Letter From Activisit Shareholder Group to Aura Minerals
A group of minority shareholders have bought up 5.5% in Aura Minerals, pushing for an ousting of CEO James Bannantine and sell of the company. The group cites management and the board as the sole reason for the 93.7% decline in the Company's market value since October 18, 2011, when Bannantine was appointed CEO. Here's the letter:
June 1, 2015
Members of the Board of Directors of Aura Minerals Inc.
Patrick J. Mars
Aura Minerals Inc.
155 University Avenue, Suite 1240
Toronto ON M5H 2B7
Dear Members of the Board of Directors:
We are writing on behalf of shareholders ("we" or the "minority shareholders") that own 12.5 million common shares of Aura Minerals Inc. ("Aura" or the "Company"), representing approximately 5.5% of the total shares outstanding.
As you know, we believe the capital allocation and general corporate strategy of Aura Minerals to be deeply flawed. Further, we do not believe that the incumbent management and Board are acting in a way that will result in value maximization for all shareholders. We provide the following as evidence:
- Share price underperformance. James M. Bannantine was appointed President and CEO on October 18, 2011. Shortly thereafter, certain capital allocation decisions impacted the capital structure of the Company and Aura moved from a net cash to a net debt position by early 2012. Since Mr. Bannantine was appointed President and CEO, the equity value of Aura has declined by 93.7%.
- Poor capital allocation. Under Mr. Bannantine's leadership, beginning in the third quarter of January 2011, Aura has generated approximately US$145 million of free cash flow (defined as EBITDA less capital expenditures) from the Company's gold mines in Brazil and Honduras but incurred approximately US$100 million of negative free cash flow from its Aranzazu and Serrote development projects and US$50 million in cash G&A expenses. Had Aura simply retained the cash from its gold operations less G&A expenses, the Company would now have cash savings equal to approximately 4.6x the current market capitalization.
- Dilutive transactions. Despite forecasting to be free cash flow positive in 2015, Aura announced on May 28, 2015 that it had entered into a private placement agreement to issue an additional 25% of common shares at a price of C$0.107. The issue price represents roughly � of the value that we ascribe to Aura's principal asset. In a similar fashion, Aura has demonstrated a complete lack of concern for the value of its shares by issuing millions of warrants and options to Auramet, insiders and Yamana at exercise prices that are a fraction of intrinsic value.
- High G&A expenses. Aura claims that they are the victim of a weak commodity market that has been particularly harsh on junior mining companies. It is not immediately clear where that harsh environment is reflected in Aura's G&A expenses. With a corporate staff of approximately 10, Aura recorded 2014 expenses of US$6.3 million (2013:US$7.0 million) for salaries and wages plus US$2.3 million (2013:US$1.7 million) for professional and consulting fees plus US$3.0 million (2013:US$5.0 million) for a line-item simply described as "Other." Together, these corporate G&A expenses represent a cash outflow of US$11.6 million (2013:US$13.7 million), which is greater than 50.0% of the Company's equity value.
- Minimal insider ownership. Aura's Board collectively owns 1.9 million common shares representing approximately 0.8% of Aura with a current market value of C$171,000. Management contends that the corporate finance activities of Aura left them in an effectively continuous blackout period for the past two years.
- Poor disclosure. Paulo Carlos de Brito, a well-known name in the mining industry, controls Cyprus River Holdings Ltd., which owns 45.6 million common shares, representing approximately 19.9% of Aura. In December 2014, Sercor Ltd., believed to be an irrevocable trust affiliated with (but not controlled by) Mr. de Brito acquired 43.8 million common shares, representing 19.2% of Aura from an entity controlled by Yamana Mining Inc. As of the date of Aura's Information Circular, Sercor had increased its ownership to 45.6 million shares, representing 19.9% of Aura. Finally, Board member Stephen Keith is understood to be Mr. de Brito's representative on the Board. Yet nowhere is the name Paulo Carlos de Brito mentioned in Aura's public filings, nor are there any disclosed measures taken by the Board to ensure independence and good faith dealings for the benefit of all shareholders.
