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November 18, 2015

Some compelling reasons why #Lonmin shareholders should vote against the rights offer - Mineweb

A compelling reason to vote against the Lonmin rights offering. 

Lonmin shareholders should vote against the rights offer

Platinum group metals 

Shareholders are being asked to carry the can for others’ failures. 
Warren Dick | 17 November 2015 23:05 
Someone needs to put an end to this whole sorry state of affairs. Tomorrow. At the company’s general meeting in London that has been called to approve the transaction. We have written extensively on the reasons for Lonmin’s precarious position. Here I lay out five reasons for why the rights offer should be voted down.

1. The management team of Lonmin is on record stating that if the rights issue does not go ahead the company will have to close its doors. I personally don’t buy that for one second. If the rights issue doesn’t go ahead, it will force everyone back to the table to make the hard, tough concessions that will return the company to a sustainable path of profitability which should have been done years ago.

2. The loss of its empowerment status: Lonmin lent $304m to Cyril Ramaphosa’s Shanduka Resources in 2010 to fund the purchase of a 50.03% interest in Incwala, the company’s designated BEE vehicle (which owns stakes in Lonmin subsidiaries). The idea was that Shanduka would repay the loan with dividends received from its stake in Incwala.

Obviously the poor performance of the company meant that dividends were not forthcoming, so by the end of September 2014 (the company’s financial year-end), the loan amount owed by Shanduka vis-à-vis Incwala had increased to $399m. Lonmin then took the decision to impair the loan, writing off $297m to leave an outstanding amount of $102m as at the end of September 2015.

Shanduka has effectively decided to walk away from the obligations of the loan due to the implications of the rights issue. Incwala was still receiving R228m by way of advance dividends in the 2015 financial year alone. So it appears Lonmin was literally throwing money at its empowerment partner when shareholders hadn’t been paid a dividend, and then when the going got tough, Shanduka simply elected to walk away.

The company’s other empowerment partner are the Bapo ba Mogale tribe which represent an ownership stake of 2.4% in Lonmin and who have indicated they do not have the financial resources to follow their rights. So the company will be forced to issue 617.5m shares to them at a greatly reduced price of 0.000001 cents per share (for a total consideration of R617) to prevent the dilution of their ownership stake. Had there been clarity on the ‘once empowered, always empowered’ principle from the DMR, this might not be such an issue. But since this has not been forthcoming (the issue is headed to the courts) one must assume that the company needs to remain empowered to ensure it can retain the mining licences it requires to operate.

3. The rights issue is really being done at the behest of the banks – to mitigate their risk. Of the $407m in gross proceeds raised, only $369m will actually be for the use of the company. So Shareholders will pay half a billion rand ($38m) for the pleasure of the bankers being able to parlay their risk. That’s extortionate in my mind. Of the $369m the company will actually receive, $135m will go towards paying down debt facilities, leaving the company $234m it can actually apply to things like operating and capital expenses. Based on some analysts’ estimates, this is barely enough to sustain one-year’s worth of capital expenditure, even on the revised production profile of the company which has been reduced for each of the three financial years to 2018. On a side note: Has anyone wondered how we got to the point where Lonmin’s short-term revolving credit and long-term loan facilities matured within one month of each other (in May and June 2016)?

4. Protect the PIC from itself. How the Public Investment Corporation (PIC) got talked into being prepared to not only take up its rights, but extend its risk to underwrite another 18% of the proposed offer (taking its potential total exposure to 25%) is quite stunning. The only plausible non-commercial reason for its involvement is that it is doing this to protect jobs. But the PIC’s biggest client is the gigantic Government Employees Pension Fund (GEPF) whose average member earns less than R15 000 a month.

Lonmin’s assets are marginal at best. So while the PIC’s offer is charitable, should they really be gambling public servants’ pensions on a company whose future – even should the rights offer proceed – is uncertain, and almost entirely tied to the fortunes of the rand/platinum price? So the GEPF, and by implication the PIC, needs to make up their mind as to whether they are an instrument of Luthuli House or the guardian of the financial well-being of the country’s public servants. You can’t be both.

