GEO Investing

In recent months, things have been pretty bad for Chinese coal company L&L Energy (LLEN). There have been public allegations of fraud, mine shutdowns and falling profits. The only bright spot has been the company’s valuation, which has stayed quite high relative to the rest of the China RTO sector (~$100 million market cap). As bad as things seem for LLEN, it could get much worse. That’s because the GeoTeam recently uncovered evidence that appears to indicate that LLEN does not own and never acquired the Ping Yi Mine. LLEN claims in its SEC filings that it acquired the Ping Yi Mine in January of 2010 and that the mine contributed close to 40% of the company’s total coal production for the financial year ended on April 30, 2011.

Red Flag Alert Summary

  • The SAIC file of the Ping Yi Mine shows that the Ping Yi Mine is currently held by a private investment group, rather than the LLEN subsidiary, Fuyuan County Baoxing Economic & Trade Co., Ltd., the company identified as the acquirer of the mine in SEC disclosures.
  • In a truly mind-blowing development, this investment group has put the Ping Yi mine up for sale during the second half of 2011. There are multiple readily navigable web links in China that address the sale of the mine:
  • The SAIC file we obtained with the official chop of Guizhou Province SAIC Office clearly shows that LLEN is not the owner of the Ping Yi Mine and that the current owners of Ping Yi Mine are Mr. Zhang Baoguo (40%), Mr. Hu Shiwei (30%), Mr. Liu Shuangyou (16%) and Mr. Chen Honglin (14%). Ping Yi Mine is a partnership and Mr. Hu Shiwei is the legal representative and executive partner of the Ping Yi mine. Based on our knowledge, these four individuals are not relevant to LLEN.
  • The company claims in its SEC filings that it paid $3.96MM to acquire the Ping Yi Mine. If the company never, in fact, bought the mine, then where did that money go? Who has it?
  • To our knowledge this is the first instance that anyone has challenged LLEN’s ownership interest in the Ping Yi Mine.
  • Recall that on August 2nd, 2011 Glaucus Research challenged the ownership of DaPuAn Mine and the SuTsong Mine, reporting that LLEN did not own the DaPuAn Mine and the SuTsong Mine. Based on the associated SEC file, Ping Yi Mine (245,547 ton), DaPuAn Mine (245,545 ton) and ShuTsong Mine (122,081 ton) jointly contributed almost 100% of LLEN’s total coal production for the financial year ended on April 30, 2011.
  • In a separate development, we learned that the DaPuAn Mine, which LLEN claims had contributed close to another 40% of the company’s coal production in the financial year ended on April 30, 2011, has reportedly been completely shut down (See also, English translated page) since Nov. 22, 2011 due to a mine disaster in that area. Based on our knowledge, it has yet to resume production activities.
  • Remember that in 2011, despite numerous public and private pleas from shareholders, LLEN has yet to upgrade its auditor from ‘Kabani & Co’ to a more reputable top 10 firm or even a top 100 firm. Could the information we just revealed be why? These latest developments show why it’s so important for companies to retain a reputable auditor to ask the tough questions to potentially find what we have found.

We have taken a short position in LLEN’s common shares. We believe that LLEN’s stock is not investable as investors become aware of these extremely troubling developments. As always, we will continue our research into the issue and will update our readers with developments.

On a side note:

GeoInvesting made repeated and good faith efforts to set up a meeting or phone call with chief executive Dickson Lee at a place or time of his choosing, but to no avail. Lee’s initial willingness to discuss GeoInvesting’s findings soon transformed into a tedious game of delay, involving even more assistants who made more phone calls and sent more E-mails. Ultimately, L&L demanded we write down our findings and questions, indicating to us that Dickson just didn’t have time to speak to us.

Well, here are our questions:

  • Who owns the Ping Yi Mine?
  • Why is it up for sale by an investment group with no apparent ties to LLEN?
  • If LLEN does not own the Ping Yi Mine, where did the $3.96 million really go?
  • Is it true that the DaPuAn Mine has been shut down since late November? The company states in its most recent 10Q that there has been a “slowdown” at the mine. A “slowdown” is different from a shutdown. Which is it?

We sincerely hope that Dickson Lee and the members of LLEN’s management team can free up some time to address these important questions.

Disclosure: Short LLEN


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