LionGold Corp Ltd - Will it invest S$165 mln in a gold mine that runs the risk of being nationalised?

16/10/2013 – LionGold Corp Ltd's acquisition spree was said to be one of the reasons for the surge in its stock price and market capitalisation, before the stock price collapsed on October 4.

But any fundamental investor would look beyond the number of acquisitions at the quality of assets being acquired.

In this story, we turn back the pages of LionGold's announcements regarding the acquisition of Vista Gold Antigua Corp, which owns the Amayapampa Gold Project in Bolivia.

But there are some questions that need to be asked.

Here is the timeline of events as they happened:

On May 18, 2012, LionGold said it was buying all of Vista Gold Antigua Corp and its wholly-owned subsidiaries from ASX-listed Republic Gold Ltd.

Vista Gold Antigua Corp is the legal and beneficial owner of the Amayapampa Gold Project in the Municipality of Chayanta, Bustillo Province in Bolivia.

As a part of the agreement, LionGold would provide a US$750,000 loan to Republic Gold Ltd to finance latter's capital expenditure and working capital needs.

Soon after, on June 4, 2012, LionGold announced it had signed a Share Sale Agreement with Republic Gold, wherein LionGold agreed to pay US$7 mln in shares for Vista Gold Antigua Corp.

But according to the Agreement, LionGold's US$750,000 loan to Republic Gold would be offset from the consideration.

Therefore, LionGold would settle the remaining consideration by issuing US$6.25 mln worth of new shares to Republic Gold.

Also, Republic Gold agreed to assign all of its outstanding loans to Vista Gold Antigua Corp, to LionGold.

Republic Gold would also transfer 25% of LionGold's newly-issued shares to an Escrow Agent for 12 months, which was subsequently increased to 36 months.

The Escrow Agent would liquidate an appropriate number of shares in case LionGold made warranty claims against Republic Gold, so that Republic Gold would have the cash to settle these.

Subsequently, on July 13, 2012, LionGold announced the extension of the deadline for acquisition.

In addition, it was extending another US$350,000 loan to Republic Gold, so that Republic Gold could pay for salaries at Vista Gold Antigua Corp.

This additional US$350,000 loan was also offset from the consideration of US$7 mln.

In other words, LionGold would now issue just US$5.9 mln worth of new shares to Republic Gold, compared to the previous arrangement of US$6.25 mln worth of shares.

Slowly but steadily, the all-script deal saw cash flowing out of LionGold.

After another few months, on September 12, 2012, LionGold yet again extended the deadline for acquisition and gave another US$500,000 loan to Republic Gold.

So far, LionGold had granted US$1.6 mln in loans to Republic Gold.

As a result, it would now issue only US$5.4 mln worth of new shares to Republic Gold.

When LionGold finally completed the acquisition of Vista Gold Antigua Corp on December 11, 2012, it had loaned another S$370,000.

Over the seven months after the deal was announced, LionGold had extended US$1.97 mln in loans to Republic Gold, and issued 6,481,757 new shares worth US$5.03 mln for the balance.

Now the escrow arrangement kicked in, and Republic Gold transferred US$1.566 mln worth of LionGold shares to the Escrow Agent, on the condition that Republic Gold could not sell more than 50% of consideration shares within 6 months from the date of acquisition.

So, LionGold finally sealed it.

Or so you would think.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Will the Amayapampa gold project be nationalised?

The Amayapampa Gold Project in Bolivia, which LionGold Corp bought through the Vista Gold Antigua acquisition, was encumbered.

First, Vista Gold Antigua Corp was making losses, because the Amayapampa Gold Project was not in commercial production and the company did not have any revenue.

Unfortunately, we couldn't find any disclosure by LionGold that addressed this issue until January 21, 2013 – a day before SGX approved the allotment and listing of consideration shares to Republic Gold Ltd:

"The Company believes that this approach will unlock asset value while building out the gold business. The fact that there is no production is less of a concern to the Company given the fact that there is a ready plan to go into production. The Company is planning to go into production as soon as practicable and will make suitable announcement when appropriate."

LionGold didn't share the 'ready plan to go into production', nor how soon it would be 'practicable' to start production at Amayapampa Gold Project.

But there was a second, more worrying problem: the nationalization plans of Bolivia's socialist President Evo Morales meant that the Amayapampa Gold Project was on the radar of being taken over by the state.