5. The appalling lack of respect implied in the rights offer. Can you really look shareholders in the eye and demand more money in the way that the rights offer has been framed? Let’s try for a moment and get into the mind of a Lonmin shareholder. Barely three years ago the company came cap in hand to shareholders for $767m. In those “heady” days the share price was north of R30/share. The price subsequently fell to R3.84/share just prior to the details of the rights offer being announced. By effectively telling shareholders to invest another R9.84/share or have their investment written down to zero smacked of sheer arrogance. The share price performance has inflicted capital losses of monumental proportions on shareholders and now they must go triple or quits?

So in summary then: The BEE shareholders are unable or unwilling to assist. This makes the rights issue risky from an empowerment status point of view partly because the state has not been prepared to clarify the ‘once empowered, always empowered principle’.

The banks – JP Morgan, HSBC and Standard Bank – hold all the cards, but are demanding compensation that is excessive. The unions are completely unprepared to budge, even to the detriment of 6 000 of their members. Instead of retrenching 20% of the workforce, why doesn’t everyone agree to a 20% salary reduction – from the Chairman down?

No-one from the executive team has been fired or asked to leave. And the one stakeholder that is prepared to help – the PIC – shouldn’t really be carrying the exposure. So why should shareholders put up with this? The expectation that shareholders should cough up for the failing and intransigence of everyone else is appalling.

So tell them to think again. Vote against allowing the rights offer to proceed.

The author does not own, nor has ever owned, shares in Lonmin. 

Lonmin shareholders should vote against the rights offer - Mineweb

November 11, 2015

#BlackRock's unfortunate #Banro bet on @WSJ

How a BlackRock Bet on African Gold Lost Its Luster

Justin Scheck in Luhwindja, Congo, and Scott Patterson in London

Evy Hambro came to the 2013 Mining Jamboree hunting for more gold.

At the conference, featuring lingerie models strutting before a South African sunset, the BlackRock Inc.


fund manager scouted for a mining company needing financing. His
search led him to double down on an earlier bet—a gold miner named Banro Corp.


he knew had troubled operations in a troubled African country.

Mr. Hambro is discovering just how troubled.

Falling gold prices have battered Banro,
as have operational setbacks. It has faced sometimes-violent unrest
around its mines in the Democratic Republic of Congo and questions about
payments it made to entities controlled by a government official. Local
residents blame it for several deaths.

Mr. Hambro’s 2013 deal was
part of a largely overlooked facet of the commodities boom-turned-bust.
Eager for exposure to rising prices, conservative investors who once
shied away from large bets on small miners in volatile places piled in.

Those wagers sometimes came with risks that exacerbated the pain of falling markets.

biggest investor was BlackRock, through funds that London-based Mr.
Hambro managed. In exchange for a cash investment, the Canada-based
miner in 2013 agreed to pay a dividend to a BlackRock trust—separate
from the funds—which he co-managed and whose investors include Yale
University and the Ohio Public Employees Retirement System.

weeks after Banro announced the deal, it ousted its chief executive, who
had raised corporate-governance concerns and suggested investigating
Banro’s finances, including payments Banro made to entities controlled
by a Congolese official, say people familiar with the episode.

Banro’s current CEO, John Clarke,
a board member now and at the time, wrote in a September email that
Banro can’t disclose why his predecessor left and that it is “complete
nonsense” that there were internal corporate-governance concerns. He
said Banro didn’t make any improper payments and wasn’t involved in the
deaths locals allege.

By early 2014, Banro was near insolvency,
said Richard Brissenden, who became its chairman last year, in a June
interview. “When I arrived I didn’t realize how bad the situation is,”
he said. “It was scary.”

BlackRock’s Mr. Hambro knew in 2013 Banro
routinely missed production forecasts because of operational missteps.
But he didn’t know, people familiar with BlackRock say, of deadly
accidents around its mines, of concerns over payments or of the extent
of local unrest.

