Bumi Burns Hole in London's Reputation

Published by MAC on 2012-10-02
Source: Statement, Reuters, Wall Street Journal, Guardian

Bumi Burns Hole in London's Reputation

By Andrew Peaple

Wall Street Journal

25 September 2012

If the City of London has become a "cesspit," as the Bank of England's deputy governor recently stated, Bumi PLC looks like a top exhibit.

The Indonesian coal miner's shares fell 25% in London Monday, after it said it was investigating "financial irregularities" at PT Bumi Resources, in which it holds a 29% stake. The disclosure is the latest in a string of problems at Bumi, listed in London in the summer of 2011 via a reverse takeover engineered by financier Nat Rothschild.

In all, investors who bet on Mr. Rothschild's vision of bringing U.K. corporate-governance standards to an emerging-market resources firm have him to thank for an 85% loss. But advisers on the deal, as well as the U.K. regulator, should also be in their firing line.

Mr. Rothschild has already lost considerable influence at Bumi. He relinquished his role as Bumi's co-chairman earlier this year after a power struggle with the Bakrie family and its new co-chairman, Samin Tan, who together own 47% of the company.

That came after Mr. Rothschild openly criticized non-core investments and loans made by Bumi Resources to various connected parties. The criticisms struck many as rather hollow given that Mr. Rothschild does not appear to have raised them when he first reversed Bumi Resources into his shell company, Vallar PLC. The combined company was renamed Bumi PLC; Bumi Resources remains listed in Jakarta.

The latest incident could be yet more serious. Bumi's board is investigating so-called business development assets worth $600 million held by Bumi Resources when Vallar bought its initial 25% stake in the company in March 2011. Acting on a whistleblower's information, Bumi's independent directors are looking into what happened to those funds, amid allegations of "financial irregularities".

Such issues raise questions about the role of Bumi's high-profile advisers, and whether they performed adequate due diligence before Vallar's investment in Bumi Resources was made. J.P. Morgan, Bumi's principal banking sponsors; the accounting firm PricewaterhouseCoopers; and the law firm Freshfields all signed off on the prospectus that enabled Bumi to achieve a so-called premium listing in the FTSE 250 last summer. Such a listing ensures investment funds that track the index are required to buy shares in the company. None of the firms immediately responded to requests for comment.

The impression left, though, is that Mr. Rothschild and his sponsors made use of weaknesses in the U.K. regulatory system when it comes to reverse takeovers.

The U.K. Listings Authority, part of the Financial Services Authority, requires companies aiming for a premium listing to provide three years of audited accounts, but a company's sponsors need to ensure all the financial statements are in order. At this stage, as irregularities emerge. it is of little consolation to investors that even Mr. Rothschild's original investment is now under water.

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The Bumi lesson: FSA light-touch approach does not work

Down to Earth, London Mining Network and War on Want

Press Release

2 October 2012

The announcement[1] of new Financial Services Authority (FSA) rules on reverse takeovers[2] and other regulatory 'blind spots' is yet another case of too little too late. Light-touch regulation of London-listed companies has for years allowed companies like Bumi plc and individuals associated with them to mislead investors and the public over the real impacts of their activities.

In March of this year, the London Mining Network (LMN) issued a report[3] outlining these issues with case studies of various mining companies, including Bumi plc. At the company’s AGM in June of this year, shareholder activists raised the impacts and transparency of the company directly with the board, but their concerns were dismissed out of hand.

LMN has been lobbying government to strengthen the powers of the proposed new regulatory body, the Financial Conduct Authority (FCA). LMN wants the government to ensure that the kind of malpractice that is alleged to have occurred in Bumi plc and its constituent companies is permanently excluded from the London financial markets. The FCA must have robust powers to monitor and penalise the behaviour of any UK listed company in order to ensure respect for international human rights and environmental standards.

The new head of the FCA, Martin Wheatley, has called on the financial authorities “not just to be ticking boxes, asking if people have been following the rules, but to be looking at outcomes and at what's going wrong and then taking action”. Andrew Hickman, from LMN member group Down to Earth is now challenging Martin Wheatley to prove that the FCA is more than just a box ticking regulatory body.  “We call on regulators to look again at the issue of the listing, disclosure and transparency of mining companies, who are using the public's money – through pension funds[4], high street banks and insurance companies – to fuel environmental and social abuse in Indonesia and elsewhere. In the case of Bumi's coal operations, this includes damaging local impacts and global impacts through the export of power station coal, contributing to greenhouse gas emissions, while many local communities still have no electricity.[5] Companies like Bumi plc should be banned from operating out of London.”

Andry Wijaya, Coordinator of JATAM (the Indonesian Mining Advocacy Network) said: “We are shocked that so much attention is being paid to financial irregularities within Bumi plc and PT Bumi Resources, compared to the little attention being paid to tens of thousands of people affected by these companies’ activities in Indonesia.  To this day, victims of the Lapindo mudflow disaster are still waiting for compensation from the Bakrie family, who are so heavily involved in the company.[6] Striking workers at Bumi’s KPC coal mine have suffered at the hands of Indonesian security forces allied to company managers and Indonesian coal continues to be bulldozed from the forests of Borneo at a rate that threatens the livelihoods of those who live around the mine and those beyond through greed-fuelled trading in coal.”

