I
Matthias Horner closed his front door gently behind him and scrunched across the gravel drive to the garage. He flicked the button on his car key ring, and the garage door began to swing open, as did the gate at the end of the drive a hundred metres away. He opened the door of the silver Tesla Model S and settled into the seat. Sure, for the short drive from his home in the exclusive suburb of Geneva to the Metal-Exx head office in the centre of town hardly warranted a five hundred horsepower car, but what the hell – he was Metal-Exx’s top copper trader, and if he couldn’t indulge himself, who could? Behind the closed shutters of the house, his wife and children slept on. They didn’t need to be on the road at five thirty in the morning.
As he accelerated out of the drive and onto the road, he punched the radio button. Soft rock. He glanced at the dashboard clock: 5:28. He was slightly ahead of schedule. There was no traffic so early, and as he pulled out onto the highway he put his foot down and the car surged forward. He loved the smooth power delivery of the electric motors, giving him the acceleration of a supercar. The pips sounded from the speakers.
“Good Morning. It’s five thirty on Tuesday the twentieth of November 2015. Here are the news headlines. The gyrations in the world’s stock markets continue. Although yesterday evening the Dow Jones recovered some of its recent losses to finish up one and a half percent, the Shanghai market has shed a further four percent today. That takes the index to a new three-year low and has had knock-on effects on the markets in Tokyo, Taipei and Seoul. More falls are expected when European markets open this morning. The price of oil has also fallen further this morning, meaning that petrol at the pumps will continue its downward move.”
Horner snorted to himself at the blatant attempt of the radio station to put a positive gloss on the news. Yes, of course petrol prices here in Europe would drop. But prices dropping because nobody wanted the stuff was hardly something to get enthusiastic about. As the newsreader carried on with his story, Horner hit another button on the iPad-like central screen on the dashboard to bring up his phone contacts. He needed to have a word with his man in Shanghai. Before he could make the call, though, his phone rang. “Steiner” was the name flashing on the screen in sync with the ringing.
Horner hesitated for a moment. Jakob Steiner was the finance chief at Metal-Exx – the second most important man in the company after CEO Phillipe Millault. Steiner controlled payments in and out of the company – and although by now it had grown to a publicly-quoted, multi-billion-dollar behemoth, he was still as meticulous in tracking everything as when he and Millault had helped set it up all those years ago. A call from Steiner at five thirty in the morning rarely presaged good news. Still, he couldn’t ignore it.
“Jakob, good morning,” he said.
“Yeah, I think we may have a problem developing. How much are we owed back in balancing payments against provisional amounts on the DRC copper we’ve shipped to Chinese smelters?”
“Well, that depends on the copper price,” Horner began.
“Yes, I know how it works, Matthias. I’m not asking to the last dollar. Copper has dropped like a stone in the last three months. We’ve made provisional payments to Congo Copper on the basis of the old price. How much – to the odd million or so – do they now have to pay back against final pricing?”
“Well, I’d have to check. It won’t be a particularly big number, though. We have been buying pretty much everything from them – and a lot of the others – with three- and four-month after-shipment QPs. That’s how we ran this year’s sales campaign, if you remember. But even so, even with the big drop in copper, it’s not going to be a huge amount they will owe us back.”
“Yes, I know. I’m just trying to get my mind round the cash flow implications right now. Have a look when you get in and come and see me at eight.” The phone clicked off.
The radio, muted during the phone call, faded back in. The turmoil in international markets was still the topic.
“Resource shares have been the worst hit again overnight, spooked by figures coming out showing substantial falls in the volumes of iron ore and oil imported by China in the last quarter. BHP Billiton and Rio – both major iron ore producers – have seen their share price hit ahead of the London opening by around a further three percent, on top of recent falls. Worst affected today, though, has been the commodity trading company Metal-Exx, headquartered in Geneva but with its shares quoted in Hong Kong as well as London. The Hong Kong quote was down five percent in today’s trading alone, on worries about the extent of its exposure to weakening Chinese metal markets. We will have more on this story in an hour.
“In other news, migrants in Hungary are becoming increasingly violent as they attempt…”
Horner switched the radio off. It wasn’t a pretty picture. On the other hand, though, the attacks on Metal-Exx were exaggerated. As one of the inner circle of top management, he knew the company was sound. Business levels were down – particularly from China – but he and his fellow traders held their jobs down specifically because they were skilled in riding the peaks and troughs of the commodity markets.
That was what they did, as they had convinced the investing public when they had floated the company back in 2007. They’d navigated the financial crash that engulfed the world then and there was no reason to suspect that they couldn’t do the same again, even in this burgeoning China crisis. In fact, if the price kept dropping, perhaps it would be time to add to his already substantial shareholding in the company. Like many of his colleagues, he had sold all he was allowed to on flotation and had been slowly buying them back as the price had dropped in the intervening years. Nothing wrong with that; that was just trading. Millault and his colleagues had judged the right moment for the original sale.
Steiner was already behind his desk in the top floor office he shared with Millault. The two of them had worked together for years, climbing through the Phillip Brothers and Marc Rich hierarchies until they had struck out on their own and joined Roger Ertl in establishing Metal-Exx. Now, since Ertl had retired a couple of years ago, they were at the top of the pile; others – like Glencore or Trafigura – might be bigger in absolute terms, but they were multi-commodity outfits. Metal-Exx had stuck to its origins in metals, and it was the undisputed king of that market. Since the flotation, with greater access to capital markets, the business had boomed and the supply of African copper from the ex-State mines now owned by Congo Copper (run by DeWet Steyn, a London-based South African) to the concentrate-hungry smelters of China had been the public face of that success.
But Steiner knew there was more behind public appearances, and that the company had a problem. It dated back to the global crisis in 2008, headlined by the bankruptcy of Lehmann Brothers. With the collapse in asset values and the strangling of credit, global trade levels had fallen off a cliff. The natural reaction of mining companies – and indeed the policy they had pretty much always followed in previous crises – would have been to cut back their production in the face of declining demand in order to give some support to prices and their own positions. But flush with the cash raised by their own flotation a year or so earlier, Millault, Steiner and the rest of their senior executives had hit on a much better scheme. Western governments, desperate to stimulate flagging economies, pumped money into the banking system in an attempt to get lending moving. But the clever traders of Metal-Exx were one step ahead, and proposed to the banks – recipients of that cheap governmental money – a seemingly far more secure business than lending to uncertain industrial enterprises. They could see that the majority of base metals were in a contango – where forward prices were higher than spot ones – and frankly likely to stay that way for the foreseeable future.
