A sling or two in the Long Bar
Friday, April 16th, 1999

Raffles Hotel in Singapore is the most civilised spot in Asia. This thought crossed Pierpont's mind the other day as he leaned back in the pub's historic Long Bar and ordered Singapore Slings for himself and Mrs Pierpont. The memsahib had endured a hard morning's shopping and was ready for an aperitif.

The Long Bar is frightfully civilised, too. At $25 for a Singapore Sling, only the seriously wealthy can afford inebriation. The lower classes run out of money before they get tanked.

Sipping his second - or it may have been his third - sling, Pierpont reflected that investing in lunch at Raffles was infinitely more enjoyable than investing in Asian stocks. If any reader doubts this proposition (which Pierpont has espoused in several previous columns), let them consider the ghastly example of Asia Gold Mining Corporation.

Asia Gold has had its share of name changes in recent years. Its lineage can be traced back to Mining Corporation of Australia, the corporate vehicle of the late Geoffrey Stokes (to whose shade Pierpont raised his glass in a silent toast). 

MCA struck it rich when Geoff sold the Mt Pleasant gold mine to Joe Gutnick's Centaur. From that windfall, MCA paid all the franked dividends it could to shareholders.

At the end of 1996, Geoffrey - who was then dying but refusing to admit it - merged MCA with Target Resources. The logic of the merger was that MCA had cash but no mineral prospects while Target had mineral prospects but no cash.

The cash in MCA was a final $6 million payment received from Centaur that December. The merged entity changed its name to Target Mining, which controlled the promising Selinsing gold deposit in Malaysia.

From this excellent start, Geoffrey's successors managed to turn Target (now named Asia Gold) into dust and rubble. Geoffrey, who never believed in holding his tongue, would have been exceedingly caustic about the fate of the company he had bequeathed in apparently good condition.

The major damage to shareholders was done in calendar 1997 when Target shares crashed from a high of $1.85 to a low of 12.5¢. Since then they have collapsed even further and as Asia Gold are trading at nominal levels of around 1¢. So Asia Gold has the dubious distinction of wiping out 93 per cent of its shareholder value in 1997 and another 92 per cent since.

How was this feat achieved? Overspending on exploration was a major cause, but before talking about that, let's go back and look at the cash position.

On top of the $6 million starting kitty, Target (as it then was) made a highly successful option issue in 1997. Option holders had the right to convert them to shares by June 1, 1997. As the conversion price was 50¢ and the shares were selling at 85¢, the conversion rate was high, raising $9.7 million for Target. 

Option holders who converted had to be fast on their feet, because by June 30 the shares were down to 51¢. Those who gritted their teeth and sold anyway were the smart ones because the shares were headed for near-oblivion.

So Asia Gold's real opening kitty was close to $16 million. In the 15 months between March 1997 and June 1998, it managed the considerable achievement of wiping out the lot, with most of the damage being done in the first nine months.

Selinsing is claimed to be one of the world's oldest gold mines, with locals scratching out the metal for possibly hundreds of years and, according to one excited scribe in 1996, as far back as 900BC. By April 1996, when Target got its stake in Selinsing, it comprised oxide ore, an open pit and tailings.  Asia Gold's excitement about Selinsing began in the June quarter of 1997 when a chap called Peter Kestel was managing director. In that quarter, the company spent $1.9 million on exploration, which included 83 reverse-circulation drill holes at Selinsing testing for extensions to the deposit. For a company of Asia Gold's size, that was a lot of money and a lot of holes. 

They then estimated a resource (not a reserve) for Selinsing of 325,400 ounces, but mostly those resources were indicated and inferred.

In the following six months, Asia Gold chucked another $3.7 million into exploration at Selinsing. At the end of that time, the Selinsing resource (it still wasn't a reserve) had risen only slightly to 335,500 ounces. 

Asia Gold chucked a lot more money about, too. The 1997 accounts show it spent $6 million buying an extra production interest at Selinsing that has never returned a dollar in revenue to the company. It spent another $5.2 million buying tenements, although these two numbers should be treated carefully because they involved shares as well as cash.

Peter spent $4 million buying drilling rigs in Malaysia and another $3 million buying and redesigning a gold treatment plant   at Temora in NSW - all before establishing whether they actually had a mine.

Peter says he was encouraged to fast-track the deposit by BT, who were very gung-ho about it. Maybe, but Peter was managing director and should have realised that the world is littered with teaser deposits that look more promising than they turn out to be. Throwing some $14 million at Selinsing in less than a year was really betting the farm on it.

Asia Gold's expansive mood is reflected in its administrative overheads, which between March and December of 1997 soaked up $2.3 million - again a sizable number for a small exploration company with no cash inflow.

Readers who have been adding these sums will not be surprised to know Asia Gold ran out of cash. From having $16 million in the kitty, plus a bit more from selling plant and shares, Asia Gold was in debt by June 1998 to the sum of $2.5 million. And still no operational mine.

It also had a couple of grumpy shareholders, notably BT Funds Management, which picked up 18 per cent of Asia Gold in the heady days of 1997, and GIO Australia, which held 5 per cent.

The result was a few board changes. Peter went, being replaced by Gavin Thomas (of Niugini Mining fame) and Steve Everett (formerly Gold Mines of Australia).

When they decided it was all too difficult, a down-to-earth Queensland boy named Alan Phillips became chairman of Asia Gold last September and is now trying to nurse the company out of life support and into the recovery ward - not that anyone meeting Alan for the first time would immediately think of Florence Nightingale.

Alan reappointed Peter as a consultant, on the grounds that he was the only one who understood the deals with the Chinese partners in Malaysia, and the company is now in very tentative recovery.

Asia Gold doesn't seem to have mined an ounce of gold, but it has produced heaps of blame.

Peter says he left Asia Gold with $3.7 million cash and a bankable feasibility study and it was everyone else's fault it went through a near-death experience.

Steve Everett told Pierpont: "Selinsing probably had about 160,000 ounces of reserves in a 200,000- to 300,000-ounce resource but the grade wasn't marvellous, the stripping ratio was high, the metallurgy wasn't certain, and if you put all the mining figures on it, Selinsing didn't really have a lot of value.

"The Malaysian situation was a heck of a mess. There were deals done over there it was very difficult to unscramble."

Alan said: "The expectation for the project in Malaysia was certainly very much higher than it turned out. There are high-grade patches, but it didn't have the depth that geology indicated in the early stages."

Alan was also critical of the spending spree, saying: "They bought Temora for $3 million without having an accurately defined mineable resource."

Pierpont: Which they still don't have?

Alan: No.

David Diamond, another chap who was on the board for a bit, said: "It could have been a successful mine, but nothing like what it was purported to be in early 1997."

Alan is now selling 35 per cent of the mine back to the Malaysians for $3.5 million, reducing Asia Gold's equity to 25 per cent. Nearly all that $3.5 million will be used to retire debt, leaving Asia Gold with maybe half-a-million dollars net at the finish.

Last January, Selinsing was independently valued at $5.2 million, so 25 per cent would be worth $1.3 million.
In other words, Asia Gold has turned $16 million into maybe $1.8 million in two years.

Even Mrs Pierpont can't spend money at that speed.

As she drained her Singapore Sling, Pierpont reflected that his bride was probably carrying more gold on her third finger than Asia Gold had produced, which makes Mrs Pierpont - not for the first time - a better bargain than an Asian stock.

"How about the Tiffin Rooms for lunch?" Pierpont suggested.

"How generous," she smiled, knowing what the bills are like at Raffles.

"Think nothing of it," said Pierpont. "Suddenly it seems cheap."


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