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What subscribers knew about Minera IRL ( (MIRL.L) on Sunday evening

This is the kind of thing we do in the subscription Weekly. This went out to subscribers on Sunday evening, before IRL had even sent out its own news release. I've been asked by a whole bunch of people to put it up here on the open blog so here were are. Enjoy.


Minera IRL ( (MIRL.L): Community protests at Ollachea and information on the company's internal and financing situation
It is as sure as you are Roderigo,
Were I the Moor, I would not be Iago.
In following him, I follow but myself;
Heaven is my judge, not I for love and duty,
But seeming so, for my peculiar end;
For when my outward action doth demonstrate
The native act and figure of my heart
In complement extern, 'tis not long after
But I will wear my heart upon my sleeve
For daws to peck at. I am not what I am.
Othello, Act1, Sc1, ll56–65

There are three main sections to this piece:

1) We start with the news from Ollachea last week, which was relayed on the blog this Sunday via the direct translation of the brief but mainly accurate report shown.

2) We consider what's been going on inside Minera IRL recently, as there's a heap of internal politics to sift through.

3) We put it together and make a call on the future of the company, its officers and the ultimate fate of the Ollachea mine project in Puno, Peru.

The news last week
To begin, both for the record and for those of you who didn't see the post on the blog this Sunday morning, here's the translation of the news report (13) dated the evening of Friday August 14th. I'm repeating it here because it gives a good overview of the facts as stand in just a few lines:

Puno: Ollachea Paralysed in Protest Against Mining Company IRL
By Juan Choquetocro, from Macusani 
The community of Ollachea has decided to indefinitely block development activities at the Ollachea gold project in protest against the new president of Minera IRL, Daryl Hodges. The company executive announced changes for the company that are considered to show a lack of respect to the agreements the community has had for the last eight years with the founding executives of the company, Diego Benavides and Courtney Chamberlain, who died last April. 
The member of the Ollachea community say they feel deceived by the new director, because he presented himself to them as the person who had obtained a series of benefits (for the company and community), including the recent debt financing deal with COFIDE for the start of the project. However, the Ollachea community says that Mr Hodges has never participated in any of the agreements with the company and is now looking to take community property. 
The Ollachea community member communicated their decision to the company via a letter that also included several queries. Among them were the question as to why the company had given maximum authority on an interim basis to Mr. Hodges and not to Mr. Benavides. According to the community members, Benavides, who was a few years ago awarded the title of 'Honorary Community Member' by them, is the person who should be in charge.

This weekend the community is holding a meeting to decide on other courses of action they might take, according to the president of the community.

Since that news report came out I've been active in gathering as much information as possible from all sides. Some have been willing to talk to me, others have refused to talk, others have supplied information on-record and others would only speak off-record but in the end I have at least the views and opinions of just about all sides in this saga. A synthesis of all that is what you get today.

Since the untimely death of Courtney Chamberlain, Daryl Hodges has been in charge at the company as executive chairman. To cut to the chase, after reaching the $70m initial credit deal with COFIDE in June Hodges decided to go to Ollachea, present himself to the community with the IRL team and, along with the presentation of some overdue social community agreement money that was now available to hand over thanks to the COFIDE deal, explain the state of play to the stakeholders there. So on July 15th 2015 the top management of Minera IRL went to Ollachea and had a town hall meeting with the community. There were around 500 people present. First the community president welcomed their guests, then Diego Benavides spoke (he also handed over the cheques) and then came the central point of the meeting, a speech of approximately 10 to 15 minutes given to the hall by IRL executive chair  Daryl Hodges, the man now in charge. After the presentations, there was a question and answer session (as is normal at this type of meeting) with the floor able to voice its concerns.

In his talk, Daryl Hodges, who spoke in English with his message translated into Spanish for the audience by VP Exploration Don McIver, used his time to introduce himself to those present. He said that he hoped the good relationship enjoyed between the company and the community would continue. He then told those present that there would be changes in the way IRL operates and does business. He was polite and good mannered in his speech, but that doesn't hide the fact that the message of "there are going to be changes" went down like a lead balloon with the community of Ollachea. When I asked Daryl Hodges about this, he replied, "I said we are still adding a lot of new people and the company is going through changes" (quote unquote). In his opinion the meeting was not fractious and in general terms, although being nervous about having to give a speech, he thought it went quite well. He also told me (quote), "Last thing I expected from that night was bad press."