So Metal-Exx went hammering on the doors of all the miners and smelters they knew, with a proposition. Instead of cutting production, sell it all to Metal-Exx, who, armed with their cash and borrowing power, would then sell it forward on the futures market and pocket the difference between spot and forward price – minus costs associated with storage – as their secure profit.
It worked a treat. Of course, once the rest of the world saw what was going on, there was a rush of competition, but Metal-Exx, through being there first and, with their strong credit rating able to offer the best deals, kept ahead of the pack. The net result was that by the autumn of 2015, the world was awash with metal that wasn’t required for consumption. Mines and smelters whose output in more normal circumstances would have been curtailed were still running at close to full capacity and the world’s warehousing sheds were full to bursting point. Everybody, more or less, was happy, particularly those who owned warehouses. Being a warehouseman was rather like winning a lottery.
II
What Steiner was looking at, though, suggested Metal-Exx was actually a victim of its own success. The metal financing trade was great – a secure income stream, and control over large parts of the world’s stock of metals, with the obvious benefit that would bring when demand surged back again. The downside was the amount of money they had tied up. Not only their own capital, but borrowings as well. In fact, all the money that they had been able to raise. He’d been responsible for making the cash available to feed the traders’ desires to grow their businesses, and now he was beginning to have a feeling that perhaps they had pushed things too far. It was absurd that a company the size of Metal-Exx should be concerned about the timing of provisional and final payments to their mining suppliers, but the numbers he was looking at on the sheets on his desk were forcing him to exactly that conclusion. It was all caused by the precipitate drop in the copper price.
As part of the normal course of its copper concentrate business, Metal-Exx shipped consignments of material from a variety of mines – in Africa, South America, Asia – to its smelter customers, who in recent years had been mainly in China as the Chinese share of the copper business had surged. The whole process of mining, concentrating, moving, shipping across the ocean and eventually smelting and refining the ore into a product suitable for manufacturing into end-products was a time-consuming one, and nobody in the value chain wanted to be out of pocket while the material was flowing through the process. Part of the function of Metal-Exx, as the trader in the middle, was to use its finance and the facilities of the London Metal Exchange to enable the transactions to go through; for a fee, of their profit, of course. One of the ways of doing this was to split the movement of the money from the time of the pricing of the material.
Thus, in the contracts on Steiner’s desk, Metal-Exx had contracted to agree the price with the mining companies three or four months after the material had been shipped on its ocean voyage. To keep the mine solvent, the trader had agreed to pay sometimes eighty, sometimes ninety, percent of the price pertaining at the time of shipment as a provisional amount when the concentrate was loaded onto the ship. Then, when the final price was agreed – three or four months later – there would be a balancing payment, in one direction or the other, to finalise the trade. Metal-Exx had no actual exposure to price changes during that period, since it was able to hedge that on the LME.
However, when there was a violent, rapid drop in the price, Metal-Exx could be left in a position where the mining company owed them money back, because the final price made the material worth less than the provisional payment. To outsiders, that might sound convoluted, but to Steiner it was a pretty straightforward piece of business, given the existence of the futures exchange, designed to oil the wheels of the trade.
What was bothering Steiner, though, was the amount of money Metal-Exx was currently due back after copper’s substantial, continued drop in price. He had no concerns about being owed money by the majors – Codelco, BHP, Freeport and the like – they would pay on time, with no problems. He was, however, disturbed by the figure he saw against the name of Congo Copper.
The relationship between DeWet Steyn and Metal-Exx was a long and complex one. A South African mining engineer in origin, Steyn had been around Central Africa for years, promoting a raft of different junior mining companies producing cobalt, coltan, diamonds and pretty much anything else from that mineral-rich belt. Metal-Exx had always been prepared to take product from him, sometimes closing an eye to the actual details of the provenance. Then, a few years ago, he’d lucked out and got the opportunity to put together a bid for substantial copper operations in the DRC. Metal-Exx had supported him, not by buying into the consortium, but by giving a guarantee to take his production, thus making his bid a bankable proposition. That had catapulted Steyn into the big league.
But Congo Copper didn’t really sit on the right part of the cost curve, though, which was why Metal-Exx had preferred to be an off-taker rather than a shareholder. Steiner knew that after the drop in the copper price, it was unlikely that the operations were profitable. That’s why he didn’t want to be in a position of being owed money by the miner.
From the sheets in front of him, he could see two ugly truths. First, Congo Copper had indeed missed a couple of payments – not huge amounts, but disturbing with bigger ones coming due in the near future. Secondly, and he kept going back over this because it was hard to believe, Metal-Exx looked like it was facing a serious hole in its projected cash flows. It was absurd; they were the biggest and most profitable metal trader in the game. The contracts Steiner had among the papers in front of him were all positive trades; and yet, unless he could raise some more cash from somewhere, that mighty company was going to miss making payments it owed.
Phillipe Millault was away travelling that day, which gave Steiner a dilemma. On the one hand, he would have to know about the problem, but on the other, Steiner would rather resolve it and then present the problem and its solution together. Horner was already coming in to see him at eight; he called an internal number.
“Hello? Eisenstadt.”
“Max, hi. It’s Jakob. Could you come along to my office at eight. There’s something I need to discuss with you and Matthias.”
“Sure, I’ll be there.”
Max Eisenstadt was Metal-Exx’s veteran aluminium trader and de facto senior trader by virtue of his years of experience – and his age; he stood out among his colleagues as the representative of a previous generation. None of them dared question his effectiveness, though. The aluminium book, year after year, was the single biggest element in Metal-Exx’s annual profit. Eisenstadt himself had made a fortune, and his success and age gave him a position as a kind of father confessor to some of his colleagues. Steiner knew he could rely on the older man to grasp the full picture of where they stood that morning. He rubbed his eyes. It was still only six forty-five. He stood up and walked across to the window, looking out across the lake, lights twinkling in the approaching dawn.
