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Open Letter to Major Shareholders of Veris Gold

November 22, 2013 | About:
GuruFocus

Mariusz Skonieczny

15 followers
This is an open letter to the major shareholders of Veris Gold (TSX:VG) which include Sprott Asset Management, Francois Marland, and Orifer. You saved the company in 2009 when it was producing no gold. Since then, the company fixed its roaster and put three mines into production. This is a huge achievement. As result of this, the gold production increased significantly. Based on the production in October, Veris Gold is producing gold at a rate of 200,000 ounces per year. Yes, some of the ore came from stockpiles, but this is not the point. Veris Gold is a serious gold producer and the only reason why it is is because of your willingness to save it in 2008/2009.

In the process of turning around the operations, the company had to take on some loans and now the loan with Deutsche Bank (DB) is suffocating the company. Veris has to be paying out $50 million a year to the bank. This is half a billion dollar worth of value. Because of this, the company cannot ever have any cash buffer because everything is going to Deutsche Bank. This wouldn’t be an issue if the price of gold did not collapse in April this year. As a result, there is constant dilution which includes your shares. How can you just sit there and watch the company dilute itself to death? Turning around the operations required a lot of work and pain. But it was successfully achieved. Now it needs its loans restructured. In other words, it needs a financial turnaround which is nothing but signing a bunch of loan documents. I have to believe that signing papers is a lot easier than fixing a roaster and putting three mines into production, don’t you think? But no, you just sit there and watch your ownership getting diluted while the operations are breaking new record highs. Yes, I understand that financing is hard for the mining companies, but collectively, you control billions of dollars of investment capital.

I truly do not get that major shareholders would allow an $85 million loan with 1.5 year of maturity to destroy the value of the company. If Veris Gold did not have any loans and only produced 200,000 ounces of gold, it could generate $80 million of mining cash flows based on today’s gold price and cash cost of $850. Then, if you add another $20 million from tolling agreements, it would be generating $100 million per year before G&A, CapEx, and other expenses. This means that this company would be worth approximately $700 million. And if Eric Sprott is right with his prediction of $2,400 gold price, this company would be generating $300 million of mining cash flows. This means the value would be about $2 billion. How does this compare with the valuation today?

The market cap is $48 million because the company is getting suffocated by the Deutsche Bank loan causing it to issue shares at ridiculously low prices. But what is crazy about this loan is that it has only 1.5 years left and major shareholders collectively have enough money to refinance it. Based on the most recent conference call, Francois Marland said that he hopes to get the loan refinanced by March 2014. At first, I thought he meant the end of month, but no he meant the end of March 2014. I could not believe my ears. By then (and you know it will not happen by then because nothing happens on time in mining) all the upside might get diluted away all because of a perfectly refinanceable loan.

I understand the debt market for the mining companies is difficult. Forget the debt market, get it done yourself. I urge all the major shareholders to work together and refinance the company’s loan obligations and save the equity value from being destroyed for no reason. If you truly believe in gold, refinancing Veris Gold obligations is the biggest no-brainer on the planet.

Disclosure: Long Veris Gold


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