Unfortunately that's not how someone in Ollachea I spoke with this weekend put it, not even close. Also present at the meeting, my contact told me that when Hodges spoke, he spoke in English and his words were translated (true). In the question and answer session he was asked on many occasions by those present (often different people were repeating the same question) a combination of "why was he head of the company", "why wasn't Diego Benavides head of the company" "why was Diego Benavides only "interim CEO" and not ratified as CEO" etc. Daryl Hodges claims he was asked that question three times and that the questions sounded scripted, my eyewitness said he was asked many times over, far more than three. His answer was to smile and say that Diego Benavides was very important to the company and he hoped that he'd decide to stay with the company. This, quite rightly as you'll see later, was interpreted by the assembly as "Diego's not getting the CEO job". He was also asked repeatedly for details on the "changes", as he was in effect being asked by the community who had been used to working with Benavides and Courtney Chamberlain for eight years. At one point when receiving one of these questions he threw his hands up in the air and laughed, not with the people but at them.

The message from a non-Spanish speaker with apparent control over the destiny over the project on the community's territory could not have been worse. According to the eyewitness, he showed no respect for the people present and though he said he wanted to remain on good terms with the community his talk about wanting to change the way the company operates showed no respect at all to the recently deceased Courtney Chamberlain, with whom the people in Ollachea had an excellent relationship. He made no mention about why he had been made head of the company and not Diego Benavides, who in the opinion of the community was and is the obvious successor to Courtney Chamberlain. To sum up the attitude of the community, here's a direct translation of the letter sent to Daryl Hodges by the community of Ollachea, dated August 10th 2015, as their words are better than mine (I'm just the translator). I was supplied a copy of this letter by my Ollachea contact:

Sr. Daryl Hodges
The rural community of Ollachea is very proud of its territory and its riches and because of that, we have always defended them against anyone who has wanted to deceive us in order to appropriate that which we consider our principal resource and the most valuable asset from our previous generations for our children.
When the company (IRL) first came (to Ollachea) we conversed with them and reached agreements based on trust with the people who came as representatives of the company such as Mr. Courtney Chamberlain, who we always remember with much appreciation and Dr. Benavides, who we named an Honorary Member of the Community due to his laudable social leadership and who we elected as the only person authorized for agreements between the community and the company.
This good relationship of trust has lasted over eight years, with total respect for our customs and particularly our territory, which is why we gave our territory as guarantee via a contract and the our support to the company so that it could obtain financing with COFIDE.
However, we now see that nothing is being respected, which is why the General Assembly which took place yesterday agreed on the necessity to get a clear answer regarding the announcements of changes in the company that you, in an arrogant manner, spoke of in the Assembly of July 15th.
Our territory and agreements are to be respected and with you we have no trust that this will occur because we feel that you have lied to us and that you do not respect the relationship that the community and the company have built.
You said that you had worked in the company for the last eleven years and that you had achieved the deal for the credit agreement with COFIDE. We have never seen you before, nor do we agree with you.
You have treated us badly because you have taken Mr. Courtney's position, we don't know how, and you have ignored he who we named honorary community member, which represents a direct affront to us.
You mocked us when we said that you (i.e. the company) should give the position to Dr. Benavides, who deserves to occupy the main position at the company and not to be an interim.
You said that there will be a new company, ignoring the good relationship forged between community and company for eight years.
Until we have your answer, we will not grant any permission for the development of the drilling campaign or any activity (at the Ollachea project). If not, we will have to take further action. We await your immediate answer.

Juan Luis Valeriano Gutierrez
President of the Ollachea Rural Community Directive
IKN327 back. To sum up so far, Daryl Hodges said the meeting wasn't fractious, seemed to go okay and he didn't expect any bad press. My eyewitness said it was an unmitigated disaster. Then on August 10th the community sends that letter to Daryl Hodges. You be the judge on how that meeting really went.

