SOLG and the The Battle of Five Armies or How to train your Mining Major Dragons and the defeat of BHP

 

In the end it was a nail biting conclusion, but the highly anticipated AGM for SolGold was a success for the Board of SolGold (SOLG) and particularly Nick Mather as he entered battle against the combined forces of Newcrest, Cornerstone and the might of BHP the worlds fifth largest mining company by Revenue.

SOLG with friendly companies including Blackrock and DGR, along with many smaller investors who answered a call from the company voted for all the normal resolutions that the company put forward. This included keeping Nick Mather as a director and CEO and the allocation of over 50% of the current share capital to potential new investors.

SOLG is the largest explorer in the highly thought after Gold and Copper frontier of Ecuador. They have built up a successful partnership with the Ecuadorian Government and the peoples of Ecuador by investing heavily in local employment, local sustainability schemes and the careful stewardship of licenses. SOLG currently sits on a mountain of copper and gold. Literally and figuratively. With projects ranging from the advanced Alpala to the new sleeping giants of Porvenir. Only today it has announced 500m of further mineralisation on a new deposit 3 km away from Alpala, which had never been drilled before this month, which will likely add world class gold and copper mineralisation to an already embarrassing about of reserves. SOLG currently has the largest amounts of combined copper and gold reserves and potential reserves in the world, not currently owned by the world’s major mining companies. A single project such as Alpala when in production would be the worlds largest silver block cave mine, one of the top 10 copper mines and one of the largest gold mines in the world.

It is no wonder then that over the last few years, Newcrest and BHP have both invested heavily in SOLG with the aim of taking these reserves for themselves. BHP have already made an offer for the company and has been rejected. For the first time in it’s investment relationship with SOLG it is out of a standstill agreement and no longer has to vote with the Board of SOLG.

For what is still a small company, under one billion dollars Market Cap. Keeping the wolves at bay, when combined Newcrest, BHP and the small Canadian company Cornerstone own over 30% between them, was never going to be easy and so it proved.

SOLG faced an almost impossible task and hired Citibank to advise them on strategy, to prevent the company from being controlled by hostile forces.

The AGM itself was a rather dry affair like many AGM’s, however the resolution to keep Nick Mather in place was passed by 55% to 45%, with nearly 80% of all shareholders voting, quite an extraordinary turnout for a smaller Market Cap company. Also passed was a resolution allowing the Board of SOLG to place over 50% of the company through new share issues to interested parties to allow for both further exploration and the potential high Capex costs associated with projects such as Alpala.

The strategy to force out Nick and take control of the company was without doubt a monumental failure for Cornerstone, Newcrest and particularly BHP. SOLG recently launched a failed hostile bid for Cornerstone, which is heavily indebted to SOLG due to their arrangement. Newcrest has been openly disapproving of SOLG’s strategy to involve Franco Nevada on financing terms for Alpala, instead of further dilution of shares (primarily to them). For BHP through it was high risk strategy that ultimately failed.

BHP has long been the favourite to obtain SOLG and its world class mineral wealth. Since the ending of its standstill agreement, BHP had the choice of two strategies to either work with SOLG as a valued partner in the same way that Franco Nevada is now or become hostile and try to obtain control of SOLG by forcing its will on the smaller company.

Major mining companies thrive and increase their reserves often by working in a friendly manner with smaller explorers. It was therefore surprising that BHP was willing to risk it’s reputation in an all or nothing bully tactic to grab control of SOLG in a hostile fashion. It was certainly an indication of how much they want and are even relying on SOLG as its main contributor of Copper and Gold for the next 10-15 years. Such a tactic was high risk, high reward for BHP, but it has failed.

BHP now has three choices, either give up on SOLG and it’s copper and gold with it’s tail between it’s legs. Whisper sweet things to SOLG to try and reinstate it’s friendly relationship or continue it’s hostile approach and make a quick bid for SOLG.

Any bid from BHP has to be quick as the next defensive move from SOLG, now that it has permission to place shares, will undoubtably be an allocation of shares to another Major, maybe Franco or Chinese interest of around 10% with a standstill agreement, possibly tied into an offtake preference agreement. Such a move would give SOLG and it’s board further protection from anything but a premium hostile bid.

It is rare for an explorer to escape the grasps of a single major mining company, rarer still to escape two, but SOLG’s expert understanding of its share register and a high stake gamble has delivered the battle and an embarrassing defeat for BHP and Newcrest. Normally a CEO would not survive 45% of the shareholders voting against them, however this is not a normal situation and the remaining 55% of SOLG shareholders have no interest in giving their riches away cheaply.