This is what LionGold had to say about that:

"It was stated in the Republic Gold 2012 Annual Report that 'the operations were suspended pending regulatory and policy certainty specifically relating to nationalisation of mining assets and the implications of the (draft) Mining Code' in Bolivia.
As part of its due diligence investigations for the acquisition, the Company has considered the threat of nationalisation of the Bolivian mining concessions. To this end, adequate due diligence has been performed and the Company has satisfied itself of the potential nationalisation risk."

LionGold didn't elaborate what 'adequate due diligence' it performed, and what 'satisfied' it of the 'potential nationalisation risk'.

Also, the announcement didn't mention the possible impact of the Mining Code on the profitability of the Amayapampa Gold Project.

However, the net asset value of Vista Gold Antigua Corp was S$6.85 mln as at December 11, 2012 (refer page 1 of this announcement).

Question

2. Did SGX ask LionGold to flag the possible risks associated with the Bolivian acquisition?

We don't know.

But probably SGX was satisfied with LionGold's explanations, because the very next day, SGX approved the listing and quotation of consideration shares issued by LionGold to Republic Gold Ltd.

Interestingly, Republic Gold sold as many LionGold shares as it was allowed to, namely 2.1 mln shares on February 6, 2013 for A$1.8 mln, exactly a week after LionGold's consideration shares were listed and quoted on SGX.

Question

3. What happened to the cash from the sale of 2 million shares?

After the expiry of the six month lock-in period, Republic Gold sold the remaining 2.2 mln shares of LionGold it held at S$1.11/share on July 9, 2013.

But what about the LionGold shares held in the Escrow account? Remember, 25% of the consideration shares were locked away.

Well, going by LionGold's disclosures to the SGX, investors would be left wondering.

But not if you kept track of Republic Gold's announcements on the Australian Securities Exchange.

In an announcement on June 14, 2013, Republic Gold informed its shareholders that it had ordered the Escrow Agent to sell 2 mln shares of LionGold.

But surprisingly, Republic Gold said it did so on the instructions of LionGold.

To settle the acquisition of Vista Gold Antigua Corp, Republic Gold paid the entire sale proceeds of those 2 mln shares to LionGold.

Unfortunately, it appears LionGold didn't announce this development to its shareholders.

In essence, LionGold issued 2 mln new shares to Republic Gold, locked them in an escrow account, and sold them in the market to earn cash.

Now, companies issue new shares for cash all the time, but this route is a little more circuitous than usual.

Maybe LionGold would argue that it had expenses, for which the 2 mln share proceeds were used.

But then, what's even more curious is that LionGold's Q1 earnings report (ending June 30, 2013) didn't highlight such cash flow from Republic Gold.

Therefore that makes us wonder if the shares were not sold before June 30.

Otherwise, where did the money go?

Perhaps the company can point out where in its cash flow statement the proceeds are booked.

We can't find it.

Question

4. Will LionGold invest S$165 mln in a gold mine that runs the risk of being nationalised?

Republic Gold's decision to sell Vista Gold Antigua Corp also makes us curious about the reasons why it was selling a project with 1.28 mln ounces of mineral resources (refer page 2 of this announcement).

And we get some of our answers in Republic Gold's Chairman Ray Shorrocks' letter to shareholders: a staggering A$130 mln (about S$165 mln) was needed to develop and commercialize the Gold Mine.

And Republic Gold saw a "high likelihood" of facing difficulties in raising funds because of the Bolivian Government's "perceived agenda towards nationalization" of the country's resources sector, which would discourage foreign investment.

He also cited the failure of the Bolivian Government to clarify matters related to the Draft Mining Code, which would have serious royalty, tax band and balance sheet implications for the potential profitability and viability of the Gold Mine.

As if that wasn't enough, he was concerned over the lack of support and commitment from the Bolivian Governance to support or co-invest in the Project.

We couldn't find any evidence that LionGold ever addressed these serious concerns publicly.

But there's more.

The Amayapampa Gold Project has a history of trouble – troubles which are now a contingent liability for LionGold.

(Total:9 questions)

We have sent these questions to the company’s Director - IR, Ms Lesley Bendig (lesley.bendig@liongoldcorp.com), and Manager - IR, Ms Pak Yudan (IR@liongoldcorp.com), to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

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