Graciela Romero from War on Want said: “As it stands currently, the priority of the UK Listing Authority is ‘to protect investors in listed securities’. The new rules must emphasise the protection of communities, workers and the environment that are affected by listed companies. The Bumi plc case is just the tip of the iceberg of a business culture of impunity, which is based on complicity between regulators and companies in the London Stock Exchange and other major financial centres.”

For more information please contact:

Andrew Hickman, Down to Earth
tel: 07504 738696

Graciela Romero Vasquez, War on Want
tel: 07947 216104

Richard Solly, London Mining Network
tel: 07929 023214

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Further information about Bumi

Down to Earth’s analysis of Bumi’s record and recommendations for change in regulation by the listing authority in the UK can be found at  http://www.downtoearth-indonesia.org/story/indonesian-coal-company-london-stock-exchange

A brief report of  Bumi plc’s first London AGM is at http://www.downtoearth-indonesia.org/story/bumi-falls-first-hurdle

London Mining Network’s recent coverage of Bumi is at http://londonminingnetwork.org/2012/09/bumi-we-said-so-didnt-we/

For further reflection on Bumi’s record, see The Indonesian mining scandal at the heart of UK capital at http://www.minesandcommunities.org/article.php?a=11759 and From Burke to Bumi – an Indonesian scandal at http://www.minesandcommunities.org/article.php?a=11939

Further articles about Bumi are available at http://www.minesandcommunities.org/list.php?r=1949

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Notes

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Rothschild-linked firm Bumi faces investigation for alleged irregularities

London-listed mining company's shares plunge after 'whistleblower' publishes damning documents

Guardian

24 September 2012

Shares in Bumi, the mining investor founded by Nat Rothschild, scion of the financial dynasty, crashed by a quarter on Monday as the firm launched an investigation into allegations of financial dishonesty at its main affiliate, one of Indonesia's largest coal producers.

The board of London-listed Bumi was sent documents from a whistleblower in Jakarta last week relating, in part, to a $322m (£198m) writedown the company made last year. The company refused to go into details about the allegations of "potential financial and other irregularities in the company's Indonesian operations." But they relate to investments of $800m (£494m) made by PT Bumi Resources, the Indonesian group in which Bumi has a 29% stake, that are judged to be almost worthless.

It is understood Bumi's lawyers recommended an independent investigation. The company told shareholders it "intends to contact relevant authorities in the UK and Indonesia, as appropriate, in respect of some of the allegations". It is understood the Financial Services Authority and Serious Fraud Office were informed on Friday.

An investigation by the FSA is also likely to start into heavy share trading on Friday afternoon, which sent the shares down more than 20% even though the allegations were made public only on Monday.

Bumi's shares hit an all-time low of 148p. The company has lost 85% of its value since it listed as a cash shell two years ago after Rothschild led a £700m fund-raising.

Rothschild, whose Indonesian partners are the Bakrie family, is said to be fuming over an apparent lack of due diligence undertaken by investment bank JP Morgan when Bumi was pursuing its Indonesian deal in 2010.

He has seen his 12% shareholding lose around £32m in value in the past week.

The original plan had been to raise governance standards at PT Bumi Resources but the Indonesian operation has run into diffculties in the last year, partly because of heavy debts and partly because of a fall in the price of coal. The family patriarch, Aburizal Bakrie, is an Indonesian presidential candidate.

Rothschild wrote to the chief executive of PT Bumi Resources last year calling for debts to be paid down. His intervention prompted a bitter war of words and threats to oust Rothschild as co-chairman of Bumi.. In the end, the financier stepped down from that position, but he maintains a position on the board. A key investor and coal entrepreneur Samin Tan stepped in as chairman after buying half the Bakrie family's stake in the London-listed company for $1bn.

In a statement on Monday the company said some of the allegations related to a writedown of "development funds" in the two Indonesian companies it holds a stake in, PT Bumi Resources, Asia's biggest exporter of thermal coal, and PT Berau. The affair will be an embarrassment for some of the non-executive directors recruited by Rothschild, including Lord Renwich, Sir Julian Horn-Smith and Sir Graham Hearne. But it is understood they are still committed to the company.

A non-executive director, Ari Hudaya, stepped down from the Bumi board hours after the investigation was announced. Hudaya has been president director of PT Bumi Resources since 2001.

In Indonesia there are concerns that PT Bumi Resources, which is laden with debts of $4bn, could be forced to hold a rights issue if the cost of thermal coal fails to rise in the next six months.

It currently pays interest rates of 19% on a $1.3bn loan it owes to the China Investment Corporation. It is also struggling to call in money it is owed, in particular $482m from an investment fund, Recapital, run by Rosan Roeslani, who also sits as a non-executive on Bumi's board.

Richard Knights, analyst at Liberum Capital, said: "Bumi won't make any money in 2013 if spot thermal coal prices prevail. In our view either thermal coal prices rise or non-core assets need to be sold in order for Bumi to avoid a capital raise in 2013."

