 69.9% of Huatuo. Huatuo held interests in Tengzhong from 26-Jan-2005 to 15-Aug-2005. Mr Suolang ceased to have an equity interest in Huatuo on 15-May-2005.

On 19-Aug-2009, Lumena spent RMB264m (HK$300m) in cash to buy the remaining 10% of one of its subsidiaries, equivalent to 46% of its IPO proceeds, paying a 2008 P/E of 20.3 for the stake. Lumena has extensive borrowings, having in Oct-2009 issued offshore US$250m (RMB1,707m) of 12% senior notes (secured against its subsidiaries) and also carrying RMB356.5m of onshore bank debt at 31-Dec-09. On the cash side, it had amounts in RMB of RMB336.3m, and other currencies equivalent to RMB563.2m. On 27-Dec-2009, Mr Suolang pledged 20.51% of Lumena for a loan of "less than US$30m" from Bank of China International for his own use. Share pledges only have to be disclosed within 1 year after the IPO.

Sodium Sulphate (or thenardite) is used as an inert filler in laundry detergents (because of its whiteness), although consumers have been switching to more compact or liquid detergents which use less or none of it. Being inert, all it does is to make the powder look nice and make your shopping basket heavier. It is also (in decahydrate form known as Mirabilite or Glauber's salt) a mild laxative, and is used as a processing agent in glass and textile manufacture.

Making a commodity as common as sodium sulphate, Lumena seems to have unsustainably high profit margins, booking earnings before interest and tax of RMB875.1m on sales of RMB1,344m in 2009, or a 65% EBIT margin. The gross profit margin was 72.9%. It attributes this to selling part of its production as higher-purity "specialty thenardite" and "medical thenardite", the latter from a Good Manufacturing Practice (GMP)-certified factory with a Pharmaceutical Production Permit, at much higher prices than the type used to bulk-out washing powder. In 2009, it sold "medical thenardite" for RMB2,582/tonne and "specialty thernardite" for RMB860/tonne, while powder thenardite was going for RMB252/tonne. In the first half (p42) of the year, Lumena's medical and specialty thenardite had gross profit margins of 78.6% and 78.9%, while powder thenardite had a margin of only 18.5%.

Even if you give them the benefit of the doubt and assume that these margins are real, it seems unreasonable to expect that competition will not bring them down to more normal levels.

Coming soon to Korea...

The Lumena prospectus also mentions that Mr Suolang controls Haton Polymer & Fibre Corp (Cayman), which has since been renamed Sino Polymer New Materials Co Ltd and in Apr-2010 was reported to be applying for a Korean listing. It makes Polyphenelene Sulfide.

© Webb-site.com, 2010


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