He never tired of the view; he was Austrian, but after initially founding the company in Vienna, he, Millault and Ertl had shifted it to Geneva about fifteen years or so ago. It was only partly for tax reasons. It was easier to persuade traders to come and live in Geneva – where they had a like-minded international community to socialise with – and Geneva was a better global hub. The fact that Millault himself was Swiss had also played its part. Steiner was rich, happy and settled with Metal-Exx. The company had consumed a lot of his life, and he wasn’t going to let it go. They’d find a way through the problem. They always had in the past. In the pool of light in front of the window, he saw flakes of snow beginning to fall. Despite his sixty-odd years, Steiner was still a keen skier. He took this first fall of the year as a good omen.
III
Max Eisenstadt wandered into Steiner’s room just before eight. By then, the dawn had broken, but the snow had got heavier and the day looked grey. The aluminium trader was a big man, a bit hunched now by advancing years, and with thinning grey hair. But his eyes still held the sparkle of a keen intelligence. Steiner gestured over to the conference table in front of the window and they both sat. A coffee pot and cups were arranged in the centre of the table, and Eisenstadt helped himself.
“So, Jakob, what do you need to talk to me and Matthias about? Have we been upsetting the regulators again?” It was a natural assumption; Metal-Exx’s buccaneering style was often anathema to the authorities who watched the world’s commodity markets. The traders didn’t really care; they knew they walked close to the line, but they also knew that Steiner and his colleagues in the legal department were red-hot in being sure they never crossed it. For all the “investigations” that had been undertaken into Metal-Exx, the company had never in its history been found wanting by the regulators. That didn’t stop the latter trying, though.
“No, no, it’s not that. It’s something more serious.” Steiner paused. What he had to say next was something he thought left in the dim and distant past, when Metal-Exx was just the new boy on the block. “I think we are heading for a cash flow problem, and I’m concerned about what that may do to our credit rating. Which in turn would adversely impact our borrowing cost.”
Eisenstadt rocked back in his chair and raised his eyebrows. “Are you serious?” he said, quizzically. “We’ve got cash coming out of our ears, haven’t we?”
“No, we don’t. We appear to have endless funding, as long as we keep turning over our trades. That’s how we operate. But…” There was a knock at the door, and Matthias Horner came in.
“Jakob, Max, good morning.”
“Morning Matthias. Come in, sit down,”
Eisenstadt acknowledged his younger colleague with a wave, and Horner helped himself to coffee and sat opposite Eisenstadt.
Steiner began again. “Mathias, I was just making a couple of points to Max. I’ll start again, now you’re here.” He paused and gathered his thoughts. “So, we have a wonderful business here, you guys and your colleagues are all running profitable trading books. However, when I look at the overall position, despite the profitability, we are running into a crunch situation where all our resources are tied up, yet we will still have payments to make. In other words, we will run out of cash. Now, the reason I wanted to discuss this with you two specifically is that there seem to be two root causes of the issue. First, we have very large amounts of capital – both our own funds and bank borrowings – tied up in financing deals. In fact, on the back of that, we are pretty much at our borrowing limit.” He held his hand up, as Eisenstadt tried to speak.
“Wait, Max. I’m not criticising. It’s a good business, and we all agreed to maximise our involvement. If we put too much in, well, it was a joint decision. We’re not here for recriminations, I want us to find a solution. Now, the second issue is that the way the copper price has performed means that the copper book has effectively overpaid against Chinese concentrate sales. Again, the underlying deals are perfectly sound, but there’s a timing issue.
“Those two facts together are what are squeezing us. They’re what you might call the internal factors. There are also some external issues. First, along with every other quoted resource company, our equity is getting hammered. In fact, we are probably being hit harder, because we are a trader and the world and his wife know we rely on borrowings and don’t have a balance sheet stuffed with hard assets. So the vultures are circling. Using the equity market to raise cash at the moment therefore would be pretty much impossible. At the same time, as I said before, we are effectively at our borrowing limits, without seeing a hike if our overall cost. In other words, if we ask the banks for more, they will raise the cost of our existing money, according to the loan schedules.
“So, we’re squeezed in the middle of all this. Before we go any further though, there is just one thing. Matthias, I see from the accounts that Congo Copper not only will be owing us money pretty consistently while the price is here, but that they have already deferred a couple of payments that were due in recent days. What’s going on there?”
“Well, you know we have a pretty close relationship with them. We always have had; we take virtually everything they produce, so we treat them a bit differently from a normal arms-length supplier. So we’ve always been prepared to give them a bit of flexibility if they ask to delay payments – we charge them, of course, but we normally give them what they want. It’s worked pretty well to now.”
“Mmm. Right now we can’t afford it. You need to tell DeWet Steyn he has to pay up and keep to the schedule. We have to finance ourselves before we start financing our suppliers.” Steiner gestured to the phone on the table. “Call him up now, and tell him to pay up.”
Horner hesitated for a moment, then shrugged. Pulling out his mobile, he scrolled through to find the number he needed and dialled the speakerphone in front of them.
“Hello, DeWet Steyn.” The voice was tinny coming through the speaker, but the South African twang was immediately recognisable.
“Hi, DeWet. It’s Matthias Horner.”
“Hey, Matthias, how are you, my friend? What makes you call so early in the morning. I’ve only just got in the car. Everything OK, I hope?”
“Well, yes, pretty much. Just one small issue I needed to raise with you. I’ve been working here with Jakob, and he’s asked me to give you a call to request you to pay those amounts left over from the end of last quarter’s business. The balancing payments, you know, against the provisionals.”
“I don’t understand, Matthias. You and I agreed that you would allow us to delay that until the end of this quarter.” Horner shot a guilty look across at Steiner, as Steyn continued.
“You know I can’t make those payments now; if I pay you, I can’t pay my workers, and if I don’t pay them, that closes down my mines. We agreed it was in nobody’s interest to do that. We’re both gentlemen, Matthias. We had an agreement; we can’t just change that now with no regard for the consequences.”
“Well, the point is, we need that money now, against our contractual agreements.”
“Come on, man. Don’t talk to me about contracts. We agreed something verbally. Do you want to close me down?”
“To be honest, in the current market, taking your production out for a while probably wouldn’t be a bad thing; you’re not making money right now.”
Steyn’s voice became a lot colder. “Is that a threat, Matthias? Pay us, or we force you to stop production? Is that where this is leading”?