BlackRock says it “has a rigorous investment
process and a strict set of criteria that is adhered to before any
investment is made,” adding: “These allegations, if found to be true,
would be entirely contrary to BlackRock’s values.”

Banro’s shares
fell 22% after its prior CEO left and are down about 90% since the 2013
deal, valuing BlackRock’s holdings at about $4.6 million, down from
$66.4 million at the end of 2011 when it owned fewer shares, according
to FactSet.

Political and operational risks have long been part of
investing in small mining companies. Until recently, those risks were
too great for many big fund managers. But as commodities boomed, small
miners became attractive.

“During the boom days, they were quite
aware of political risks, and had greater appetites to swallow them,”
says Daniel Litvin, managing director of Critical Resource, a London
firm researching on-the-ground risk for companies and investors. “Quite
often they made substantial mistakes.”

Cobalt International Energy Inc.,


an oil company whose investors have included Vanguard Group and
Janus Capital Management LLC, according to FactSet, disclosed in 2013
that the U.S. Justice Department was investigating it on bribery
allegations in Angola dating back several years. Cobalt denies
wrongdoing, says it is cooperating with the investigation, and that the
U.S. Securities and Exchange Commission dropped a parallel
investigation. Vanguard, Janus, the SEC and the Justice Department
declined to comment.

The Kyrgyz government and several NGOs alleged over the past four years that Centerra Gold Inc.,


whose backers according to FactSet have included Franklin Templeton
Investments and USAA Investment Management Co., engaged in corrupt
dealings and polluted an area around a Kyrgyzstan glacier. Centerra says
the allegations “are unfounded and without merit.” USAA declined to
comment. Franklin fund managers didn’t respond to inquiries.

Warming to risk
Banro’s Congo operations show the kinds of risks investors can face in developing-world mining.

years, BlackRock avoided volatile stock investments. A 2006 deal with
Merrill Lynch & Co. brought risk-taking fund managers like Mr.
Hambro. He is a banking-family scion and son of an investor in Russian
gold mines.

Mr. Hambro, 43 years old, turned BlackRock into a
mining-investment powerhouse, becoming well-known for the publicly
listed BlackRock World Mining Trust. It did well during the commodities
boom but lost 61% in net asset value in the three years ended Sept. 30,
compared with the Euromoney Global Mining Index’s 54% loss. The trust,
while receiving dividends from Banro, doesn’t hold stock in the miner;
several BlackRock funds do, making the firm Banro’s largest investor.

Banro foray began 10 years after Banro entered Congo, then called
Zaire. Banro, under founder Arnie Kondrat, in 1996 acquired rights to
mine gold near the Rwanda border, a region that erupted into war soon
after. In 2006, Banro deployed exploration teams to the mountainous
Twangiza region, where violence continued even after the war ended in
2003. Mr. Kondrat didn’t respond to inquiries.

Banro had listed on
the Toronto Stock Exchange, and one of Mr. Hambro’s BlackRock funds
bought about $10 million of its stock, a 3% stake. Banro soon disclosed
big estimated reserves at Twangiza, and BlackRock’s stake gained about
50% in value over the next months.

Mr. Hambro was a commodities
evangelist. Chinese demand meant a sustained boom, he was cited as
saying in a 2007 interview, describing his due diligence: “I physically
go into mines and get my hands dirty.”

Tensions mounted around
Banro’s Congo operations. In 2006, an exploration team drilling near the
village of Katombwe dislodged a rock that killed a local pastor’s
mother, say the pastor and other local leaders.

Starting in 2010,
after the government approved Banro’s plan to mine near Katombwe, about
1,000 people were relocated from a fertile hillside where Banro would
build its mine to Cinjira, a barren mountaintop. Cinjira residents say
crops won’t grow well there.

Banro built homes, a market and a
water system for the displaced. It provided some with cash compensation.
Banro’s Mr. Clarke wrote that the relocation “was voluntary,” that
Banro didn’t choose the relocation spot and that “the Cinjira site was
chosen by the community.”

