BREAKINGVIEWS-US minerals quest steps into Korea governance mess

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add graphic.

By Robyn Mak

HONG KONG, Dec 18 (Reuters Breakingviews) - When U.S. President Donald Trump signed an executive order to rebrand the Department of Defense as the Department of War, he was probably not thinking of corporate governance battles in South Korea. Nevertheless, his administration's decision to build a new zinc refinery stateside has dragged it into one of the country's messiest takeover feuds. The saga is another reminder of the pitfalls of state meddling in private firms.

There's little to fault the strategic rationale of joining forces with Korea Zinc 010130.KS in a $7.4 billion refining project. The United States is keen to cut its reliance on China for materials vital to chips, electronics and weapons. The $18 billion Korean company is the world's top zinc smelter and produces 14 of the 54 critical minerals designated by Washington as essential to national and economic security. The latest agreement envisages Korea Zinc building and operating a large-scale facility in Tennessee that will begin producing zinc, lead and copper before expanding to strategic minerals like antimony and germanium. Commerce Secretary Howard Lutnick hailedthe initiative as a “big win for America".

The financial small print is messier. Korea Zinc will get access to up to $4.7 billion of loans plus $210 million in subsidies for the project. But in an odd move, it is also creating a joint venture that will inject $1.9 billion into Korea Zinc in return for a roughly 10% stake. The company will in turn take a similar shareholding in the joint venture, in which the Department of Defense will hold a 40% voting stake. The new unit will not directly own or operate the U.S. refinery, which will be wholly owned by Korea Zinc.

The company has yet to explain the reason for diluting investors or for creating a new circular shareholding of the type that many of South Korea's family-controlled conglomerates are unwinding. True, this joint venture would allow Korea Zinc to keep full control of the U.S. smelter, according to someone familiar with the matter. But the biggest beneficiary may be Chair Yun B. Choi, who since October last year has been locked in a fierce battle for control with the company's top shareholders, Young Poong and private equity giant MBK Partners. Issuing shares to a potential ally might tip the balance of power in Choi's favour.

It's not clear that the U.S. government realised it was potentially picking sides in a bitter corporate dispute. The Department of Defense did not respond to a request for comment. However, Young Poong and MBK are legally challenging the share issue, partly on grounds that it is designed to "preserve" Choi's grip over the company. The project's fate will now be decided by a court in Seoul.

The outcome could be an embarrassing hitch for Trump's administration, which is eager to buy shares in companies it deems strategic. In August, for example, the government took a 10% stake in ailing chipmaker Intel INTC.O. Korea Zinc is a reminder that sometimes the art of the deal is not so different from the art of war.

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CONTEXT NEWS

Korea Zinc's two major shareholders, Young Poong and MBK Partners, announced on December 16 that they have filed for an injunction with the Seoul District Court to block the company's plan to issue new shares as part of a $7.4 billion critical minerals project with the United States government.

The pair, which together holds roughly 46% of Korea Zinc, said they were not opposed to the company's decision to build a new U.S. smelter but objected to the proposed issuance of new shares worth $1.9 billion to a joint venture backed by the U.S. government and unnamed U.S.-based strategic investors. The joint venture would own roughly 10% of Korea Zinc, diluting the two shareholders' holdings and helping the company's chairman cement control of the firm, the pair said.

Young Poong and MBK have been trying to wrest control of the company from current management led by Chairman Yun B. Choi. He and his backers have a 32% stake in Korea Zinc but have 11 members on the 15-strong board.

Korea Zinc on December 15 unveiled a joint venture with the U.S. Department of Defense and other unnamed investors. The company will issue 2.2 million new shares to the joint venture. It will also inject $89.99 million in capital in exchange for a 9.99% equity stake in the entity, in which the Department of Defense will hold a 40% voting right, according to filings.

Korea Zinc will then inject $2.5 billion into a wholly owned U.S. subsidiary that will build and operate a smelter in Tennessee. The Department of Defense and other financial institutions will contribute up to $4.7 billion in loans, while the Department of Commerce will contribute $210 million in subsidies under the CHIPS and Science Act. Besides zinc, the project also aims to refine copper and a range of other minerals considered critical by the U.S. government, including antimony and germanium.

As of mid-morning on December 18, Korea Zinc shares had fallen roughly 16% to 1,337,000 won since December 15. The Department of Defense did not respond to a request for comment.

(Editing by Peter Thal Larsen; Production by Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))