Oriental Peninsula stock collapse: another lesson in equity investing

Judith Balea, abs-cbnNEWS.com

Posted at Aug 27 2008 06:03 PM | Updated as of Jun 04 2009 09:29 PM

When an investor in the Philippine capital market loses a whopping 65 percent of the value of his or her investment over six months, fingers are inevitably pointed at the culprits and blame game ensues.

It's a typical affair at the local stock market when a listed company's shares zoom up or down. Capital market regulators and some involved in selling the stock stress that it's the investors who should watch out for the risks, which come with the prospects of high returns.

On the other hand, investors say market regulators, including the Securities and Exchange Commission (SEC), are supposed to protect the interest of the investing public by keeping risks in check.

All these come to fore again because of Oriental Peninsula Resources Group.

Hundreds of individual and corporate investors who bought P804 million worth of 300 million Oriental Peninsula's shares during or after its initial public offering (IPO) in December 2007, now find themselves holding an almost empty bag as the listed firm failed to deliver ostentatious promises on time.

As uncertainties clouded Oriental Peninsula's growth prospects, coupled with unfavorable capital market conditions, the stock collapsed straight down to P1.14 per share, a 57 percent decline over its listing price of P2.68.

In the first half, it lost 65 percent, underperforming the mining and oil index, which only shed 18.1 percent. Mining firms are supposed to be a good buy considering that metal prices continue to go up alongside oil prices.

The meat of the case

Oriental Peninsula, through unit Citinickel, currently holds a mineral production sharing agreement (MPSA) with the Department of Environment and Natural Resources (DENR), covering an area of 2,176 hectares in Palawan, of which 1,408 hectares is located in Sofronio Espanola and 768 hectares in Narra.

The MPSA is being questioned by PGMC, which conducted small-scale mining operations in the sites after signing a 25-year operating agreement with landowner Olympic Mines and Development Corp. in 2003. However, Olympic had sought the cancellation of its agreement with PGMC when it executed a deed of assignment transferring all rights and interests in the mine sites to Citinickel. PGMC alleged that Citinickel could not have gotten an MPSA without the consent of the indigenous people in the sites who assailed the latter's mining rights claim. PGMC also said that it has the Palawan provincial board's project endorsements that are non-transferrable.

In July 2006, Citinickel filed a petition before the Panel of Arbitrators of DENR in Region IV, asking for the cancellation of PGMC's environmental compliance certificates (ECCs) and small-scale mining permits (SSMPs) as well as its operating agreement on allegations that it over-extracted minerals. The DENR ruled in favour of Citinickel.

PGMC, in turn, appealed the order to the Office of the President, which reinstated the company's operating agreement, including its ECCs and SSMPs.

As expected, Citinickel challenged the decision of the executive department before the Court of Appeals.

Latest CA decision

The seemingly unending legal war between the two mining companies took another turn recently when the appellate court promulgated a decision that upheld the previous ruling of the President.

The Office of the President, citing lack of due process, reversed the DENR's decision and ordered further investigation into the reported over-extraction of nickel ore by PGMC.

Oriental welcomed the CA decision. But it emphasized that the appeals court in no way "accorded the mining rights" over the Palawan sites to PGMC.

"It must be emphasized moreover, that the original complaint for the cancellation of the ECCs of the small-scale mining permits of PGMC…has already been rendered moot and academic as [these] already expired last April 2008," it said.

"Thus, there being no more valid and existing small-scale mining permits, the issue of the cancellation of the ECCs of the [permits] regarding over-extraction of minerals and other violations by PGMC is no longer necessary," it added.-Judith Balea

"I am disappointed," one investor in his mid-30's who was attracted by the growth prospects of the mining industry told abs-cbnNEWS.com. Instead of putting his hard-earned P50,000 in passive investments in banks and other less risky financial products, he said he bought shares in Oriental only to lose more than half of it.

At the core of these uncertainties dragging Oriental Peninsula's stock price down are legal issues on who owns the mining sites from which Oriental Peninsula was supposed to extract billion pesos-worth of nickel ore.

