IKN

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.

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Minera IRL
(IRL.to) (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 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.

Sincerely,

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.