Steiner decided it was time to intervene, before the conversation degenerated. “DeWet, it’s Jakob here. Nobody is making threats. I’m just trying to rationalise my cash flow and these amounts seem to be outstanding. I don’t see any records of us granting extra payment terms, but of course if we did, that would be different.”
“Listen, Jakob; I can’t pay you right now and keep my mines running. If I shut my mines, I’m in a financial black hole. You guys know this. So don’t call me at this time in the morning to threaten me. And if you’re thinking of going to the law, remember we all have tapes on our phones these days. I had a verbal agreement with Matthias giving me extra time.” The phone went dead as he hung up.
“That went well,” observed Eisenstadt. Steiner just glared at him.
Sitting in the back of his car in London, Steyn’s face was a mask of fury. He was a man with a high opinion of himself, who barely tolerated disagreement. Indeed, one (possibly apocryphal) story told of how he had arrived at one of his mines in the DRC for an “offsite” board meeting. As his helicopter touched down, one of his fellow directors – who had all made the long journey the day before rattling around in a convoy of Land Rovers – was heard to mutter to his colleagues, “Ah, I see the ego has landed.” He wasn’t going to let himself be pushed into a hole by anybody. But one thing Horner had said gave him serious pause for thought.
IV
“That wasn’t very smart, Matthias,” said Steiner. “I mean, I know I said there would be no recriminations, but really, agreeing to give him that extra time to pay doesn’t help.”
“No, but I had no idea we had this problem. We’ve done it before, and everything’s been fine. If I’d known things were different, obviously I would have behaved differently.”
Eisenstadt spoke. “Look, we’re not going to get anywhere arguing about that. It’s done, and we are where we are.That avenue is not open to us. We need the cash now, so even if he’s wrong and we had a legal case, it would be too late by the time the lawyers achieved anything. It’s a little bit the same with the financing deals. If I break them, and get the cash back, it’s still not going to solve the immediate problem. We need something more immediate. Have we really not got a bank line left that we’re not fully utilising?”
“No, we’re pretty much up to the limit everywhere.”
“How about BBV? They’re normally very accommodating to us. Any chance of something there?”
BBV was the Baseler Bank Verein, not the biggest bank in Switzerland, but the one that had traditionally been most active in the international trading business. It had had a long relationship with Metal-Exx.
“Mmm. We’re at our limits there, but you’re right, it’s worth a try. I’ll go up to Basel and talk to Gerber.” Steiner sat back in his chair. “OK, I think that’s it for the moment. Please think about this, though. We have to find a solution, and quickly.”
After the other two had left, Steiner called Urs Gerber, the CEO of BBV. They were old friends as well as long-term business associates and Gerber agreed to see Steiner the following morning at his head office in Basel.
In London, Steyn’s mood that morning was black. Fortunately, he had no external meetings, but all those of his employees who had any dealings with him caught the rough edge of his tongue. He was never an easy man to work with, although when it came to schmoozing putative investors for one of his ventures he could be the most silver-tongued orator. His time at the moment was largely occupied in convincing those same investors that despite the rapid and severe drop in the copper price, Congo Copper was still a valuable property. The threat from Metal-Exx – whom he regarded as a thoroughly on-side co-operator – was potentially a fatal spanner thrown into the works.
But through the black mood, he had the glimmering of an idea that he thought was going to interest one of his investors – a New York based hedge fund called Leopard-Star Associates, run by a veteran fund manager by the name of Jason Serck. The two had become acquainted years ago, and Serck had consistently been prepared to put money into Steyn’s various projects; until Congo Copper, it had all been pretty small beer for the fund, but then it had taken a fair-sized slice of the copper business. This had performed well, but the drop in the copper price together with the turmoil in financial markets generally had eroded much of the gains generated by the holding.
This time, Serck had been wrong-footed by the resource markets in which he specialised and he was nursing some substantial losses both on outright commodity futures positions as well as equities of resource companies. He too got an early morning phone call that day as he was in his car driving in to New York City from his Far Hills estate.
“Jason, hi, good morning, it’s DeWet.”
“DeWet, good morning, I see the markets are taking another hammering today.”
“Yeah, it’s not pretty. There seems to be no good news coming out from anywhere.”
“Especially not China. Nor the Eurozone. One crisis we can cope with, two become difficult.” He chuckled. “Anyway, what have you got for me this morning?”
“Nothing directly, but I have a proposition that I think may be of interest. Maybe a way of making some money out of the copper market for a change.”
“Hey, I’m good for that. But listen, I’ve just got a couple of market calls to make before I get in, so can we speak a little later, after I’ve hit the office and got through the morning meeting?”
“Sure. Whenever suits.”
“OK, I’ll call you later. In the office, in London. Right?’
“Yeah. Let’s speak later.”
The news Serck got when he arrived and sat down to discuss the day’s tactics with his closest colleagues was not good. Leopard-Star’s major funds had all taken another kicking from the markets. They had ridden the resource and China horse for a long time, and profited mightily, but the market was telling them now it was beyond the time to get out. The firm had had another round of withdrawal requests as investors took the decision to move their money away from the sector, back into more defensive positions to help weather the storm that seemed to be engulfing the financial world. They couldn’t have their money straight away, of course; the lock-in provisions of the fund prevented that. Nevertheless, Serck was faced for just about the first time in his career with a major setback. Certainly, he’d run losing trades before, but always they’d been balanced with positive ones; this time, the whole strategy he had in place was leaking money like a sieve. This time, there was no saving grace.
They were long of all the wrong things, and a turnaround seemed no more real than a mirage across the desert. Serck was annoyed, mainly with himself for failing to act on the signs. Chinese growth had failed to live up to forecasts for some years now, but he’d allowed himself to be swept along by the optimism that China could still drive the whole world’s economy. Instead, the continuing reduction in GDP growth was having a catastrophic effect on basic raw materials – oil, iron ore, copper and so on – which were precisely the areas in which he was invested. He’d ridden out the 2007/08 Lehmann Brothers slump; indeed, having liquidated long positions in early 2007, he’d actually come out substantially ahead. The money attracted by that success was now the same money looking for a way out of his funds. After thirty-plus years running Leopard-Star, he was a very rich man; the blow to his reputation by now was frankly more painful to him than the financial loss.
