The tangled web of Chatham Rock Phosphate

NZSA Disclaimer

There was much fanfare at the launch of the NZ Alternative Exchange, way back in 2003. Commerce Minister Lianne Dalziel trumpeted the virtues of the new exchange, reflecting that this would provide new opportunities for the many small-medium sized businesses in New Zealand.

The conventional market or securities exchange is typically suited to larger, traditionally-structured companies. As a result, smaller or non-traditional companies and their investors may be denied the benefits of a market for their securities, that does not impose the same regulatory framework that a conventional exchange requires.

Lianne Dalziel, Minister of Commerce, November 2003.

All market exchange structures, whether public or private, retail or wholesale, represent a constant trade-off between encouraging access to capital for issuers and offering protection for investors. Lest we forget, though, the primary purpose of any stock exchange is to provide a medium for its listed issuers to raise capital. The secondary trading of shares between investors is an additional benefit.

Both are supported by legislation and regulations. These days, the advent of NZ RegCo has strengthened the co-regulatory approach with the Financial Markets Authority, allowing even more confidence for New Zealand investors in the local exchange. The model allows a strong level of connection for individual investors to the NZX – it’s relatively easy for any perceived injustice to be brought to the attention of NZ RegCo by…well…anyone.

But that’s now. Back in 2003, the NZ Alternative Exchange (NZAX) allowed smaller issuers to operate within a low-fee and (relatively) low-compliance environment, supported by exemptions. The pendulum swung very much towards the interests of issuers when it came to establishing the NZAX.

NZSA would argue that the perennial difficulty in attracting new listings has more to do with the light-handed compliance regime enshrined in the Companies Act than the exchange itself.

Glass Earth (GEL) listed into this environment – this was to evolve, via Antipodes Gold Limited (AXG) into today’s Chatham Rock Phosphate (CRP). Let’s not trace the full and convoluted history of the corporate spiderweb that has resulted todays Chatham Rock – there are few who would have the time and bandwidth required, although I have no doubt it would be fascinating. Suffice to say, in March 2017, Antipodes Gold completed the purchase of Chatham Rock Phosphate (CRP) – a process that had started back in April 2015. This was essentially a reverse listing – Antipodes key assets (from CRP’s perspective) were a listing on the Toronto Venture Stock Exchange (TSX-V) and its NZAX listing, in addition to net cash of around $250k.

Chatham Rock remains one of the few anachronisms associated with the NZAX remaining today – a vestige of the issuer-friendly environment prevalent in the early 2000’s. There’s an argument that the NZAX rules of the time have had the unintended consequence of developing a culture of poor information transparency within those businesses. Past NZSA assessments of Enprise Group (another NZAX listing) expressed similar concerns related to poor disclosure.

At the time of the NZAX and NXT closure (in 2017), the two alternative exchanges had 22 listings between them with a total market capitalisation of around $600m.

Complexity

There’s no doubt that the variety of rules, regulations and legislation surrounding Chatham Rock are complex for most investors – in itself, that should be a ‘red flag’ for retail investors. A company whose primary listing is on the TSX-V exchange (and is therefore governed by their rules), operates secondary listings on the NZX and Frankfurt Borse, is incorporated in British Columbia (Canada) with an overseas company registration in New Zealand, while actually carrying out its business in Australia sounds like an overly complex structure to this humble investor.

I am quite prepared to admit that I am not across German, Canadian, British Columbian, New Zealand and Australian company law and the full gamut of listing rules of their associated stock exchanges. I would challenge any individual investor who claims to be.

It’s possible the company finds it difficult as well. Earlier this year, NZSA queried the TSX-V on statements promoting Linda Sanders as an independent director and independent member of their Audit Committee. Linda is the partner of Chatham Rock Managing Director, Chris Castle. This resulted in a correction of disclosures from CRP.

Incidentally, if you’re really interested in Chatham Rock, Frankfurt is the exchange to look at. The last trade, on October 12th, saw shares trade at €0.032 – around NZ$0.06 – at the same time they were around $0.14 on the NZX. There may be a liquidity problem though, with only 2,275 shares changing hands in that particular transaction.

This jurisdictional complexity is further compounded by the lack of plain-English language inherent in their company disclosures. Even something as simple as the meeting time is expressed as “at the hour of 5:00 o’clock in the afternoon” in the company’s Notice of Meeting. The company’s ‘Information Circular’ is the equivalent of a company’s annual report, issued in compliance with the rules of the TSX-V. Financial Statements are not published; as a shareholder, you have the right to ‘request’ them.

As always, NZSA reaches out to issuer representatives prior to publishing its assessment reports and voting intentions. Chatham Rock is no different. Chris Castle, the Managing Director of CRP, has been clear in his responses to NZSA queries related to CRP and this year’s assessment, including this ironic statement:

NZSA continues to try and fit a square peg into a round hole. As an overseas issuer Chatham is not obliged to report or operate in accordance with NZSA policies.  

