Eastern Platinum (EPS) announced this week that it had received “unproven whistleblower allegations” of “undisclosed related party transactions pertaining to the sale of chrome concentrate at discounted prices”.
If proven true, this would be tantamount to asset stripping.
A special committee comprising two independent directors has been formed to investigate the allegations and, based on the findings, recommend what steps to take.
“The Board has determined that it is in the best interests of the company to form a special committee … consisting of two independent directors, George Graham Dorin and Xin (Alex) Guan,” EPS said in a Sens announcement on Tuesday.
“The committee will be responsible, together with independent counsel retained by the committee, for conducting an investigation, review and analysis of the allegations and if deemed appropriate will provide recommendations to the board on any necessary steps to be taken …”
Allegation
A letter Ulrich Roux and Associates sent to Eastplats and its CEO Wanjin Yang on behalf of a number of minority shareholders last week alleges that Eastplats subsidiary Barplats sold roughly 100 000 tons of chrome concentrate at $105.11 a dry metric ton, roughly half the going market price of $213/t.
That’s nearly $11 million (R200 million) in revenue that is alleged to have been stripped from the company.
“It is evident that these unauthorised transactions were not concluded at arm’s length and concluded with the sole intention of prejudicing the shareholders of Eastplats,” claims the letter, adding that there are other allegedly unauthorised transactions contemplated “which will cause further prejudice to the shareholders and loss of income for EPS”.
The letter goes on to claim that the concentrate was sold to a US-registered Great Wall Enterprise, a company reportedly linked to Dijun Liu, the sister of EPL director Changyu Liu, who also owns 32% of EPS.
If true, this is a related party transaction that is not disclosed in the latest annual report.
Massive expansion on the cards
This comes at a time when Toronto- and JSE-listed Eastplats is about to close a rights issue, which, if fully subscribed, would raise roughly R200 million for expansion, a figure curiously similar to the amount allegedly lost through the sale of concentrate to Great Wall Enterprise.
The letter from Roux seeks an undertaking from Eastplats that no further unauthorised sales will take place, and a postponement of the 5 May 2023 deadline for the close of the rights issue, failing which he is instructed to approach the high court in South Africa for an urgent interdict.
The shareholders will also seek a costs order against Yang and Liu “by virtue of their positions and breach of fiduciary duties as well as to bring the necessary proceedings to remove them as directors”.
The whistleblower allegations come amid a raft of law suits and legal claims against the company.
Another oddity is the appointment of Hannelie Hanson as chief operating officer in August 2022, and her resignation two months later “to pursue new career opportunities”.
Eastplats has direct and indirect interests in platinum group metals (PGM) and chrome assets on the western and eastern limbs of the Bushveld complex. The primary source of revenue is from tailings retreatment at the group’s Barplats Zandfontein tailings dam in North West province. The remaining assets are either in care, maintenance, or on hold.
The 2022 financial statements make it clear that additional funding is needed to commence underground operations at the Crocodile River Mine, as well as bring the nearby Spitzkop and Mareesburg PGM projects into operation.
Cash flow concerns
Auditors PwC said there remains material uncertainty that the company will be able to achieve sufficient cash inflows in the next 12 months to meet expected financial obligations.
Read: Platinum surplus is ‘fragile’ amid supply risks, council warns
Much of its financial difficulties seem to relate to concentrate offtake agreements with a company called Union Goal. Eastplats suspended shipments to Union Goal in the third quarter of 2022 due to non-payment and embarked on “contract free” sales. However, PwC says there is no assurance these sales will be sufficient to alleviate the liquidity crunch.
The auditors stopped recognising revenue from chrome concentrate sales to Union Goal in the second half of 2022 due to non-payment.
Read: Load shedding threatens platinum supply in top miner
The group announced a loss of $2.5 million (2021: loss of $2.71 million) for the year to December 2022. In November 2022, it secured a R110 million loan facility with Investec, with nearly half of that drawn by December of the same year.
Some 75% of the company’s $37.6 million revenue in 2022 came from the processing of chrome concentrates under an agreement with Union Goal. The remaining 25% of revenues came from PGM concentrates, generated via an offtake agreement with Impala Platinum.
Read: Impala Platinum’s shares up over 9%, as it increases stake in RBPlat
The value of property, plant and equipment has declined by about $100 million to $651 million since December 2020, due mainly to disposals and forex movements.
Since December 2020, the company started to generate PGM concentrate revenue from processing tailings material based on an agreement with Impala Platinum. That agreement was later extended annually by mutual agreement.
The latest annual report values the company’s chrome sales at $107/t, very similar to the price at which it is claimed chrome concentrate was sold to Great Wall Enterprises. This is wildly at odds with the $213/t market price quoted by Roux in his letter to Eastplats.
Legal suits
The latest company filings show the company is involved in several court or regulatory actions, either as respondent or applicant, some of which represent contingent liabilities.
One of these cases involves the loss of its BEE shareholders, Ingwenya and Serina, in 2017.
It successfully sued Serina in Canada’s British Columbia Supreme Court in December 2018 for $13.4 million, but according to Eastplat’s annual financial statements for 2022, it “has been unable to successfully contact either Serina or Ingwenya to date”.
“The company has been advised that recovery of the funds or judgment appears remote.”
The company also sued former officers and directors for agreements apparently entered into with Serina and Ingwenya resulting in $13.4 million being transferred to the BEE shareholders without any apparent benefit to the company.
The former directors and officers lodged a counter-claim, denying liability and seeking indemnity. These matters were settled in June 2021 and the outstanding lawsuits dismissed. Eastplat received payment of $3.3 million with neither side admitting wrongdoing or liability.
The mining licence issued for the Spitzkop property has been challenged, as has its water use licence. These challenges have been defended, and discussions to resolve the issues raised with the claimant were underway by late 2022.
In 2018, the company was notified of an intention by a shareholder to launch a so-called derivative action against current and former directors in relation to the approval of the transactions between it and Union Goal. The matter eventually found its way to the Supreme Court of Canada, which declined to hear the appeal.
The same shareholder involved in 2018 cases brought another one in 2020 seeking damages, a change in directors and senior management, and a change in share ownership. Eastplat says it intends applying to dismiss the lawsuit.
A shareholder of the company, Xiaoling Ren, has launched a so-called derivative action against certain current and former directors.
Moneyweb reached out to Eastplats for comment on Tuesday 25 April but had not received a reply at the time of publication. Moneyweb was likewise unable to get comment from Ulrich Roux prior to publication.
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