The morning meeting dragged on, and it was not until around ten that he got to call Steyn back. A few pleasantries, then “So, you said you had a proposition for me. Right now, I’ll listen to anything, so tell me what it is.”
“OK. I had a call from Metal-Exx this morning. Now, you know we sell pretty much all our production to them, and we have a very close relationship with them. They’ve always treated us well, and the deal has been good for both of us. So, we’ve been pricing with them on long QPs, really at their request. But they’ve been helpful, and they’ve paid us a ninety percent provisional on shipment. I think with their other suppliers, that’s been eighty percent, so they’ve been good to us. The way copper has dropped has meant that for some while now, we’ve actually been required to pay them back against that provisional payment – in other words, the ninety percent is more than the current ruling price. OK, we all suffer when the price goes down, but I have had a verbal agreement with Horner – he runs the copper book – giving me extra time to make that return payment.” He paused for a moment. “You know, of course, that we can’t make money at the current price.”
Serck snorted. “DeWet, for sure I know that. With the amount of your stock we own, that’s one of our problems, as well.”
“Yeah, OK. So this morning, I got a call from Horner and Jakob Steiner telling me that despite my agreement with Horner, they were calling me to bring my payments up to date, immediately. I no longer have the extension. If I do that, I won’t be able to keep the mines open. They would be forcing me to close. When I pointed that out, they said that in fact that might be a good thing for the market. It was a clear threat – pay, or we’ll close you down. I don’t like being threatened.”
“So can you find the money?”
“No. Not right now. But I have a different idea, as I said earlier.”
“If your idea involves a rights issue that you expect me to take up, or a bond issue that you expect me to buy, forget it. I like Congo Copper, I think it’s a great long-term play, still, but I’m not putting any more in right now. If anything, I’ll be reducing resources positions until the picture improves. We’ll stick with you as we are, though, for now.”
“No, I know that wouldn’t fly at the moment. No, I’m looking at Metal-Exx. During the conversation we had, Horner said – in these words – ‘We need that money for our contractual commitments’. That started my mind thinking. The whole market knows they’ve got huge outstanding borrowings, not least against that mass of financed material they are holding. Maybe they have overstretched themselves – perhaps they actually do need the money. Their equity is taking a kicking, they’re heavily leveraged – have they pushed it too far? Let’s face it, the amounts I owe them shouldn’t be critical for a company like them. It’s peanuts in the normal run of their business.”
“OK, so what are you proposing? I haven’t bought it yet, I’m just curious to know your thinking.”
“I’m thinking we push them over the edge. We short their equity, we short their bonds. We push them everywhere we can. If we can push them over the edge, then we step in and take the business away from them.”
“Mmm. But what happens if they are not as badly placed as you think? And bear in mind it’s only a guess, based on one conversation.”
“Come on, Jason, there’s already a head of steam against them. In the worst case, we can just buy back the shorts.”
“OK. I have to say that at the moment I’m not inclined to join you, but I will see if I can get any more information. If your best case is right, and they are on the edge, then it could be an interesting play. But right now I’m sceptical. It’s a big company, with a very strong record of profitability and a very strong reputation for prudent financial management. I’m not about to walk into a trap. I’ll think about it, see if anything else supports your case. Let’s talk again, in a day or so.”
Steyn was disappointed, but at least he had planted the seed. He was convinced that what Horner had let slip was significant, but he was also a canny trader. He knew Serck wouldn’t act without more confirmation; he also knew that Serck had a better chance of digging out more information than he did himself.
V
The snow had continued falling all day and most of the next night, so instead of sitting in the back of the Mercedes limo to be driven up to Basel, Steiner sat up front in the Range Rover, next to the driver. It was autoroute most of the way, but it was best to be prepared. What it meant, though, was that instead of peace and quiet in the back to get on with the phone calls he wanted to make, he had to listen to an endless stream of chat from the driver. By the end of the two-hour journey, the man’s job was hanging by a thread.
Urs Gerber was not the archetypal Swiss banker; he was stocky, built like the farmer his ancestors were, bearded and without the smooth exterior of most of his peers.
Despite – or perhaps because of – that, he had risen to the top of the bank and held the position down for the last fifteen years. He still maintained direct relationships with many of the clients he’d been working with for years. Metal-Exx was one of those, and, CEO or not, he had the detail of the account at his fingertips. He welcomed Steiner with a broad smile and a firm handshake. A few pleasantries about family and mutual friends, and Gerber cocked a quizzical eye at Steiner.
“So, Jakob, you don’t normally come dashing up to Basel just for a chat. Although, of course, it’s always a pleasure to see you. What’s the problem, and how do you think we can help you?”
Steiner had thought hard about how much he needed to tell the banker; in the end, he’d decided he would have to be completely open and disclose his position entirely – although it went against the grain of the self-reliant Metal-Exx ethos to do so. Still, extreme situations needed clarity. So he set out the position as he had done the day before to his colleagues. Gerber sprawled back in his chair and listened.
“Well,” he said, as Steiner finished his explanations, “frankly, you seem to be in a bit of a mess. But you’re not the first, nor will you be the last. In simple terms, what you want me to do is tell you how to raise some cash from the market to tide you over.” He looked keenly at the other man. “I’m relying on your word that it is a short-term issue, and that there are no nasty surprises lurking in your forward commitments which would make the problem worse.” He waited.
“No, I’m happy that we have a profitable business. This is only a cash flow squeeze, nothing more.”
“Only? It could put you out of business; I don’t call that ‘only’. You know how serious this is, or you wouldn’t have come to see me. For all your market strength, you can’t solve this yourselves.
“Now, let’s see what we can discard immediately. Selling equity won’t work; the market is too jittery and your stock is right now highly unpopular. We wouldn’t be able to place anything. If we made a rights issue, I’m guessing the only ones who would take them up would be you insiders; the rest of the world wouldn’t touch it with a bargepole. You have no space in your bank lines, and I frankly think it highly unlikely that in your current position you would get anything new, either from an existing lender or a new one. We certainly won’t lend any more unsecured money, and I struggle to see where you have any unencumbered assets to collateralise.”
Steiner interrupted. “Borrowing more would be difficult anyway, because it would push us over our covenants and that would trigger an increase in borrowing cost, which I would be very reluctant to do.”
