IKN

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 3^rd,
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 30^th 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 30^th 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.