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MINING IN AFRICA

Author: Barry Sergeant|

19 May 2011 16:35

How a Joburg “gold mine” ate $200m in cash

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Ex-cons, a Lamborghini, exploding balance sheets, and other weird stuff.

JOHANNESBURG – During 2010, London- and Johannesburg-listed Central Rand Gold (CRG) produced 9 321 ounces of gold. This is the company that categorically stated in its 2007 annual report that it is “intended that CRG will begin gold production in early 2009 at an annualised rate of 100 000 ounces. This production rate is forecast to increase to around one million ounces a year by 2012”.

This is the company which raised £100m (about R1.5bn, at the time) in cash from its initial public offer, just ahead of taking up its listings on November 8, 2007.

Since 2006, CRG has raised $230m in cash from investors, of which tens of millions has been diverted to non-mining expenditure: astonishing payments to executives (who have demonstrated an interesting knowledge of mining), “other expenses” (including millions spent on “accommodation” and “travel”), and further millions on “consulting services”, paid to unidentified persons.

Writing in CRG’s 2010 annual report, Michael McMahon, chairman from April 14 2010, covered some of the issues that have influenced a fall of 99% in CRG’s stock price from its listing levels. On March 29 2011, CRG halted underground mining, citing rising acid water levels - a threat known on the Witwatersrand for years, if not decades. Since inception, CRG has spent $63m on actual mining capital expenditure. Its free cash flow over five years has been negative to the tune of $183m.

Central Rand Gold

 

 

 

 

 

USD m

2010

2009

2008

2007

2006

Operating cash flow

-19.9

-39.9

-33.0

-21.0

-6.2

Capital expenditure

-20.6

-26.9

-10.9

-1.9

-2.2

Free cash flow

-40.5

-66.8

-43.8

-22.9

-8.4

CRG made it into the mass media, to an extent, late in 2010 when former (and convicted) fraudster Kenny Kunene, who was released from jail in 2003, recounted his appointment as a “senior manager” at CRG, along with Gayton McKenzie, who some years ago was convicted for bank robbery. In interviews, Kunene said the two owed their success to “mentors” Greg James (Central Rand Gold’s “founder” CEO, who left in 2008, “after the initial gold pour”), and Gavin Varejes, named as a “telecommunications tycoon”.

The 2010 CRG annual report records that the company’s remuneration committee was informed on December 9 2010 that “Mr Gayton McKenzie would be leaving the full-time employ of the company in 2011, but would continue to provide services on a contract basis, and that Mr Kenny Kunene would similarly be leaving the full-time employ of the company shortly thereafter”.

CRG claims to have “poured” its first gold on December 4 2008. The gold pour, which reportedly “resulted in 18.417 ounces of gold being poured from trial mining operations” was not considered to be of any use to the company’s revenue line; instead, it was “used to produce commemorative memorabilia and will not be held for sale”.

Like something, perhaps, from a Hollywood blockbuster, “Greg James, the company’s first CEO, chose the day after the initial gold pour to announce that he would be standing down from his leadership role”.  The spin continued: “it had always been Greg’s intention to get CRG to the gold production stage, and he achieved this within the timeline indicated at the time [November 2007] of the IPO”. 

If that was not all, CRG’s publicity continued: “what had started out as a concept three years earlier had now directly translated into gold output; an outfit that started out with less than ten people had now transformed into a gold exploration and mining company directly employing over 250 people with many more employed by our contractors”.

Five years of financial records show that heavy “rewards” went to a handful of individuals. In November 2010, The Sunday Times, Johannesburg, put it so: “A month after drawing public fury for his R700 000 birthday party, former gangster Kenny Kunene has ordered a yellow Lamborghini valued at around R1.5m, and is shopping for a helicopter.

“He has deliberately parked one of his four sports cars next to the BMW of his partner and fellow ex-convict, Gayton Mckenzie, so that their personalised number plates read ‘X Con’ – ‘So what’.”