“Jakob, you may be reluctant, but you may have no choice. Let’s leave the question of rates and cost until we have at least got an overall plan in mind. I don’t think we could go the bond route, either; the market’s got quite a lot of that already, and more in current conditions is not going to work. We wouldn’t be able to get it off.” He glanced at his watch. It was twelve thirty. “I’ve arranged for lunch here, in-house. That way, we won’t be disturbed. Let’s go through, then I’ll tell you what I think we can do.”
Basel eschews the Francophone fripperies of Geneva, and lunch in the BBV boardroom was typically hearty Swiss food and – of course – top echelon Burgundy. As they settled in to the meaty venison main course, Gerber outlined his thoughts.
“OK, so we’ve rejected what we can’t do, which I think leaves us with only one place to go. It won’t be easy, but my feeling is that with your assurances about the forward profitability – and some supporting evidence, of course – we could probably sell a tranche of commercial paper. That will only buy you a maximum of sixty days, but I think that will cover the problem period.”
“Sixty days will be enough. Are you prepared to underwrite the offering?”
“I will agree to take part; I have several funds in mind whom I believe I can persuade to take a good part as well. If that works, then the balance will be absorbed by the market. I can’t tell you what the rate will be until I have spoken to potential buyers, but it should not be too far away from your normal unsecured financing rate.” He looked seriously across at Steiner. “This is a big risk for us. You are in a bad position, and the very best we can offer is to buy some time this way to help you clean up. We’ve been friends a long time, Jakob, and I must say I would never have expected to have this conversation with you and Metal-Exx. I’m not going to try and teach you your job, but you seem to have taken your eye off the ball.”
Steiner took a mouthful of wine, and rolled it around his tongue. It really was very good. “Urs, I should be offended by that, but in truth I can only agree with you. The only reason I can offer is that we allowed ourselves to be seduced by the easy money in the financing business. It may be Congo Copper’s reluctance to pay that is the catalyst, but really what we did was abandon – albeit only temporarily – our tested business model of turning trades and money over. We let ourselves be weighed down by just one trade. It’s a great profit generator, don’t get me wrong, but it’s stopped us being as nimble as we need to be.”
He sat back. With the business deal sketched out, he was now talking to his old friend. “I wonder if I’m getting too old for this. You know, ten years ago I would have seen this well in advance. I got too comfortable.”
Gerber smiled. “Rubbish. I agree you should have seen it, but I don’t think age is anything to do with it. You know, and you will recall I said this to you and Philippe at the time, I think the problem stems from the public flotation. When you were private and it was your money, and you didn’t have to worry about shareholders, the game was easier.”
“Maybe. It’s been a mixed blessing.”
“Well, let me just say there is no way I would let BBV float; we value our independence of action far too much.”
They chatted on, and eventually Steiner took his leave. He was confident that he had bought some time to sort out the difficulties.
Gerber called one of his analysts and gave him an hour to produce a note on Metal-Exx, taking into account the position that Steiner had just outlined to him. He had exaggerated a little to his old friend; although BBV couldn’t take the entire issue, he was actually only anticipating sharing it with one fund, not the several he had indicated earlier. He knew the company, the people, the business; he was confident Metal-Exx wasn’t about to go down, and he knew he could price the paper at a level that would give him a healthy profit margin. He would keep as much as he could and share the deal with one fund, whom he was sure would share his view. But he didn’t intend to call them until his analyst had given him all the facts and figures. He would have one shot, and he would need to get it right.
He mused for a moment on what he’d said to Steiner about public ownership. When Metal-Exx – at that time run by Ertl, with Millault and Steiner poised to succeed him – had first approached him with their plan for a flotation, he had not been enthusiastic, and his view had not changed in the interim. Sure, Ertl had been able to get his money out, and Millault, Steiner and their other senior colleagues were all notionally extremely wealthy men, but they’d opened their whole business up to a far greater degree of public scrutiny. From the press barely knowing of their existence, they now featured heavily in any debate about the resource business. Instead of being able to run their operations in the shadows, they were now constantly in the full glare of the financial world.
In Gerber’s view, trading entities – and, given the entrepreneurial way in which he ran it, BBV also came within that category – were far better served by staying in private ownership. Why give yourself the added headache of outside shareholders if you didn’t have to? He knew Millault theses days spent as much time keeping investors happy as he did managing a trading business. And the moment you need to reduce the dividend payment because of a short-term hiccup, like Metal-Exx was now experiencing, the investors would punish your stock like there was no tomorrow.
In Gerber’s view, it made simple things far more complicated. Still, not his problem. BBV was a decent-sized shareholder in Metal-Exx, quite apart from one of its major trade financiers, and he was happy to put in more now. He shook his head to himself. If BBV were quoted, he wouldn’t have been able to take that decision so quickly and personally. That’s why he had no desire to be a rock-star banker, like Jamie Dimon. Sitting back in the shadows, that’s how he could get so wealthy. And that’s what the Metal-Exx team had lost. He shrugged his shoulders and looked at his watch: three thirty. He had an internal meeting which would take about forty-five minutes at three forty-five, and after that he should have been given the note he wanted on Metal-Exx. He was handling this deal himself; it wasn’t going to go through the traders.
VI
It was actually more like five thirty by the time Gerber was able to make himself time to concentrate on the Metal-Exx deal. His analyst had put together a punchy assessment of the company’s current position focusing on the strong track record and contrasting the optimistic forward profit projections with the current short-term problem. Reading through it, Gerber was impressed; it largely confirmed his own view that the projected deal was a good one. He picked up the phone and dialled a number in New York.
The private telephone on Jason Serck’s desk rang, and he picked it up.
“Serck.”
“Jason, good afternoon; or rather, good morning to you. Here is Urs Gerber from the BBV in Basel.”
“Urs, my friend, how are you. It’s a while since we’ve spoken. Is all good with you? And how’s that delightful wife of yours?”
“Yeah, we’re both well, and things here are pretty good. We’re just watching the market carnage and the Chinese rout, but so far we’re managing to keep our heads above water. We cut a lot of our Asian exposure a while ago; I just began to get twitchy and I wanted to get our focus back to markets we really know. Still, we had a good run in Asia. How about you? Still making those super-gains for your investors?”
