Puda coal scam

The aggressive government mandated consolidation of the coal mining industry beginning in 2009 coincided with the darkest days of the world financial crisis. PUDA management either had to become a consolidator, requiring massive additional capital, or else dispose of its coal businesses.

Management, lead by Chairman Ming Zhao, made the decision to pursue aggressive growth by becoming a consolidator. Zhao transferred the ownership of PUDA’s sole Chinese operating entity, Shanxi Puda Coal Group Co. Ltd (“Shanxi Coal”) to himself in 2009 without shareholder approval, according to official government filings. Then, in 2010 Zhao sold 49% and pledged the other 51% of Shanxi Coal to CITIC Trust Co. Ltd, a Chinese private equity fund, for 245 million RMB ($37.1 million). Zhao then recklessly leveraged Shanxi Coal by borrowing 3.5 billion RMB ($530.3 million) from CITIC at an incredibly high 14.5% annual interest rate (including fees) to finance the development of its coal mines. PUDA shareholders were completely unaware of these transactions that decimated the value of its U.S. listed shares.

The average of the valuation CITIC paid ($1.91) and the book value of PUDA’s investment in Shanxi coal ($3.41) was $2.66. Due to the 2009 and 2010 audited finances that could no longer be relied upon, and more importantly the complete lack of internal control, Chairman Zhao was able to steal the company, selling half of it (pocketing the proceeds), and then pledging the other half to a Chinese PE fund.

One expert commented at the time: “even if Shanxi coal can grow its profit by 80% in 2011 to $61.2 million, this growth is insufficient to cover 2011’s $76.9 million interest expenses.”

eChinacities



Categories: Crime & Corruption

Tags: , , , , , ,

1 reply

  1. Reblogged this on Craig Hill.

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