Kingsgate's cashbox

Ross Smyth-Kirk is the Executive Chairman of Kingsgate Consolidated Limited.

This is a unique situation, as it is not an operating company anymore; it's basically a cashbox. It's recently won an insurance payout, because the mine that it had in Northern Thailand was expropriated by the Thai government in 2016 and it had sovereign risk insurance which it had to negotiate and go to court over with Zurich. It finally won $82 million in December. The company has repaid its debts, and now has about $50 million in cash. It also owns a deposit in Chile which it's also trying to sell and Ross Smyth-Kirk says that's it's worth about $25 million; the market cap is $60 million, so basically the market cap is covered by cash and the potential proceeds from selling this deposit in Chile.

But the reason potentially for investing in this company if you're interested would be because it's got a claim against the government of Thailand under the Australia-Thailand Free Trade Agreement and that's under arbitration in Hong Kong and it's going to be heard in November. And that could lead to either a heap more cash or nothing, who knows? It's one of those situations that is basically a bet. They've got a claim under the Free Trade Agreement against Thailand, it's being arbitrated, they could either get cash or get the mine back, which they could then sell. Ross Smyth-Kirk says that the intention would be to give the cash back to shareholders, whatever is achieved. 

But the point is, I guess, is the downsides are protected by the cash that they've got, as long as they don't spend it and in particular, waste it.

He says they won't do that. So the downside, it's a bet where the downside is protected it looks like. The market cap of $60 million is covered by existing cash and potential cash from selling the operation in Chile so a unique opportunity, certainly not an institutional investment and certainly not one for the most conservative investors, this is something where you might want to have a bit of an interesting play on. It's certainly an interesting and quite unique situation. 

Here’s Ross Smyth-Kirk, the Executive Chairman of Kingsgate Consolidated Limited to explain what's going on.

Ross, you've just succeeded in settling the insurance claim for the gold mine in Thailand claim, and I think it's $82 million, can you just give us the background on that?  How did that come about?

Well right at the very start of our involvement in Thailand, going back into the last century, we had a political risk insurance, we originally financed the operation with a loan from Macquarie Bank and they required political risk insurance at that time, we had political risk insurance all the way through it, we continued it for about 16/17 years. 

Who was the insurance with?

Over the years it was with, the main insurer was Zurich but what happened was in...  Gee, I'm getting my dates mixed up now, but I think in about 2015 we were temporarily closed down by Director General of the Department for about six weeks on probably what was an illegal thing but we didn't challenge it and we realised that things were getting harder and could intensify up there.  So we kept as to what our level of insurance was and even though we talked about it many times over the years about increasing it, we hadn't increased it, it was for $30 million.

I asked people to talk to the insurance company and see if we could make it higher, we ended up coming to an agreement for US$200 million.  The policy was for US$200 million, the main insurer was Zurich, they had about I think it’s six other Lloyd's syndicates involved.

Right, and so what we're talking about is a gold mine that you were developing in Thailand?

Yeah, well we developed it and opened it in 2001, it was operating, it was a very successful gold mine and it's gold with some silver and it was very successful, in fact we paraded it for a long time as the gold mine of South East Asia, to show how these things could be done in these areas because they don't have a long history of mining in a lot of them.  In fact, we were visited by nearly every South East Asian country over the period of our involvement to just see how a modern gold mine, how mining should be done.  Which is terribly ironic with what happened.

And so what did happen?

When I go back over it, Alan, our main problem was we were too successful.  Success in a lot of these areas generates a hell of a lot of jealousy, a nationalistic tendency, "You're making too much money, et cetera, et cetera." A hell of a lot of greed over us and the inevitable corruption that you're dealing with in all of these countries, so it's a combination of a whole lot of things. 

