Troy Resources' dissident director John Jones has returned fire in an increasingly heated boardroom battle as the company sets a date for the shareholders to decide which directors stay or go.
More to come....
The announcement is below:
Response from John Jones
Troy Resources founding director and largest shareholder, John Jones, has called for a spill of three board positions including the removal of the chief executive officer, Paul Benson. In addition he is seeking the appointment of Peter Stern, geologist by training but a career investment banker, Robin Parish, highly regarded principal of a UK fund that owns 5% of Troy shares, and Andrew Barclay, a Perth-based solicitor.
Mr Jones says financial mismanagement of the company, particularly involving the development of a suitable financing option for the development of the Casposo gold project in Brazil, is at the core of his concerns.
But his concerns reflect more than a year of dissatisfaction with the boards performance, a period in which Mr Jones has had to intervene several times to protect the interests of shareholders from potentially disastrous and ill-considered financial transactions.
If not for Mr Jones' intervention the Troy board was of the mind to approve two mergers, either of which had the potential to seriously disadvantage the company and its shareholders.
Mr Jones is the largest shareholder in Troy with 13.28% of the stock and stresses that his actions are to protect the interests of all shareholders.
In relation to the Casposo financing proposal the Troy CEO, Paul Benson, originally proposed raising the necessary capital through a share placement.
Troy Resources has approximately 70 million shares on issue. The share placement would have involved the issue of 33 million new shares at $1.50 to raise $50 million at a significant discount to the prevailing share price, resulting in a massive dilution of around 40% of all existing shareholders.
Allowing for a significant contingency and a minimum treasury balance of $5 million, Casposo will require around $40 million in additional funds to develop.
This unnecessary transfer of value from Troy's loyal shareholders was considered to be totally unnecessary and unacceptable by Mr Jones.
His stout defence of the interests of all shareholders was not reflected at board level and forced Mr Jones to seek to vigorously work to prevent the deal proceeding.
As a means of assisting the board, Mr Jones, at his own expense, procured firm alternative funding options which included a $20m debt facility and a rights issue proposal in which all existing shareholders could participate.
The board, led by Mr Benson, has remained focused on equity and refused to consider the debt option as anything but a contingency despite its obvious merits in protecting shareholder value and providing a cheaper alternative to the company.
Mr Jones has publicly stated he will support a combination of rights issue and debt, and is of the belief that both options are eminently achievable, notwithstanding the present dispute, and is strongly encouraging management to get on with the task at hand.
Mr Jones has no intention to resume his former role as Troy Resources chairman or its CEO. However, he believes the board is out of touch and is being dominated by the influence of Mr Benson, with whom relations have broken down.
Mr Benson and the board at large own very few Troy shares and their performance in developing the company in the recent past has been poor.
The Casposo asset acquisition is a fabulous deal for the company. Had Mr Jones not prevented two previous merger transactions attempted by Mr Benson, both of which in hindsight would have been highly value destructive, the Casposo acquisition would never have been able to occur.
Mr Jones said that, "it had become clear that I had no alternative but to take this action in the best interests of all shareholders. No-one has more to gain or lose than me."
"We have allowed the overhead expenses of Troy to rise to an unacceptable level, in my view. We have lost the entrepreneurial spirit that is so essential to the success and growth of a company like Troy." "I am genuinely concerned that shareholders' best interests would be adversely impacted if this attitude of the board were allowed to persist. The Jones family has a considerable financial investment in Troy and has always aligned itself with the interests of all shareholders. I simply cannot allow this situation to go on without seeking to remove these concerns, despite the rather dramatic steps involved."
"There is insufficient business skills and experience amongst the directors. The combination of these two issues has resulted in an inappropriate relationship between the senior management of the company and the board. I want good governance restored."
Statements in Notice of Extraordinary General Meeting
In the Notice of Extraordinary General Meeting, the so-called Independent Directors, whose removal Warrigal is now seeking, respond to Warrigal's statement to shareholders. Mr Jones in return responds to their responses as follows.
Statements on how Casposo should be financed
In relation to the statements as to how Casposo is to be financed, the fact is management submitted a six-page document entitled "Casposo Financing" to the Troy Board on 5 August as its recommendation for the funding of Casposo. In a discussion between John Jones and the Chairman on 4 August, the Chairman confirmed his support for the recommendation.
The sole transaction proposed therein involved the issuance by placement to outside shareholders of 33 million Troy shares at a price of $1.50 per share.
Nowhere does the document in any way suggest that the proposal was a mathematical exercise, that the recommendation was preliminary, or that a further recommendation or update would follow at a later stage.
Moreover, nowhere in the document, not on one single occasion, do the words "rights issue" or "entitlement issue" get mentioned.
It is noted that management has not to this day provided the Board with a valuation of Troy upon which the extent of value dilution to existing shareholders resulting from the placement could be assessed.
Saving money for Troy
The Independent Directors draw reference to the fact that the Board is presently favouring undertaking an underwritten rights issue whereas Mr Jones is favouring a non-underwritten rights issue.
They go on to say that avoiding underwriting would come at the expense of certainty of funding.
The following points are noted:
- The potential cost saving to Troy is of the order of $1 million
- Mr Jones believes that, in the current gold market, an appropriately discounted rights issue will almost certainly be fully subscribed particularly when "top up" is offered to shareholders who seek more than their allocation
It is noted that, having regard to the discussion above, but for Mr Jones' urgings, it is highly possible that management would not now be considering a rights issue.
