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Twelve months ago Sierra Leone was the world’s sixth-largest iron ore exporter to China,with its nascent iron ore industry and related services accounting for around 30% of the country’s GDP.
This rapid return of the West African country to the list of the world’s top-ten iron ore producers after a hiatus of over 35 years amid a string of brutal civil wars, was driven by two London-listed junior miners; African Minerals and London Mining.
Both kicked off production in 2011: iron ore’s heady heyday when Chinese demand and supply tightness saw the raw material’s price reach an historical all-time high of $190 per tonne.
Just three years later and both companies have folded, leaving thousands of jobs at risk and threatening to further decimate an economy which has been shattered by the ravages of the world’s worst ever outbreak of the deadly ebola virus.
London Mining went into administration in October 2014 and African Minerals, after halting share trading and output in December as funds dried up and iron ore prices fell to six-year lows of less than $60 per tonne, finally called in the administrators on March 6.
As shocked investors attempt to piece together what drove the downfall of these two former darlings of London’s Alternative Investment Market (AIM), Steel First looks at the history of their demise.
African Minerals’ funding crisis
Headline-grabbing Romanian-Australian mining entrepreneur Frank Timis formed African Minerals out of the Sierra Leone Diamond Corp in 2007, after discovering the a huge iron ore deposit in the heartlands of the country; Tonkolili.
Timis, a convicted heroin dealer with longstanding interests in the oil and mining sectors and the self-styled 'emperor' of West African mining, has operations in four countries in the region. His interests in Sierra Leone stretch back over a decade.
Following its discovery, the Tonkolili mine was developed rapidly, largely with the help of a landmark $1.5-billion investment from Chinese state-owned enterprise Shandong Iron and Steel Group (SISG) in August 2011 for a 25% stake in the project.
With the SISG investment in place, African Minerals started producing ore from Tonkolili in November 2011.
Tonkolili’s rapid transition from exploration project to producing miner in 2011 was lauded by investors as one of West Africa’s greatest mining success stories of recent years.
African Minerals grew rapidly, becoming the largest market cap company on AIM, valued at its peak at more than $3.5 billion.
The company’s rocketing value came despite a slew of challenges along the way - a rapid turnover of ceos (four appointments in as many years, one of whom was Timis himself); a riot at the mine site which left one person dead and several injured; an investigation into human rights violations; a scandal over a $50 million payment made to a Cypriot trading company allegedly owned by Timis himself and questions raised by local press about founder Timis’ close relationship with Sierra Leone president, Ernest Bai Koroma.
While questions over African Minerals’ management of personnel and finances failed to make any major dent in the company’s share value, a sharp decline in iron ore prices did.
The miner, which produces a 58% Fe direct-shipping ore product which is priced at a discount to benchmark 62% Fe grade material, battled to lower production costs as prices fell rapidly throughout 2014 from levels of over $130 per tonne cfr China for 62% Fe material at the beginning of the year, to lows of $65 per tonne in December.
As iron ore prices fell, African Minerals' management turned to its mine joint venture partner SISG to help plug the funding gap.
In August, African Minerals said that SISG had agreed to let it access a full $284 million, previously earmarked for the mine’s expansion, for "project construction" and "working capital" purposes.
One of the conditions behind the release of funds was the the publicly-listed company and its operating subsidiaries separated financially.
But prices, and the company’s share value, fell further. And the funds from SISG, which African Minerals had been so confident about being able to draw down from, dried up, with SISG refusing to release funds allocated for October and November.
So what made the Chinese company change its mind about funding its own investment?
On October 16, African Minerals’ neighbour London Mining went bankrupt. Just two weeks later, Frank Timis bought the Marampa mine from London Mining’s administrators for an undisclosed fee through his own privately-held investment vehicle, Timis Corp.
Why didn’t African Minerals bid for the mine itself? The company was short of funds and in the process of restructuring its debt with the help of lender Standard Chartered. Sources close to the matter told Steel First that the bank had advised against making a bid for the asset. The debt restructuring ground to a halt in November, with the miner and the bank citing deteriorating market conditions.
