Following ADEX - Wish I could go to AGM
Here is my summary of what’s I see going on with ADE. Some of it will sound like the same old tune, but here it is any way. (I have held ADEX since 2008 & continued to aquire as recently as 2012)
History
Going back to 2008, Adex invested heavily in development (“Additions to mineral properties” in the annual & quarterly reports. This includes exploration, process development, improvements to infrastructure, ie. tailings pond, etc.). Investment was 4.7 mil (2008), .9 mil (2009), 1.8 mil (2010), 2.6 mil (2011). After GH took over management this dropped substantially in 2012 to .6 mil and based on the first quarter 2013 will be less still this year (only 88,500 in first quarter). This may reflect that the expensive part is drilling, assaying & process design, which are complete, but formulation of the DFS is dragging. Why ?
Wages have fluctuated, but trends up significantly since Great Harvest came in (August 2010). Wages 439,000 (2008), 346,000 (2009), 515,000 (2010), 458,000 (2011) and 518,000 (2012). This may reflect the cost of GH dumping Errol Farr (450,000 or more). In fact he and the previous board were fairly productive until they brought in GH to finance development. They were at the threshold of developing the lower cost North Zone and planned to use the cash flow from that to develop the more expensive mine at the Fire Tower Zone. Since May 2011 we have been paying Linda Lam Kwan and now Yan Kim Po $225,000/yr plus options as acting president to unravel the plan and accomplish little if anything towards getting either site moving towards production. We were to have a Definitive Feasability Study in 2011, and it has repeatedly been pushed back, most recently to 2014 (Annual Report and recent Power Point). Why are we paying more for less progress ?
During the same time as GH and the board have slowed if not arrested progress, director’s fees have skyrocketed. They were 72,000 (2008), 88,000 (2009), 109,000 (2010), 188,000 (2011) and 187,000 (2012). In addition Po & Kwan have been granted significant options (600,000 or more shares each), and other directors have received lesser amounts of options in addition to their fees. It may be that prior to 2011, directors received a greater portion of their compensation as options, but I note that these expired out of the money. Again, why are we paying more for less and why aren’t we paying the bulk as options ?
Digging into Great Harvest and the Po/Kwan family investment network may explain the delay. While it is Great Harvest Canadian Investment Company Limited (GH) that holds the shares of ADEX, Great Harvest Maeta Group Holdings(GHMGH), registered in the Cayman Islands but operating from Hong Kong, seems to be the Po/Kwans major operating entity. That company is in hard times. The principal business is shipping and there is an oversupply of shipping capacity worldwide. GHMGH reported losses of $6.9 mil in 2012 and $13.4 mil in 2013. GHMGH is to vote on a convertible bond issue to finance it’s cash flow at it’s AGM August 8. The convertible bonds are being purchased by “Ablaze Rich Investments Limited” (incorporated in the British Virgin Islands). Ablaze Rich is owned 51% by Po & 49% by Kwan. I note that the independent advisor’s recommendation in the GHMGH circular says “In relation to debt financing, the Directors advised us that under the current market conditions and in light of the Group’s current financial position, it was considered not plausible to apply/arrange for bank loans with terms being comparable the relatively low annual interest rate and the amount equivalent to the Convertible Bonds. The interest rate payable on the Convertible Bonds is fair and reasonable as compared with the indicative interest rates of not less than 6% per annum offered by banks and financial institutions to the Group for new loan facilities on a loan restructuring basis. Furthermore, the principal amount of any bank financing or bonds would require repayment at the end of its term whilst the Convertible Bonds would not create any financial burden on the Company if it is converted in full.” I have not been able to find more information on Ablaze Rich, nor identify any other information about them that would reassure me of GH’s or the Po/Kwan’s ability to finance the 50 million that would be required of them if a DFS was obtained. Further, I suspect that the financial difficulties of GHMGH may be an impairment to ADEX raising capital independent of GH and the Po/Kwans. I have said for some time that I question the ability of GH to meet their obligations were a DFS to be forthcoming, therefore I suspect that they are deliberately delaying the DFS. If GH could finance their commitment and GH or Po/Kwans had the ability to raise any additional amounts needed to develop Mount Pleasant it only makes sense that they would move ahead. Although many of us are frustrated with the loss of value on our investment, no one has lost more than they have ($ 8.8 mil @ .04/share), nor has anyone as much to gain from a turn around.
What should happen @ AGM
I do not expect that Po or Kwan will address any of these concerns, although they should be pushed.
Betts, as the Lead Independent Director and a member of the Audit, Nomination & Corporate Governance and Compensation committees should be put on the hot seat about all of these issues. The role of the Lead Independent Director is to protect shareholders from insider abuses. The role emerged following the Enron failure and others like it. Major stock exchanges require listed companies to have a majority of independent directors, a lead independent director and that the independent directors meet separately from the board as a whole. Audit, nominating/corporate governance and compensation committees are to be made up of independent directors only. Betts, as a member of several other corporate boards and the Faculty of Business Administration at The University of New Brunswick no doubt is very aware of this role and I believe should be front and center in ensuring that the interests of management and the controling shareholder (GH) do not conflict with the interests of independent shareholders. In my opinion he should be questioning and reporting to shareholders whether GH and the Po/Kwans can meet their obligations should a DFS be presented and whether or not they are delaying the production of a DFS.
The annual report, on pages 20 - 22, outlines issues with respect to compensation. Essentially it states that the considerations with respect to compensation include qualifications, experience, retention, achievement of milestones and incentives. I can find no evidence of Po or Kwan having lead a mining start up into production. I have found no other evidence of their qualifications or experience. Given the serial delays to produce a DFS, they have failed to achieve stated goals and so there is no reason for ADEX to desire to retain them. It makes sense that they should be dismissed. There is no reason for them to serve in executive roles they are not performing in just because they are major shareholders. (Owning an airplane wouldn’t make them pilots.) Finally, if they must continue, their compensation should be based on incentive to a greater extent than presently. (ie. rather than 225,000/yr, pay 50,000/yr but give them 1,750,000 options @ .10/share than can be exercised for 12 months.) Then they’d have to get moving !