Chris Castle, Managing Director Chatham Rock Phosphate, e-mail to NZSA Nov 2023

I should be clear that Chris wanted us to publish his comments (his full response is shown at the bottom of this article, which includes specific responses to elements of our assessment report and other questions we asked).

I’m not sure it is NZSA that is the ‘square peg’ in this conversation. CRP is like no other issuer on the NZX. It conforms to no common practice in terms of governance practice or information disclosures. Its jurisdictional complexity allows the company to get away with practices that would not comply with even the minimal requirements contained within the Companies Act, were it to be a New Zealand-registered company.

The election of a ‘slate’ Board rather than individual directors (a practice that can be vetoed under s.155 of our Companies Act).

The determination that only shareholders on the register 6 weeks before the Annual Shareholder Meeting can attend the ASM.

That’s on top of other ‘interesting’ practices, such as the slew of price-sensitive announcements that were issued by the company earlier this year.

Note that we offer no assessment on the prospects of CRP’s future success. Certainly, at an investor presentation in July this year, the company was able to demonstrate a path to positive cashflow and significant profitability from as early as 2027 as its current projects come to fruition. This includes some re-invest of funds into its (original) Chatham Rise seabed phosphate mining project.

We can’t help noticing, though, that the presentation was NOT amongst the vast variety of price-sensitive announcements posted to the NZX.

Compliance vs Transparency

Now let’s get to the second sentence of Chris’s response. NZSA’s policies are drawn from best practice – and are aimed at the ‘investor’ end of the pendulum (not issuers). They aim to apply standards that support investor confidence in markets and provide information relevant for investors to support investment decisions and make sure that shareholder representatives (directors) are genuinely doing the right thing by both the company and its shareholders.

That extends well beyond compliance – whether incorporated in New Zealand or Canada.

It is the second time this week where I have had a discussion on the trade-off between compliance and information transparency. A clearly-defensive shareholder approached me at the Colonial Motor Company this week, following our encouragement of the Board to improve disclosure practices. He felt that there was “too much compliance” and “the company should not have to tell me what they are doing”. Fair enough if that’s how you choose to invest – but don’t expect this investor to follow the same philosophy.

The question is, why should investors choose to invest in a company that is upfront about reducing information transparency for investors? The answer is, of course, that many choose not to. Poor information disclosure by any issuer has strong potential to result in lower valuation metrics, simply because a large pool of investors want better information disclosure before committing their hard-earned cash.

Ultimately, NZSA contends that the complexity inherent in Chatham’s Rock structures and communications is a means of keeping within a tight path of legal and regulatory compliance while obfuscating transparency for investors.

That is no good thing for any market. People may remember the plethora of options when it came to mobile phone plans a few years ago – the phrase “baffle you with bullshit” was a common refrain in complaints to the Commerce Commission at the time.

Back to the NZX.

A foreign-exemption for a listed issuer allows the issuer to offer a secondary market for shares in a different geography. The regime predicates that the rules of an issuer’s home market are broadly similar to the listing rules of the NZX. For the ASX, FTSE and other affiliations, it is hard to argue otherwise.

But when it comes to TSX-V, we’re not so sure. We call on NZX to review the foreign-exempt issuing status of companies whose primary listing is on the TSX-V. The TSX-V rules, combined with jurisdictional requirements, seem to result in outcomes that are vastly different to the expectations of most New Zealand investors – exemplified in the practices of Chatham Rock Phosphate. The company itself is one of the last exemplars of NZX’s foray into ‘alternative’ markets, a throwback to the early 2000’s.

It’s time to consign the remains of that regime to the annals of history.

Oliver Mander

As noted above, the full text of the email received from Chris Castle in relation to our assessment report is shown below:

1. Colin Randall is a fulltime executive director with operational responsibility for all the Australian operations and SAS Avenir Makatea in French Polynesia.
   
2. The record date for determining holders of shares is in accordance with Canadian regulations as is the reporting format as a whole.
   
3. Chatham Rock Phosphate Ltd was formed in British Columbia (BC0362293 119369742BC0001) and that is its primary registration although it has a secondary registration in NZ.
   
4. There are no staff as such, the business is run by two executive directors, consultants and external contractors.
   
5. Chatham is a development company and will continue to incur development costs until our phosphate mines are fully permitted and go into production. This is normal for companies operating in the resource sector.
   
6. Finally, as in previous years, NZSA continues to try and fit a square peg into a round hole. As an overseas issuer Chatham is not obliged to report or operate in accordance with NZSA policies.

Please correct the document and also include my comments when you circulate it to your members.