Sanjeev Gupta can’t hide his financial secrets from Whyalla steel mess

OneSteel was never really a business under Sanjeev Gupta’s ownership. Steelmaking was just a by-product of the magnate’s financial engineering.

Whyalla steelworks was placed into administration last month with debts of more than $1.2bn. Picture: Ben Clark

KordaMentha’s team has been in charge of Whyalla’s collapsed steel works for exactly a month, and the mess it’s found is far worse than had been anticipated.

The steelmaker is bleeding $1.5m a day and, based on current forecasts, OneSteel will run out of money by mid May. That puts it on a collision course with the federal election, meaning most certainly South Australia and Canberra will have to tip more funds into the business just to keep it alive.

The two governments have already pledged nearly $400m to keep it running and paying its wages bill. This was never going to be enough.

KordaMentha has found a decrepit blast furnace. There were no funds for necessary for maintenance and, as the new manager, KordaMentha has very real fears about safety risks.

Safety is an area of “extreme concern” and there’s doubts the plant is even compliant with basic workplace rules. The steelworks is again offline this week for urgent repairs.

On the financial side, OneSteel’s accounts are incomplete and confused.

The only thing that’s holding it all together is Whyalla’s dedicated 1200-strong workforce and its small army of suppliers. The sad thing is OneSteel looks like it was never a real business under Sanjeev Gupta’s ownership. It was an empty shell merely designed for funds to flow easily between other related companies. Steelmaking seemed to be a by-product of this financial engineering.

GFG Alliance executive chairman Sanjeev Gupta. Picture: AAP

KordaMentha’s urgent task is to stabilise OneSteel and then, hopefully, have it in some shape to prepare for a sale, or at least give it some business pulse. This is all going to take lots of time and money to rescue the only local producer of long steel for rail and construction.

The sorry state of affairs at OneSteel all point to the former owner, the Dubai-based UK magnate Sanjeev Gupta, and how he ran the business that turns over $1bn a year. KordaMentha intends to keep the pressure on Gupta and we should be cheering it. OneSteel’s local auditor, KPMG, also needs to face hard questions.

Since the collapse of his financier, Greensill, more than three years ago, Gupta has been on a highwire act keeping his GFG Alliance empire afloat.

Tipping point

He’s so far managed to avoid losing control, by securing deal after deal with creditors around the world who are chasing funds through Greensill. At the same time Gupta is currently being pursued by UK authorities for failing to file financial accounts across several companies. He’s being investigated by their serious fraud office. He has denied any wrongdoing.

However, OneSteel could be the tipping point that finally ends Gupta’s deal making.

The terrible state of affairs, outlined in a Federal Court affidavit filed by KordaMentha, shows a complicated, opaque empire, propped up by related-party deals.

In the first few weeks KordaMentha has encountered a complicated “web” of corporate structures around OneSteel and GFG, where money moved through numerous local and international entities.

The relationships include intercompany trading and financing, as well as shared services deals. There was one example whereby Whyalla continually sold finished steel products to Gupta’s other Australian entity, Infrabuild, at well below cost.

In another case, OneSteel had booked revenue from some customers for goods it has not yet delivered, and even more worrying, the goods don’t even exist.

While not illegal, it is certainly a very broad interpretation of revenue under Australian accounting rules. The administrators have expressed serious doubts over the stated $1.6bn asset value of the business.

OneSteel lacked the governance or structure needed to run a serious steelmaker. Several directors were based in Dubai and the cash flowing around made it impossible to reinvest for longer-term growth.

In an explosive twist, KordaMentha says it now intends to investigate the “nature, impact and lawfulness of these related party transactions, arrangements and relationships”. To be clear, KordaMentha has not alleged any wrongdoing, but it merely intends to investigate the links between the Gupta businesses.

The real risk for Gupta, is the more that KordaMentha digs into OneSteel, is it threatens to uncover the secrets of the rest of his empire.

This is part of the reason why GFG’s lawyers are already stalling or playing hardball when it comes to KordaMentha trying to get access to OneSteel’s full financial information.

While KordaMentha’s lawyer, Leon Zwier, can apply to the Federal Court to compel local entities to open up the OneSteel books, there’s a real risk that investigation beyond Australia will be impossible – with the financial details disappearing in a puff of smoke.

An extraordinary exchange over the past month between Zwier and GFG’s lawyers, contained in the affidavit, reveals a key sticking point in releasing OneSteel’s accounts is that they are so intermingled with other entities in the group. In one email, GFG lawyers say OneSteel’s immediate Australian parent Liberty Australia was currently attempting to remain solvent.

This suggests real stresses at Gupta’s other separately held Australian entity, Infrabuild.

Just a few years ago Infrabuild was being touted as a candidate for a stockmarket listing; today it is in a critical condition. As The Australian has previously revealed, Infrabuild’s local directors have sought protection from the safe harbour bankruptcy rules, and bond markets are pricing in a high chance of default. Zwier has demanded more information about this from GFG, but it hasn’t been forthcoming.

Infrabuild is the biggest creditor to OneSteel as its main supplier of scrap. OneSteel was simultaneously Infrabuild’s biggest supplier, which means both companies’ positions are even more precarious.

SA Premier Peter Malinauskas in Whyalla. Picture: Brett Hartwig

The South Australian government took the extraordinary step last month of placing OneSteel into administration with debts of $1.27bn. Nearly half of this is claimed to be owed to entities relating to Gupta’s GFG.

In the seven months to the end of January, OneSteel was running at a loss of $319m and is operating at a negative operating margin of 26.7 per cent, KordaMentha says. This means that every steel rod it is producing is costing money and there is not yet a pathway for becoming profitable.

Stabilising the business will take as much as six months, KordaMentha has warned – and that’s even before it can start a sales process. East coast steelmaker BlueScope has since signed on and is offering safety and operational advice at Whyalla.

The bleak picture would be hard for a potential buyer to digest. Whyalla was arguably in better shape when it collapsed the first time around, and South Korea’s Posco framed as a buyer.

Whyalla has gone backwards in the seven years under the ownership of Gupta. Promised hundreds of millions of dollars in investment never materialised and, when steel prices surged coming out of the Covid-19 pandemic, OneSteel’s profits were being hoovered up and sent to prop up other parts of Gupta’s struggling empire.

A sales process in a normal market could take as much as 18 months. Now Donald Trump’s steel tariffs have only served to complicate the process and this will keep most buyers at bay and OneSteel in the hands of the taxpayer for longer.

It’s a mess and all roads lead back to Gupta.

Originally published as Sanjeev Gupta can’t hide his financial secrets from Whyalla steel mess