Just as it’s about to bring a second gold mine in the Democratic Republic of Congo (DRC) into commercial production, Banro (TSX: BAA; NYSE-MKT: BAA) is facing a proxy battle from a dissident shareholder that claims the company is being poorly managed.
Liberty Street Capital, a Toronto-based private merchant bank that is working with Banro shareholder Noam Franklin, outlined its case against Banro’s board and management team in an information circular posted to SEDAR on June 16.
Liberty cites a tanking share price, the company’s deteriorating financial position, a lack of focus among Banro management, and rising management compensation that is at odds with the performance of the company.
“Banro’s share price, since March 2012, when it raised debt capital to complete its gold production facilities, has steadily fallen from $5.28 to 45¢ recently, a decline of over 90%,” reads the circular. “This loss of value is attributable to management’s consistent failure to meet its announced objectives within projected budgets and timeframes — a result of poor governance and oversight at both the board and management levels of the organization.”
To illustrate its point, the cover of Liberty Street’s circular features an image of a swirling vortex of coins being sucked into a hole in the ground.
Banro owns the Twangiza and Namoya gold mines in the eastern DRC. Twangiza, located in South Kivu province, began commercial production in September 2012 and is expected to produce 100,000 oz. gold this year. Namoya, located in Maniema province, 200 km southwest of Twangiza, began initial production at the end of 2013 after a series of construction delays. Namoya is expected to produce 50,000-60,000 oz. gold in the second half of 2014, once it enters commercial production in the third quarter.
Banro closed a US$175 million debt financing in March 2012 to develop Namoya, and has since completed another $140 million in financings (in convertible preferred shares and credit facilities).
The company had nearly US$160 million in debt at the end of March.
“Liberty Street believes that Banro’s consistent failure to meet its announced objectives in a timely manner reflects a lack of leadership in the senior management team and their lack of focus due to their diverse external interests with other resource companies," reads the dissident circular. "The corporate governance structure of the corporation has been consistently rated poorly by Glass Lewis and ISS. We believe that the Banro assets in DRC have been poorly managed and the corporation’s resources have been squandered through inefficiency and ineffective management.”
The merchant bank points to dilutive financings and “the incurrence of excessive amounts of debt” and concludes that Banro’s financial position has deteriorated to the point where its current working capital deficit is not sustainable.
“In our opinion, Banro is at the point of exhausting its capacity to raise capital through debt facilities, and a revised financing strategy is needed.”
Liberty Street says that it has a plan for Banro, including a full strategic review of its operations and management and the development of a financing plan. It anticipates that if its nominees are elected to the board, there would still be a role for members of the current management team who are committed to financial accountability.
Liberty is proposing that shareholders elect its slate of nominees to Banro’s board in advance of the company’s annual general meeting on June 27. Its circular asserts that its own nominees have the experience, skills, perspective and independence from management required to address Banro’s issues and achieve long-term value for shareholders.
Liberty Street’s slate of nominees include Liberty chairman Loudon Owen, who is an experienced director in resource sector companies and in the DRC; Thomas Pladsen, who has served on many resource company boards (including in the DRC), and is CFO of Atacama Pacific Gold. It also includes six others with ties to the DRC (DRC businessmen Michel Losembe and Imran Patel), experience in finance (Edwin Nordholm, James Gillis and Scot Martin) or both (Niral Merchant).
Liberty Street is jointly owned by Owen and Nordholm.
To be fair, Banro hasn't been the only gold junior facing hard times over the past couple of years and the company says it has accomplished much during that time.
It adds that it is only months away from transforming into a company with two operating gold mines generating robust cash flow.
“Over the past 18 months, Banro has navigated the 35% collapse in the price of gold, adjusting its capital/operating budgets to meet conditions during this difficult period,” the company said in a letter to shareholders. “During that same time, Banro upgraded the Twangiza processing plant and constructed the Namoya mine, which is being commissioned for commercial production expected during Q3 2014.
"Banro is reaching a milestone in its history where it will be able to reap the benefits afforded to a multi-mine company. The inexperienced dissidents who are void of mining skills are now seeking to take control of the company to deprive you of that benefit.”
The company added: “Do not hand control of Banro to a self-serving group of dissidents with no defined strategy. We have strong corporate governance with a renewed board of highly experienced professionals.”
In its defence, Banro notes that Institutional Shareholder Services (ISS), an independent firm that provides governance and proxy voting analysis for institutional investors, has recommended that shareholders vote for Banro’s slate of directors.
Banro quoted ISS as saying that Liberty Street Capital and Noam Franklin, which together hold 11,000 shares of Banro, “have not made a compelling case that a change to the composition of the board is needed. Shareholder support for the management slate, therefore, is warranted.”
The company also quoted ISS as saying: “There are also early signs of operational progress: year over year gold production increased by 16% at Twangiza, the Namoya plant was brought online, and the company successfully raised capital in February under difficult conditions. Though the company still faces a number of challenges ahead, it is unclear what else a new board or management team would do that the current board has not done. The dissidents, therefore, have not made a compelling case that a change to the composition of the board is necessary at this time."
Banro’s plan going forward includes “an intense focus on managing cash flow and debt repayments;” continued cost containment and waste reduction; increasing throughput and recoveries at Twangiza and starting commercial production at Namoya in the third quarter.
In addition, the company notes that Liberty Street owns only 1,000 shares of Banro, which were purchased after the record date for the AGM, while Noam Franklin owns 10,000 shares.
“Liberty Street — which owns just 1,000 shares which are ineligible to vote — is proposing to take over the entire board with a group of nominees that has limited mining experience, no gold production experience, no technical background and several candidates with no public board experience,” Banro said in a letter to shareholders.
The company noted that only four of the dissident nominees have served on the board of a public company.
Banro also questioned the nominees’ ability to act independently of each other, noting that some of them have worked together extensively in the past, including in companies that went bankrupt (Flight Network) and or were delisted (Hangfeng Evergreen).
While Liberty Street wants to elect slate of eight directors, Banro is seeking to downsize its board from eight directors to six.
Banro’s nominees are recently installed chairman Richard Brissenden, Banro president and CEO John Clarke (who replaced Simon Village as interim president and CEO in March 2013), Maurice Colson, Peter Cowley, Thys Terblanche and Derrick Weyrauch.
Three directors are not standing for re-election: Arnold Kondrat, Bernard van Rooyen and Richard Lachcik.
Banro says it has responded to shareholder concerns with changes to its board and a reorganization of its management team in the DRC over the last year.
The changes include the appointment of Brissenden as chairman to provide new, independent leadership, and the addition of three new independent directors (Brissenden, Terblanche and Weyrauch).
The company adds that its key committees are now fully independent, as are the majority of its nominees. Some of its directors have also resigned from outside directorships to devote more time to Banro.
The proxy battle didn’t make much of a stir in the market: Banro shares rose 3% or 1.5¢ to 49.5¢ in late afternoon trading on low volume of 51,300. The company has 252.1 million shares outstanding and has traded in a 52-week window of 43¢-$1.22.
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