Two Chinese customers--APAC Resources Ltd. (1104.HK) and Fushan International Energy Group Ltd. (0639.HK)-- took effective control of Australia's fourth-largest iron ore producer Wednesday, in a shareholder rights battle that crystallizes Australian concerns about the power and intentions of Chinese investors in the country's resource sector.

Shareholders of Mount Gibson Iron Ltd. (MGX.AU) went against retiring chairman Ian Hamilton and voted down the re-appointment of one of the company's non-executive directors, in a move which leaves directors linked to APAC and Fushan, among the company's biggest customers, holding a majority of board seats.

At the company's annual general meeting in Perth Wednesday, shareholders voted against the re-appointment of Peter Knowles, a former Wesfarmers Ltd. (WES.AU) executive whose re-election was recommended to shareholders in Hamilton's address to the meeting.

Lee Seng Hui, a non-executive director of APAC Resources Ltd. (1104.HK), which owns 25.85% of Mount Gibson, was reappointed as non-executive Wednesday. With Hamilton and Knowles gone, that leaves seven directors in the board of Mount Gibson. The vote Wednesday effectively gives control of the company's board to shareholders APAC, a Hong Kong-based commodities trader, and Fushan International Energy, which owns 14.24%.

People close to Mount Gibson argue the companies regularly operate in tandem with their own majority shareholders, although APAC denies this. APAC's majority shareholder is COL Capital and Shougang Concord International Enterprises Co. Ltd. (0697.HK), a division of one of China's largest steelmakers, is Fushan's.

It is a situation that is "very disappointing for the company and all stakeholders", Hamilton said.

"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.

"I also regard it as important that institutional and other investors in the company are able to rely on the fact that the board is controlled by a majority of directors who are independent of significant customers of the company. If the situation develops to a point where this is not the case I believe it is likely to have a negative effect on the value of shares in the company."

Hamilton last week announced he would stand down from the nine-person board due to concerns about its independence. Hamilton Wednesday told reporters that all votes cast against Knowles where made by APAC, with Fushan abstaining most of its vote.

China consumes around two-thirds of the world's sea-borne iron ore and is keen to diversify its sources of material away from Vale S.A. (VALE) Rio Tinto PLC (RIO) and BHP Billiton Ltd. (BHP), which collectively control around the same proportion of supply.

However, some Australian resource companies have grown suspicious of attempts by Chinese steelmakers to take positions in the country's mining sector, due to fears that they are more interested in their own security of supply than running profitable businesses.

In recent weeks a consortium of Chinese steelmakers sparred with Xstrata PLC (XTA.LN) over its ultimately successful bid for control of Mauritania-focused magnetite producer Sphere Minerals Ltd. (SPH.AU).

Australian analysts also believe Chinese steelmaking interests are behind a A$930.6 million bid last week by Wah Nam International Holdings Ltd. (0159.HK), a Hong Kong investment company which earns most of its revenues from operating limousine services, to take over iron ore developers Brockman Resources Ltd. (BRM.AU) and Ferraus Ltd. (FRS.AU).

Trading in Mount Gibson was halted shortly after the vote Wednesday, after its shares fell 7.8%, or 17 Australian cents, to A$2.01 during the day.

In a statement released after the meeting Wednesday, APAC said the move would not affect its relationship with the miner. "APAC has not, and will not, seek special treatment from Mt Gibson. Evidence for this is the signing this month of new, arms-length iron ore sales agreements between APAC and Mt Gibson," APAC said.

APAC said claims it was acting together with other Mount Gibson shareholders or with Shougang were "false and misleading".

Fushan was not immediately available for comment.

In his speech, Hamilton said that he had agreed with the two shareholders to slim down the company's nine-member board to seven members, but that APAC and Fushan had refused to confirm whether they would sacrifice one of four directors which Hamilton and the company's Australian directors consider aligned with the Chinese shareholders.

Hamilton will be replaced as chairman by non-executive director Craig Readhead, who Hamilton said won't be happy with the composition of the board.

Chief Executive Luke Tonkin may also be disappointed and there is a risk that he could leave the company, Hamilton said Wednesday.

"Luke won't abandon the company but if this situation is not fixed, that is a risk, and that is a severe shareholder value risk."

He said it's still open to APAC and Fushan to reduce their number of board seats by one, although he added this would be "a challenge".

"I live in hope that perhaps what we've seen is people flexing muscle, making sure that they're not going to be pushed around," he said.

Tonkin said that he would continue to work for the company, but would find his position "difficult" if the board issue was not resolved.

APAC and Fushan took stakes in Mount Gibson in 2009 after several of its major customers defaulted on shipments during the global financial crisis.

-By David Fickling and Ross Kelly, Dow Jones Newswires; +61 2 8272 4689; david.fickling@dowjones.com

 
 
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