Surge in Chinese coal company’s shares produces quick gain for private placement investors

A surge in the shares of SinoCoking Coal and Coke Chemical Industries Inc. (Nasdaq: SCOK) has produced a small fortune – on paper at least – for a group of unidentified investors who bought stock in an offshore placement last month.

SinoCoking’s stock rose tenfold after the little-known Chinese company went public Feb. 5 through a reverse merger with Ableauctions.com Inc., based in Burnaby, British Columbia. 
SinoCoking’s shares peaked at $53.70 on Friday. They gained nearly $22 last week alone, with the only news being the groundbreaking on a $70 million coking facility in Henan Province. 
SinoCoking’s stock closed at $34.09 on Wednesday, giving the company a market capitalization of more than $500 million.
SHARE PLACEMENT
On the same day that SinoCoking completed its reverse merger with Ableauctions.com, it raised $7 million through a placement of shares and warrants to what it called 34 “high net-worth investors.” Those investors got 1.18 million shares at $6 each, plus warrants to buy 590,446 additional shares at $12 each.
At Wednesday’s closing price, the shares were worth $33.1 million more than the investors paid for them, and the warrants could have been exercised at a profit of $13 million.
The shares were issued under a so-called Regulation S exemption, which covers stock sold to non-U.S. buyers. They cannot be resold in the United States until certain holding conditions are met.
Sharesleuth asked SincoCoking over the weekend whether it could offer any explanation for the sharp rise in its stock. The company did not respond, but issued a press release on Monday saying it was unaware of any “recent or pending material announcements or recent or pending corporate developments that would account for the unusual trading activity in our stock.”
Roughly 1.25 million shares have traded hands since March 4 – when the company’s stock jumped more than $11, topping $40.
SinoCoking said in a recent SEC filing that it had 14.7 million shares outstanding as of Feb. 16.
It is unclear how many of those shares are in the public float, or whether the surge in the company’s stock is simply the result of an increasing number of investors pursuing a relatively small number of shares.
(Disclosure: No one associated with Sharesleuth.com has any position, short or long, in SinoCoking.)
THE COMPANY
SinoCoking, which has headquarters in the city of Pingdingshan, supplies coal and coke to power plants, steel mills, factories and other end users. It produces coal from its own mines, and buys some from third parties.
SinoCoking said in a recent financial presentation that it needs $65 million in “incremental capital” to complete its new coking facility. It is pursuing another share placement, using U.S. investment bankers and soliciting U.S. investors.
The company had $51.4 million in revenue in the 12 months that ended June 30, according to an SEC filing related to the reverse merger. That was down from $58.6 million in the same period a year earlier.
The company said it had net income of $17 million for the 12 months that ended June 30, off 4 percent from a year earlier.
In a recent financial presentation, it projected sales of $69.4 million and earnings of $19.3 million this year. That estimated profit margin would far exceed the actual margins of virtually every publicly traded coal producer.
ABLEAUCTIONS.COM
SinoCoking’s merger partner, Ableauctions.com, was a money-losing company that specialized in liquidating merchandise through auctions and closeout stores. It also dabbled in collectibles, and more recently moved into real estate lending and development. 
Ableauction, reported revenues of $1.44 million and a loss of $1.12 million for the nine months that ended Sept. 30, 2009. It had sales of $2.81 million and a loss of $2.77 million in 2008.
Ableauctions was controlled by Abdul Ladha, a Vancouver-area entrepreneur and philanthropist.
The company completed a 1-for-20 reverse split just prior to the merger with SinoCoking, which left its original shareholders with a roughly 3 percent stake in the combined entity.
Ladha resigned as president and chief executive at the time of the deal. He was succeeded by Jianhua Lv, who is described in SEC filings as being 41 years old and having more than 20 years of experience in the coal and coking industries.
The SEC filings also say that he has a bachelor’s degree from Henan University in Chinese, a master’s degree from Henan University in economics and a master of law degree from Central Party School.
Sharesleuth asked SinoCoking how Lv was able to work in the coal and coking industries while pursuing those academic degrees. The company did not respond.

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