John Greenslade, the embattled CEO of Vancouver-based Baja Mining Corp. (TSX:BAJ), is under pressure to step aside following revelations the company’s $1.14 billion Boleo mine project in Mexico is underfunded by $246 million.
The news prompted the resignation of three of the company’s board of directors last week, which helped trigger a nosedive in the company’s share price. It dropped 58% from $0.91 at close of markets April 20 to $0.38 on April 24.
The defections followed the April 17 resignation of Gerald Prosalendis, who cited personal and family reasons. On April 23, Graham Thody, Wolf Seidler and former board chairman Tom Ogryzlo resigned.
“I think it’s a strong indication that the board has lost their confidence,” said Adam Low, a Raymond Jamesanalyst.
Baja’s copper-cobalt-zinc project near Santa Rosalia, Mexico, is scheduled to go into production by mid-2013.
Seidler told Business in Vancouver it wasn’t so much the cost overrun that prompted his resignation as the fact that he and other board members were kept in the dark about it.
“I still believe in the project,” Seidler said. “Why did we resign? What I would describe as unsatisfactory information flow from management to the directors, and the costs are just an example. These things don’t just happen at the last minute. I found out a week ago.”
A Baja mining spokesman told BIV the company issued a press release as soon as it became aware of the overruns.
Baja directors aren’t the only ones who say they were given no warning of the shortfall’s magnitude. During a trip to the Boleo mine site in Mexico more than three weeks ago, investment analysts say they were given no indication the project was headed for a 21.5% shortfall.
The company said the overruns result from a change in the project’s scope and design and inflation in the price of steel, fuel and other key inputs.
“We are in an inflationary environment,” Low said. “So I don’t think anyone would have been too surprised to see a slight overrun on the costs. I think it’s the magnitude that has shocked everyone – myself included.”
Haywood Securitiesanalyst Stefan Ioannou said a 21.5% shortfall on a major mine project is not unheard of.
“We see it all the time in the industry,” he said. “What is frustrating, though, is the analysts were down there three weeks ago and there was no mention of it.”
At the time of the analysts’ trip, Baja was still in a nasty proxy fight with Mount Kellett
Capital Management LP – a fight the investment firm lost April 3 during a shareholders meeting.
Much of the proxy battle’s heat has focused on Greenslade, who has been accused of nepotism. His daughter is the company’s corporate secretary, and by Mount Kellett’s reckoning, her compensation is much higher than what an executive in her position would typically receive.
Baja owns 70% of the Boleo mine project. A Korean consortium owns the remaining 30%.
Baja raised about $840 million through debt financing to fund Boleo, about half of which has been spent. The company said it still has enough money to keep construction on track for the next few months and still hopes to be in production by mid-2013. But Ioannou pointed out that the company will need to cover the shortfall if it expects to draw more funds from lenders.
Low fears the overrun could be even higher than $246 million.
But Low added that, if it can address the shortfall, the company still has value. He said Baja has three options to fund the shortfall:
•a forward sale of copper, after the mine comes into production;
•issue new shares;
•sell a stake in the project to Baja’s Korean partners.
Low is recommending the latter. He said Baja could cover its share of the shortfall – $161 million – by selling 21% of its stake in Boleo. That would take Baja down to a 49% ownership position.
“It would take them out of majority control of the project,” Low said, “and I think, given the cost overrun that’s happened, that’s probably a reasonable concession that another party would demand.”
In a news release, Greenfield said his company would work to control costs and still planned to meet its 2013 production target. The company stated that Mike Shaw, Baja’s vice-president of construction and development, has resigned, and it has retained a special adviser “to ensure the company’s governance practices remain effective through this critical transition period.”
The press release added that Baja has received offers from investment bankers willing to assist with financing and suggests that the company isn’t planning to issue new shares. •
