As Russian coal miner Sibanthracite hits this road this week to test investors' appetite for buying one quarter of its equity, further details emerge which cast dark clouds over the mooted $850 million flotation. Potential investors are being dangled with a dividend carrot to feed their appetite – but can the miner really afford it?
Sibanthracite hopes to raise between $157 million and $213 million through listing on the London Stock Exchange. None of this money is going to the company. Instead, GLG Emerging Markets Growth Fund will get the cash as a means of exiting its investment in the business.
That would leave oil-to-real estate investor Alltech as the majority shareholder, owning 75% of the business once listed. There's limited information on this business and its long-term intentions for the stock.
If the story is so compelling, why is GLG selling out? It is pretty easy to take a guess: Coal prices are in the doldrums and investors are becoming more and more sceptical towards foreign miners that lack transparent operations and good corporate governance.
Sibanthracite hopes to replace GLG with a series of institutional investors. Key to its sales pitch is an attractive quarterly dividend stream – a tactic used by many miners in the wake of falling commodity prices. Miners are effectively paying investors to buy their stock and sit tight until markets recover.
Here's the shocking news. According to a research note from Sberbank, seen by Shares, the coal miner will be paying dividends almost entirely funded by debt for the immediate future. This is an absolute 'no-no' in our investment book. Best practice is using HARD CASH generated from operations to fund dividends.
Just as most miners wind down capital expenditure and focus on cashflow and return on investment, Sibanthracite is expected to double its capex in 2013, rising even further in 2014. The next four years are set to be the company's most capex-heavy period in its history, spending $995 million by 2017. It will go from having positive free cash flow to negative – albeit with the aim of turning into a cash machine once more, in four years' time.
You could argue that the only one benefiting from Sibanthracite being on the stockmarket will be GLG as the fund cashes in its chips.
The stock is being listed as global depositary receipts (GDRs) – which are packets of shares designed for institutional investors, not your average retail investor wanting a few miners in their portfolio. The only way for retail investors to get exposure would be through spreadbetting as you cannot hold GDRs in a normal share dealing account, Isa or Sipp. Making matters worse, Alltech's massive stake means the stock would be highly illiquid.
As for corporate governance, the company has told the stockmarket absolutely nothing about its proposed board in the intention to float and pricing announcements. We know it has found two independent non-executive directors – but you can't find out their identity just yet! This is all very unusual behaviour for a company wanting to join the stockmarket.
The miner's website has some details of the management but these are all unfamiliar names. This article from Business Insider provides some interesting insight into the business and its shareholders – but also voices frustration at the way in which the flotation is being handled.
Given that the GDRs could restrict exposure to the stock to just an inner circle of investors, it is worth getting annoyed at the way Sibanthracite is conducting its listing? Absolutely. If the business is going to have a presence on the London market, regardless of having GDRs or ordinary shares, it needs to behave in a proper manner. That means transparency and high governance standards. Otherwise it is just adding to the negative sentiment created by troublesome duo Eurasian Natural Resources (ENRC) and Bumi (BUMI) whose damage alone threatens the future of the London market for attracting the cream of the global mining community.