Interview: ERI directors discuss strategy
Environmental Resources Investments (ERI) is forecasting it will raise up to 44 billion rupees new equity in the next five years to acquire Sri Lankan business and buy a British Virgin Islands based investment firm.
A rights issue this month and six warrants, allowing holders to buy shares at set prices in the future, will be used to raise the new equity.
Two of ERI’s directors Kosala Heengama and Gregory Newsome, the main promoters of the firm here, were interviewed by LBR’s Shamindra Kulamannage recently.
Edited excerpts….
Q: Where will you invest the money you are raising through a rights issue?
Heengama: Any sector that makes sense, manufacturing or any other sector.
Q: How much money will you raise if everybody takes up the rights?
Heengama: About 2 billion in the rights, in the ordinary shares and subsequent warrants.
Q: Those warrants come in later years?
Heengama: Yes because warrants are options for people to take on at certain times. So when exercisable people can take up those warrants based on the company’s performance.
Q: Will Lionhart, your major shareholder, take up the rights?
Heengama: We are hopeful they will take up all the rights because up to now whatever rights we have done they have taken.
Q: Have they given you an assurance, because that is the bulk of it, they hold 93-percent of equity?
Heengama: Yes, this is a good chance for them to come and invest in Sri Lanka. So they say, as long as things improve in the country, if favorable investment opportunities exist in the country then they will invest and we are hopeful.
Q: How did you come to the picture?
Heengama: We knew Lionhart and they are an investment company and we invited them to invest in Sri Lanka.
Q: If you look at Lionhart’s portfolio, is there any trend which you see in the sort of companies they invest in?
Heengama: The investment strategy is based on the ERI board decision. The strategy is not based on the major shareholder. ERI is looking for sick companies, good branded Sri Lankan companies that we see potential for growth, potential for better results with restructuring.
Q: So you would be like a private equity firm?
Heengama: I’d say more like a venture capital firm.
Q: People are curious about, ERL which is a British Virgin Islands company that you have agreed to buy. What can you tell us about ERL?
Heengama: ERL is also an investment company. Majority of the funds will be invested in Sri Lanka and a smaller portion will be invested to buy ERL. It gives the opportunity for a Sri Lankan company to own foreign assets.
Presently ERL owns Eastern Platinum shares, 24 million shares, and also few other private investments. So once we have this structure is in place, we can locally as well as globally do some purchases that will also bring a little bit of balance to Sri Lankan investments.
So basically, Sri Lankans who own ERI will have an indirect opportunity to own foreign assets.
Q: Are all ERL shares going to be purchased by ERI?
Heengama: We have signed an agreement to purchase 100-pct, we haven’t purchased it yet, a payment hasn’t gone yet, we will be doing it pretty soon.
Q: Have you agreed on a price?
Heengama: We got exchange control approval to pay out up to 76 million dollars. But we will do an independent valuation and based on the valuation we’ll pay up to 76 million or less for 100-pct of the company.
Q: Who owns ERL right now?
Heengama: It is owned by major shareholders. They own it through a trust or something, it is a related party transaction but the whole purpose of acquiring ERL is to get the structure in place where we can have access to foreign investments. But what needs to be understood is that a major part of that investment is coming to Sri Lanka.
Q: Why do you do this transfer, because right now Lionhart controls ERL, and if they transfer the ownership to you they will still fully control ERL. Why do this?
Heengama: It is an investment strategy we proposed to them. It’s good to have an investment company in Sri Lanka which invests in Sri Lanka, plus has investments outside the place and it also gives balance in investments. Similar to when Sri Lanka had a bad time in tourism and lots of Sri Lankan hoteliers invested in the Maldives.
Q: But in Lionhart’s point of view, this won’t make much difference whether they own the firm through Sri Lanka or not?
Heengama: Yes it doesn’t make much of a difference but it gives a really good structure for the Sri Lankan investment company.
Q: So by bringing funds here you will have to convert them in to rupees, so then you are taking on an forex risk?
Heengama: Yes, but it’s a short term FX risk, this is not a short term play, we are here for the long term.
Q: ERL is investing in platinum mines. Tell us a bit about its business?
