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Merrill Cuts Mount Gibson as Customer Takes Control

Mount Gibson Iron Ltd., an Australian iron ore producer, had its rating cut by Merrill Lynch because the company’s major shareholder and customer Hong Kong-based APAC Resources Ltd. took control of the board.

Independent board member Peter Knowles failed to win reelection at the company’s annual general meeting yesterday in Perth, the company said in a statement. Four of the seven board members are now aligned with APAC, Merrill Lynch said in a report. It cut its rating to “underperform” from “buy.”

Merrill Lynch may change its rating if APAC relinquishes a board seat or the company continues with a strategy that meets the expectations of minority shareholders, Peter O’Connor said in the report. There is unlikely to be any progress before the next board meeting scheduled for December, he said.

APAC “exercised their rights as major shareholders,” Luke Tonkin, Mount Gibson’s managing director, said in a phone interview from Perth today. “I do the negotiations with their management regarding the off-take agreements and any other agreements we may enter into in the future. I do that free of fear and full of confidence.”

Shares in the Perth-based company closed unchanged at A$2.01 at 4:10 p.m. Sydney time on the Australian stock exchange. They had earlier fallen as much as 14 percent, the most in almost two years. APAC is the largest holder of Mount Gibson, with 26.14 percent of the company, according to Bloomberg data.

“I believe it preferable and in the best interests of the company to avoid a situation where major shareholders who are also significant customers of the company are in control of the board,” outgoing chairman Neil Hamilton said in speech notes for the general meeting yesterday. If the board isn’t independent “it is likely to have a negative effect on the value of the shares in the company.”

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