Fin Review Article

http://www.copyright link/business/mining/the-fairytale-ending-for-kbl-20150604-ghgg0p

KBL's recent events scored a full page article in yesterdays Fin Review, page 19.

"Uncork a Bollinger and light up a Cohiba! Pierpont has a thrilling story this month about a small mining company driven to the edge of ruin by a rich foe before it won a famous victory and miraculously escaped.
You will tremble with fear as the dark clouds loom, sigh with relief when they vanish and may even (at a stretch) have your faith restored in the Australian legal system.
The small mining company is KBL Mining, chaired by Jim Wall, which produces copper in concentrate with gold and silver credits from Mineral Hill in central NSW. But, like every small company on the mining board, KBL did not have enough cash to develop the mine.
In 2011 it raised $11.2 million from a convertible note issue and placement at 38¢. That cash was to build a carbon-in-leach (CIL) circuit and additional flotation plant at Mineral Hill, together with a pre-strip of the Pearse gold-silver orebody, only a few hundred metres away.
But KBL kept passing the hat around. It borrowed a further $3 million, made another convertible note issue for $10 million in 2013 and received a $14.5 million reimbursement of research and development costs. If you add all those numbers together, KBL had raised the impressive total of nearly $40 million in less than three years and still didn't have a CIL plant. And Pearse still needed the overburden stripped.
The (highly unreliable) gossip at the Croesus Club is that KBL spent some $30 million on development of the G Lode at Mineral Hill and drilling Pearse. But both those were gold-silver orebodies and KBL still didn't have a gold treatment plant.
The $3 million that had been borrowed had to be repaid and there were quarterly interest payments on the $11.2 million note issue, ripping out more cash.
Perhaps worst of all, KBL struck talc in its underground workings. Talc is splendid in your bathroom or on a baby's nappy, but in an orebody it's dreadful. The flotation plant, which is supposed to attract the copper and gold to the bubbles, will also attract the talc, and it's the devil's own job to separate the talc from the rest. So mining becomes more expensive and recoveries fall. Even worse, in an underground mine, the slippery talc makes the overhead rock more prone to shearing, so mining has to be conducted carefully and at extra cost.
So Mineral Hill's copper grades and recovery slumped, just as the copper price was taking a dive too, falling from $US9000 to $US6000 a tonne.
Nothing loses money faster than a hungry mine. In FY12 and FY13, KBL's operating losses totalled nearly $10 million and another $27 million was spent on development and plant. By June 2013 KBL was down to $5 million cash.
Meanwhile a white knight had ridden to the rescue. In March 2013 Capri Trading, run by Geoffrey Kinghorn, agreed to invest $10 million in a fresh issue of KBL convertible notes (which Pierpont mentioned earlier) and also picked up 9 per cent of KBL in the shortfall of an issue. The notes had a two-year term, maturing on March 16, 2015, when they would be redeemed for $12.6 million, representing a simple interest rate of 13 per cent.
Capri was a private company run by Geoffrey, the son of John Kinghorn, who won Pierpont's undying admiration when he floated RAMS Homes Loans in 2007 and collected $650 million as the main vendor. So a Kinghorn should have been a really shiny white knight. But alas! Sharemarket white knights have a habit of turning black, and Geoffrey wound up at least dark grey in the eyes of KBL.
Last year KBL foresaw that it might not be able to repay Capri's $10 million when the notes matured in March, so they asked Geoffrey if they could extend the term of the notes to June. Geoffrey didn't want to, so KBL started hunting for an alternative white knight.
Guy Fawkes Day saw the fireworks start, because on November 5 last year, Capri assigned its shares and notes in KBL to RIKID511 Pty Ltd. Incidentally, Geoffrey still had his hand on the throttle, even though RIKID was nominally a subsidiary of the listed Kidman Resources. Geoffrey was at all times a director of RIKID and for most of the relevant period he was the sole director. Justice Richard White of the NSW Supreme Court found: "From at least January 24 it appears that he [Geoffrey], and he only, would be the person whose mind would be the mind of RIKID".
Kidman held tenements next door to Mineral Hill, but how it could afford the notes and shares was a small mystery, because it was only holding some $1.6 million cash. Kidman was active, though. It had approached Geoffrey to do the deal and as soon as he did, Kidman began soliciting KBL shareholders in an effort to sack KBL directors (starting with two who were up for re-election at the annual general meeting due on November 19) and to replace them with three Kidman nominees.
The KBL board's first response was to adjourn the AGM until November 28, when KBL's directors managed to secure enough support (roughly 120 million votes to 93 million) to keep their jobs. Since then the parties have been fighting in the law courts and the Takeovers Panel, with Kidman and RIKID arguing that KBL had committed an act of default and should pay whopping interest on its notes and KBL denying everything while desperately trying to find another knight who was a bit whiter.