Contested mining sites

The ongoing legal saga between two local mining companies over a mineral-rich property in Palawan has been initially shrugged off as just another family feud story with complicated twists and turns, or as another example of the complexities of doing business in the Philippines.

Skyrocketing nickel prices in the world market turned old family friends and business partners—the Atayde and Lecaros families—into bitter foes. Both families have a long-standing operating agreement over the low-grade nickel laterite deposits in Narra and Sofronio Espanola towns in Palawan province.

The Lecaros' Olympic Mines are the original claimant to the area and have tapped the Atayde's Platinum Group Metals Corp (PGMC) to operate the mines. PGMC was operating on a short-term small-scale mining permit while it also pursued the requirements for a longer term permit from the government. (Read: "Meat of the Case")

The Ataydes said they were surprised when the Lecaroses revoked their operating agreement and assigned the already approved long-term mining permit to Citinickel Mining Development Corp.

Series of court cases on various issues surrounding the disputed mine sites have been filed among PGMC, Olympic Mines and Citinickel.

Citinickel is a subsidiary and the main moneymaker of listed company, Oriental Peninsula.

Before Oriental Peninsula listed its 300 million shares out of its outstanding 1.45 billion shares in the local bourse in December 2007, it said it planned to ostensibly use the IPO proceeds of P804 million to operate the Palawan mine sites.

Oriental told investors that its unit, Citinickel Mines and Development Corp., would start mining operations in Palawan early 2008 and nickel ore production by the first half. The company projected its first shipment to reach 600,000 metric tons.

Nearly eight months since the IPO but these targets still hang in the balance because Citinickel has no physical possession of the land, whose actual occupant is PGMC.

Warnings in fine print

An inevitable question, thus, persists: With these legal issues, why was Oriental Peninsula allowed to obtain funds from the general public in the first place?

Based on interviews by abs-cbnNEWS.com, the market regulators were aware of the legal issues before Oriental Peninsula's IPO.

PGMC had written to the corporate watchdogs, the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE), to reject Oriental's application for an IPO because of its "improper disclosures."

PGMC stressed that Oriental Peninsula did not disclose to investors that it has no presence in the mine sites, which PGMC has been operating since 2004. PGMC said the rejecting the IPO proposal would benefit retail investors since the valuation of the maiden offer was based solely on the operations of the two Palawan sites.

However, the regulators considered PGMC's complaint as without merit and allowed Oriental Peninsula's listing to proceed.

Both the SEC and PSE granted Oriental a listing permit after finding it in full compliance with disclosure requirements.

Disclosures are vital to help retail investors make informed investment decisions. For IPO hopefuls, these come in the form of prospectuses.

Oriental Peninsula, for its part, furnished investors a 166-page prospectus that is downloadable from the website of the PSE.

In pages 28 to 34, the company discussed briefly the risk factors, including ongoing litigations, which could hurt its share price after its listing. A longer discussion of the court cases, most of which are with PGMC, was buried in pages 84 to 88.

In other words, these were warnings tucked away in the fine print.

Conflict of interest?


In a phone interview with abs-cbnNEWS.com, PSE president Francis Lim said that their responsibility lies in ensuring accuracy in disclosures made by publicly-listed companies.

He said the approval of Oriental's IPO was preceded by thorough discussions among the PSE board members.

It is worth noting, though, that one of the board members, Roberto Atendido, is president of Asian Alliance Investment Corp., the underwriter of Oriental's offering.

Underwriters earn from an IPO by buying all the company shares to be offered and selling these for a premium to investors.

When asked how a board member with vested interest on the successful listing of the shares of the company in question could give an impartial vote on the issue, Lim dismissed it by saying it was not just Atendido who had a say on the matter.

"We had special board meeting on this and we deliberated on the complaint of the other party (PGMC) regarding Oriental's prospectus. The legal cases were disclosed in the prospectus and we found no reason to deny the application," Lim said

Lim said the board also noted that the SEC has already junked PGMC's petition for a temporary restraining order against the IPO.

