JES's bet on Mineriver leaves no room for error (Amended)

IS it too good to be true?

That's the question investors, traders and analysts are asking, after Mineriver, the Xinjiang mining exploration firm in which mainboard-listed JES International is buying a 30 per cent stake, announced that it is sitting on 4.2 billion tonnes of resources worth more than US$500 billion.

The share price of the Chinese shipbuilder soared to a year high of 20 cents on active trading last Wednesday, one day after the announcement.

Over the next few days, however, mounting scepticism over the figures pushed the price down to 17 cents on Monday. The counter closed trading at 17.9 cents yesterday.

Much lies at stake for JES International on this question.

If Mineriver were to realise its potential, it would be a dream come true for struggling JES, which owns a shipyard in the Jiangsu province.

Overcapacity in the Chinese shipbuilding industry and a global slowdown in demand for shipping vessels have caused the firm to sink into the red for the past four consecutive quarters. On its balance sheet, current liabilities have overwhelmed current assets in the same period, implying that JES could face problems meeting its short-term obligations.

In a sign that the weak macro environment is continuing to take its toll on the firm, JES increased its provision for liquidated and ascertained damages in the last quarter to 70.4 million yuan (S$14.9 million) - the highest since it started doing so in the 2011 financial year. The additional provision was made for potential penalties the firm might have to pay for the delayed delivery of vessels in the third quarter of 2013, as the refusal of customers to take delivery of completed vessels in the midst of the downturn affected the production of other vessels at the shipyard.

The amount of cash and cash equivalents that JES is holding has similarly fallen to 32.4 million yuan as at Sept 30 last year, from 227.31 million yuan a year earlier.

At the same time, as a result of a monetary tightening policy in China, banks there have been reducing their support to the shipping industry, including JES International, its chief financial officer Patrick Kan told reporters last week, though he added that there are signs of a turnaround.

The only bright spot for JES is in the offshore marine business, a new area for which the firm just started work end last year, where the firm is seeing strong demand.

Such dire straits is why JES is betting the farm (or shipyard, in this case) on Mineriver - the $127 million it is paying for a 30 per cent stake in Mineriver represents almost 90 per cent of its market capitalisation.

Much scepticism, however, remains on the size of Mineriver's resources.

The firm on Monday sought to dispel these by emphasising that SRK Consulting, which wrote the report, is an established international firm which has done similar work for other firms seeking listings on stock exchanges.

JES also released the JORC (Joint Ore Resources Committee) report on the Singapore Exchange.

The credibility of the report aside, other questions such as future capital expenditure and operating costs also hang over Mineriver.

Mineriver's chief executive Ho Sing Ming said in response to queries from BT that the costs of extraction from the mine are likely to be low.

"Because ours is a surface mine, and the accessibility of the mine is so good, I don't have a concern that there will be a big difference between resources and reserves (which indicates the current economically mineable part of a resource)," he said.

Mineriver is planning two approaches to developing the mine. Firstly, it will set up its own facilities to produce magnesium-rich serpentine fertiliser and flux, which is used in steel making. As this is done through crushing, it will be relatively low in capex, costing an estimated $30 million, Mr Ho said.

For the more capex-intensive work of extracting and processing the ore into magnesium, Mineriver will partner larger multinationals that have the resources to do so.

A large cash infusion for Mineriver will come from the $127 million that JES is injecting into the firm, through a combination of cash and share issuance. Some $2 million out of $7 million in the first tranche payment for the deal has been completed.

To raise cash, JES could issue bonds, or conduct a rights issue, Mr Kan said.

Given the capital intensity of mining projects, the latter could be the first of many cash calls that the firm might have to make of its shareholders.

For JES then, there is no room for error - the deal has to come good. The alternative would, otherwise, be disastrous.

We wrongly stated that JES had parted with $7 million so far in the deal. JES has pointed out that only $2 million out of $7 million in the first tranche payment for the deal has been completed. We are sorry for the error.