Cinjira residents say police came to
their homes and said they must leave. The local government leader,
Esperance Barahanyi, says an official from Congo’s capital made the site
decision. Attempts to reach Congo’s mining ministry weren’t successful.

says it follows “conflict-free gold standards” from the World Gold
Council trade group. Banro’s Mr. Clarke said in a July interview its
charitable foundation has spent millions of dollars helping communities
near its mines. The foundation this year reported spending more than $5
million on education, health care and other programs from 2004 through
2014. Last month, Banro won a Congo mining-industry award for social

A greater stake
In 2010, BlackRock increased its Banro stake to 7%.

2012, Mr. Hambro sent a deputy, say people familiar with the trip, who
met Banro officials including then-CEO Simon Village and helicoptered
in to inspect the mine site. That year, a bulldozer working on a Banro
waste pile dislodged a rock that struck 16-year-old Bukuze Kabalabala,
who died hours later, say locals. Villagers stormed Banro’s gate. “It
created an enormous animosity,” says Crispin Mutwedu, a Banro employee
in Congo who handles community relations. He says he offered Ms.
Kabalabala’s father two cows’ value and that they settled on $16,000,
about eight cows’ value.

In his email, Mr. Clarke wrote that “at
no time has Banro been directly or indirectly involved” in the deaths.
“Notwithstanding the mystery surrounding the death of the 16-year-old
girl, and indeed the lack of any connection to Banro,” he wrote, the
company “completely out of good faith, and most importantly, out of
sympathy for the family’s loss, agreed to compensate the family.”

slowed during the rainy season when ore became too wet. An ore-crushing
mill broke. Banro told investors the rains were “unseasonably heavy.”
In the July interview, Mr. Clarke said Banro could have “implemented”
its equipment better. “They’re not excuses,” he said, “they’re just
embarrassing facts.”

A new Banro mine, in Namoya, was on a jungle
road that militia leader William Yakutumba says he controlled. Last
year, a United Nations committee reported, his militia attacked villages
and boats, stealing money and raping women. A Banro contractor agreed
to pay Mr. Yakutumba’s men to let their drivers pass, say people
involved in the convoys.

Mr. Clarke wrote: “At no time did Banro
ever pay money, or pay tolls, or provide any favour to ANY armed rebel,
to gain some sort of road access.”

Mr. Yakutumba says his group
helped Banro workers travel the route but “never taxed Banro.” He denies
the U.N. allegations, saying “we respect women and human rights.”

made payments to a company controlled by Ms. Barahanyi, the traditional
chief near the Twangiza mine, that provides services such as labor, and
made payments to her nonprofit company, Banro and Ms. Barahanyi say.
She goes by the title Mwamikazi.

“Traditional community
chiefs such as the Mwamikazi are recognized under DRC law but not,” Mr.
Clarke wrote in his email, “as some sort of elected government official
or civil servant appointed by Kinshasa or some sort of representative of
the central government, but rather as protectors of cultural identity
and traditional values.”

A Congolese-government
information-ministry official, asked about Ms. Barahanyi, says: “The
Mwamikazi is the local chief recognized by Kinshasa” and “takes orders
from Kinshasa” on governing the local area and is in charge of the local
apparatus of the Kinshasa-based government.

At the February 2013 Mining Jamboree, the mood was tense among

executives attending, say people familiar with the group. Operational
delays and gold’s falling price had crimped revenue; Banro needed cash.

Hambro was looking to offer cash for a slice of a miner’s production. A
BlackRock analyst met Banro’s Mr. Village at the jamboree. Over the
next weeks, they discussed Banro’s potential and its operational
problems, say people familiar with the talks, and Mr. Village promised
stronger management.

On Feb. 21, 2013, Banro announced the
BlackRock trust would pay it $40 million for a dividend based on
production and gold price. The investment was later reduced to $30

Mr. Village sent documents to Banro’s board outlining
corporate-governance concerns and actions to address them, say people
familiar with the matter. He suggested sidelining the founder, Mr.
Kondrat, who was still involved in management, and changing the board,
say people familiar with the documents. The documents raised concerns
about financial issues, including payments involving Ms. Barahanyi.

