London is awash with rumours of a bidding war between Jiangxi, the largest copper producer in China on the one side, and BHP - possibly in alliance with Newcrest - on the other. BHP and Newcrest have been shareholders since 2016 with about 13.5% each. Jiangxi isn’t in yet, but SolGold said last week that a share raise worth $36 million would bring in China’s largest copper producer, which would speak for 6.3% on completion of the deal. A new balance of power has emerged at SolGold with Bob Sangha, head of Maxit, propelled as a key player with his firm conducting a strategic review - viewed as shorthand for a mandate to sell of all or parts of Cascabel in the new year. The big change is the planned merger of SolGold with Cornerstone Capital Resources unveiled in October which will give Maxit a 5% shareholding, and remove Cornerstone as a minority shareholder at the asset level. Instead, Cornerstone, now an ally of Sangha, could take shares in SolGold and put two directors on the board. Well-place City sources say the sudden departure of CEO Darryl Cuzzubbo after less than a year in the job on November 12 was a result of a new and powerful alliance between small shareholders such as Maxit, Cornerstone, Berry Street Capital and SolGold founder Nick Mather (4%) who is still on SolGold’s board despite stepping down as CEO 13 months ago. Apparently, Mather has given up the idea of developing Cascabel independently and has agreed instead to bring in the Chinese for a face-off with BHP/Newcrest. Sources said the decision to drop Cuzzubbo and delay both the Cascabel definitive feasibility study and the Porvenir preliminary economic assessment was rooted in a desire to make SolGold/Cascabel more appealing to a bidder by shrinking overheads. It would also accelerate the sales process - which might have been more difficult if Cuzzubbo had remained in place. The last two years have seen as series of spats at SolGold with Mather and his allies determined not to give BHP and Newcrest creeping control of the company via equity that would dilute the stakes of smaller players.
Instead, Mather and then Cuzzubo plumped for royalty deals with Franco Nevada and then Osisko, designed to provide SolGold with upfront finance in exchange for conceding profits once the mine is in operation. The royalty arrangements angered both Newcrest and BHP leading to boardroom clashes. Mather said in a YouTube interview recently the majors want us to pump out cheap equity and by way of their pre-emption rights take control of the company without having to offer the sort of premium one would expect with this sort of …. Recruiting the Chinese has certainly ratcheted up the bid tension - with action probable in the first half of 2023. But a fly in the ointment that few have considered is the reaction to any Chinese takeover by Washington or the Ecuadorian government. The Chinese have overtaken the US to become the largest overseas investor in Ecuador. The South American country’s first large-scale copper mine, the Mirador project operated by a subsidiary of Chinese consortium CRCC-Tongguan, began production in mid-2019. But recently the wind has been blowing the other way with many in Ecuador, as elsewhere, angered by onerous interest rates charged by the Chinese for loans designed to cement Beijing’s global trade offensive. As a result, the Americans are no longer viewed with as much suspicion as they once were. Last year, the US International Development Finance Corporation struck a deal to help Ecuador repay billions in loans to China and boost development in exchange for excluding Chinese companies from its telecom networks. The US cause has been helped by the election of centre-right businessman Guillermo Lasso as Prime Minister after years of rule by left-leaning administrations. What will Lasso’s position be if the Chinese look like acquiring SolGold? Will he come under any pressure from the US? Another wild card is linked to the widespread opposition to mining in Ecuador, especially by indigenous communities who tend to live in areas where minerals are found. Last month, there were huge demonstrations in Ecuador’s capital Quito by protestors who want to block six gold-mining concessions in the Choco Andino forest. They cited threats to water sources, nature and their local businesses. Lasso will have to play his cards carefully despite his stated intention that he wants to boost mining in Ecuador to make it less dependent on oil. The battle of Solgold is reaching a climax but, frankly, anything could happen.
DGR Price at posting:
6.1¢ Sentiment: Buy Disclosure: Held