Management has not said that debt cannot be obtained
The Independent Directors state that Mr Jones has been advocating that Casposo be financed predominantly with debt.
In fact, Mr Jones' position is that Casposo should be funded with half rights issue and half debt. Troy currently has a market capitalisation of approximately $170 million. If Troy was to raise, say, $20 million by way of a rights issue, notionally increasing its market capitalisation to $190 million, Mr Jones believes that $20 million in debt would easily be supportable.
The fact is, so strong will be the Casposo cashflow that what Troy requires is a short-term bridge, not permanent capital. On the basis of the company's cashflow forecasts, $20 million of debt will be fully repayable in well less than one year's contribution from Casposo.
It is noted that the cost of debt is considerably cheaper than the cost of equity. Moreover, debt needs only to be serviced for the term of the facility whereas equity needs to be serviced in perpetuity.
The Independent Directors do not see the incongruity in, on the one hand, lending (therefore risking) US$30 million (at the time, approximately $35 million in Australian dollar terms) to a company "experiencing serious financial difficulty" (their own words) and, on the other hand, being prepared for Troy borrow for the short term $20 million against its market capitalisation of $190 million, bearing in mind the fantastic project that is Casposo.
The Independent Directors note that the Board has instructed management to continue to pursue the possibility of putting in place a debt facility to be considered as part of the funding solution for Casposo.
However, in draft Minutes that accompanied the Notice of Meeting for the 25 September Board meeting, it states:
"The Board then requested that Management vigorously investigate a debt facility with [name of proposed lender withheld]. The Facility should be a General Corporate line facility. Management were to request a revised proposal from [name of proposed lender] for the Board to consider. This facility would be subsequent to the equity raisings and the stronger balance sheet."
Thus, the Independent Directors statement is misleading in that their interest in a debt facility is not part of the Casposo funding solution but rather to be put in place after Casposo is fully equity funded. The fact is, so substantial will be the cashflow from Casposo that a debt facility, if implemented once Casposo is fully equity funded, is highly unlikely to ever be utilized. Based on the draft term sheet, the cost to implement this facility would be in excess of $1 million. Whilst Mr Jones advocates debt for part of the funding of Casposo, he believes that for Troy to implement a debt facility for standby purposes would be a waste of money and stupidity.
It is noted that the debt facility referred to above was brought to the table by Mr Jones. Management has never brought to the table a debt facility, their position being that it could not be achieved.
Mr Jones has not saved Troy from uncommercial transactions
The Independent Director's response states:
"Since Mr Benson joined the Company, the only acquisition that eventuated was the Casposo acquisition. It is simply not accurate for Warrigal to suggest that Mr Jones has prevented ill considered transactions".
Reference is made to the proposed transaction referred to in Warrigal's Statement involving a company referred to as MergeCo. Curiously, the Independent Directors are silent on this transaction, nor do they take the opportunity to refute the fact that, comparing the proposed merger terms to current market prices, Troy would have lost well over half of its investment.
In the Minutes of the Board Meeting from 30 January to 2 February, following a visit to MergeCo's primary operation by the Troy Board, it states:
"The Chairman proposed a resolution that:
"The Company (Mr Benson) prepare and indicative non binding letter to MergeCo indicating the terms on the company's proposed offer to merge the two companies, subject to certain areas of advanced due diligence.
"The Board authorise management to commence as soon as possible the required Mine planning / engineering review (including costs from first principles) due diligence with outside consultants, but not to proceed at this point with Legal and Accounting (Finance and Tax) due diligence.
"Before the non binding letter is issued, it is to be circulated to all directors for review. The Board would then reconvene by telephone at an appropriate time on Monday 2nd February 2009 to consider and approve the letter before release to MergeCo.
"The Chairman confirmed the proposed merger ratio or range of ratios acceptable to Troy would be a key point of the letter.
"All directors present indicated they were in acceptance of the resolution except for Mr Jones who indicated he was against such a motion stating "he cautioned the Board not to undertake a vote". Following further debate the concept was again restated clearly indicating this was a non-binding letter and was to be followed by further specific due diligence. The Board unanimously voted in favour but with Mr Jones emphasising strong reservations."
Thus, Mr Jones contends that, but for his intervention, this potentially disastrous transaction would have proceeded.
So far as Mr Jones is aware, this investigation, even this investigation into a transaction that did not proceed cost Troy in excess of $200,000.
It is noted that, within two weeks of work on the MergeCo proposal ceasing, the Casposo opportunity was brought to management's attention by Troy Director, Mr Ken Nilsson. Thus, the timing is such that Mr Jones does not believe that the Casposo transaction could have proceeded at the same time as the MergeCo proposal.
The Independent Directors state that the only reason Troy was in a position to consider the acquisition and development of Casposo was because the company's interest in Comaplex had been sold at a substantial profit. They state "Mr Jones was the only Director who resisted the sale of that interest".
Reference is drawn to the Minutes of the Meeting of Directors that took place on 29 April 2008, just prior to the decision to sell Comaplex. It states:
"Mr Dow acknowledged Mr McKeith's comments but didn't see the point of selling the Comaplex stake now which would in effect be a "slimming down" process rather than a "bulking up" process. Mr Dow suggested that Troy needed to hold its current position until it acquired another project or undertook a merger and hence bulked up and could then make use of the potential significance of the Comaplex holding."
Nowhere in these Minutes is Mr Jones' position on this matter stated.
The Minutes record that Mr Dow opposed the Comaplex sale, not Mr Jones.