JES

JES: The investment story of JES takes a new twist, as the group announced that it is putting its much ‘talked about’ investments into Mineriver on hold and potentially terminate the agreement, as it attempts to diversify into the African forestry business. JES has announced an agreement to buy a 51% stake in SCIBOIS Co for US$65m, which has a 75% stake in a timber extraction firm (STE) holding a licence to harvest an area of 229,440 ha of forest in Africa, Congo until May 2036. The value of the forest is estimated to be worth more than US$3b. The acquisition will be carried out in two stages and upon completion; JES will be provided a guarantee of accumulated net profits before tax amounting to US$170m for the next four years. During the four years, SCIBOIS will also undertake to seek listing on a reputable stock exchange, with a minimum market capitalisation of US$450m. JES believes that the acquisition is an excellent opportunity to diversify from its cyclical shipbuilding business. With the forestry acquisition providing both diversification benefits and synergies, JES has announced that the company has been in contact with Mineriver and there has been negotiation on the entering into of a mutual deed of release and discharge in respect of the Investment Agreement. We raise an eye brow however that the vendors of SCIBOIS s would sell their stakes in the group for just US$65m, considering that the deal comes with profit guarantees (before tax) of US$170m over a four year period and its forestry assets are worth more than US$3b. The news also comes a week after JES’ auditor, BDO issued an emphasis of matter on material uncertainty that may cast significant doubt about JES’s ability to continue as a going concern, citing JES’ Rmb0.5b FY13 net loss, and its current liabilities exceeding current assets by Rmb373.6m. To re-cap, JES raised many eyes brow late last year revealing that Mineriver - a Xinjiang mining exploration firm in which JES was planning to acquire a 30% stake – is estimated to hold 4.2b tonnes of resources (mainly magnesium) valued at over US$500b. As a sanity check, we previously highlighted that according to Geoscience Australia, the estimated world resources of magnesite are ~8.6b tonnes. This would imply that Mineriver holds about half of the world’s magnesium deposits. It would appear incredulous that half the world's magnesium resources could be concentrated within such a tiny plot in resource-rich Xinjiang province, which spans 1.6m sq km, and that the vendors will be willing to sell a 30% stake in a supposedly multi-billion dollar company for a mere consideration of $127m.