How Germans are being sizzled by hot Australian stocks
By Andrew Main
It is a long way from the Snowy Mountains town of Adelong to Berlin, but an internet-driven share-buying frenzy has brought the two together in a way which illustrates that the world's most exciting new medium can be a two-edged sword.
The Australian Stock Exchange suspended shares in Adelong Consolidated Gold Mining NL at $1.46 on January 27 after they spiked up to $1.55, leaving hundreds of Germans, who now own 73 per cent of the stock, stranded and incredulous. The Germans had bought into the stock late in 1999 and early this year from prices around 20¢, after reading about it on German websites and after it listed in Berlin on December 9.
German investors have had a surprisingly long love affair with the small end of the sharemarket in Australia, considering the share price shellackings this market has regularly handed out. The irritations in Germany of a high personal tax rate and a staid sharemarket full of interlocking shareholdings mean that German investors have long seen Australian stocks as a perfect destination for their undeclared earnings. As one told The Australian Financial Review last week, "You can only lose 100 per cent but you can make 1000 per cent."
The gold boom of the mid-1980s gave them a successful canter in tiddler gold stocks, many of which climbed sharply because of gold discoveries or old-fashioned stock promotion. The slump in the gold price through the 1990s eroded almost all the capital gains, but the early investors who remembered the proverb that "gold shares are for buying and selling, not holding" did well enough to keep the myth of the Australian El Dorado alive.
The game began again in 1999 when Ludger Kohmascher, scion of an Osnabruck frozen foods family, made millions trading shares in E*Trade Australia. Kohmascher has long been a visitor to Australia because he suffers a crippling bone disease, ankylosing spondylitis, which responds well to sunshine.
He had bought in at about $2.51 a share in late April, and once German investors saw the price move, they piled in. Kohmascher sold much of the stock in Germany on the "over-the-counter" market and it rose to $11. He is still understood to have some of the stock, but is well below the 5.5 per cent level, having sold out at about $8.
The stock price now? Back where Kohmascher bought in. But then, word of his coup spread fast in Germany and several websites, particularly Zockeronline.de and Wallstreetonline.de, started looking in earnest at potentially exciting corporate situations in Australia.
Back in Adelong, which is midway between Tumut and Wagga, the local mining company's situation was anything but exciting. The company had been floated in 1997 at 25¢ a share by a syndicate who wanted to develop the thin but rich seam that had given up 800,000 ounces of gold between the late 1800s and World War I. The issue raised $6 million, but by April 1999 the project had still not reached the commissioning stage and most of the money had been spent.
Jon Starink, an engineer who was one of the original significant investors, had made an art of buying second-hand mining equipment for reuse. But it emerged that some economies, such as a lack of infill drilling, had seriously hampered the project's ability to turn what is known in the trade as a resource into a mineable gold reserve. The official resource is 146,000 oz, a tiddler by current standards.
Adelong directors approached a dealer called Craig Manners, son of the Kalgoorlie mining veteran Ron Manners, at the Melbourne office of broker D&D Tolhurst to look for a way out of the financial jam. Last April, with the share price at about 8¢, Manners suggested using some of the remaining funds to buy into internet prospects.
He also introduced Pacific Rim Investments Pty Ltd, a Perth-based investment company chaired by an Englishman, Clive McKee, whose stated intention is to build a "niche financial services and investment banking group" with advisory businesses in Australia and an office in Switzerland.
Pacific Rim bought heavily into Adelong via its subsidiary, Pacific Asset Management, paying about 10¢ a share for stock sold by Starink, who was forced to resign from the board.
On September 1, 1999, McKee became a director, alongside Manners, who had introduced two internet businesses, eSmart Ltd and FreeISP.com Pty Ltd, taking 50 per cent of the first and 20 per cent of the second for some $300,000.
The new beefed-up board provided the ASX with a solid diet of positive announcements and the company recovered nicely, not just through a share price climb back past 20¢, but also thanks to a series of small share placements and rights issues via D&D Tolhurst, at least one of which was declared to have gone to "international institutional investors". Indeed, by the end of September, Pacific Asset Management was only the second-biggest holder, on 7.3 per cent of the shares, behind the mysterious ANZ Nominees with 8.36 per cent.
Most of the long-suffering shareholders, many of whom were Adelong locals, were too happy to see the stock price recover to worry about who was buying the shares, but it emerges that it was small German investors sniffing for a "hot" story. If they wanted a hot story, they certainly got one.
On January 14, with the share price at 43¢, Manners gave an interview to the Dusseldorf-based Wallstreetonline.de website in which he painted a very rosy picture indeed of Adelong's future as a venture capital provider to the internet industry, and the stock price bolted.
The ASX had been querying Adelong's share price climbs regularly from late 1999, but kept getting the anodyne "we know of no reason" response, which merely talked up the stock's internet potential by way of background.
In the seven trading days after the interview, the share price more than doubled to $1.08, but a query on January 18 got the stock response, with the disingenuous addition that "the company's securities are traded on the Berlin Stock Exchange as well as the Australian Stock Exchange, and have been very actively traded in recent days".
In the two weeks following Manners' interview, which he has said his fellow directors did not know about, several directors including Manners sold shares and options. McKee, for instance, sold 700,000 shares and one million options. The ASX suspended the stock on January 27 on learning of the Manners interview, by which time the stock price had spiked up to $1.55 before closing at $1.469.
The stock is still suspended and looks set to remain so for a while. The ASX has made no official comment about Adelong, but it is tightening its surveillance of mining companies that go into high technology, and has resolved, with the regulator the Australian Securities and Investments Commission, to crack down on companies that give inadequate responses to its queries. The ASX queried Adelong six times in all, and it was only after the sixth that it got a reply of any consequence whatsoever, by which time it suspended the stock anyway. And who has lost out? The Aboriginal community in Adelong is still waiting to be issued the second half of a one million share issue as part of a land use agreement, but the main losers are the existing shareholders, 73 per cent of whom appear to be in Germany. Adelong's chairman, Stan Lewis, admitted to the AFR that he did not know who was behind ANZ Nominees, which is understood to be the sub-custodian for Deutsche Boerse Clearing AG. Asked when the Germans started buying in, he said "we never really knew who took the placement to clients of D&D Tolhurst" late in 1999.
German investors are furious. The major websites are seething with angry debate and Craig Manners, who quit on January 31 to spend more time on the "development and floatation [sic] of FreeISP and eSmart Ltd", is the prime target of most of the complaints. The grumbles are widespread and, not surprisingly, focus on the feeling that the Germans have been taken for a ride by "the Australians".
But hope springs eternal. The AFR contacted the major website in an attempt to bring a few facts to bear and got some anxious replies, but many included requests for tips on other Australian "hot" stocks. And late in the week came this priceless exchange between two Adelong followers, both of whom had moved beyond cynicism to satire: "SeppiBert" said his uncle in the US was a college friend of Bill Gates and they had dined together at the weekend. He said the uncle had asked Gates what acquisitions he planned, and Gates said he was looking at Australia and hoped to make a saving of $US2 billion for Microsoft by buying Adelong. "Then Adelong would be worth $US4 billion," he concluded.
"Standing Bull" replied drily, "That's not all. Beate Uhse [a chain of sex shops] will be divided up between Microsoft and DaimlerChrysler. Microsoft wants to bring vibrators to the market that are internet capable and can be hot linked to sex chat lines and DaimlerChrysler will start the production of inflatable sex dolls to make air bags more attractive."
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