Exclusive: EY finds China copper smelter Fangyuan has misstated accounts - sources

By Cheng Leng, Engen Tham and Tom Daly

BEIJING/SHANGHAI (Reuters) - A report by auditor EY found that Shandong Fangyuan Nonferrous Metals Group, China's biggest privately held copper smelter, has been overstating its profit and production levels while understating its debt, according to two sources with knowledge of the matter.

Its core unit, Dongying Fangyuan Nonferrous Metals Co Ltd, and group firm Dongying Lufang Metals Material Co Ltd had "significantly higher debt, lower profitability, (and) lower production volumes," than publicly disclosed, one source quoted a summary of the EY report as saying.

The audit covered 2018 and the first three quarters of 2019 for Dongying Fangyuan, Dongying Lufang, and four other Fangyuan units, the source said.

The second source, who works for a lender to the Fangyuan group and was briefed on the report prepared for domestic creditors, also told Reuters the auditor had found Dongying Fangyuan and Dongying Lufang had been misstating their figures. The source added EY was continuing to dig into the matter and would be updating creditors.

On Thursday, the Fangyuan group said in a statement on its website that some media had reported it is suspected of financial fraud. The reported content "is untrue," it said. EY said it did not comment on client matters.

Reuters has not viewed a copy of the report and could not independently verify its findings.

The sources, who declined to be identified as they were not authorised to speak on the matter, said the report was distributed to creditors in March and April.

According to a company filing, 22 banks had provided a combined 16.1 billion yuan (£1.8 billion) in credit lines to Dongying Fangyuan as of June 30 last year, of which 11.47 billion yuan had been used.

Domestic creditors at the time included state-owned Industrial and Commercial Bank of China <1398.HK> <601398.SS>, Bank of China <3988.HK> <601988.SS> and Agricultural Bank of China <1288.HK> <601288.SS>. Foreign lenders also included Natixis and RaboBank, according to the filing.

ABN AMRO, a lead arranger of a $430 million syndicated loan from mostly foreign banks for Dongying Fangyuan and Dongying Lufang, declined to comment on the status of its loans. RaboBank declined to comment. The other lenders did not respond to requests for comment.

Concerns about the Fangyuan group's financial health intensified late last year after sharp declines in spot treatment charges for copper concentrate <AM-CN-CUCONC> led to fears it would not be able to repay debt.

The group in a statement in December denied speculation circulating in China online that it had filed for bankruptcy, but said it had "a certain degree of liquidity shortage".

ABN AMRO <ABNd.AS> has also sued Dongying Fangyuan, Dongying Lufang as well as their founder Cui Zhixiang and his wife for the repayment of $38.39 million in loans and interest overdue, according to a March 19 filing by the Shanghai Financial Court.

The court said it made the statement public because Cui and his wife were "unreachable". Reuters has not seen the original complaint and could not determine when it was filed.

A hearing on the case is scheduled for July 9.

ABN AMRO declined to comment on the lawsuit. Fangyuan declined to comment. Cui did not respond to emailed requests for comment.

Fangyuan has said it accounts for around 3% of the world's refined copper and can produce 700,000 tonnes per year.

Publicly available earnings figures for Dongying Fangyuan showed it made a profit of 444.6 million yuan in the first half of 2019.

The sources also said foreign creditors had also hired Deloitte to conduct a similar audit of the Fangyuan group on their behalf. Deloitte said it does not comment on client matters.

(Reporting by Cheng Leng and Tom Daly in Beijing and Engen Tham in Shanghai; Editing by Shivani Singh and Edwina Gibbs)