I mean it starts in a thing, you've got to buy your land right, because there's no adjudication process about land so you need to own the land.  At some stage you have to stop buying land so the guy down the street, the next door neighbour wants to know why he's not getting the money that his neighbour got, et cetera, et cetera.  It starts in those kind of things, there's a lot of greed and lot of things there, so people have their noses put out of joint and people are very greedy.  Over a period we started getting stories about how we had environmental problems, how we had health risks and everything and unlike here of course where we have a reasonable media, up there the media just prints anything, anything that anybody says without any clarification whatsoever so eventually it feeds on itself.

And of course, we had lots of advice on how to handle things in these countries and our advice was to keep our heads low, to keep a low profile, don't argue, don't take on people and stuff like that which all turned out to be totally wrong.  Once it's in the media it just feeds on itself and then the media harass the bureaucracy and the politicians and it becomes a nightmare that no one can control.  It's a sad story but it's an interesting one for people dealing in those areas.

The government just took the mine off you did they?

Well they closed it down, I mean we're dealing with a military dictatorship up there at the moment, and as I say, this stuff in the press was becoming more and more intense and putting more pressure on the bureaucrats and the politicians.  The dictator at the time, his popularity had reached lower depths and he decided it was a good idea if we could take on this terrible international company that's exploiting our peasants up in the north.  He was ill-advised and it was a very stupid decision but he did it and everyone's been trying to dig him out of a hole ever since but they can't, because if they pay us the compensation we're clearly entitled to they'll have to admit that they made a mistake and that they did something wrong and therefore they lose face.

What we're dealing with at the moment is an incredible Asian save face situation that will only be resolved if we can properly negotiate with them, which at the moment we're negotiating but we're miles apart, or they get hit with this international arbitration that we're taking.  We're taking legal action under the Thai-Australia Free Trade Agreement, which we're clearly entitled to compensation for.  There are provisions in it that’s almost specifically to handle these kind of things. 

In the meantime you've put in a claim under the sovereign risk insurance, right?

Yeah, yeah.

And did Zurich deny it?

They never denied it, they just played hardball.

What does that mean?

Well we negotiated for about nearly two years and got nowhere so we sued them in the New South Wales Supreme Court and that was to come up, the court action was to be in June.  But we negotiated a number of times before that, we had court sanctioned negotiations to start with and that got nowhere, but as it got closer, they decided...  I mean they never said that they don't have to pay, they claimed a whole lot of different things that they were going to challenge us on, but they knew that they would have lost.  We ended up settling after intense negotiations and that was really intense and unfortunately was lower than I'd hoped we'd be able to get but unfortunately, we'd pushed it as far as we possibly could and we were in no position to properly carry on because of our cash situation and unfortunately insurance companies can read as well.  So they played very hard ball.

So you've now...

But I mean everybody that was involved thinks that our settlement on it was pretty good and that the deal was pretty good, US$55 million plus they're contributing up to another US$3.5 million on future legal expenses under the TAFTA case.

Right, is that going to cover your costs in the TAFTA case?

Yeah, we hope so, we probably paid about two million, let's hope so, in legal costs for the two cases and we estimate that it's probably another 10 million Australian so that's about seven million US so that's half, of it of course.

You've repaid the loan now, I think, haven't you?

Yeah, yeah.

And how much cash have you got left?

I don't have it on me exactly the amount, but it's around about 50 million Australian, it might be just a little bit less.  We repaid the loan, we'd also come to agreements with a number of our creditors on things that we had to repay, some of our legal expenses, preference shareholder up in Thailand, et cetera, everybody had been playing ball on it and helping us with everything.  Directors hadn't taken any fees for six months as well so I mean everybody was trying to do the right thing to try and get a resolution. 

Before that we do have another project in Chile called New Esperanza, it's a nice silver gold deposit and we have had that on the block to sell but of course same thing, people think that it's a fire sale situation as well.  So anyway…

How much do you think that project's worth?

Doesn't matter what it's worth, it's what you get for it.

Well what do you think you can get for it?

