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Fogs of war

22 January 2013 By Kevin Allison

Bumi’s minority shareholders are ill-served by the open conflict raging between the coal miner’s board, its founder Nat Rothschild and Indonesia’s Bakrie clan. They deserve an adult debate about the merits of competing plans to unwind a tie-up with its Indonesian backers. They need clarity about the nature of alleged financial irregularities. They are getting a juvenile shouting match.

News on a probe into Bumi’s Indonesian business does nothing to clear the air. Macfarlanes, the law firm engaged to undertake the independent review, has operated in difficult circumstances. But while it detected cause for concern, key people refused to cooperate – with varying degrees of justification. Bumi says there are legal risks to disclosing full details of the investigation. The result is more muddle.

Investors may be tempted to hold on and hope for a share price rerating once the structure of the miner’s ownership, and a reform of its governance, is complete. The competing plans – one backed by Nat Rothschild, the financier, and another favoured by the current Bumi board – both envisage separation from the powerful Indonesian Bakrie family. But after a recent rally, the London-listed vehicle’s market value of $1.3 billion is already greater than that of its two big Jakarta-listed assets. That suggests the governance discount may have been rubbed out already.

Investors who bought into Bumi in 2011, when its shares began trading in London, might be loath to give up on the venture now. The shares are still down nearly 70 percent since then. And despite the company’s myriad governance problems, the quality of the underlying coal mines doesn’t appear to be in doubt. Yet it is important to remember that coal price, as well as governance, has undermined Bumi. A rally in beaten-down thermal coal looks unlikely. Seaborne coal producers are still under pressure from plentiful Chinese supplies.

Having travelled in profitable hope from the nadir, investors might sense they have arrived at a pivot point. It might be that the recent upward share price momentum is maintained. But there is also clear downside risk. Getting out now, while retaining readiness to buy back in once the swamp has been drained, will be tempting. With the shares well up from last year’s lows, the exit beckons.


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