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UPDATE:James Hardie Misled Investors On Asbestos-Inquiry
By Morag MacKinnon
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--James Hardie Industries NV (JHX) misled shareholders when it said in February 2001 that it had set aside sufficient funds to compensate victims of asbestos, a government inquiry found Tuesday.
The A$293 million placed in the Medical Research and Compensation Foundation by James Hardie was inadequate and the company was aware of the need for more funding, Commissioner David Jackson said in his findings.
Jackson also found that James Hardie media releases to the Australian Stock Exchange were "misleading" and said it is now a matter for Australian government authorities to determine whether any further action should be taken.
James Hardie Chief Executive Peter Macdonald and Chief Financial Officer Peter Shafron were singled out by Jackson for breaching their executive duties.
The building products manufacturer which generates more than 80% of its earnings in the United States, established a new parent company in the Netherlands in December 2001.
Victims' groups and unions say the move was aimed at cutting its exposure to asbestos claims in Australia.
James Hardie, which has been listed on the ASX since 1951, has a moral obligation rather than a legal liability to fully fund liabilities arising from the asbestos it manufactured, Jackson said.
In his 1,000 page report, Jackson said funds currently set aside for asbestos liabilities will likely be exhausted in the first half of 2007.
"To put it directly, James Hardie still has in its pockets the profits made by dealing in asbestos, and those profits are large enough to satisfy most, perhaps all, of the claims of victims of James Hardie asbestos," Jackson wrote in the report.
The liabilities aren't likely to be less than A$1.5 billion, on a net present value basis, he added.
The A$293 million set aside was based on false information provided by an actuarial report commissioned by James Hardie and its true value should be between A$1.5 billion and A$2.24 billion, Jackson said.
The ASX said in a statement later Tuesday that it had referred the matter to the Australian Securities and Investments Commission to determine whether the company's market disclosure obligations were met.
An ASIC spokeswoman said it was reviewing Jackson's findings.
Jackson fell short of making recommendations other than to say that a statutory funding scheme suggested by James Hardie two months ago was a "starting point."
More clarification and discussion was required, he said.
Such a scheme requires the approval of James Hardie shareholders.
At a shareholder meeting in Sydney last week, James Hardie Chairwoman Meredith Hellicar repeated the board's commitment to provide additional funding for asbestos victims.
Following the release of the report, James Hardie said in a statement that it had noted Jackson's remarks in favor of a scheme and remained committed to work with stakeholders to develop "a satisfactory compensation solution for asbestos claimants against its former subsidiaries which it could put to shareholders for approval."
James Hardie shares, which had been halted pending the release of the report, recommenced trading a few minutes before the market closed and closed up 21 cents, or 3.8%, at A$5.80. The benchmark S&P/ASX 200 index closed flat.
Analysts have been generally bullish on James Hardie shares saying the 27% decline over the past year when evidence of a funding shortfall emerged represents an overshoot.
"The efficient markdown of its share price assuming the seemingly worst-case scenario appears overdone," Credit Suisse First Boston analyst Rohan Gallagher said in a report.
Gallagher has an "outperform" view on the stock and a 12 month price target of A$7.35.
In a research report released prior to the findings, he said possible legal action against Macdonald and Shafron would be of most interest.
At the release of the findings, New South Wales Premier Bob Carr told reporters the government will pursue James Hardie and "make it pay."
"The NSW (state) government will not endorse James Hardie's statutory scheme unless satisfied by unions and victims groups that it will deliver more money for victims," he said.
Carr warned that the NSW government may boycott James Hardie products. It accounts for 8.1% of James Hardie's sales of construction materials in Australia.
Australian Council of Trade Unions Secretary Greg Combet called for Macdonald to resign or for the James Hardie board to fire him.
Combet said Jackson's report had implications for corporate law reform in Australia whereby parent companies must be held liable for their subsidiaries.
James Hardie's separation of its assets from the fund is "one of the most disgusting corporate acts I have ever seen," he said.
James Hardie booked an operating profit from continuing operations of US$37.1 million in the first quarter ended June 30, up 13% from US$32.9 million in the same period a year earlier.
For the fiscal year ended March 31, 2005, James Hardie forecasts operating profit from continuing operations between US$135 million and US$169 million.
It has a market capitalization of A$2.66 billion.
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