Our expectations have come down over time, but a minimum of probably US$25 to 30 million, something like that.

I mean obviously I'm asking because your market cap is $60 million, if you've got $50 million in cash and that's worth $20 million then the market cap is well covered.

Yeah, oh yeah.

What's the plan?

Sorry?

Sorry go on.

No I was saying, look it's quite a unique situation, it's one of these...  I mean I couldn't recommend it for institutional investors unless they had a high risk profile and could understand it, but it's one of these situations.  It's a high risk, potentially very high return situation at these kind of levels.

Why would it be very high return?  I mean if there's potentially...

It's a matter of how much we could get under TAFTA, it's a matter of how much it would be to TAFTA.

Oh I see, in the TAFTA.  So is the deal with the...

And that is an asset, see people here in investments are not used to looking at these things as assets.  Our insurance policy was an asset and this was pointed out to me by a lawyer, he said, "You realise you're sitting on two very, very high worth assets here?" But no, the people here in Australia particularly don't quite appreciate that.

Yeah, well I'd assume obviously wrongly that if you got some money under the TAFTA claim that you have to repay the money to Zurich, is that not correct?

Yeah, we've got an agreement with them.  The thing is this was one of the things that hung over it as well, they had subrogation rights, right?  So normally in an insurance situation like this they pay out a policy and they probably own the asset or be able to do the asset.  With our situation the asset is the court case, so the plant, the whole thing is separate to that.  There was no point them coming and taking over it but on top of that because it's under the Thai-Australia Free Trade Agreement it has to be an Australian company and basically, we were advised the structure as we have it now not to be changed, to continue litigation.

Whilst we can have a side deal with them and pay our stuff we have to be the party that does the litigation so they had to join us in that rather than take it over themselves.

Yeah, right I get it.  Tell us about the action under the Free Trade Agreement, is that in court and how is it to be decided?  What are the grounds for you winning on that?

Right, well under the Free Trade Agreement the expropriation of assets of an Australian company, they can expropriate your assets but they have to pay fair and adequate compensation and immediately and of course they haven't done that therefore they're in breach of the TAFTA.

We're taking action in an international arbitration case, it's to be heard in November of this year, I think it's the 19th to the 28th I think, it was to be in Singapore but it's been transferred to Hong Kong and the whole process is very, very well advanced.  We've submitted our case and all our witness statements, et cetera, they've submitted their case with expert, so called expert witnesses and stuff.  We have now till June to counter those witnesses and any statements that have been made and it'll continue from there.  But as I say, heard in November of this year. 

The whole international arbitration thing is a whole big industry, that well I certainly didn't know and I think very few people here even understand that it exists.  But I believe there's about 30 or something international arbitration cases on at the moment involving Australian companies so I'm told.  Anyway…

Who makes the decisions?

Not specifically mining.

Who decides?  It's a judge in Hong Kong decides?

No, no, no, no it's a whole industry of its own, I've met with people all around the world feeding off it, it's very expensive and lengthy.  What happens is you have a three-man tribunal and there's a whole selection of people who sit on these tribunals, they're ex judges and legal types.  We're allowed to appoint one, they appoint one and then those two then appoint another one as an independent and chairman of the tribunal.  But we're allowed to object, we're both allowed to object to that.  So that was done 18 months ago or something, the tribunal has met and sat on a number of occasions and a whole lot of things are clarified, for instance we were having it in Singapore and we had that preliminary thing in Singapore a couple of months ago.  But one of the arbitrators is an ex Hong Kong judge and he requested that if everyone would agree if they could move it to Hong Kong.

Anyway, so that's what's happening.  We went through a whole rigmarole about what jurisdiction, or where it would be to start with, what legal jurisdiction it'd be under.  We opted for Singapore law, they argued for UK law but apparently there was more chance of them being able to appeal under UK law so we won on that, we got it under Singapore law.  They asked for confidentiality, we opposed that, we lost on that, it's a confidentiality thing so unfortunately there's a lot of things that we...  Now, I'm probably saying too much about it anyway but there's a lot of things that we basically are not supposed to say.  But basically, all it means is that the public's not there at the hearings I would think, because we've got a dispensation in it because we're a listed company anything that we have to announce under the ASX rules we'd be able to announce.  So yeah, one of those.

