After more than seven years spent analyzing metals, mining and industrial equities for Dutch bank ABN Amro, Ngotho joined Spanish fund manager Azvalor Asset Management in May this year as a senior buy-side analyst.

His move came at the same time as the company that he spent much time investigating, Nyrstar, was preparing to go into private ownership.

Over several years Ngotho's reports raised the alarm about the company's investments and debt reporting. He provided deep insight into the workings of a company in financial decline for Nyrstar shareholders, which are to an unusually large proportion retail investors from Belgium and the Netherlands, the location of its core smelting assets.

Trading house Trafigura has recently agreed to take full control of the company, which is one of the world’s principal producers of zinc and lead, and has been attempting to finalize a deal with bondholders to do so.

Speaking to Fastmarkets by phone from Madrid, Ngotho was excited about making a new start, settling in to local life and learning to speak Spanish. But he was also reflective about his time advising on Nyrstar and his role in informing bond and equity markets.

Many Nyrstar shareholders have seen their stakes almost wiped out in the past year, with the share price plummeting from to €0.19 ($0.21) on June 6 this year from €7.14 on January 14 last year.

A group of small shareholdings on Friday last week filed a lawsuit against the company, seeking further information on its dealings with Trafigura.

Ngotho, who started reporting on the company in 2012, came to cover Nyrstar at a point when the company had made some questionable investments.

“Back then, there were other things that I saw as being an issue,” Ngotho said. “For example, [there was] the offtake [agreement] it had with [Finnish nickel miner] Talivivaara. [Nyrstar] had already pre-paid for this and it was questionable whether the metal would be delivered. That was the first reason to be negative.”

In 2010, Nyrstar paid Talivivaara $335 million upfront for 1.25 million tonnes of zinc concentrates, a quantity that was never delivered before Talivivaara’s insolvency in 2013. Nyrstar took an impairment charge on the value of the streaming agreement of $222 million in 2015.

Good beginnings
Nyrstar was formed in 2007 by merging the smelting assets of Belgium’s Umicore and Australia’s Zinefex into a company with a market capitalization in the initial public offering (IPO) of €4.88 billion ($5.49 billion). The company began life well, controlling roughly 8% of the world’s zinc production. 

But in 2009, it embarked on a string of mine acquisitions intended to transform it into a more integrated metals producer. This, Ngotho now says, proved to be the beginning of the end that would come a decade later.

“Everyone agrees that the thing that really cost [Nyrstar] was mining acquisitions,” he said. “It spent $1 billion on them, and those mines were worth maybe $100-200 million. So [the process] was very value-disruptive and it just accumulated debt without any benefit.”

“It was really the management team under Roland Junck that was responsible for those acquisitions,” he added.

Nyrstar declined to comment when approached by Fastmarkets.

Junck is now chairman of British Steel, which was put into compulsory liquidation by the UK’s High Court in May after the company’s fortunes declined because of high costs, a slump in order volumes and significant challenges related to Brexit.

Under Junck’s leadership as chief executive officer of Nyrstar, the company spent US$639 million to buy Canadian company Breakwater Resources for its Myra Falls, Langlois, El Toqui and El Mochito mines, which produce zinc, lead and silver.

El Mochito and El Toqui were sold for a combined US$26 million in 2018. Although Nyrstar retained Myra Falls , it was idled between April 2015 and 2018. Nyrstar wrote down the value of Myra Falls and Langlois by US$148 million over 2018, citing lower recoverable amounts of metal than was previously thought, it said on June 22.

Meanwhile, the Campo Morado mine in Mexico, which Nyrstar acquired through its US$405 million buyout of Farallon Mining of Canada, was sold in 2017 to Telson Mining, also of Canada, for US$20 million.

Sources with direct knowledge of these events contend that Farallon had already sold the entire output of Campo Morado to Trafigura before Nyrstar acquired it, meaning that the smelter would not receive any tonnages despite owning the mine.

“It’s very easy to conclude, with hindsight, that [Nyrstar] didn’t do its due diligence very well,” Ngotho said. “It was a smelting company that wanted to get into mining but you can question whether it really had enough mining knowledge to be able to assess the value of the mines that it was buying.”

High costs led to Myra Falls being mothballed just before what was to be a once-in-a-decade bull run for zinc prices and concentrate treatment charges, on which smelters rely for their income.

In October 2015, rival zinc producer Glencore idled 500,000 tonnes per year of capacity - some 4% of global mine supply - because of low prices. But these then surged to $3,622 per tonne in January 2018 from surged from $1,427 per tonne in January 2016.

“That’s something which you can say was a bit unlucky,” Ngotho said. “That at the moment the zinc price exceeded $3,000 per tonne, it was hardly mining anything because it had closed the mines down and put them on care and maintenance. All this time, the treatment charges were also very low.”

The factoring factor
In June 2018, Ngotho was looking through Nyrstar’s high-yield prospectus and came across written acknowledgement of a factoring program that was not disclosed in its annual or quarterly reports.

Factoring is a type of debt finance by which companies sell invoices or receivables to banks temporarily, paying interest when they repurchase them, in return for immediate cash.

“I was actually doing more work on finding what kind of facilities Nyrstar had, what interest rates it had and accidentally stumbled on the fact that it was selling its receivables to a bank [and] receiving money in return,” Ngotho said. “Most companies disclose that they’re doing this in their financial accounts.”

The factoring came to a total of €70 million against a market capitalization of €500 million. After ABN published a research report, this was acknowledged in Nyrstar’s next half-year results statement, prompting further questions.

“When you notice that a company is not always straightforward in its disclosing, you become a bit more critical,” Ngotho said.

Nyrstar’s half-year report showed a “very large jump” in cash interest paid but flat net debt. This “didn’t really add up,” according to Ngotho.

When the story unfolded, Nyrstar and Trafigura became embroiled in a proxy battle with funds that target distressed debt, which bought up large chunks of the €340 million of Nyrstar bonds that were due for repayment in 2019.

Because it was unable to repay these sums, Trafigura agreed to take the company private. This was a “good solution” for the company and its employees but not necessarily so for bond and equity holders, Ngotho said.

“Nyrstar is known to have really good smelting assets, especially in Belgium and the Netherlands,” Ngotho added. “With the solution in place, people can start to focus on running the business.”

Ngotho’s role in the saga highlights the importance of rigorous sell-side analysis at a time when many banks are reducing the number of roles of this type in the face of MiFID II regulations.

Ngotho - who started his finance career by modelling mortality rates for pension funds at Deloitte - is trying to see the positive outcomes from the story.

“I definitely wouldn’t say I enjoyed it, considering that the company nearly went [insolvent], but I learned a lot from it,” he said.

In the way that companies present their accounts, “you can discover quite a bit about their culture,” he added. “If there’s aggressive accounting being applied, you need to be cautious of the numbers that a company gives you.”