The company was accused of human rights abuses over alleged coal dumping, releasing chemicals into coral reefs, and mistreatment of workers at its last AGM.

Andrew Hickman, from the London Mining Network, said: "We continue to question the legitimacy of Bumi plc's listing on the London Stock Exchange. Through light-touch regulation, companies with shocking financial, social and environmental records associated with Bakrie familiy interests have gained access to the London financial markets, under the umbrella of Bumi plc.

"Today's news of a company investigation into malpractice appears to be window-dressing for a situation that is well known to Indonesian observers of the mining sector."

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FSA to tackle listing rules as Bumi debacle escalates

By Kirstin Ridley and Kylie MacLellan

Reuters

27 September 2012

LONDON - London's ambitions to attract foreign-owned mining companies have suffered a sharp blow with the announcement by Bumi Plc of an inquiry into alleged irregularities at subsidiaries, just days before a clamp-down on listing rules.

The Financial Services Authority (FSA) will publish proposals next Tuesday designed to protect investors and ease concerns that London-listed companies such as Bumi, an Indonesian coal venture co-founded by financier Nat Rothschild, are diluting standards of corporate governance.

Bumi's launch of an inquiry this week into potential irregularities in more than $500 million (308.6 million pounds) of funds follows unrelated concerns at fellow natural resources firm ENRC and oil producer Genel .

"Bumi is one of a number of recently listed companies that, whilst traded on the UK market, is essentially an overseas business," said PIRC, a corporate governance consultant that advises pension funds and fund managers with combined assets of over 1.5 trillion pounds.

PIRC noted concerns shared by regulators and investors about groups with dominant shareholders in which relatively few shares are traded on the market. "A number of such companies in the extractives industries have a very limited free float, meaning that minority shareholders can struggle to have their voices heard, and unusual governance practices are difficult to challenge," it said.

The FSA proposals are expected to tighten rules on reverse takeovers - often seen as backdoor listings - as well as addressing the size of free floats, the power of controlling shareholders, corporate governance and the independence of company boards.

They are also likely to prevent cash shell companies, small listed companies into which larger private groups are typically folded in a reverse takeover, from joining London's top indices.

Pushing some new listings onto "regulatory light" standard listings, rather than premium listings, might not seem too onerous for those seeking cash quickly. But preventing them from joining the prestigious FTSE indices will protect tracker fund investors from unwittingly placing cash in riskier companies.

Nevertheless, experts concede the FSA's powers to improve corporate governance are limited. As it tries to strike a balance between tightening rules and ensuring London remains attractive for international companies the principle of "caveat emptor" - let the buyer beware - rules.

"If you comply with listing rules, there is often very little the FSA can do," said one source familiar with the regulator. "It is ultimately up to individual shareholders whether they buy into that particular company."

IRREGULARITIES

Bumi was born after London-listed cash shell Vallar - led by 41-year-old Rothschild, the hedge fund veteran and scion of the Rothschild banking dynasty, and James Campbell, the former head of Anglo American's coal arm - engineered a reverse takeover of Indonesian coal assets and re-listed in 2011.

The aim was to marry the Rothschild name to the Bakrie brothers, one of Indonesia's most powerful business families, to create the world's biggest thermal coal company and one of the largest listed groups on the London bourse.

But as newly-named Bumi joined London's FTSE index, tensions rose quickly. A leaked letter last year from Rothschild to Ari Hudaya, then chief executive of both Bumi Plc and an affiliate, PT Bumi Resources , urged a "radical cleaning up" of Jakarta-listed PT Bumi Resources.

On Monday the company commissioned London law firm Macfarlanes to launch an urgent investigation into potential financial irregularities at its subsidiaries, including PT Bumi Resources, sending its shares spinning.

Roger Barker, head of corporate governance at the Institute of Directors, told the Reuters Russia Investment Summit in Moscow that the affair had called into question the "Rothschild model" of creating a shell to invest in emerging markets assets.

"Given what has happened to the share price of that particular vehicle, it hasn't been a good deal for investors, and investors are going to be looking quite warily at that type of approach going forward," he said.

The story echoes that of ENRC, which has had two separate independent probes following whistleblower allegations, one involving Kazakh and one its international businesses. The results of the first have been presented verbally to Britain's Serious Fraud Office. The second is still underway.

Lawyers expect Bumi's Macfarlanes report also to find its way to the SFO. The fraud squad declined to comment.

Russian firms and companies in the natural resources sector have increasingly dominated the trickle of businesses going public in London, raising concerns about investor protection.

The FTSE Group, an index provider owned by the London Stock Exchange , has already tightened entry requirements for its UK indices. This responded to investors' worries that companies with low free floats and hazy corporate governance standards could join the FTSE 100 index of top blue-chips too easily.

"I welcome the bar being high, so companies that get there, stay there," said Riccardo Orcel, deputy chief executive of Russian bank VTB Group .

London has long been considered the listings hub for natural resources companies. But in an effort to broaden its appeal, it plans to lift some restrictions for technology listings, paving the way for a battle with dominant tech hub New York.

(Additional reporting by Clara Ferreira-Marques in Moscow and Sinead Cruise in London; editing by David Stamp)