I want to thank everyone for the support after my first post. I wasn’t sure if I would have the time to keep up with this blog, but the support definitely motivates me to try.
This will be my first post on Migao “TSE:MGO”. I have many more half written posts in the pipeline on Migao; however I thought that instead of taking a while and having one large post I would do smaller more frequent posts.
The Russian Deal
In this first post I thought I would highlight the largest and most blatant red flag of all. From a March 15, 2011 Migao press release:
“As part of the terms of the agreement, Migao will prepay USD $100 million, with further payments to be negotiated and advanced prior to the initial potash delivery in January 2013. Migao will receive preferential pricing on up to 500,000 tonnes of potash per year for 10 years.”
It is not common business practice to write a cheque for $100 million USD for delivery of potash over a year away and then not disclose ANYTHING about the company with which the money was given.
As per this article, Migao cites that the reason for lack of disclosure is that they do not want to give away any competitive information. This sounds awfully similar to Sino-Forests excuse for not disclosing some of their transactions.
The concern with this transaction is that the Russian company with which the agreement was made could be an undisclosed related party that Migao is using to funnel money out of the company. In almost every RTO that has been halted so far, a vast majority of them have failed to disclose related party transactions.
However it should not be too difficult to find out who this Russian company is, because there are only two producers of potash in Russia. So you would assume that it would have to be one of these two companies. However as per this article, both of these producers have denied involvement in the transaction.
If you’re not already concerned, it gets better. I was reading a few of the earlier filings (April 13th 2006 information circular) by Migao prior to them going public and noted two things of concern.
1) The company has a history of purchasing raw materials from related parties.
“During the year, the Company purchased $NIL (2004 - $3,659,001 and 2003 - $751,202) of raw
materials from Dandong Development District Yongfeng Agriculture Development Co. Ltd.
(“Yongfeng”). Yongfeng is related by being controlled by a person related to the shareholder of Yongcheng.”
The shareholder of Yongcheng is Mr. Liu Guocai and he is the Chairman of the Board, General Manager and CEO of Migao.
2) Prior to Migao being publically traded in 2006 via a reverse takeover of Fox Mountain, Migao was owned 75% by the CEO Mr. Liu Guocai and 25% by a company called Russia Liumix Chemical Co. The 25% ownership was eventually converted into equity of Migao. I have not been able to find any other information about Liumix, but the fact that 25% of Migao used to be owned by a Russian company and the other 75% by the current CEO certainly doesn’t ease the concern that Migao is using this Russian contract for illegitimate purposes.
Disclosure: Short Migao
