By Euan Rocha
TORONTO (Reuters) – China’s Migao Corp said Thursday it would buy back up to 5 percent of its stock to help reassure investors suspicious about a contract that the Canadian-listed fertilizer company said it had signed with an unknown Russian supplier.
Shares of Migao have tumbled over the last week due to investor misgivings about the contract and exacerbated concerns about North American-listed Chinese companies.
Investors are particularly sensitive to any suggestion of impropriety involving such companies since fraud allegations surfaced last week against Sino-Forest, a Toronto-listed company that a short-seller says exaggerated its Chinese forest holdings.]
Aware of the market’s heightened sensitivities, Migao sought to shore up confidence in a statement on Thursday, even as it announced a 14 percent drop in quarterly profit.
“I acknowledge the confusion and uncertainty caused due to the potash supply agreement announced in March,” said Chief Executive Liu Guocai. “To show my confidence in the agreement, I have pledged my entire shareholdings of Migao against the possibility of default by our supplier.”
Guocai owns a third of the company’s outstanding shares, his stake based on Wednesday’s closing price is worth roughly C$88 million.
The company also outlined plans to buy back up to 2.64 million shares, or 5 percent of issued and outstanding shares, a move that helped lift shares 3 percent in early trading on Thursday.
Migao shares fell 22 percent in the past week to C$5 on the Toronto Stock Exchange, but rose 15 Canadian cents to C$5.15 on Thursday. The company’s shares are down more than 30 percent year-to-date and earlier this week touched a two-year low of C$4.74.
POTASH SUPPLY DEAL
In March, the company signed a 10-year deal with a potash supplier to get 500,000 tonnes of potash a year at a discount to market prices. The deal it said would help cut costs at a time when prices for the coveted commodity are rising due to growing pressures on food supplies.
Migao said it signed the deal with Potash Export Co, a private company established by Russian-based producers to market and distribute potash overseas. As part of the deal, Migao agreed to prepay US$100 million to the Russian entity with further payments to be negotiated and advanced prior to the initial potash delivery in early 2013.
The deal has stirred suspicions among analysts and investors, as there are only two potash producers in Russia and both denied having any involvement in the deal, or any ties to Potash Export Co.
A third Russian fertilizer company, EuroChem, which plans to launch production at its potash mine in 2013, has also denied any relationship with Potash Export Co.
Even though doubts have hit its share price, Migao said it will honor a non-disclosure agreement prohibiting it from disclosing the share structure and resources of its potash supplier. For competitive reasons, it also refused to disclose the exact discount pricing that is built into the contract.
The uncertainty around the supply deal, coupled with the recent allegations against Sino-Forest and other Chinese entities listed in North America, has accelerated pressure on Migao shares.
The latest data available as of May 31 indicates that short positions in the company’s shares have quadrupled since the end of February.
It is uncertain whether short positions in Migao’s stock have risen or dropped since short-seller Muddy Waters went public with its allegations against Sino-Forest on June 2.
Net income in the quarter to March 31 fell to C$8.9 million, or 17 Canadian cents a share, from a year-ago profit of C$10.4 million, or 20 Canadian cents.
The company said profit dropped in part because gas supply constraints held back its Chinese potassium nitrate output. ($1= $0.98 Canadian) (Reporting by Euan Rocha; editing by Frank McGurty)
Category: Business News