The fate of the combined $230m that CRG has raised from investors in stockmarkets is a subject of fair clarity. At the end of 2007, the company’s balance sheet showed total assets of $162m; by end-2010, the number had shrivelled to $56m. The net cash balance plummeted from $149m at the end of 2007 to minus $4.1m by mid-2010. The cash position was improved after further calls on investors in 2010, with nearly $43m in cash rolling in. At the end of April 2011, according to latest information, CRG had $7m in cash.

Central Rand Gold, USD m

2010

2009

2008

2007

2006

Cash on hand

14.6

15.9

69.6

149.2

7.5

Debt

0.0

0.0

-0.1

-0.1

0.0

Net cash

14.6

15.9

69.5

149.1

7.5

Gold prices have provided big tailwinds for gold miners everywhere, but not for CRG. When CRG listed in November 2007, gold bullion was trading around $850 an ounce; since then it has been over $1 500 an ounce.

Given increasing cash starvation, on June 4 2010, CRG announced the issue of 1.3bn new shares, versus the-then existing 276m shares, to raise $35m “to achieve a positive cash generating operation by the end of 2013”. When the company listed, there were around 134m shares in issue. The number has risen to 1.6bn, ranking the stock as one of the most dilutive in modern global history.

Upon its listing, CRG sold 58m shares at a price of £1.25 a share, and then traded as high as £1.40 a share. At this point, the stock is priced at just over a penny a share, representing a loss (in round numbers) of 99% for investors which took up shares at the listing price.

During the latter parts of 2008, Central Rand Gold’s targeted 2009 annual gold production of 100 000 ounces was revised down to 40 000 ounces, and, early in 2009, down again, to 20 000 ounces. Less than 10 000 ounces was produced in 2010, and now mining has ceased.

Despite years of promises, CRG is yet to produce a bankable feasibility study (BFS). Inexplicably, thus, CRG was awarded a “new order” mining right in September 2008, by South Africa’s Department of Mineral Resources (DMR). In the 2010 CRG annual report, McMahon states that “a coherent mine plan was completed and approved by independent third-party appraisers (Snowden) in April 2010”. This is still short of a BFS.

CRG’s first “gold smelt” was announced on July 27 2009. There had been no gold sales for 2008, after James quit in 2008, “after the initial gold pour”, and none in 2009. Financial statements for 2010 record $11.7m of gold sales as “other income”.

CRG’s initial “statement” on resources (gold-in-the-ground) declared “an indicated resource of 21.4m ounces of gold and an inferred resource of 12.4m ounces of gold, making a total of 33.8m ounces”. This was subsequently increased. Despite a substantially higher gold price (which makes more in-the-ground gold economical to mine) the CRG 2010 annual report refers to 13.4m ounces of resources. It seems that more than 20 million previous ounces have gone walkabouts.

During 2007, directors’ emoluments at CRG were a truly astonishing $10.1m – alone worth nearly all the gold the company has ever sold. If that was not enough, there was in 2007 an equally astonishing $11m reported as “other share based payments” – most of it for “consulting services rendered”. This recipients of this largesse are not identified.

Greg James scored disclosed emoluments of $2m in 2007, and $2.8m in 2008. Gayton McKenzie was awarded 250 000 CRG shares on November 1 2007 (when the stock was trading around 140 pence a share) for a princely penny a share. McKenzie was awarded by far the most among “senior managers” at CRG; the next highest number of shares is 50 000.

Kenny Kunene was awarded 30 000 shares on November 1 2007, and a further 20 000 in May 2008; all at a penny a share. It seems that 20 000 shares in the name of Kenny Kunene vested on May 9 2008, when the CRG stock price was around £1.10 a share.

Alastair Walton, CRG’s erstwhile chairman scored “emoluments” of $1.1m in 2007 and $2.2m in 2008. Along with “other” expenses, not least travel, CRG has splashed out just over USD 80m in non-mining expenditure over the past five years.

