Having failed to rally enough shareholder support for its proxy battle against Banro’s (TSX: BAA; NYSE-MKT: BAA) board, private merchant bank Liberty Street Capital has backed off its bid for control of the gold miner.
After discussions with other shareholders, the Toronto-based bank withdrew its board nominees from consideration on June 25, ahead of the gold miner’s annual general meeting on June 27.
“In light of representations made by management to shareholders about the company’s plan, prospects and timetable to rectify its negative working capital position, the feedback from shareholders has been to give management a further opportunity to deliver better results,” said Liberty Street chairman Loudon Owen in a release.
Liberty Street holds only 1,000 shares of Banro, and because they were acquired after the record date for the meeting, they are non-voting. It was working with New York-based Banro shareholder Noam Franklin, who owns 10,000 shares, and who launched the proxy battle with a letter dated May 27 to Banro’s board.
In a release, Banro chairman Richard Brissenden thanked institutional and retail shareholders for their support.
“Banro is at a critical point in its life cycle, with the company poised to enhance long-term value for shareholders, and intends to ensure that the go-forward plan continues to respond to the feedback we have received from our shareholders.”
The company said that the battle had been “very costly and a distraction to the board,” but added that it is “confident that the clarity achieved through shareholder engagement will better enable the company to proceed with the business at hand and continue to enhance value for all shareholders.”
While Liberty Street said it believes Banro has a valuable core asset, it also said the company needed to make material changes, including adding directors from the Democratic Republic of Congo — where its assets are located — to its board.
Liberty Street had put forth an alternate slate of directors that included Owen, businessmen from the Democratic Republic of the Congo, and Atacama Pacific Gold (TSXV: ATM) CFO Thomas Pladsen.
Ahead of the vote, Banro had the support of Institutional Shareholder Services (ISS) and Glass Lewis, independent firms that provide governance and proxy voting analysis and advice for institutional investors.
Banro owns the Twangiza and Namoya gold mines in the eastern DRC. Twangiza, located in South Kivu province, began commercial production in September 2012 and is expected to produce 100,000 oz. gold this year. Namoya, located in Maniema province, 200 km southwest of Twangiza, began initial production at the end of 2013 after a series of construction delays. Namoya is expected to produce 50,000-60,000 oz. gold in the second half of 2014, once it enters commercial production in the third quarter.
Aside from Banro’s sinking share price and what Liberty Street called a lack of focus among the company’s management team, the dissident shareholders cited Banro’s deteriorating financial position as a reason for its challenge.
Banro closed a US$175-million debt financing in March 2012 to develop Namoya, and has since completed another $140 million in financings (in convertible preferred shares and credit facilities).
The company had nearly US$160 million in debt at the end of March.
Only two days before it dropped its proxy challenge, Liberty Street’s Owen had issued a release urging shareholders to vote for change.
Citing the company’s debt of $217.5 million due in 2017 or earlier, plus its $30 million in preferred shares and the recent issuance of another $40 million in preferred shares due in 2017, he suggested the situation was urgent.
“One way or another, Banro must raise equity, failing which it will likely cease to function,” he said. “The reality of this financial quagmire and the financial challenges the company faces in seeking to secure further equity, must be addressed immediately by professionals with the experience and bench strength to do so.
“This may be the last time shareholders are able to elect leaders who can change the direction of this company.”
Banro says it has responded to shareholder concerns with changes to its board and a reorganization of its management team in the DRC over the last year.
The changes include the appointment of Brissenden as chairman to provide new, independent leadership (Brissenden joined the board in December 2013 and was appointed chairman in early June) and the addition of three new independent directors.
Liberty Street called the board changes Banro has made “unconvincing” and said the same leaders who had steered the company badly were still at the helm.
“Having suffered a cash outflow before financing activities of approximately $27 million during the first quarter of 2014, the entire future of the company seems to be predicated on its hopes for full production at the Namoya property, which, under any reasonable scenario, seems virtually impossible, especially as we are headed into the difficult rainy season in the DRC.”
In a press release yesterday, Banro defended itself saying that it has been working along with its larger shareholders on strengthening its balance sheet, and the process had been interrupted by the “dissident attack.”
It also noted that Namoya is in commissioning and ramping up, and that Twangiza is poised to benefit from an expansion program carried out in 2013 and early 2014.
Liberty Street said it would continue to hold management accountable for meeting its promises and that it may increase its holdings in Banro.
Banro shares have been little affected by the proxy challenge. They traded at 48¢ this afternoon in a 52-week range of 43¢-$1.22. The company has 252.1 million shares outstanding.