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Minera IRL: Some extra information (from IKN392)

The following was part of The IKN Weekly, IKN392, that went out to subscribers on Sunday evening. You get to read it, too.

Minera IRL: Some extra information
I want to expand a little on the three posts regarding Minera IRL that appeared on the blog last week (17) (18) (19). The first thing to explain is the circumstances of the meeting I had last week with a group of people who I am going to refer to as “shareholders”, they want to remain out of the limelight. The only thing I can say is that between them they hold many millions of shares of IRL and they’re hopping mad about the way they’ve been treated up to now.

Before diving in, a confession. I admit to all here that even though I’d already downloaded my copy of the IRL Management Information Circular (MIC), filed to SEDAR on November 3rd, in which the company had published its AGM agenda I hadn’t read it very thoroughly. Now I have (and more than once, too). So to my own shame I wasn’t planning to do anything on IRL until receiving a message that later became a phone call last week. Shareholders were very concerned about the contents and style of the AGM agenda and wanted to speak with me urgently, so I went to Lima and met with them. We then went into a long meeting, with several people at the table that lasted all day. Shareholders voiced their concerns and I started to see where they were coming from.

  • The directors had quietly filed the AGM details, without any sort of heads up to the market or to shareholders, and were planning to hold the AGM less than a month from the file date.

  • They were looking to change the company statute in several very significant ways, all with a view to make corporate control more lax and give them more autonomous power.

  • They stated clearly that they were leaving the London AIM market and due to the fact that the Peru re-listing process was not mentioned, while the Canadian CSE market listing was mentioned in many places, the inference that IRL was about to abandon the Peru listing was clear and easy to conclude.

  • The directors had set up not one but two agenda points, either one would give them the power to emit 115m new shares without any further explanation. The purpose of the share emission was dealt with in the vaguest terms possible in the MIC.

  • The MIC also made clear that none of the directors owned a single share of the company, zero skin in the game and no damage to their own back pockets if they diluted the company share count to kingdom come.

Along with several other snippets and rumours that these experienced and relatively high powered Peruvian market investors had picked up, it all smelled (and still smells) very fishy. And I’ve made the point twice on the blog now but I’m going to make it again here; we the shareholders would be complete idiots to trust the Minera IRL board of directors and take them at face value after the way they treated us last year. We deserve far better disclosure and transparency than trying to quietly sneak in an AGM at the last minute and hoping that nobody notices the massive changes they are trying to push through, not to mention the risk of dilution at an unknown price and to unknown third parties. They might think they can treat us in such an arrogant and offhand manner, but they can’t.

Therefore the posts appeared on the blog last week and the reaction to them has been interesting, to say the least.

Here’s one example: According to one trusted correspondent, who after reading the IKN posts spoke with Derrick Weyrauch on Friday, Mr. Weyrauch is trying to make the case that IRL needs to sell the 115m shares because it’s desperately short of cash. It’s just this kind of thing that hoists my red flags about this guy because, according to any straightforward analysis of the IRL financials, that’s almost certainly not true.

As at the last set of financials, 2q16, IRL had what looks like a mess on its balance sheet but when you start taking it apart it becomes clear that as at June 30th 2016 the company was fine for cash. On the balance sheet, cash and equivalents came to $8.474m so there’s lot of liquidity there to begin with. Total current assets came to $12.753m. Meanwhile current liabilities were at $74.297m which makes for a whopping looking negative working cash position, BUT $67.004m of that current liability is the Cofide bridge loan position. As that’s not going to be called in until the main $240m Cofide loan is closed, the “real life” liquidity negative of current liabilities as at 2q16 is a mere $7.293m (all made up of typical working mining company trade & payables). Therefore the “virtual” working cap is positive, at $5.46m.

Now Weyrauch is pleading corporate poverty, perhaps because since then the company hasn’t made much money or perhaps because they need to pay the current drilling program at Ollachea, but that doesn’t make sense either.

1)      In its filings Minera IRL stated that the approximate cost of the current drill program, now getting towards its end, is budgeted at $1.2m.
2)      If Corihuarmi production fell off a cliff in 3q16 we might be able to assume the mine made a loss, even though gold prices in 3q16 were better than in 2q16. But that’s not true either, in fact Corihuarmi produced more gold in 3q16 than it did in 2q16. Here’s a chart:

Yes, Corihuarmi produced over 5,900 oz of gold in 3q16 (if they sell that at $1,300/oz average it’s $7.67m). Now let’s be clear here, it’s true they posted a net loss of $2.421m in 2q16 but that was nearly all due to a non-cash item, the nominal financial expense of the Cofide bridge loan interest and was an accounting line item, not money actually leaving the company. Revenues from gold sales in Q2 were $7.126m, COGS on those $5.147m and G&A plus exploration costs came to $1.815m. In other words, 2q16 IRL cash flow was positive thanks to gold sales from Corihuarmi (in fact for minor adjustment reasons to those three figures, IRL booked positive cash flow of $0.323m).

If Weyrauch, while knowing those figures, is trying to claim while on the phone to a shareholder of Minera IRL that a company with nearly $5.5m in true liquidity as at 2q16 and with a cash flow positive mine that almost certainly posted improved figures in 3q16 and covers all the corporate G&A bill as well, cannot cover a $1.2m drilling bill, then I submit that he’s either taking very strong medication or he’s trying to make shit up in order to push through an unnecessary and highly dilutive share offering. For his own reasons, rather than for the best of the company. And by the way directors, especially you Weyrauch (and I know you’re reading this without paying me), we out here know how much gold you produced in 3q16 because it’s on the Peru Mining website (20) so don’t start your stupid and totally false e-mail blame games on how I got my information on you like you did last Friday morning (insert emoji of author smiling sweetly).

However, there are a couple of other things that need to be stated at this point:

1) Due to way this whole AGM was announced late (and quietly) it’s going to be very difficult to do anything except vote against the agenda. In order to have a functioning company after November 30th it needs at least two directors and if they all get voted off, the directors will have legal recourse to re-appoint people (almost certainly themselves) on an interim level. It would however be very difficult for them do do anything so in effect, IRL goes into a deep freeze. That wouldn’t be the case if there were a proxy slate alternative, but as things stand and with just two weeks between us and the cut-off date, that’s an unlikely scenario. Not impossible, just unlikely (without an AGM delay).

2) A non-functioning corporation helps nobody. Yes it can stop these people from riding roughshod over us, that’s about all. Therefore we need to consider the practical side of things as well and that got a boost with the news picked up Saturday (19) that IRL directors are putting together a news release for publication in the next day or so. One shareholder wrote to the company and (at last they’re replying) one of the directors wrote back on Saturday morning to say that the company is putting together a press release that they hoped would be published early this week (e.g. this Monday, or perhaps Tuesday). The director told the inquiring IRL shareholder that the news release would clear up his doubts about what was going on at the company and give him the information he required.

I’m encouraged by that. I’m not encouraged by the fact they ignored us all and tried to sneak through the AGM agenda, but it’s good that they now realize they need to give us more and better information about their plans. I do not know what the contents of the NR are going to be and will find out the same day as you are. Therefore I’m going to reserve judgement but I certainly hope they can give us the type of guarantees and commitment to fiduciary duty that we deserve, instead of the arrogant mushroom politics of the last few days.

All it took was a few lines on a blog...J.

So the final message here is, “Let’s see what they come up with first”. If they are upfront in next week’s NR, if they’re more open and can provide assurances (not just empty talk) that they’re on our side, even after the awful way they’ve tried to treat us there’s a compromise solution on the table. We shall wait and we shall see.