You'll also note how many times the word "respect" has come up in the last few hundred words, both in the narration of my eyewitness and the letter sent to Daryl Hodges by the community. I cannot overstress the importance of this, plus the element of trust and it leads me in a slightly abstract way to a point I want to make before moving on: The Assembly Meeting on July 15th should never have taken place. Knowing what I know about the way Peru works, it was in my opinion a gross error to call a meeting and go to the community. The rub here is that it was Daryl Hodges who insisted on going to Ollachea and introducing himself to the community, despite receiving advice not to do it from several quarters. I've been on the receiving end of that type of situation personally and know they're difficult to manage, and I'm a fluent Spanish speaker with a wife and in-laws from the region and a decent notion of the cultural codes and suchlike. For a gringo (no other word) like me it's not easy, for one that doesn't speak Spanish, doesn’t have a clue about the culture and then not only proclaiming himself boss but ignoring the achievements of a highly respected person such as Courtney Chamberlain and telling those present that the company is changing the way it does business….the phrase "recipe for disaster" only scratches the surface.

Which brings us to this week. On receiving the letter from the Ollachea community on August 10th, Daryl Hodges dispatched the head of his community team to Ollachea with a letter (that I haven't seen…yet) and directives to explain the situation, say that the company has no plans to change any of the social programs and that it remained fully committed to the community. In other word to calm the waters, which was the right thing to do (though a little too late, I fear). After that was when the community talked to the News Ser reporter who published his report seen above on Friday evening (the news also appeared in other media sources such as Peru's El Correo, by-lined to other reporters, so I'm assuming without knowing that the community president held a small press conference of some sort).

This weekend the Ollachea community has again been meeting to decide on their response to the message delivered by Daryl Hodges. Today Sunday they resolved to maintain the current freeze on the Ollachea mine development until such time as Diego Benavides is ratified as CEO and put in charge of the project.

On Minera IRL internal politics
If you managed to get through all that lot (and I apologize for the length of the piece, but this time it's unavoidable) it's not going to come as much of a surprise when I tell you that there's friction inside IRL at an officer level. There are plenty of anecdotal comments I could bombard you with to back up that statement as I've heard no end of negative comments about person or persons X about person or persons Y recently, sometimes veiled comments and sometimes starkly unveiled. But I'm not going to go there, I've learned from experience to keep out as much as possible of the personal ego-driven side of internal corporate politics, especially when I'm a mere third-party outsider looking in.

What we know, or can easily deduce, is another matter:

  • There is bad blood between Interim CEO Diego Benavides and Executive Chair Daryl Hodges.
  • Hodges does not want to ratify Benavides as CEO. That's clear from his answers to me, to the community and it's a glaringly obvious omission from the agenda of the company's AGM coming up on August 27th. This implies that he wants the job himself. In fact I'd bet large amounts of money on that one.
  • If this came to pass and then Diego Benavides decided to stay with the company, it means Benavides would be in a subordinate role to Hodges. With Hodges recently arrived at the company (made director in early 2014) and Benavides a founder of Minera IRL, the tensions would be obvious to anyone.
  • However Hodges seems to enjoy the tacit support of the corporate backers of IRL (to generalize, "the London people") as witnessed in May 2014 when he received the highest number of ratification votes as director (around 51m) of all the board.
  • Hodges has also made it clear he wants to "change" the company and the way it does business. We've yet to see what that means.
If it were just a type of Venn Diagram of politics, with Daryl Hodges and his camp one side, then Diego Benavides and his camp on the other side, then the company, the Ollachea project and its community in the middle, then it would be difficult to make a truly objective call on what was going on, who was in the right, who was in the wrong.
Hodges says this, Benavides says that.
Benavides wants IRL to do business in manner X (that one we basically know, status quo), Hodges wants IRL to do business in manner Y (changes).
The community says it's against Hodges as company head (that's a fact), but while Camp Benavides says it's the way Hodges has treated them (implication: permanent mess), Camp Hodges says that Benavides has turned the community against him for his own nefarious reasons (implication: situation can be repaired).
Camp Hodges says it's changing and renovating IRL into a better company, Camp Benavides says Hodges&Co is ruining the company for its own nefarious reasons right at the point when the company was about to secure the financing deal and build the mine.
We could continue. And after hearing from all sides, or at least all the sides that wanted to talk with me, I sat back and tried to consider things as a third-party onlooker. After all, this is capital markets and not kiddies play-date friendly-time, the ultimate objective for us the retail shareholder is to buy low sell high and if that means getting onside with a new broom that comes into a company, ruffles feathers, shakes things up and gets things moving forward in better shape, then it could be a perfectly acceptable situation that improves the company's stock price and with that, there are only questions of personal style and taste left to consider.