Heengama: It’s mainly a portfolio company. It doesn’t have operations except for holding shares. Right now the major proportion are listed shares in Eastern Platinum and others are two guaranteed bonds. That we will keep on investing in the commodity sector. So there is a unique investment opportunity that no other company has in Sri Lanka.
Q: East Plats is a listed company, so you should be able to value these investments you have there?
Heengama: Yes you can, it’s 24 million shares into whatever the traded price, right now its 1.40 Canadian dollars.
Q: So you have this and you have two debentures. Tell me about them?
Heengama: They are First Platinum, two debentures.
Q: Roughly what do you think they are worth?
Heengama: If you have the rights issue document it says what each one is worth.
Q: Basically Central Bank has cleared you to buy at 76 million dollars or less 100-pct of ERL with whatever money which you are bringing from outside the country, not what you are raising here. I’m struggling to understand why you are doing this, why bring it through Sri Lanka?
Heengama: Why wouldn’t you?
That’s the structure we have. If you have a paper manufacturing company you can’t do paper manufacturing everyday you have to come up with something unique. It gives Sri Lankan shareholders the opportunity to own foreign assets which will bring more value to the company. But majority of the funds will be here. It will give foreign exchange stability and also it will attract foreign investors who follow Eastern Platinum. It is traded in three to four countries. Canada, Johannesburg, Europe, likewise. So people who know these stocks will follow to Sri Lanka.
Maybe very few foreign investors know what’s going on in Sri Lanka. Our intention is to bring more exposure to the country by bringing known stocks.
Q: I’m asking this because people will be curious as to why you are doing this here?
Heengama: People will understand this structure as we move on, we just started investing. So it’s a good opportunity to invest because the war is over therefore lots of foreigners and investors are looking at Sri Lanka, and you probably reported on this; Morbius and other big investors are coming to Sri Lanka. So this is a very good opportunity and we already have an instrument which is restructured to invest. For one and a half years we were waiting for these investors to come in and trade. And we’ve got a really good positive sign that investors are willing to put up cash.
Q: Some analysts are concerned about the origin of the money that is coming?
Heengama: That is managed by Central Bank, so if Central Bank clears it there is no issue and that’s part of the regulation. Most of the time North America and European companies are anyway monitored. So sources of funds are well regulated and they have not found anything wrong with the funds. If we start questioning every fund that comes in, go through all the investors in foreign funds….? Obviously for one and a half years we were talking to Central Bank to get the approval and they definitely went through A to Z of it.
Q: What’s the expertise ERI has in investing in platinum or in commodities?
Heengama: We do have another gentlemen on our board, his name is Gregory Newsome he is a financial expert. He is aware about commodities. You see the price movements of oil and other commodities why wouldn’t you get into the bandwagon? Anybody would. So we believe that we have the expertise and we will get the expertise needed.
Q: How did you come to do what you are doing now?
Heengama: With the work which we have done, I have come to know a few investors.
Q: Your father is the chairman of this firm. Did he get involved with this from the beginning?
Heengama: Yes he and other board directors got involved in the last couple of years. Investors were brought in by me and the other director Scott Newsome and we explained to the board. The board is experienced, H B Dissanayake being a former governor of the Central Bank and he has also worked for IMF, he has regulatory experience. One of the other directors is Gamini Munasinghe, a former Sri Lankan ambassador to South Africa and Bangladesh, which is a really good thing for the company because ERL is dealing with commodities in South Africa. So that expertise is most valuable for the company. Scott Nielson is a financial engineer and brings expertise in managing and restructuring businesses.
Q: If you do raise the entirety of the rights which around 2 billion rupees in the first round and your purchase price for these assets could be as high as US$ 76 million, then there is a large gap there. What’s your plan for that?
Heengama: So that’s why we have these warrants coming due as and when money is raised we pay a portion of that to the company.
Q: You will use the 20 million dollars you raise here?
Heengama: We can’t use the whole 20 million dollars only a portion. Only 38-pct of the money that comes in to the country. 62-pct will remain in the country for investment.
Q: If you raise 20 million dollars through rights and invest only 38-pct of the foreign funding that comes, that’s not much?
Heengama: It’s about six million dollars.
Q: You have 76 million exchange control clearance to buy this, how much is ERL worth?
Heengama: It is worth 76 million dollars according to their December accounts, and the ERL share has increased from 40 cents to 140 cents right now.