Mr. Village proposed an outside audit. Instead, Banro directors ousted him.

Clarke in July said he wasn’t aware of the audit proposal. In his
September email, he wrote it is “complete nonsense” that “there were
internal conflicts about corporate governance at Banro in early 2013”
and it is “incorrect” that documents Mr. Village submitted to the board
raised corporate-governance concerns and outlined measures for improving

“Banro does NOT make, and never did make, any illegal or improper payments” to Ms. Barahanyi, Mr. Clarke wrote.

Mr. Village’s departure, members of Mr. Hambro’s team held a call with
Mr. Clarke, who succeeded Mr. Village as CEO, demanding to know what
happened. Mr. Clarke in July said he explained that Banro “closed out
the contract” of Mr. Village and that “we weren’t going to bad-mouth”
Mr. Village. Mr. Clarke said “it was a necessary time for change.”

Twangiza, tensions continued. On May 29, Ishara Chasinga, then 18, left
home and saw protesters blocking Banro’s gate. Villagers say a Banro
truck and mine police pulled up.

“They just got off the car and started shooting,” said Mr. Chasinga five days later at the hospital.

bullet pierced his leg, he said, showing his bandaged thigh. Protests
continued for two days. Mr. Clarke in July said the shot was a warning
and hit Mr. Chasinga accidentally, but was “inexcusable.”

August, Banro reported gold production was up but that it lost $48.7
million in the quarter ended June 30, versus a $3 million year-earlier
loss. In September, the New York Stock Exchange warned that, barring a
sustained increase in Banro’s share price, it would delist it from its
small-cap exchange. Mr. Clarke declined to comment on the NYSE notice.

BlackRock trust, which Mr. Hambro still co-manages—he also still
manages funds with Banro stakes—has written down its $30 million Banro
investment by 30% amid falling gold prices.


Write to Justin Scheck at and Scott Patterson at

How a BlackRock Bet on African Gold Lost Its Luster - WSJ

November 6, 2015

‘Walking dead’ on the TSX Venture Exchange: How are ‘zombie’ companies surviving?

‘Walking dead’ on the TSX Venture Exchange: How are ‘zombie’ companies surviving?

BEN NELMS for National Post
BEN NELMS for National Post Tony Simon, co-founder of the Venture Capital Markets Association is pictured in their offices in Vancouver.
Management at the TSX Venture Exchange would probably appreciate it if Tony Simon just shut his mouth for a while.

As the co-founder of the Venture Capital Markets Association, Mr. Simon is an unlikely torchbearer for the theory that Canada’s market for junior resource stocks is broken and the Venture Exchange is part of the problem. But he has assumed that role with gusto in the past few weeks as his thoughts have reached an increasing number of ears. It is hard to imagine that anyone else is causing more headaches for the Venture Exchange these days.

Mr. Simon, for his part, thinks he is just stating the obvious.

“This is not something that’s an unknown problem,” the Vancouver-based entrepreneur said.

The Venture management team has fired back, completely denying his claims that they are not doing their jobs properly.

However one feels about the debate, all would agree that Mr. Simon’s research paints a frightening portrait of Canada’s junior exploration sector. It raises questions about how hundreds of tiny resource companies can continue to exist. Sources said that auditors are offering these companies cut-rate fees to maintain their viability.

The controversy started in February, when Mr. Simon published research suggesting there are about 600 “zombie” resource companies on the TSX Venture Exchange that are not meeting listing requirements and should be de-listed. His report has spread around, even getting picked up by Zero Hedge, the influential U.S. financial blog.

The big numbers are grim: by Mr. Simon’s calculation, these “zombies” have combined negative working capital of greater than $2 billion. Raising money has become impossible for many of these junior firms as market conditions have deteriorated over the past few years. Now they are just “walking dead” companies with no serious prospects that pose a threat to investors looking at the sector, he said.

So why are they still around? Mr. Simon noted that TMX Group Inc. is a profitable corporation that relies on listing fees for revenue. He believes the exchange is failing to enforce its own rules, and also blames auditors and securities regulators for not doing enough to crack down on these companies and protect investors.