Central Rand Gold

 

 

 

 

 

Per income statement, USD m

2010

2009

2008

2007

2006

Directors' emoluments

-1.2

-1.7

-9.8

-10.1

-2.6

Other share-base payments

 

 

 

-11.0

 

Other expenses

-6.6

-6.0

-6.0

-5.9

-1.7

Consulting services

-1.8

-2.7

-7.9

-4.9

-1.6

 

-9.6

-10.3

-23.7

-31.8

-5.9

CRG was established on June 15 2007 following the restructuring of Rand Quest Syndicate Limited, to which shareholders CRG shares were issued. By early 2009 (at the latest), a good number of previous investors in Rand Quest Syndicate Limited had had enough. Complaints were made in writing to the London Stock Exchange and the Financial Services Authority; in South Africa, to the Johannesburg bourse, and the Financial Services Board.

The gist of the complaints was that James and Walton led a pack of people which dealt with CRG’s cash as if it were their own; this included apparently worthless expenditure and non-starter metallurgical plants. An instance: the Gekko Plant was built and commissioned amid fanfare, only to be impaired and put on sale by the end of 2009.

CRG’s external auditors, Moore Stephens, quit sometime during 2009 and have refused to discuss the CRG matter. Moore Stephens completed the 2008 audit; while “expressing their willingness to continue in office”, they were replaced in 2009 by KPMG Audit Plc (which noticeably charged less than half the prior audit fees). No reason was ever given for the change in auditors; KMPG has declined comment.

Central Rand Gold

2010

2009

2008

2007

2006

Audit & related fees, USD '000

172

125

325

499

5

Walton retired in April 2010, to be replaced by Michael McMahon, well known as a mining executive in South Africa. McMahon was appointed a director of CRG in April 2008; his emoluments for the year were $363 000. He was also awarded 300 000 shares, on June 27 2008, also at a penny a piece.  

His emoluments fell to $200 000 in 2009, in line with the reduction in overall directors’ emoluments at CRG. These have fallen from $10.1m in 2007 to $1.2m in 2010. McMahon’s remuneration from CRG for 2010 was $158 000, well less than half the number for 2008.

Central Rand Gold

 

 

 

 

 

Per income statement, USD m

2010

2009

2008

2007

2006

Directors' emoluments

-1.2

-1.7

-9.8

-10.1

-2.6

From Day One, CRG has been involved in recycling brownfield areas in proximity to the Johannesburg CBD, assets in which South Africa’s established gold miners have shown no interest for decades. CRG recently made the startling disclosure that “while developing ahead of the next planned stopes, between 120mbs [meters below surface] to 180mbs, some 30% of the stopes accessed have been found to have unexpected ‘double voids’ ie, not only has the original Main Reef Leader been extracted but also the Main Reef”.

Old timer miners, decades ago, were more active than CRG seems to have assumed; as McMahon puts it, finding the double voids is “contrary to historical mining plans”. This raises further questions over why CRG was granted a mining licence in the first place, and yet further questions over what directors and executives were doing spending millions of dollars on the likes of accommodation, travel and “consultants”, when the cash should have been spent on confirmation drilling - which is as basic as mining gets.

The good news is that the fun is far from extinct in the Witwatersrand gold basin. For even CRG, there may be some hope: CRG’s stock price hopped around 50% on Thursday, on news that South Africa’s water affairs authorities may chip in to addressing rising acid water where CRG has been “mining”. At the “all-new” 1.2 pence a share, CRG’s stock is still more than 99% off its highs after listing.

Topics: Central Rand Gold, CRG, Greg James, Michael McMahon, Gayton McKenzie, Kenny Kunene,
Who's Who
JOURNO PROFILE

NAME:  Barry Sergeant
BIO: Moneyweb’s investigations editor loves chasing after crooks.
EMAIL:  barry@moneyweb.co.za

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