Shares are lodged in Deutsche Bank Colombo; the ERL shares. They have a structure through Singapore. Now it’s in the process of transferring, we have decided to purchase. Its form a Singapore company but Deutsche Bank Colombo manages these Eastern Platinum shares.
Deutsche Bank Colombo is giving us the statements. It’s the first time in Sri Lanka that we have done this, which gives extra comfort.
Q: You won’t get the entirety of the asset, only part of it?
Heengama: Because we haven’t paid for it. We have to pay for it.
Q: Scott why are you going this complex transaction to buy ERL?
Newsome: Initially it was going to be a share swap. We took over Walker and Grieg and the idea was to share swap ERL-British Virgin Islands for ERI. But unfortunately it couldn’t happen, they wouldn’t allow.
We didn’t give up and then we asked our selves, “what will work?” and the only thing we found was we had to go back to what was working at the time. The only way we can do this was based on the laws without any kind of objections was it had to be a capital infusion via a rights issue.
Q: Why go through all this to bring the funds in when you could have set up an investment company here and bring in funds directly?
Newsome: We got them (Lionhart Investments) committed to investing via Sri Lanka and we wanted to keep the investor interested in Sri Lanka. If we structured it separately they could have just done the ERL purchase in a separate private equity fund, and then they are gone. What’s the benefit of the company?
They already had an investment vehicle, former Walker and Grieg, and they liked the opportunities that exist in Sri Lanka, why not fold them together? There are institutional as well as very high net worth individuals.
Q: Can you tell me about Lionhart?
Newsome: I believe they are controlling three billion dollars AUM (assets under management). They are classified as a hedge fund. They never had any kind of issues with the FSA (UK financial regulator).
Q: Why the interest in platinum?
Newsome: It’s about timing. We time and things fall into place for the company very nicely. With the war being over, it just lined up very nicely for Lionhart to commit.
If you look at the timing of platinum and commodity prices, commodity prices have crashed. Gold prices have come back. Now what’s lagging? Platinum, palladium and rhodium, those prices have not come back because of depressed industries. The industries that use these metals have been depressed. The auto industry is number one.
There is also the illiquidity factor in trading platinum. That improved in January 2010. The US market was the largest market in the world that has not had an Electronic Trading Fund (ETF) to trade platinum. It had an ETF to trade gold, copper, silver but nothing to trade platinum. It’s been traded in Europe for years. But in January it started trading platinum. Liquidity has increased tremendously. If you look at the TMX web site one of the company’s that has been added to precious metals index is Eastern Platinum. It was added just last week and the day after they announced record trading volumes, 15 million shares traded. Normally they trade between 5 and 10 million shares.
Platinum has always been twice as the amount of gold. In the last 20 years platinum prices have been twice the amount o gold. But they actually converged, and at one point gold and platinum were literally the same price at the height of depression. Now they’ve started their divergence again, to get back into norms. But they are still not there. Gold has accelerated and platinum has not outpaced gold. Industries using platinum are now picking up and the liquidity function is now being sorted. So, what will happen now is, with current levels of trading the prices should go back to the normal levels. If you look at where platinum is trading at and where gold is trading at its no where close. Platinum is 1600 dollars an ounce, no where near double.
Heengama: We are planning to have an investor forum once we have the capital. It’s better to raise the capital and have a path. So five years down the line we know how much money we are going to raise and also there will be an instrument for people to invest, warrants will come and they can take that to invest.
Newsome: A lot of difficulty for investment holding companies is raising capital we’ve sorted that out for the next five years.
Q: How much of the capital will come in the next few years?
Newsome: We’ll have another tranch. We did one in August, that was 18 million dollars, then we are doing one for April, that’s another 18 million. Then we have a warrant due in June which is almost 20 million and then June 2011 that’s another 22 million. And then if you look at April 2012 it’s about 105 million dollars. That’s done.
So come April 2012 ERL is paid off and we now have a lot of extra cash to do a lot of I think fun and exciting things.
Our investment approach is based on the market environment. Right now there are a considerable number of sick companies. We can help out the sick companies as well as bring them onto our fold. But maybe in two years there will not be many sick companies, then we’ll have to invest in healthier companies that have nice balance sheets and nice cash flow. Then it becomes more value investment as opposed to helping sick companies and helping them.
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