A 'SLOW CHECK FROM CHINA' FOR UNWARY INVESTORS
by Joe Shea
American Reporter Correspondent
BRADENTON, Fla., March 10, 2004 -- The old phrase "a slow boat to China" may soon compete with a new one: "A slow check from China."
The country's laggard pace of business is endangering billions of dollars and countless investors. Some have seen their stocks nosedive because China has failed to perform as promised on an investment.
Once-eager investors in the allegedly booming Chinese economy may find that the country's state-owned businesses are eager to strike a deal but slow to keep it, and especially slow to pay foreign companies in dollars. And in at least one case, Chinese demanded that a company purchase $50 million in Mongolian bonds - whose real value is unknown - as the price of doing business. That - along with a huge balance of trade deficit and the loss of tens of thousands of American jobs to cheap Chinese labor - is the downside of the rush to trade with China. The upside has yet to reveal itself.
I know what I'm talking about. Last year, I began investing in a small Canadian oil and gas exploration company whose owner had some very notable successes with ore. He had solid ties - or so they seemed - to Chinese leaders and was able to get his foot in the door of their nascent oil industry. He parlayed his contacts into a deal with the Chinese state-owned CITIC holding company under which both parties would fund an energy exploration venture called Sunwing whose shares would be listed on the Hong Kong Exchange.
Sunwing had a great name, but no cash until it was funded by the two sides. China's share was $20 million, and Ivanhoe Energy Co. (IVAN on the OTC BB, IE on the Toronto Exchange) had to put up an equal amount. The company had drilling projects in what as know as the Yudong Block that required immediate day-to-day funding.
When the dough started to flow, it would go into British Virgin Islands company, which would issue 100 shares and disburse the revenues 70 percent to Ivanhoe and 30 percent to China. China can relinquish its shares in the new company to Sunwing in exchange for Sunwing shares, and Ivanhoe can require CITIC to transfer its Sunwing holdings to Ivanhoe in exchange for a 20 percent share in Sunwing.
In the Sept. 26, 2002, agreement with Ivanhoe that set up Sunwing, China warranted that it "has the necessary corporate capacity and authority to execute and deliver this Agreement and to observe and perform its covenants and obligations hereunder..." The "authority," though, is now in disarray.
The Chinese check was to come, Ivanhoe told investors based on Chinese commitments, "by the end of December." It didn't arrive. The stock, which had been going up at a pretty good pace, started to slip. Then a company spokesman told the American Reporter in early February that the check would be in hand by the end of February.
Investors began to notice, and the short-selling sharks called "bashers" that inhabit the Yahoo and Raging Bull investor boards started amplifying the panic. Down the stock went, wiping out hundreds of millions in market capitalization and forcing Ivanhoe Energy to private placements to raise funds to keep their enterprise going.
On top of that, the chief tout for the stock, a CBS Marketwatch writer named Thom Calandra, was forced to resign after he reported getting free trips to China from the company (and then Editor & Publisher gave his editor their top journalism award, the Eppie).
It is a matter of some encouragement that one of the big investors in IVAN is headed by John E. Robson, the former deputy secretary of the Treasury who also headed the Resolution Trust Corp. when S&L's were going belly-up. I am inclined to trust his judgment, even if he does live in San Francisco.
Robson's venture fund bought 6,600,000 shares in a deal that closed in February, and since then they have bought a couple million more. The company has bright prospects - but its investors, especially those who may have purchased IVAN on margin - have lost their pants. It's cost me about $25,000.
The problems with the check had political origins. When a natural gas explosion wiped out a village and killed hundreds of people in late December, the Politburo officially blamed the management of CITIC.
Naturally, in a state-driven economy like China's, heads began to roll. There may have been no one around to approve and sign the check due Ivanhoe Energy. Now, the Vancouver-based firm says it expects the check "when it is approved by China."
Not only is Ivanhoe $20.9 million deeper in debt, at least in the form of equities, but here it is mid-March and they still haven't received their $20 million from China. And some suspect that among the purchasers of large blocks in recent weeks have been - guess who? - Chinese state-sponsored investors who want to be able to control a company they are driving towards bankruptcy.
For those who invest in companies like Ivanhoe Energy, it's important to remember that dealing with China means that a huge bureaucratic apparatus can pass the buck until the cows come home. Ironically, John Robson spoke about these challenges in 1999 before the US Trade Deficit Review Commission.
"Hands off!" he said. "Follow Mao's advice and let 1,000 flowers bloom. We're doing just fine without government in the executive suite, the boardroom, or venture capital firms."
Too bad for Ivanhoe investors that one oil company didn't heed those words. Now Robson's preaching to the choir - and he owns it.
Joe Shea is Editor-in-Chief of The American Reporter and an investor in Ivanhoe Energy.