A recently-completed independent technical report has found that the reserves at Guyana Goldfields Inc.’s Aurora Gold Mine in Region Seven were previously overestimated.
This was disclosed in a letter to shareholders by René Marion, Non-Executive Chair of the current Board of Directors, who says that while there is “no easy path to overcome the reduction in reserves,” the Canadian company’s current management team has the experience and strategic plan to position the company for future success. At the same time, Marion has revealed that while pursuing its current business plan, the board is open to a potential sale and several “credible mining companies” are in various stages of conducting their due diligence on the company.
A proxy battle is currently raging over the control of the company as former Executive Chairman Patrick Sheridan, who was ousted from the company in July last year, now leads a group of shareholders that are aiming to take over the board.
While the actual vote for the proxy battle will be done at a special meeting on May 22, the company noted in a statement yesterday that, in keeping with Canadian law, it has filed the letter to shareholders as well as a Management Information Circular in respect of the meeting.
In the letter, Marion notes that a just-completed independent technical report, which was done by Roscoe Postle Associates Inc. concluded that the contained gold reserves were 38% lower, after mining depletion, when compared with December 31, 2017 data.
“Notably, the prior reserves were based on a resource model developed in 2012 under Mr. Sheridan’s watch as CEO and Interim COO of the Company. Now we know that the 2012 model overestimated the contained ounces at the Aurora Gold Mine,” the letter said, while noting that the unavoidable consequences is that the net present value of the reserves is lower than it was.
Nevertheless, Marion maintained that there are opportunities ahead.
The letter noted that the company has “turned the page” over the last year and has met and dealt with a number of serious challenges, and also developed a new strategy to create sustainable value for shareholders.
Marion said the company improved mining and milling rates at the Aurora Gold Mine, eliminating an inefficient and costly dual reporting structure; strengthened the management team and refreshed the Board; enhanced governance practices; restructured the local office in Guyana; and developed a new resource model and life-of-mine (LOM) plan to deal with the biggest challenge – the overestimation of contained ounces in the Aurora Gold Mine’s 2012 resource model.
The letter explained that the company recognises that the challenges, particularly the revised model, have taken a toll on its share price. “But had we not faced them, the toll would have been much worse,” Marion adds.
According to Marion, the company has already engaged a recovery plan which includes, but is not limited to, the prudent management of the balance sheet and liquidity, executing the new LOM plan, pursuing cost efficiencies and optimisation opportunities, replacing and growing the reserves, engaging with their stakeholders and evaluating potential value creation opportunities.
Strong balance sheet
In an accompanying Management Information Circular, Marion said that the company’s balance sheet “remains strong” and reported an unaudited cash balance of approximately US$73 million at the end of March 31, 2019, and that the total debt has been reduced to US$35 million.
He said the company is also actively pursuing cost efficiencies at its operations, including optimising the LOM plan to spread the working capital over more years; pursuing prudent near-term cost control initiatives, with a targeted cost savings of US$10 million or more on an annual LOM basis and US$15 million or more in the first year; improving working capital management by accelerating value-added tax (VAT) refunds; reducing and optimising stores inventory; rationalising and disposing of certain non-essential capital assets and selling its Twin Otter and tendering for charter aircraft services.
Under the strategic plan, Marion said, the company is expecting to maintain approximately US$35 million to US$40 million in available cash at all times during the transition to underground mining at Aurora, based on gold prices of US$1,200 per ounce.
Potential sale
He also noted that the company is open to strategic alternatives and contrary to Sheridan’s “false claims,” its board nominees are not entrenched and take their fiduciary obligations seriously “and are open to all value maximising opportunities, including a potential sale of the company.”
“In fact, earlier this year the Board formed a committee of independent directors to, among other things, review, assess and examine available strategic alternatives, while the Company continues to execute on its standalone business plan,” Marion added.
As part of the review, the company has entered into more than 15 confidentiality agreements with credible mining companies who are in various stages of conducing due diligence regarding the company, and while there is no certainty of a transaction, the Board is open to the right one “if it make sense for stakeholders.”
As it relates to the dismissal of Sheridan, the circular explained that he “had to go and he should stay away.” It alleged that Sheridan was terminated due to poor managerial performance, conflicts of interest and ethical lapses and the move was the first step in the Board’s renewal effort. “Shareholders are asked to support the new vision for the Company proposed by the Board, instead of retreating to the old, unproductive management practices propagated under Mr. Sheridan’s ineffective leadership,” Marion added.
No experience
In the circular, Marion also argued that Sheridan’s board nominees are underqualified and inexperienced since they have limited board experience with producing miners, no experience on boards of large producing miners and value destruction – which was recorded at 27.3% during the Sheridan Nominees’ limited tenure as directors, as compared to 50.1% average value creation for the company’s nominees with producing miners.
The circular said that since the termination of Sheridan, the company has already delivered a new mine plan based on a new and more reliable resource model, improved cost controls and efficiencies, a brownfield exploration focus (surface and underground) to add reserves adjacent to the mine, an improved and more effective reporting structure, a strengthened management team and a refreshed and more diverse Board with improved governance.