All I'm trying to say is there's been a whole lot of things already set out and done and it's getting to final stages of the whole exercise.

What does success look like?  Do you get the mine back or do you get cash?

There's no decision on that exactly.  We're certainly after compensation, cash.  The thing with the mine is, we still have mining leases over the area, Kingsgate, the parent company, owns the land that the actual plant is on.  That was one of our original dispensations we got from the Board of Investment in Thailand.  All the rest of the land that the mining leases are on are actually owned by a Thai subsidiary so I doubt whether there's a chance of them, without us doing a deal with somebody or with the government, there's any chance of us losing the actual mine itself.  However, they have brought in a whole lot of new legislation since they closed us down at the end of December 2016.  They have a new Mining Act and a new Goal Policy, both of which have got items in there that I don't believe that anybody that understands mining or any proper mining companies would be able to operate under and that is part of negotiations we're...to them on.

Right, I understand why you'd want to just get cash and get out of there.

Yeah, and of course, that gets to the thing, even if you win there's a chance of a appeal and then you've got to get your money, you know?  It's still a process and it's still got high risk to it, there's no doubt, but potentially quite a high return. 

But if you lose, so the downside, I'm just trying to explore the downside now for an investor who decides to take a punt on it.  Is there downside protected?  I mean will you, if you lose, return the cash that you've currently got and the cash from selling the Chile operation to shareholders?

Look, the whole intention, and I've said publicly all the time, is that excess cash that we get from any of these things will be returned to shareholders.  We've been through a terribly rocky road for quite a considerable period here and we've had a lot of loyal shareholders, particularly reasonably high net worth and small Australian shareholders and we've always been shareholder oriented and I certainly wouldn't leave the company with hundreds of millions of dollars sitting in it for somebody else to piss up against a wall, quite frankly.

But you wouldn't aim it at the wall either, would you?  I mean you wouldn't propose to have another crack at another mine?  Sorry.

Possibly, yeah.  But I'm saying that a bit flippantly but I'm getting on as well, it's a matter of how long I stay involved as well and by all Australian corporate governance stuff, I've been here far too long.  Anyway, sometimes it needs that.

How old are you?  How long you been there?

I'm 72 now.  I've been on the board since about ‘94, I think it was, when we rescued the company at the time before it got into production, so it's a long time.

Are you saying that the aim one way or another is to basically liquidate Kingsgate and return the money to shareholders, whether you win or lose?

It's not to liquidate it.  As you can appreciate even in the last few weeks since we now have money, we've miraculously changed around from having our arses exposed to having money we're being pursued by lots of people that've got projects.

But you have to resist, right?  You have to?

We're not rushing into anything. 

Yeah you have to resist, you have to give the money to shareholders?

Yeah, exactly, exactly.  And basically we are unique amongst Australian mining companies, we gave a dividend to shareholders seven months after starting a production and I was criticised for that and they said, "Mining companies don't do that." And I just said, "Well, why don't you mining companies pretend that you're a real company and give money to shareholders?" We, over the period of our operation, about 15 years or something, we returned over $100 million in dividends to shareholders.

Well there you go.

I mean we've got a long record of it, and I think you probably know I had a background in investment management and I'm very much on the shareholder’s side, I can tell you.

Yeah, very good.  Well interesting to talk Ross.

So it's an interesting situation, it's a difficult one but it's a potentially high risk but potentially quite high returns.

Very interesting.  Thanks very much, Ross.

All right, good to talk to you.

That was Ross Smyth-Kirk, the Executive Chairman of Kingsgate Consolidated Limited.