KBL was initially handicapped because it didn't know the terms of the deal between Capri and RIKID, which were not revealed until November 28. On March 16 of this year, Capri was due to redeem its KBL convertible notes for $12.6 million paid by KBL. The Capri/Kidman agreement effectively provided that Kidman was not required to pay for the KBL convertible notes if Capri were repaid in full in March.
KBL detected a sinister aspect of the agreement. If KBL repaid Capri in full in March, the Capri/Kidman deal would be reversed and Kidman would gain nothing from it. But if KBL defaulted, Kidman could enforce security over, and take control of, KBL's assets. The Capri/Kidman agreement stated that if an event of default occurred, the holder of the notes could declare the money to be due and payable immediately and appoint a receiver.
KBL's premonition was correct. Kidman sent a letter on December 2 saying it believed KBL was insolvent, and KBL spent the next five months trying to prise Kidman's jaws off its financial jugular. On December 8, Kidman issued an ASX release querying KBL's solvency. KBL responded that Kidman was trying to engineer an insolvency.
Between December 10 and March 5, RIKID served eight notices on KBL alleging that it had defaulted and was liable for RIKID's legal costs as well. All these notices must have been a dreadful distraction for KBL, because it was trying to woo another financier at the time.
The first notice said an event of default had occurred, and that representatives of business recovery accountants Nicols and Brien would arrive in KBL's office at 9 am next morning to investigate its finances. KBL immediately demanded that RIKID explain the grounds on which its allegation was based. Until that happened the investigators would never get through the front door (and they didn't).
Undaunted, RIKID kept bombarding KBL with notices alleging it was in default. KBL was in the position of a batsman receiving six bouncers an over, but rescue was at hand. In the nick of time, KBL managed to raise $US23 million ($30 million) on March 9 under an agreement with Quintana Mineral Corporation (a rich private Texan company) and was able to repay the $12.6 million loan to RIKID on March 16.
That left just one matter outstanding. On top of the default allegations, RIKID had been demanding $3.125 million interest on the convertible notes plus legal costs. Its seventh notice included five invoices totalling $108,855.27, and after the eighth notice its solicitor estimated that the costs could run to $146,600.
All this went to Justice White, who brought down his finding on April 8. He dismissed the claim for extra interest, saying there was clear and convincing proof that no interest was to be payable on the $10 million investment apart from the $2.6 million.
His Honour was pretty critical of RIKID, saying: "I draw the clearly available inference that service of the repeated notices of events of default and service of statutory demands constituted an attempt to disrupt KBL's attempt to refinance …This as an abuse of the statutory procedures."
He noted that some $78,000 of RIKID's demands for costs were no longer being pressed. His Honour said: "Although not admitting as much expressly, by its conduct RIKID acknowledges that it had no right to demand the greater sum." In one case, where costs of geological services had been dropped, he said: "No explanation has been provided as to why the demand, if it was thought to be genuine, has been dropped, or if not thought to be genuine, why it was ever made in the first place".
He said that as RIKID had not been entitled to serve the notices of default, none of the charges for costs were justified. "In my view RIKID has been guilty of such improper conduct as disentitles it from requiring KBL to pay any of its costs of the proceedings … It did not act in good faith."
At first glance it looks like a fairytale ending. KBL has avoided going into receivership and has found a new white knight. As Pierpont writes, KBL is finally pouring concrete for its CIL plant and scraping the overburden off the Pearse orebody.
Geoffrey must be happy because he's been paid his $12.6 million. Kidman has reinvented itself by acquiring gold deposits around Coolgardie, where its managing director, Martin Donohue, says he's much happier.
The joy has begun spreading to the market. KBL shares dropped as low as 1.5¢ during the warfare with RIKID, but have since recovered to 4¢. The 2011 convertible notes that were due to terminate next year have been pushed out to 2017, and since last July KBL has had a new managing director, Brian Wesson.
Brian is originally a South African, but he's worked on mines around the world and must have collected some good backing, because last year he considered taking over KBL before deciding to run it instead.
The streaming deal with Quintana requires KBL to sell 24 per cent of its gold to them at 18 per cent discount to market, indicating KBL needs to produce 100,000 ounces before Quintana is repaid. And it still needs a few million for working capital, so KB is not quite out of jail yet.
But otherwise, everyone is living happily ever after."
Rod