However, when I found out about the position of the main lender COFIDE in all this, the whole thing changed.

The COFIDE position: The canary in the coalmine
Let's start with a clear statement: I believe the deal done by Minera IRL with COFIDE to be a good one. Good for the company, for the Ollachea project and all its stakeholders, good for shareholders such as you and I and said as much in the NOBS report we ran on IRL in IKN318 dated June 14th 2015, just after the announcement was made. I liked the deal, I stuck a 23c target price on the stock (assuming the current $70m deal solidifies into the full debt financing deal of up to $240m). I also added more to my position afterwards and averaged down.

Since then and even taking into account the new wave of abject negativity in the wider gold sector through the end of June, all July and into early August (you know all about that) I've been at a loss to understand why the stock has been trading so poorly. Yes they've all gone down but we're now back at 7.5c and that's AFTER the financing deal has been struck, not before! The other big mystery connected to that is the lack of traded volume in the stock, as even at these basement levels people are not interested in the equity that should be interested (by whom I mean switched on people, particularly in Lima and London, who know the project and its robustness…there are a few of you reading these words right now).

But this weekend I now understand why. And this is the part that starts to explain the prime buying opportunity for IRL shares that I think is about to present itself. To mix metaphors, it took the news from the community in Ollachea to rip the lid off this can of worms and get the canary in the coalmine to sing for its supper. But before getting there I want to highlight the weak point in this section so that you see it clearly, I'm not hiding anything or playing sleight of hand: Sources for this part are off-record and will stay that way. However they're also trustworthy to the point where I'll stake my reputation as an analyst of LatAm mining matters on their word. If the following doesn't pan out the way it's presented don't ever listen to me again or take anything I say seriously. Enough 'the lady doth protest too much methinks' stuff:

  • I now know that the COFIDE people aren't annoyed at Daryl Hodges, they're absolutely livid. In several ways, COFIDE has been treated with absolute disrespect by Hodges ever since the initial $70m deal was closed.
  • For just one example, I know that the deal liaison man between COFIDE and IRL, who happens to be a Peruvian financial person of good standing in its business community, was accused being a thief by Daryl Hodges and unceremoniously kicked out of his office.
  • I know that despite his representing otherwise, Daryl Hodges had very little to do with the thrashing out of the deal. The agreement between COFIDE and IRL was finalized in a process lasting over a year and a half and the only reason Courtney Chamberlain wasn't there at the end to sign the papers is that he passed away before the process closed.
  •  I know that COFIDE has voiced its grave concerns directly to Hodges over the direction the company is going and asked for a conference meeting with the IRL board of directors, but was refused that opportunity by Hodges.
  •  I know that once COFIDE sensed problems it sent its own team to the town of Ollachea to investigate the situation for itself (not stupid, there are millions in play here). I know that their own independent findings coincided very closely to the position taken by both Diego Benavides and the community leaders as regards Daryl Hodges and "new" IRL.
  • I know that if Daryl Hodges remains as head of Minera IRL the company isn't going to get another penny from COFIDE.

Those are things I know and because of that I'm sharing them with you. I also know that I've just trodden on a lot of people's toes by doing so, but at this point I care more about the equal distribution of knowledge than political correctness or interpersonal niceties. You, the IKN Weekly reader and/or IRL shareholder, need to know about this in order to fully understand what Daryl Hodges has done to this company since he took over after Courtney Chamberlain's death, to what degree he's wrecked the company's good standing in Peru. What I suspect but don't know is that Daryl Hodges wants it that way because he's found a different source of financing, one that's going to be very shareholder-unfriendly but serve his personal purposes more readily. That's a maybe, just a personal suspicion.