By buying Oriental shares, Lim stressed, investors took the risks and betted on the company's ability to deliver on its promises.

Regulators must protect investors

The question now rests on the readiness of the regulators to step in on matters concerning the welfare of the investing public.

A 1997 ruling of the Supreme Court on the proposed listing of Puerto Azul Land Inc. should be instructive. The high court basically said that SEC's mandate cannot be fulfilled only on the basis of requiring full disclosures of companies.

Citing Section 9 of the Revised Securities Act, the high court cited the grounds for possible rejection of a security. It said, "A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the issuer, to be determined by the SEC."

The high court ruling also stressed that it is the SEC's responsibility to protect investors.

"This measure was meant to protect the interest of the investing public against fraudulent and worthless securities, and the SEC is mandated by law to safeguard these interests, following the policies and rules therefore provided."

"The absolute reliance on the full disclosure method in the registration of securities is, therefore, untenable."

However, this seems lost to several stock market stakeholders.

While expressing his sympathy towards investors who have been caught out by the plunge in the share price of Oriental, Astro del Castillo, an analyst at First Grade Holdings, noted however, that investors carry the blame for whatever losses they might have incurred from their investments.

"They cannot really point their fingers to the company. The situation right now is beyond the control of Oriental. Public investors are unwarranted victims," he said.

IPO disbursement


In its final IPO prospectus, Oriental gave an overview of its operations and the operations of its affiliates. It also detailed its business plans and where it would spend the proceeds of its maiden offering. (See table below)

USE OF PROCEEDS

(in millions)

PROPERTY, PLANT, EQUIPMENT:

Capital Equipment

P130-P200

4Q 2007-2008

Mine site and Mine camp development

P50-P80

4Q 2007-2008

Laboratory

P20-P30

4Q 2007-2008

Road Network, Bridges, Drainages and Dams

P100-P150

4Q 2007-2008

Land Acquisition

P60-P100

4Q 2007-2008

Pier Site Development

P80-P120

4Q 2007- Q1 2008

Ore Stockyard Site

P20-P30

4Q 2007- Q1 2008

Exploration and Validation

P20-P30

2008

Sub-total

P480-P740

 

INITIAL WORKING CAPITAL REQUIREMENTS:

Direct Mining and Handling Costs

P20-P30

Q1 2008

Assay, Laboratory, Power, Fuel and Other Mining Costs

P10-P20

4Q 2007- Q1 2008

Direct Labor

P5-P10

4Q 2007- Q1 2008

Loading and Barging

P20-P30

4Q 2007- Q1 2008

Total Overhead

P5-P10

4Q 2007- Q1 2008

Sub-total

P60-P100

 

TOTAL

P540-P840

 

The legal impediments have kept Oriental Peninsula from delivering on the goals it had set.

We called and emailed questions to representatives of Oriental Peninsula to inquire about their plans as the court cases drag, but we have not received a reply.

As far as the disbursement of IPO proceeds is concerned, Lim said the company has the option to deviate from the original plan it presented to investors.

"For example, they want to invest in other mining claims, they can do that as long as they disclose it to the public. We don't impose penalties on deviation but on non-disclosure," he said.

Looking ahead, analysts expect prospective investors to shy away from Oriental's stock as time-consuming court battles continue to hamper its business plans.

"I don't think the price of the stock would go anywhere until these are resolved," Francisco Liboro, president of brokerage firm PCCI Securities, noted.

More stringent rules

When caught up in bitter legal battles like this, retail investors undeniably get the short end of the deal, said PCCI Securities' Liboro.

"The public is very trusting. Maybe that's why they still bought Oriental shares despite pending cases, it's because they trust that regulators examined the risks very well," he said.

"Now, in cases like this, the regulators may need to look at the requirements again. Be more observant of what the situation really is and lay down more stringent rules," Liboro added.

Preserving public trust, after all, should be at the core of efforts in boosting market trading, especially since a recent study by PSE showed less than one percent of Filipinos invest in stocks, making the country a laggard in Asia.