Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The ex chairman of ERA Mining, the Chinese machinery maker acquired by Caterpillar (NYSE:CAT), said on Monday he was “shocked, dismayed and surprised” at the $580 million writedown on the value of the company taken by the world’s heavy equipment giant.
“We were shocked and dismayed […] by this situation as we cooperated very closely with the Caterpillar team during their extensive due diligence,” Emory Williams said in a statement, according to FT.com (subs required). This is the first public comment since the Peoria-based firm said Jan. 19 it had found “deliberate, multiyear, coordinated accounting misconduct” at a mining equipment maker named Zhengzhou Siwei.
Williams, who was one of the largest individual shareholders of ERA, said he had asked Caterpillar for more details on the allegations, but had not heard from the group’s senior management.
ERA’s case is nothing new. In the last two years fraud allegations have swept over several China-based firms listed overseas. Last month, the US Securities and Exchange Commission (SEC) charged the Chinese affiliates of five leading accounting firms with violating securities law for refusing to disclose document related to nine companies whose securities are publicly traded in the US.
But what makes this incident particularly intriguing is the fact that Caterpillar’s due diligence team had six months between the deal being announced and closing, time during which it did not observe any accounting misconduct.
As FT analysts cleverly put it: “The matter accounts for less than a tenth of Caterpillar’s projected earnings. But it should not be allowed to sink quietly. If Caterpillar is right, how a multinational did not spot a problem that seems likely to grace any list of classic accounting tricks is something investors in Caterpillar, and in China generally, deserve to know.”
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