Serck gave a hollow laugh. “Not really. Our performance hasn’t been great recently. I wish you’d told me to get out of Asia as well. We’re taking a bit of a kicking. But, you know, we’re still here, we’ve ridden bad times before. We’ve just got to draw in our horns and wait for the next opportunities.”
“Well, that’s why I’ve rung, really. I’ve got an opportunity that I think you may like.”
Serck was interested. He knew Gerber well, and had a lot of respect for the banker’s nose for a good deal. They had worked together in the past a number of times, and they’d made some good money together.
“Right now, Urs, I’d listen to the devil, if he showed me a deal. As it is, old friend, I’ll just have to make do with you. What have you in mind?”
“Well, it’s to do with our old friends Metal-Exx. You know we are pretty close to them and we have put together a number of financings for them over the years, as well as the trade finance stuff? Well, there’s an opportunity that came out of a conversation I had with Jakob Steiner – you know Jakob, I assume – about a funding deal they are looking at right now which I think you and I could get together on.”
Serck’s interest was piqued. That was the second time in two days somebody had brought Metal-Exx to the table. “Sure, I know Jakob Steiner – not too well, but we’ve met various times over the years. We’re a major resource fund and they are one of the world’s biggest metal trading companies, so we get to meet from time to time.” He paused for a moment. How much of what he knew should he make apparent? Best be cagey, to begin with. “Current market conditions can’t be too good for them, though. After all, metal prices have taken a hammering and they’ve been up to their eyeballs in the China story for the last five plus years. So what can we do with them?”
“Mmm. It’s true that they have not been well affected by the China problems, but out of problems always come opportunities, and this is one. I’ll give you the bottom line right out, and then we can talk about my proposal to make something out of this problem.”
“OK. You’ve got me listening.”
Gerber rattled off his pitch. Good, historically strong and financially prudent company, healthy forward profit projections, major player in its sector. He ran through his analysts’ forecasts of maintained margins and consolidation of the biggest position in the industry. Serck listened to it all, knowing that at some point there had to come a “but”, otherwise, what was the reason for the call in the first place? Sure enough, it came.
“At the moment, though, the company is suffering from a degree of cash flow squeeze, and is looking to raise some short-term capital to get over the hump.”
“So what are you offering me? A rights issue?”
“No. I have discussed that with Steiner, but honestly I don’t think in the current disturbed market conditions we would get sufficient take-up of the rights. Which would mean that we – or any other lead bank, if they chose someone else – would end up holding more Metal-Exx equity than we would choose.”
“But, Urs, you just gave me your spiel about what a good prospect Metal-Exx is. Why wouldn’t you want to hold the equity?”
Serck was playing with him, and Gerber knew it. “Come on, Jason, you know our business is not that kind of investment. Sure, we take equity positions, but they’re generally short-term trading deals. I’m not a fund manager. That’s your business.”
Serck chuckled as Gerber continued. “Anyway, the need is for a short-term solution, not an infusion of more equity capital. My proposal is a tranche of commercial paper.”
Gerber carried on, outlining the details of the deal he had in mind, as Serck listened intently. DeWet Steyn had not convinced him that his plan had legs, but Gerber was rapidly causing him to change his mind. The banker was effectively confirming that the difficulties in which Steyn had suggested Metal-Exx found itself were genuine and serious. It was a big, successful and – largely – well-run company that was on the verge of unravelling. Or, as Gerber was outlining, it could be saved.
Serck let the other man run through his whole proposal. Then, “It’s an interesting proposition, Urs. I’m sure you realise I can’t make a snap decision on something like this. I’m going to have to ask for a little time to think about it. Suppose we say I’ll get back to you definitively, one way or the other, by mid-day your time the day after tomorrow. That gives me time to do a little research of my own and to look at the cash implications. How does that sound?”
“OK, I can live with that. No longer, though. Any more time than that and it may be too late.”
They finished the conversation, and Serck sat back in his chair and stared through the window, down onto the bustle of Fifth Avenue below. Which way to play it? On the one hand, he could be the saviour, if he went with Gerber’s short-term refinancing. On the other, by allying himself with Steyn, he could destroy the whole thing. Serck was a hard man; after all, locked away in his memory, however much his mind tried to ignore it, was the knowledge that he had been responsible for the death of Mack McKee, after the man had tried to double-cross him during the Kanagi copper scam (see Tarnished Copper, by Geoffrey Sambrook). The prospect of killing a company didn’t bother him, even for a moment, if it meant he could turn a decent profit. No, for him the question was not an ethical one, but rather, which of the two roads would produce the bigger outcome for Leopard-Star? He sat staring out of the window, lost in thought.
The ringing of the telephone jerked him out of his reverie. It was his wife, reminding him that that evening they were to attend a charity fund-raiser at the Metropolitan Museum of Art. It had been organised by one of his fellow hedge-fund managers, to give them all a chance to show their softer, more caring side. Serck groaned inwardly as his wife told him with whom she had arranged dinner after the reception, and that she had decided they would stay in their Park Avenue apartment that night, rather than drive back out to Far Hills. He wanted the time that evening to focus his mind on Metal-Exx; but however he bestrode the markets, he wasn’t about to disagree with his wife over this one.
Distracted, deep in thought, he was poor company, and his wife let him know it when they finally got back to their apartment at around two. Serck poured himself a whisky and retreated to his study to see what the east was making of the markets. He flicked the TV onto the BBC channel, and the screen was filled with the head of business correspondent Robert Peston – he of the strange hair and even stranger vocal delivery.
“Once again,” the reporter was saying, “the markets in China and its Asian neighbours have taken a beating. And with oil and metal markets also sharply lower, it’s the resource stocks that that look set to be the biggest fallers in Europe. Rio and BHP Billiton, with their heavy reliance on iron ore – whose price has also been falling as Chinese steelmakers show little enthusiasm – have suffered in recent days, as have the oil majors. But the biggest loser looks to be metals trader Metal-Exx. That company, which most people had never heard of before its flotation a few years ago, is by far the biggest trader of metals in the world and up until the turnaround in China had been riding a wave of profitability. On flotation, it created three billionaires and many millionaires among the staff who had owned it. Those fortunes are now sharply diminished, and shareholders appear to be voting with their feet. One thing that is spooking them is the level of debt that the company is widely perceived to have. If the markets for its products keep weakening – or even just stay at current depressed levels – then some fear the weight of that debt could force some sort of financial restructuring. On the line is DeWet Steyn, the boss of Congo Copper, a substantial miner of copper in Central Africa, particularly in the Democratic Republic of the Congo. Mr Steyn, how do you read what is going on in the resource markets at the moment?”