- Lack of credibility. In contrast to the name Paulo Carlos de Brito, the name James M. Bannantine is not as well-known. Other than Mr. Bannantine's ability to speak Spanish and Portuguese, and being a self-proclaimed former activist investor and private equity entrepreneur, his only long-tenured corporate affiliation is that he was a senior executive at Enron for 10 years. As outlined above, the share price performance under Mr. Bannantine's tutelage has been nearly as catastrophic as that of Enron. Further, he has alienated the Company from the investment community. Specifically, in Q3'11 there were six research analysts covering Aura Minerals, all with a "BUY" rating and an average price target of C$3.70 per share (representing C$840 million of equity value.) Today, there are zero analysts covering the Company, the market capitalization is approximately C$20 million and no actions are being taken to engage the investment community.
In spite of all the above, there is still tremendous value in Aura that is not reflected in the current share price. Using the mid-point of management's 2015 guidance, Aura should generate approximately US$50 million (C$62.25 million) of cash margin from operating gold assets. Aura is expected to be free cash flow positive in 2015, after US$12.8 million of capital expenditures, US$9 million of G&A expenses, and a US$3.0 million net smelter royalty payment.
The Company's debt obligations primarily consist of a gold loan that will be repaid with produced gold, and a loan related to the Serrote development project that is non-recourse to Aura's producing gold assets. Further, Aura has confirmed that it expects to have a net debt position of "almost nil by the end of the first quarter of 2016." We believe that this can be achieved at least a quarter earlier, even without the announced private placement.
For 2016 and beyond, the Company's value is primarily derived from its San Andres gold mine in Honduras, which has been in production since 1983 and has well-developed infrastructure and on-site camp facilities. San Andres is capable of producing an average of 80,000 ounces of gold per year for a minimum of eight (and management expects more than 10) years. At spot gold prices of US$1,200/oz, this represents US$24 million of cash margin, which management has said represents US$15 million of free cash flow per year. Beginning in 2016, this stream of cash flow would recur for eight to 10 years on an all-equity capital structure. We conservatively value this at US$75 million (C$94 million) which equals C$0.40 per share on the shares outstanding prior to the announced private placement. Moreover, incremental option value exists around the Company's Aranzazu, Serrote and Pau-a-Pique assets.
To assist management and the Board, we outlined a five-point strategic plan that we felt should be communicated to the market, which would result in the greatest long-term value for the benefit of all shareholders. The strategy summary, with brief details, is as follows:
1. Manage Costs Vigilantly.
- Target and be held accountable to reduce G&A from US$13.1 million in 2014 to US$9 million, as per management guidance
- Cease all spending on feasibility studies for Aranzazu and Serrote
2. To Pay Down Debt.
- Formalize the year end net debt target of less than US$10 million based on current commodity prices; try to beat that target
3. With a Commitment to Repurchase Common Shares.
- Aura must confirm that it will no longer allocate capital to feasibility studies until the share price reflects the intrinsic value of San Andres
- Commit to buying back shares as long as that capital allocation decision yields the highest risk-adjusted return
4. So as to Regain Credibility - and Engage Investors and Equity Research Analysts.
- Aura has lost credibility in the past by missing announced deadlines on feasibility studies and corporate financings / joint ventures. By regaining control of the capital structure and equity value, Aura will be better positioned to deliver on milestones in a timely fashion
5. With Prospects of Future Upside Based on Feasibility Studies, Future Asset Monetizations and Return or Redeployment of Capital for the Benefit of All Shareholders.
The press release issued by Aura on May 28, 2015 confirmed all the fears and grievances we had previously expressed to the Board and management. Rather than follow a sound capital allocation strategy based on low risk activities and creating value for shareholders, the Company announced a private placement resulting in the issuance of 25% more shares at a price equal to � the standalone value of San Andres and a continuation of the high-risk and reckless capital allocation that has significantly contributed to the 93.7% decline in Aura's equity value.
Under the incumbent Board and management, Aura has shirked accountability to minority shareholders and failed in its fiduciary obligations of duty and care. As such, we are calling on you to take immediate actions to maximize the value for all shareholders. Specifically, we believe that the resignation of the President and CEO, James M. Bannantine, is warranted, and that an orderly sale process of the Company should be initiated expeditiously.
Timothy J. Stabosz (on behalf of minority shareholders)