There are plenty of others who believe the Venture should purge these weaker firms.

“It tarnishes the viability of the [stronger] companies there, and it turns the exchange into a laughingstock where very few people will go to invest,” said Bill Sheriff, the opinionated chief executive of Till Capital Ltd.

Mr. Simon’s research points out numerous companies that are in appalling financial positions. For example, Bluenose Gold Corp.’s latest statements show the company had $3,491 of cash and receivables at the end of December, compared to $2.6 million of accounts payable and accrued liabilities. Xiana Mining Inc. had $6,954 of current assets as of Oct. 31, compared to $1.7 million of current liabilities.

In some cases, the accounts payable in these tiny companies are owed largely to insiders, which shows they are putting their own money in to keep the firms going.

There is a legitimate debate to be had on whether it is in the interests of investors to have companies such as these on the public markets. But in the Venture Exchange’s view, there is no debate that it is upholding its standards. In an interview, Venture president John McCoach defended his company’s practices and accused Mr. Simon of selectively choosing data for his study.

“The one thing that jumped out at me is his allegation that we were intentionally turning a blind eye [to non-compliant companies] or changing our practices. Which is totally without any basis, and in fact it’s absurd,” he said.

“Our continuing listing standards have been applied the same way as long as anybody here can remember in at least 10 years.”

For example, on the issue of negative working capital, Mr. McCoach noted the rules give the exchange some discretion to keep companies listed if their capital position is weak because of seasonal or temporary conditions. And he said working capital is not necessarily the best tool to judge these companies, since the nature of mineral exploration is that you spend your money on drilling and then go raise more of it (if you can).

Mr. McCoach said 27 of Mr. Simon’s 600 companies were previously bounced to the NEX board, which is for Venture companies with little-to-no corporate activity (Bluenose Gold is one of those). The Venture Exchange then took a sample of 135 of the other weakest companies on Mr. Simon’s list, and determined that 30 may not be meeting listing requirements. “Extrapolating that out, we would end up with a number far less [than Mr. Simon],” Mr. McCoach said.

For the past few years, numerous experts have predicted there will be a purging of these companies. They are seen by some as a relic of the mining bull market from last decade that no longer have a reason to exist. But despite their struggles to raise capital, they have shown an ability to hang in, and Mr. McCoach thinks the vast majority of them will continue to do so.

THE CANADIAN PRESS/Aaron Vincent Elkaim
THE CANADIAN PRESS/Aaron Vincent ElkaimThe Toronto Stock Exchange Broadcast Centre is pictured in Toronto.
The question becomes: How are they doing that? Auditing fees alone can cost upwards of $25,000 a year for a small junior mining company, experts said, while listing fees are a minimum of $5,000 to $6,000. And that does not even account for legal fees and transfer agent fees.

By law, an auditor cannot start a new audit for a company until it has been paid for the prior one. Companies with minimal cash and negative working capital should not be able to pay that money. Company insiders won’t foot the bills forever.

But sources said some auditors are offering very low rates to keep these companies from folding — in some cases less than $10,000. One source said he knew of a case in which an auditor settled up with a company at a lower-than-expected-rate, just to ensure it got paid quickly.

“A lot of the auditors have given them a lot of slack,” said Mr. Sheriff.

The miners themselves are always trying to find ways to ease the burden. Tony Drescher, an entrepreneur involved in many small mining companies (including Xiana), said he does as much of the administrative work as possible in-house to control fees. “It would be very difficult if we had to contract this stuff out,” he said, adding companies are always finding creative ways to lighten their fee load.

But insiders wonder how long the survival can last. Junior exploration companies have, for the most part, been in a bear market since 2007. They have managed to defy the doubters and keep the lights on year after year as they hope and pray for better market conditions. It is not a scenario that can go on indefinitely. However one feels about the listing debate, at some point it may make more sense for a lot of companies to just die than to be part of Tony Simon’s Walking Dead.

‘Walking dead’ on the TSX Venture Exchange: How are ‘zombie’ companies surviving?