“Robert, good morning. That’s an interesting question, but not really one for us as a miner. Our business is to extract the ore from our holes in the ground; our concerns are whether or not we can do that profitably at any given time. If we can’t, then we delay our production until the price goes up. That’s the simple supply/demand logic of the mining industry. So we’re sitting on a valuable resource and we let it into the market when the price is right. Right now, we’re running our production.”
“So the inference from that is that your production cost is still below the current level.”
Serck wondered how Steyn would answer that one. “So how much further do you think prices can fall?”
“Well, that’s a difficult question. There is no doubt that with reduced demand from China, we are facing a growing surplus, not just of our product, copper, but across the board in metals and energy. So far, a lot of that surplus has been taken up by financiers happy to exploit the cheap money western governments are handing out as QE. While that persists, normal market behaviour seems to be suspended.”
“So where does that leave Metal-Exx, who seem to bearing the biggest part of the market’s gloom?”
“Again, that’s not really a question for me. Of course, we have a very close relationship with them, which has been mutually beneficial for some years. But just looking at them as an outsider, the debt burden seems to be causing some problems. But, you know, my focus is on my own company and business. I can’t worry about somebody else’s excess debt. All I would say is that the market appears to believe that they are in trouble; we ignore what markets tell us at our peril. That’s something we should have learned from history.”
“DeWet Steyn, of Congo Copper, thank you very much for talking to us this morning. And now back to the studio for the news headlines.”
Serck switched the set off. Very neatly done, DeWet, he silently complimented. You managed to sidestep the issue of your own production cost and leave the viewer with the implication that Metal-Exx have serious debt problems. For a moment, he was tempted to call the South African, but decided in the end to leave it until the following morning.
VII
As he went off air, Peston still had Steyn on the line. “OK, so off the record, what do you really think of Metal-Exx right now? Can they get through this or are we seeing something a bit like Enron?”
“Off the record, and I mean that, they’re screwed. They’ve taken on so much debt – a lot of it to finance stocks of metal – but also to fund some of their investments in production, that they’ve got nowhere to go if they are squeezed for cash flow. And that’s where they are, right now. And it concerns us – they are our major offtaker, so of course we follow closely what’s going on. But,” he added hurriedly, to make it clear Congo Copper was not directly involved, “if they go down, there’s plenty of others out there – Glencore, Trafigura and so on.”
“But will others buy, with current weak demand?”
“Like I said, we have a valuable asset in the ground. The game for us is to bring it out at the right time. We can be flexible.” It wasn’t really a true picture of his position, but how was a journalist going to be able to know his production cost? The analysts had been trying to estimate it ever since he’d taken over the properties, and they didn’t get close. It was a lot higher than he would have liked, but that information was kept tightly under wraps. “Anyway, it was a pleasure talking to you. If you need comment on the metals sector, I’m always available.” And he hung up. He knew he’d stuck the knife into Metal-Exx, just a little, but it was the start.
Peston settled down to write his daily blog for the BBC website. Clearly, he wouldn’t use the off-the-record comments from Steyn, but he didn’t have to. He wrote about the pressure low prices could be causing in the resource sector. It was another opportunity to make the point about the weakness in the Chinese economy and the potentially serious knock-on effects it could have on the west, still fragile after the Lehmann debacle. Inevitably, he drew attention to the position of Metal-Exx, as a major player in resources and at risk from the decline in China’s appetite for them. He hadn’t intended to focus the piece on Metal-Exx, but in the end that’s what he did. It was a good story, and, without mentioning it by name, clearly had echoes of the Enron collapse.
The BBC website has a wide reach and Peston is an influential blogger on it, and resource sector analysts, first in London and then around the world, picked the story up and pinged it out to their clients, often with an added comment detailing the extent of Metal-Exx’s borrowings. By the time Serck woke up the following morning in New York, the story had become accepted fact: Metal-Exx was having difficulty sustaining its financial position, dragged down by the twin weights of its debt and the weakening of its principal market. That was bad, but what made it worse was that the market’s perception of the company was that as a trader, without ownership production facilities, it could be more flexible and react more swiftly to changing circumstances. A demonstration that it appeared to have been caught out brought a wave of selling. Shareholders were not amused.
Neither was Serck, initially. He was furious with Steyn; the South African – in Serck’s eyes – had precipitated exactly the fall that he had suggested, but he’d done it before Serck had had a chance to position Leopard-Star to take advantage. It looked like a major lost opportunity. Slowly, though, as he watched the carnage meted out by the stock market, a different thought began to stir in his mind.
Jason Serck made two phone calls that morning. The first was to Urs Gerber at BBV. He told the Swiss that, reluctantly, in view of the continued attacks on Metal-Exx, he wouldn’t be interested in participating in any new round of financing for the company. Gerber sounded noticeably panicky as he tried to persuade Serck to change his mind, but the latter was adamant. There was no way he was going to lend any money to Metal-Exx while its position was so fragile. The fact that that left Gerber in an awkward hole was a matter of complete indifference to Serck. The second call he made was to his favourite investment bank brokerage unit. There he gave some very specific instructions about a trade he wanted to set in motion. He didn’t bother to call De Wet Steyn to give him a comment on his proposal – as far as he was concerned, the man had made a stupid mistake with that interview; Serck wasn’t about to get further involved with a man who made stupid mistakes when it came to money and investment.
The reason for Gerber’s nervousness became apparent over the succeeding days; no further financing for Metal-Exx was announced and the trashing of the share price continued. At the same time, metal markets were hit with a wave of selling, as Philippe Millault, now back in Geneva and alert to the black clouds, instructed his colleagues to liquidate all possible holdings, in a desperate last attempt to prevent his company from unravelling. But the selling continued, and Millault and Steiner feared they had lost control. They were completely at the mercy of events.
All the while, Serck kept in close contact with his brokerage; they were executing the strategy exactly as he had planned.
Steiner and Millault both made the trip up to Basel to see Gerber again; he was their last hope of raisin
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