Standard Chartered did not respond to calls for comment about its role in the restructuring of African Minerals’ debt at time of publication.
SISG could not be reached for comment.
The relationship between SISG, which was a partner in the mine but did not hold any shares in the London-listed public company, and African Minerals worsened as 2014 drew to a close.
As 2015 dawned and iron ore prices tumbled further, African Minerals’ saw an exodus of personnel from the miner to Timis Corp, including ceo Alan Watling and long-time Timis associate, Mike Jones.
On March 4 SISG, through its Hong Kong-based subsidiary Shandong Steel Hong Kong Resources, took control of African Minerals’ rail and mine subsidiaries. The move came just days after the Chinese company took on $250 million of African Minerals' debt from lenders Standard Chartered and Citi and demanded its repayment.
Two days later, late on Friday March 6, and African Minerals finally called in the administrators.
African Minerals’ rapid slide into insolvency has prompted questions from among the miner’s investor base including why African Minerals did not clarify that SISG held the final authority over the release of the $284 million in funding earlier.
But the biggest mystery surrounding the decline and fall of African Minerals remains how and why its chairman secured a deal which saw his privately-held investment company ship out Sierra Leone ore on African Minerals' infrastructure while operations at the latter company ground to a halt.
London Mining’s administration and sale
Major cracks started to appear in the iron ore market in early 2014, with rumoured defaults of Chinese mills emerging just as a slew of cargoes of ore from newly expanded mines owned by the world’s largest producers of the mineral - Rio Tinto, Vale, Fortescue Metals Group and BHP Billiton - hit the market.
As supplies increased, prices started to fall steadily but interest in London Mining’s product - a high-grade concentrate prized by Chinese steel mills - remained firm.
Having already secured offtake deals with international traders Glencore and Vitol, the company secured a third major offtake deal with international trading house Cargill as late as March 2014, pocketing a $20-million offtake related prepayment as part of the deal.
Not only was London Mining securing new offtake deals, it also boasted in its 2013 full-year accounts that it had slashed costs to $57 from $72 per tonne.
This, together with expected cash flows from existing operations, would have been able to finance the miner’s $280 million plan to expand Marampa to 6.5 million tpy, London Mining said in its 2013 results.
But signs that London Mining was struggling with finances emerged in May, when the company announced it was on the hunt for a strategic partner to help fund its expansion as iron ore prices slid.
A number of interested parties stepped forward, including Indian steelmaker miner JSW, the China Development Bank, existing offtake partner Glencore and Sierra Leone entrepreneur Ronnie Decker, according to sources close to the matter.
A deal was close to being struck, but at the last minute, the unnamed bidder stepped down, citing the ebola situation and a lack of clarity surrounding London Mining’s finances.
A further drop in iron ore prices and rising costs associated with airlines restricting flights to regions impacted by the increasingly severe outbreak of ebola saw London Mining’s position weaken into September, compounded by a dispute with Glencore prompted by the trader refusing to make a down payment for a cargo.
On October 16, after a series of increasingly panicked announcements to the market, London Mining reached the end of the line, and appointed PricewaterhouseCooper (PwC) as its administrator.
Timis Corp’s ‘leftfield bid’
Less than a fortnight later, PwC announced that it had sold the Marampa mine to Timis Corp for less than $10 million, with Timis putting forward $3 million of ‘at risk’ money to secure the asset, and then paying a further $3 million for the mine itself. Some $230 million of London Mining’s debt was rolled over to Timis Corp as part of the deal.
Timis borrowed $20 million for the purchase from long-time friend and business partner Tony Sage’s Cape Lambert mining investment company to fund the purchase, in exchange for a royalty of $2 per tonne for four years.
And as African Minerals biggest shareholder, Timis now controlled close to 30 million tpy of iron ore output from Sierra Leone.
