China coal firm shares extend loss after fraud claims
* Grande Cache says deal with Winsway, Marubeni stands
* Jonestown report accuses Winsway of cooking books
* Winsway says fraud claims unsubstantiated
(Updates shares, adds bond details, quote)
By Pav Jordan and Anne Marie Roantree
TORONTO/HONG KONG, Jan 20 (Reuters) - Shares in China's Winsway Coking Coal Holdings Ltd (1733.HK) fell further on Friday even after the company dismissed allegations of fraud from a mysterious research firm and sought to reassure investors that a proposed C$1 billion ($991.23 million) takeover of Grande Cache Coal Corp GCE.TO is still on track.
A series of fraud allegations against China-focused companies last year rattled investors and led to scrutiny of Chinese accounting standards, regulatory probes and dozens of investor lawsuits.
Winsway, an importer and distributor of coking coal from Mongolia into China, said late on Thursday that a 10-page report by a company called Jonestown Research that accused it of "cooking its books" was unsubstantiated and wrong.
The Jonestown report appeared on a website called InvestDoor
(www.invest-door.com) and was then reposted on other websites in Canada and Hong Kong. The report carried no identifying telephone numbers, web address or mailing address for Jonestown Research and a web search failed to locate any information other than news stories about the report.
Jonestown Research is not licensed by the Hong Kong Securities and Futures Commission, the SFC said on Friday.
Toronto-listed Grand Cache, which agreed in October to be bought for C$10 per share by Winsway and Marubeni Corp (8002.T), a Japanese trading house, said there was no reason to believe the allegations by Jonestown Research. "Grande Cache Coal has no reason to believe there is any merit to the allegations made in a report recently issued by Jonestown Research in respect of Winsway and has been assured by Winsway that the report is entirely without merit," Grand Cache said in a statement.
Grande Cache and Winsway said the planned takeover deal was still on track.
"I look forward to closing the deal with Grande Cache," Winsway's chief financial officer, Jerry Xie, said during a conference call on Thursday. [ID:nL3E8CJ4VE]
Jonestown Research said in a disclaimer at the end of its report that it had built a short position on Winsway shares and has "every reason to want its stock price to go down."
Shares in Winsway plunged as much as 8 percent on Friday morning to HK$1.76, adding to a drop of 8.6 percent on Thursday. They recovered slightly to close the morning session down 4.7 percent, lagging a 0.3 percent rise in the benchmark Hang Seng Index .HSI.
Winsway, which made its market debut in 2010 with a value of HK$7.2 billion ($927.81 million), said nothing in the Jonestown report had been substantiated.
"There is nothing funny or smelly in our prospectus," Xie said on Thursday. "KPMG will be fully behind us. We don't know if there will be a review. We need time to decide how to respond to this officially and if an investigation is warranted."
KPMG declined to comment on Friday.
A few analysts said on Friday that Jonestown's allegations were based on faulty information.
"The formula Jonestown uses is misleading. Their calculation of inventories and accounting terms is questionable," said Helen Lau, a senior analyst at UOB Kay Hian (Hong Kong). The reaction in share price "is totally understandable. It reflects how fragile the market is.
"Investors really need analysts to do their own independent investigation. They will take the Jonestown report as a chance to seek additional due diligence."
The Jonestown report is the latest to level allegations of fraud against China-focused companies.
Among the most prominent was Sino-Forest Corp TRE.TO, a forest plantation company accused of exaggerating its assets by short-seller Carson Block and his Muddy Waters firm. Sino Forest has said a preliminary investigation by its independent directors shows no evidence of fraud, although its historical financial statements should not be relied upon.[ID:nL3E8CC5SC]
Winsway was among 49 junk-rated companies flagged by Moody's in a report last summer as having potential governance issues.[ID:nL3E7IC05G]
"Jonestown was using Moody's report to say Winsway is a fraud. I don't know how credible that report was," Xie said.
The buyout offer for Calgary-based Grande Cache, which owns leases containing more than 300 million tonnes of coal in the Smoky River coal field in Alberta, was the latest in a flurry of deals in the global coal industry.
"Grande Cache Coal continues to work with Winsway and Marubeni Corp to complete the arrangement," the company said.
Winsway's 8.5 percent 2016 bond 975731AA8= fell to 76.5/78.5 cents on the dollar from the previous 84. The yield is up to 16 percent from 13.6 percent.
"When there is news like that, people sell first and ask questions later. Most people are comfortable, but some are taking a very cautious approach and are happy to lose five points now than more later," said a Hong Kong-based high yield trader. "But I don’t think it is another Sino-Forest. You need a lot of skills for that. I am sure there are companies with far worse corporate governance track records.”
($1 = 1.0089 Canadian dollars)
($1 = 7.7603 Hong Kong dollars)
(Additional reporting by Umesh Desai, Alison Leung; Editing by Frank McGurty, Chris Lewis and Matt Driskill)
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