Allegations against Winsway hurt Grande Cache Coal

Allegations of possible securities fraud against Winsway Coking Coal by an unknown research firm called Jonestown Research may spell trouble for Grande Cache Coal (GCE-T).

In October last year Winsway offered to acquire Grande Cache for $10 per share, up from its trading price at the time of about $6 per share, in a deal worth about $1 billion.

But the allegations against Winsway could delay and perhaps even scupper those plans. Jonestown Research claims that Winsway has materially misstated its reported numbers and that the company’s balance sheet inventory values could not be reconciled with the tons of coal inventories that should be on its balance sheet.

Shares of Grande Cache tumbled 5.75% or 57¢ to end the Jan. 19 trading day at $9.35 per share with more than 18.6 million shares changing hands. In mid-afternoon trading on Jan. 20, Grande Cache shares were down 8¢ or 0.86% at $9.27 per share with about 4.3 million shares traded.

Grande Cache said in a Jan. 19 statement that it had “no reason to believe that there is any merit to the allegations made” in the Jonestown Research report and “has been assured by Winsway that the report is entirely without merit.” It further noted that it continues to work with Winsway and Marubeni Corp. to complete the acquisition.

Winsway has denied all of Jonestown’s allegations and said it “stands by its audited inventory balances” and “refutes any suggestion of material discrepancy between the official PRC data and the company’s own figures.” It also said that its board is seeking legal advice “in relation to taking possible legal action against Jonestown.”

It also noted that it has “no information about the identity of Jonestown,” which is short Winsway and Grande Cache Coal shares, and that the research firm is not registered in any jurisdiction as an investment advisor or broker or “anybody who would need a license to discuss investments.”

Winsway also pointed out that the report cautioned that Jonestown itself “cannot give any assurance as to the report’s accuracy [and] the company recommends shareholders of the company exercise extreme caution in responding to the report.”

The accusations against Winsway follow allegations of fraud last year against Silvercorp. Metals (SVM-T) by another little known research firm called Alfred Little. Those claims were later found to be false and Silvercorp says it is taking the firm to court.

Shareholders of Grande Cache approved the plan of arrangement with Winsway on Jan. 12 but the proposed takeover remains conditional on approval under the Investment Canada Act and from the Hong Kong Stock Exchange.

Winsway, incorporated in the British Virgin Islands in September 2007 and listed on the Hong Kong Stock Exchange in October 2010, has offices in Hong Kong, Beijing, Singapore, Macau and Brisbane. According to its website, the company is one of the largest integrated suppliers of high-quality coking coal in China and one of the single-largest off-takers of Mongolian coking coal into China in terms of volume purchased.

Its business spans procurement, transportation, storage, processing and marketing of coking coal and servicing the Chinese steel industry at large.

“Serving as a major gateway connecting global coking coal supplies with Chinese customers, besides coking coal supply, Winsway also provides end-to-end services to customers through an integrated platform consisting of logistics parks, coal processing plants, and road & railway transportation capabilities,” Winsway’s website reads.

“As the single largest importer of Mongolian coal by volume and an importer of seaborne coals, Winsway has built a stable and growing customer base of over 60 steelmakers and coking plants in China.”