He significantly drove down the costs of exporting Marampa ore by securing capacity on the African Mineral rail line in December, instead of trucking and barging the material to the seaborne market.
London Mining investors asked why the assets were not put out to public tender and why so little of the miner’s value was recovered.
Investors in both companies speaking to Steel First have taken issue with the speed of the sale, the transparency of the process and the fact that no final report has been circulated to creditors, despite this being one of the conditions of a ‘pre-pack’ sale.
PwC told Steel First that there had been a ‘limited amount of credible interest’ in the sale of Marampa and that it had ‘identified Timis Corp as the best bid’.
“London Mining had already tested the market, they put the business up for sale in May,” PwC partner Russell Downs told Steel First.
“Timis Corp was a last minute, leftfield bid- it was the best bid received. He put up ‘at risk’ funds, which helped eliminate the massive risk of losing 3,500 jobs in Sierra Leone at a critical time,” Downs said.
“If the sale process had taken longer the mine would have had to shut and the asset would have lost not only its licence to operate but the good will of the people on the ground.”
Downs said that PwC had not visited Sierra Leone in person to evaluate the assets physically and did not make an audit of the company ahead of its sale.
“It's not relevant and I am not sure what benefit would have come from it,” said Downs.
The administrator is not required to send a ‘pre-pack’ report to creditors as the deal was transacted in Sierra Leone, PwC added.
Timis is thought to have made back the value of his investment in the mine already through the sale of ten capesize vessels carrying a total of 1.4 million tonnes of Marampa’s high-grade ore, shipped out at a lower cost than London Mining could achieve through its barging solution, via African Minerals’ rail line.
A number of the cargoes of Marampa ore shipped by Timis Corp have been sold by UK-based trading company Gerald Metals, Steel First understands. All offtake deals agreed with London Mining were rendered void when the miner went into administration.
What was less clear was whether Timis would have to honour royalty deals made by Marampa’s previous owners. Royalties are usually agreed on an asset basis rather than a corporate basis.
Timis’ own agreement with African Minerals to utilise its rail capacity has since been rendered void by SISG taking control of the line and African Minerals itself going into administration.
Investors demand answers
Amid the wreckage of Sierra Leone’s iron ore industry, investors and analysts are asking how did London Mining manage to run out of cash so quickly and why didn’t African Minerals bid for Marampa rather than Frank Timis’ private company?
Sources close to London Mining speaking to Steel First are adamant that the miner’s administration was not caused by complications caused by the ebola crisis but rather by a mismanagement of funds and have questioned why the company didn’t work harder to reduce costs earlier on.
"We talked to them about changing their logistics model. There could have been significant cost savings there," an offtaker told Steel First.
Sources told Steel First that the two companies had actually started working together to dredge the port they both used in order to allow Capesize vessels to dock there, bringing down freight costs. In this spirit of cooperation, London Mining also allowed African Minerals to run test batches of its product though the Marampa concentrator back in mid-2014, sources said.
These initiatives came to a halt once the companies fell into serious financial problems, Steel First understands.
African Minerals' shareholders stand to lose around $2 billion through the company’s collapse, a failure which is starting to prompt calls for greater scrutiny and regulation of the Alternative Investment Market.
And back in Sierra Leone, where easing of the ebola outbreak is only serving to highlight the devastation wreaked by the disease, the fate of thousands of workers who work either directly or indirectly for the miners, now hang in the balance. It will be down to SISG to decide how and what to salvage from the collapse of these two miners.
Timis Corp did not return requests for comment.
In a phone call to Steel First, London Mining’s former ceo Graeme Hossie said that the miner had worked hard to secure value at a time of falling prices and increasing costs.
“Management did everything in its power to save the business including cutting costs and entering into in-depth discussions with potential strategic partners,” said Hossie.
“Unfortunately, with the continued and significant deterioration in iron ore pricing at the same time as the escalation of the ebola crisis in Sierra Leone, this was a perfect storm that we were not able to overcome.”
What a difference a year makes.