Is­land hop­per

Gil­bert­son’s new list­ing harks back to old min­ing house sys­tem

Finweek English Edition - - The Company You Keep - MICHAEL COUL­SON coul­

THE JSE LIST­ING OF Brian Gil­bert­son’s Pallinghurst Re­sources (Guernsey) is a wel­come change of plan (see story on p. 31). When I spoke to him in Lon­don last July, his feel­ing was that rather than list his hold­ing com­pany, he’d pre­fer to list its in­di­vid­ual in­ter­ests. In fact, the cur­rent com­pany was nom­i­nally listed on the Ber­muda Stock Ex­change last Septem­ber, though there has only been one trade: the equiv­a­lent of 500 000 shares at the nom­i­nal value of US$1/share.

But in fact what’s on of­fer isn’t the ul­ti­mate top com­pany in Gil­bert­son’s com­plex Pallinghurst group – that’s the Bri­tish lim­ited part­ner­ship Pallinghurst Re­sources LLP – and its struc­ture bears sur­pris­ing re­sem­blances to as­pects of the old min­ing house sys­tem. While Gil­bert­son (chair­man) and Arné Frand­sen (CEO) are ex­ec­u­tive direc­tors, there’s an in­vest­ment man­age­ment con­tract with Pallinghurst (Cay­man), a lim­ited part­ner­ship reg­is­tered in the Cay­man Is­lands, a well-known (some would say no­to­ri­ous) off­shore fi­nan­cial cen­tre.

The Cay­man en­tity is en­ti­tled to an an­nual fee of 1,5% of the com­pany’s funds for the first five years, the same 1,5% (but cal­cu­lated dif­fer­ently) there­after and, prob- ably more im­por­tantly, a per­for­mance in­cen­tive. That’s re­lated to a hur­dle de­fined as an 8% com­pound re­turn on re­tained funds. Sim­pli­fy­ing the legalese, the Cay­man en­tity will take all the next 2% re­turn and 20% af­ter that.

Let me try and elu­ci­date with a hy­po­thet­i­cal ex­am­ple. Should Pallinghurst earn its tar­get 25% re­turn on its funds, in­vestors will be al­lo­cated the first 8%, Cay­man the next 2%, in­vestors will get 80% of the other 15% (or 12%) and Cay­man the other 20% (or 3%). Tot­ting that up, in­vestors will get 20% and Cay­man 5%.

The ex­ec­u­tives of the in­vest­ment man­ager have taken up shares worth $11m. For all prac­ti­cal pur­poses I imag­ine you may equate the in­vest­ment man­ager with Messrs Gil­bert­son and Frand­sen. That may be a sub­stan­tial in­cen­tive – but it’s also a sub­stan­tial re­ward. I should point out Gil­bert­son and Frand­sen will re­ceive no direc­tors’ fees; but this cream­ing off of prof­its from share­hold­ers is rem­i­nis­cent of how top ex­ecs of the old min­ing houses flour­ished.

It’s a mech­a­nism more com­monly found in as­set man­agers and prop­erty ad­min­is­tra­tors rather than op­er­at­ing com­pa­nies and it’s rel­e­vant that Pallinghurst is be­ing listed not un­der “Gen­eral min­ing” or even “Di­ver­si­fied in­dus­trial” but as an “Eq­uity in­vest­ment in­stru­ment” along with the likes of Brim­stone, HCI (the sec­tor leader, with a mar­ket cap of R7,5bn), Makalani and Sab­vest.

Pallinghurst’s port­fo­lio has been widely writ­ten about, so I won’t go into de­tail. It in­cludes the Fabergé brand and a see-through 28% stake in the Gem­fields emer­ald mine in Zam­bia, to which, as soon as pos­si­ble af­ter the list­ing, will be added in­ter­ests in the Ntsimbintle man­ganese prospect near Sa­man­cor’s Ma­mat­wan mine and two platinum prospects – the hot com­mod­ity of the mo­ment, de­spite re­cent price weak­ness.

The bal­ance sheet puts to­tal as­sets at $172m, of which Fabergé con­trib­utes $26,5m, Gem­fields $31,9m, a $2,3m loan to the man­ganese project and $112,7m cash and near cash, of which $35,3m is de­scribed as “un­al­lo­cated”. That seems to leave a fair sum for fur­ther ven­tures.

With 169,3m shares in is­sue, net as­set value is 102c/share (US) – around 785c (SA). Writ­ing (due to dead­lines) be­fore the start of the list­ing, I hes­i­tate to sug­gest how the share price may re­late to that. Much may de­pend on how many shares the 67,4% con­trol­ling share­holder – a Guernsey char­i­ta­ble trust whose ben­e­fi­cia­ries aren’t dis­closed – de­cides to make avail­able to the mar­ket.

How­ever, I hope it de­vel­ops an ac­tive mar­ket and I look for­ward to the de­ploy­ment of that “un­al­lo­cated” $35,3m, as I’m sure the in­vest­ment man­agers won’t want it to sit idly in a bank for too long earn­ing only nom­i­nal in­ter­est.

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