LCM Finance and national law firm Piper Alderman have announced a proposed shareholder class action on behalf of all shareholders of Discovery Metals Limited (in liquidation) who held shares in the company from 23 November 2012 to 15 February 2013.
The proposed class action arises out of an independent expert valuation of DML that was prepared by KPMG Financial Advisory Services (Australia) Pty Ltd released to the market on 23 November 2012.
The valuation was commissioned by DML’s board to support a recommendation to shareholders in respect of an off-market, takeover bid received from Cathay Fortune Investment Limited seeking to acquire all of the ordinary shares in the mining company for $830 million at $1.70 per share in October 2012.
KPMG concluded in its report, amongst other things, that the fair market value of a DML share, inclusive of a full premium for control, was within the range of $1.74 to $2.11 per share. At the time DML shares were trading at around $1.65.
Referencing the KPMG valuation, the DML Board recommended shareholders reject the takeover bid on the basis that the offer of $1.70 per share did not reflect the full value of the business and was fair and reasonable.
The proposed class action will allege the KPMG valuation was flawed in three fundamental respects:
- KPMG applied, without justification, a 40% uplift to the low end technical value of DML’s primary asset, a copper mine in Botswana (the Boseto Project), as determined by SRK Consulting (Australasia) Pty Ltd (SRK). The application of this uplift resulted in KPMG’s low end fair value of DML being US$268.4m higher than the low end technical value of the Boseto Project.
- KPMG instructed SRK to adopt a long term inflation rate assumption of 2.3% per annum for the purpose of determining the technical value of the Boseto Project, which was inconsistent with the risk free rate of 1.8% per annum adopted by KPMG for the purpose of assessing an appropriate range of discount rates for the Boseto Project.
- KPMG applied a 0.5% alpha factor discount which was insufficient to account for both the sovereign risk associated with mining activities in Botswana and development risk, including the risk of delays in the ramp up of the Boseto Project to full production.
Piper Alderman Partner, Simon Morris stated that: “In our considered view, but for these flaws in KPMG’s approach to valuing DML, KPMG would have formed and expressed the opinion that the takeover offer of $1.70 per share was fair and reasonable.”We believe that shareholders who suffered loss and damage as a result of reliance on the flawed KPMG valuation have causes of action against KPMG in negligence and for breach of relevant provisions of the Corporations Act 2001 (Cth).
These claims will be fully funded by Litigation Capital Management Ltd (LCM). Under the LCM funding agreement a DML shareholder who participates in the action will not be required to pay any fees unless the claim is successful.
Piper Alderman is currently seeking all former shareholders of DML who held shares during the period from 23 November 2012 to 15 February 2013 to join the action. Shareholders can register their interest to participate through Piper Alderman’s online registration portal or by contacting the law firm at: firstname.lastname@example.org