Conclusion, discussion, recommendation
To round this off we need to get down to the baseline of this wild and weird saga. There are three points to take in:

Without the support of the community, Minera IRL will not be able to build its mine. Period. As I put it to Daryl Hodges in a mail yesterday Saturday, "The community is a key stakeholder. Without the community Minera IRL has nothing, zip, zero. You cannot force a project onto a community in Peru, as any number of recent examples will amply show". Just by reeling off names like Santa Ana, Conga, Cañariaco, Majaz, Tia Maria I make my point to the casual observer of the Peru mining scene but it doesn't end there: Not only is the town of Ollachea consummately easy to physically defend (one road in, one road out, high mountains all around) but the access from the town to the mine is even easier to blockade successfully. It matters not if a bunch of lawyers walk into town waving pieces of paper saying that the community has broken its agreement with IRL and now has to pay. It won't matter a jot if the government is stupid enough to send in police to break up protest barricades, either. Without Ollachea the town onside, Ollachea the mine doesn't happen. Very simple.

With Daryl Hodges at the helm of Minera IRL, the company will not get the support of the community. Period. The community of Ollachea has made its position crystal clear in this regard. You may agree or disagree with their decision, you may find it objective, subjective, smart, biased, influenced, understandable, political, reasonable or otherwise. In fact I haven't gone much into the thorny issues of cultural empathy and the value systems of provincial communities in Andean Peru, but I for one see exactly where they're coming from and respect their decision. But be clear, what matters to us is the result, not the reasoning and once a decision like this is taken those people don't back down, it's not about money.

And semi-on-topic, one thing that Hodges told me is that his community team was at fault, as they haven't handled the situation correctly. This beggars belief, because it's exactly the same community team that built the strong relationship with Minera IRL. Even if I hadn't done all the digging that I've done on this story, it's plain as day that the only thing that's changed is the person running the company and that the only question would be how directly or indirectly that had affected the sudden deterioration in community relations. And even discounting something that obvious, the executive chair of any company is the person responsible for its actions and the buck must stop there.

With Daryl Hodges at the helm of Minera IRL, there's no deal with COFIDE. Period. And you better get used to the idea.

To sum up the three main points, on the one hand you have the stakeholders of the community of Ollachea, who for eight years built a relationship with a mining company under the tenure of Courtney Chamberlain that was the best in all Peru (that, as you may know, is one of the reasons I've stuck with this company through the downturn), who are now blocking the project due to the way they've been treated by IRL's new head. On the other hand you have the chief financing body that's now blocking the project due to the way they've been treated by IRL's new head. See the common denominator? Yep, me too.

Tomorrow Monday we can expect a news release from Minera IRL. It won't have even a tenth of the information you've just read and I'd expect it to be spun hard to make the company's top man look in as good a position as possible. Be clear, he's not, and until he either resigns or is fired it's not going to get any better. That's where the upcoming AGM may become a factor because on August 27th we the shareholders get to vote on the ten point agenda put forward by the IRL board. The points include the ratification of Daryl Hodges as director of IRL, plus the voting on-board of at least one of his close allies. I'd advise all shareholders of IRL (and I know there are many who read The IKN Weekly, be that good or bad) to get their proxies in early (we're close to the deadline date) and to use their votes wisely.

But even if Hodges survives the vote on August 27th his days are numbered at IRL and that's where the real investment opportunity lies, ladies and gentlemen. He may try to deflect blame for the soured community relations onto the leaders of Ollachea, the IRL team or even (and in the circumstances very likely) the Interim CEO Diego Benavides. I'm likely to come in for my own quota of flak too after writing this exposé on his incredibly poor handling of IRL affairs (and guess how much I'll care about that? Yup, you got it). But when the facts emerge about COFIDE's position, he's toast. This is something Daryl Hodges doesn't seem to understand yet, but he will. It's not if, it's when.

I expect that IRL will trade lower next week on news of the community unrest. If so I'm a buyer of this stock and will average down my position further because when Hodges leaves and Diego Benavides is ratified as CEO (and by the way, I'd like an independent insto person to be chosen as eventual company chair to oversee good financial housekeeping), the community relationship will be restored immediately and COFIDE will be good about returning to the deal at hand. It will be like waking up from a bad dream and with that, the share price should start recovering on decent traded volumes to where it deserves to be. And that for me is at least a double on the day when COFIDE and IRL close the main debt financing deal.

I could add more, but this has gone on long enough already and you should have the picture by now. So I'm going to wrap this up, clean up the copy, PDF and send it out. IKN327 main feature, Sunday August 16th, signing off.