#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

Updated Nov. 3, 2015 9:06 p.m. ET 

 

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.
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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.
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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.

Banro’s
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.



Two
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.,
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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.,
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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.

For
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.



BlackRock’s
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.



Banro
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
investment.

A greater stake

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



In
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.”

Production
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.”



Banro
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



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



Mr.
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
million.



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.



Mr.
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
governance.



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



After
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.”



In
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.

A
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.”

In
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.



The
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 justin.scheck@wsj.com and Scott Patterson at scott.patterson@wsj.com

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

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

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 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?

@CondorGoldPlc La India project sees ounces increase after Whittle optimisation study, hoping will tempt someone to make a bid

$CNR.L Whittle optimisation study works wonders at Condor Gold’s La India project

Within the trade, the benefits of the employing Whittle Consulting to enhance the economics of a planned mine have long been recognised.

Jeff Whittle founded his first mine optimisation business way back in 1984, sold it, and then developed another one along similar lines.

It’s all about using the proprietary Whittle optimisation software to enhance the economics of a mine by modelling pit design, scheduling and a host of other features.

But because the main customers tend to be the major mining companies, it’s not often that the full impact of a Whittle study can see the light of day.

Condor Gold (LON:CNR) is one recent exception, and Condor’s chief executive Mark Child is in no doubts about the improvements Whittle optimisation have made to Condor’s plans for the La India gold project in Nicaragua.

“The results have stunned us,” he says. “They are far better than we thought they would be.”

And on many levels too.

Condor’s original pre-feasibility and preliminary economic studies were prepared by SRK Consulting back in December 2014.

These studies outlined three potential development scenarios: a mining project solely focussed on an open pit at La India, a mining project centred on La India but incorporating satellite pits too, and a project incorporating both open pit and underground mines.

Whittle went to work on all of these scenarios, and the results are startling.

The basic open pit, which was originally modelled around 674,000 contained indicated ounces has now been upgraded to 866,000 ounces. Under the Whittle optimisation it will now produce an average of 91,000 ounces over the first five years of production, instead of the 76,000 ounces that was originally modelled.

That’s a production improvement of 20% per annum. over the first five years on a theoretical reserve basis. If a a small amount of inferred material and production is included it rises to 101,000 ounces from a single pit

But there’s more.

The production improvement for the combined open pit plus satellite operations adds up to an even better 25%, as contained ounces jump from 827,000 ounces to 1.06mln ounces, and average annual gold production over the first five years jumps from 94,000 ounces to 118,000 ounces.

For the open pit and underground combined operation the improvement is back at 20%, based on an increase in contained ounces from 1.3mln to 1.55mln and an increase in production over the first five years from an originally projected 138,000 ounces to a newly modelled 165,000 ounces per annum.

How has this all been achieved?

Ah, that would be telling, and the precise workings of Whittle’s software remains a closely guarded secret. They utilise 10 techniques across the mining value chain.

But the modelling is clear enough, the data is held by Condor, and the improvements are there to be made.

Whittle, explains Child, has simply taken ten existing studies and re-worked them with an unremitting focus on the economics.

Thus, under the Whittle modelling although recoveries may not be at their maximum potential, from a cost point of view varying the ratio of recoveries to grinding costs can make a lot of sense.

In the case of Condor’s project, there are several such examples.

“Whittle do their own pit planning and pit phasing,” says Child. “The pit shells have gone deeper. They’re now 30% bigger. Why? – because we’ve got an average 3 gram open pit material that increase in grade at depth. What was previously deemed high grade underground is now open pittable.”

But he emphasises that in spite of the increases in size and mooted output, several other key metrics remain the same.

“The capex is the same,” he says. “The opex is the same. The all-in sustaining cash cost is the same at under US$700 per ounce. An incremental 20% to 25% more gold production per annum goes straight through to the bottom line. The life of mine extends because there is 30% more contained gold. It’s all optimised to money and NPV.”

It is fairly obvious there have been material increases in the NPVs and IRRs, although Child doesn’t quote numbers.

All of which sets Condor up nicely for the ongoing sales process, which the company has initiated and is likely to take 4 to 6 months.

It’s not a given that the company will be sold, but Child has always emphasised that he and his team are not developers.

And having sent out teaser documents soliciting declarations of interest, the Takeover Panel has declared the company to be in an Offer Period.

So be it.

Child doesn’t deny that the company’s for sale.

Indeed, at this point in time a sale is the outright preference compared to some of the other potential scenarios under which La India might get built such as a joint venture or a potentially dilutive equity raise.

“Our focus is on selling the company,” he says. “But there are a number of potential outcomes. We always said we’d probably sell, but we’re not desperate to sell.”

Indeed, there’s money in the bank, and a renewed confidence in the quality of the asset following the Whittle study.

That speaks of a certain strength in depth, especially considering that a number of confidentiality agreements are already in place and a major shareholder has recently topped up its stake.

What happens over the course of the next few months is likely to be very interesting indeed.

Whittle optimisation study works wonders at Condor Gold’s La India project - Proactiveinvestors (UK)