A Peculiar Pattern of Private Deals at Richland Resources

Photo courtesy of Richland Resources

A Peculiar Pattern of Private Deals

There is risk-free money to be made in sapphire mining licences.

Last April, a private Australian company, Gregcarbil Pty Ltd, was granted two mining licences in Queensland’s gemstone district: ML70419 and ML70447. The area covers an abandoned blue sapphire deposit and after legal action involving cattle farmers, the price Gregcarbil paid for the land’s surface rights was A$203,000.

The payments however were staggered over four years, so the cash Gregcarbil paid upfront was only A$43,000. That too was comfortably covered by an option it had already sold over the licences for A$120,000, three years before they were even granted.

And within two months of the licences being approved, Gregcarbil sold them both for a further A$1.8m ($1.7m), including A$1.2m in cash and 18m shares, tradable on the London Stock Exchange. It was a risk-free trade that Goldman Sachs would be proud of, if on a smaller scale.

Richland Resources

The buyer was Richland Resources. Well known to investors in London, the company previously owned the world’s largest tanzanite mine at the foot of Mount Kilimanjaro. It is led by chairman Ed Nealon, the driving force behind Aquarius Platinum, and director Nicholas Sibley, a former executive chairman at Barclays’ investment banking division.

But who is Gregcarbil and how did it land such a favourable deal with Richland Resources?

Announcing the acquisition, Richland described Gregcarbil as “a special purpose vehicle setup especially for the purpose of holding the mining leases”, without giving further details. But that is not how Gregcarbil (pronounced Greg-carble) presented itself to the Queensland government in its application process.

Instead, it had pledged to redevelop the property and rehabilitate its abandoned pits, without disclosing that it had already agreed to sell them. The site overlaps an endangered ecosystem and was previously mined by a listed Australian company, Australis Mining Corp., which failed after it was ordered to cease mining in 2006, having exceeded its disturbance area.

Again, Richland’s filings give a less detailed account, saying “Australis experienced inter alia working capital shortfalls during the ramp up phase, which resulted in the company being placed into voluntary administration.”

There is no mention of unresolved legal issues surrounding Australis’ breach of its licence, nor of the legal action between Gregcarbil and local farmers, including a compensation liability that Richland now carries. Nor are there any further details about the owners behind Gregcarbil.

Caring for Kangaroos

The company that had boxed Richland into a risk-free transaction was run by three locals, including a mother, who spends her spare time talking to tourists and caring for kangaroos. On top of A$1.2m in cash, a local firm had emerged from the Richland deal with more than 8 per cent of Richland’s stock. Had they got lucky, were they simply more astute than Richland’s board, or was there more to it?

Richland has a history of dealing with opaque companies. It countered a hostile takeover in 2008 by issuing 84m shares to a loop of companies beginning in South Africa. Its retail division operates out of Hong Kong and Richland itself is registered to Clarendon House, Bermuda.

The company also has a history of buying assets from private companies at substantial prices. An almost identical deal to the Gregcarbil transaction happened in 2007.

Green Hill Mining

Richland, then known as TanzaniteOne, bought twelve licences in Tanzania from two private companies, Kirkwood Resources and Green Hill Mining. In total, the deal was worth £6m, equal to $12m at exchange rates at the time, landing Kirkwood and Green Hill cash and more than 9 per cent of Richland’s stock.

The licences never entered production and were resold this summer to Sky Associates Group Ltd, another private company, registered in the British Virgin Islands.

Who owns Sky Associates Group? Richland says it is a consortium of Tanzanian and Indian businessmen, unrelated to Richland’s directors. Who owned Kirkwood and Green Hill Mining? Ed Nealon and Nicholas Sibley both held interests, but the company has never disclosed the level of their holding. Why did Richland enter such generous terms with Gregcarbil? Gregcarbil denied any connection to the old Australis licence and refused to discuss the agreement.

Richland says the terms were competitive. Its shares are flying, up 157 per cent this year to 4.5p, but a third, similar transaction gives an intriguing insight into the future.

Magnum Mining

Magnum Mining & Exploration, based in Perth and listed on the Australian Stock Exchange, is superficially separate to the Ed Nealon camp of companies. HSBC nominees rank as the largest investor, holding 7.97 per cent. A list of private companies also hold large positions, including Aero Agencies International, Stately Glory Ltd and Rogue Investments Pty, whilst Ed Nealon appears lower down the register, holding 1.8m shares.

Gerry Nealon (Ed Nealon’s brother) holds a further 3m shares. Together, it equates to a 2.99 per cent interest, but because they are not directors, they would not have to disclose any larger, affiliated interests sitting in private companies.

Magnum’s core asset was a tantalite deposit in southern Namibia, but last year, the company exited tantalite and announced the acquisition of G.E.M Venus Holdings, a private company that owned the Gravelotte emerald deposit in South Africa’s Limpopo province.

G.E.M Venus Holdings

Amongst gemstone dealers, Gravelotte is known as the Cobra emerald mine, reportedly producing more than 100m carats until its closure in the 1980s. Magnum paid roughly A$1.2m, including 8.5m South African rand and 20m shares, valued at A$260,000. It was primarily a cash transaction, but that was not originally intended to be the case.

G.E.M entered the deal on the basis that Cobra would be vended into a London-listed company, but “at the nth hour”, Ed Nealon, who led the negotiations, switched the acquisition vehicle to Magnum Mining. Magnum’s shares at the time were trading at 1 Australian cent, slashing the value of the deal, but G.E.M had already committed to selling Cobra and had run out of options.

Why stop there? Magnum is one transaction short of a fourth, Nealon-style deal. Why not vend Magnum into Richland Resources, allowing the company to sell the story of a consolidated gemstone house in emeralds as well as sapphires, raising fresh capital to keep the wheels turning? Shareholders in Magnum, including Ed and Gerry Nealon, would meanwhile receive a healthy takeover premium.

Magnum said it was not considering a deal with Richland “at this stage”, whilst Richland deferred questions to an email address that has not been used since March. Magnum last traded at 2.7 Australian cents.

Co-published by Global Mining Observer (www.globalminingobserver.com)