„Letter to Management“ an CEO Goode von NSL Consolidated

Eine Gruppe um den Betreiber von Copesetic.de hat folgenden „Letter to Management“ an den CEO Cedric Goode von NSL Consolidated Ltd. geschrieben, um ihre Unzufriedenheit mit der Entwicklung des Unternehmens mitzuteilen. Besonders die anstehende Equity-Finanzierung von 102 Millionen neuen Aktion + 102 Millionen neue Optionen stellt eine massive Verwässerung dar, die nicht unkommentiert toleriert werden kann. Jedoch wurde heute morgen auf der ASX-Seite von NSL Consolidated verkündet, dass ein Großteil der Finanzierung bereits durchgeführt wurde. Dennoch wollen wir dem CEO unsere Meinung sagen.

Hier der Brief, der am 23. Oktober 2013 abends dem Herrn Goode per E-Mail zugestellt wurde:


LETTER TO MANAGEMENT

Dear Management of NSL Consolidated Ltd.,
dear Mr. Goode,
dear Mr. Muir,
dear shareholders and/or interested people,

I am a shareholder of NSL Consolidated Ltd. since a few years and I am following the development of NSL very closely. The last capital raising (3rd July 2013) we did tolerate uncommented. But due to the last news release of NSL (dated 14th October 2013) shareholders (including me) are stunned, appalled and more than displeased with the company’s development.

NSL plans to raise $1,029,462 trough a placement with 102.946m new shares @ $0.01 and additional 102.946m options @ $0.01. The dilution would be extreme for every shareholder. Till 30th June 2013 we had around 353.274m shares outstanding plus the capital raising announced on 3rd July 2013 with additional 23.010m shares @ $0.02 (+23.010m options @ $0.04). In long-term (with exercising all options) this would result in a share amount of 605.186m (leaving the other “normal” options aside). This means shareholders will be diluted by 71,30% and this is totally unacceptable and a disgrace for the Management of NSL.

Postings from users on Hotcopper:
“I would be very surprised if this stock does not hit half a cent.”
“We have gone from a DSO operation that would be self funded, no debt and have a NPV of $100 million to a magnetite benefication plant requiring a $10 million equipment investment that doesn’t work properly and no mining. Who thinks management should go? Not just Cedric, all of them!!!”
“[…]seriously, everyone of them should be sacked. NSL is beyond a joke.”
“I think NSL invented the term „laughing stock“ they are the biggest jokers out. The Indians are pissing themselves laughing as well. I just feel sorry for the poor shareholders as it seems we have paid a shit load of money for a comedy show.”

If the project is that attractive and profitable as the Management of NSL always suggests (see Presentation of 12th July 2011: ”robust economics – modest cost (2.3m), cash back within 2-3 month post commissioning” + “net cash flow (steady state) US$800,000 per month”) why is the Management of NSL unable to arrange an alternative, non-dilutive funding like:

  • Off-take financing agreement: an off-take partner would make an advance payment of $1 million which will be credited against future sales in the next (two) years. Labrador Iron Mines signed such an agreement with RB Metalloyd (see http://www.miningweekly.com/article/labrador-iron-mines-clinches-sales-contract-and-offtake-financing-2013-05-14)
  • If the Vijay Group is responsible for the tight liquidity position of NSL because they do not fulfill the terms under the Heads of Agreement, then the Vijay Group should be made liable for that. As a compensation for the missing and due payments of Vijay, NSL could arrange a debt financing for which the Vijay Group will guarantee for and the Vijay Group will pay the interest.

The Management themselves said once: “NSL is evaluating a range of potential options to fund the modest capital cost of the plant and is confident the expected economics will support a range of funding alternatives”. And how was it funded? Trough a combination of renounceable rights issue to existing shareholders and a placement for new sophisticated investors (clients of Patersons Securities Limited). Where was the alternative to a dilutive financing???

And if the Management of NSL is still unable to arrange an alternative, non-dilutive funding, why are the terms of the current placement that bad? Is the position of NSL (and the Management) that weak und unsecure that they are even unable to arrange the placement at $0.020 (or at least $0.015) to reduce this massive dilution for shareholders? The additional 100m options that should be issued at $0.010 are an impertinence and a proof for the incapability of the Management that signs responsible for actions impacting the investments of shareholders. Every shareholder should vote against the approval of those options and should take action against this funding!

And what would the Management try to say to defend themselves? That they are highly self-invested in this stock? That they were participating in the past capital raisings and in this funding, too, and this should people see as a sign of confidence and safety? At the fair in Munich in last November and the year before Mr. Goode told everyone how much money the Management invested in NSL. But what’s that information worth till now and especially when we reach the number of 605m outstanding shares?

When we take a look back in the past of NSL:

  • News release 15th July 2010: NSL executed a long term cooperation Heads of Agreement with China Metallurgical Mining Corporation (CMMC). CMMC would receive a 10% equity stake in Kuja and Mangal and discounted off-take from Kuja and Mangal in return for US$10 million investment and the commitment to provide up to US$100 million in funding for other projects.
  • Then the timeframe for the Heads of Agreement got extended
  • Per news release of 20th January 2011 NSL emphasizes that “the Company has generated significant interest from a variety of different funding parties. These parties include multiple Chinese State Owned Enterprises, Chinese private investors, Korean Investors and other international investors.“
  • Per news release of 1st March 2011 NSL announced that “the CMMC Heads of Agreement expired on 28 February 2011. The expiration of the HOA is not expected to diminish the ongoing process with CMMC to finalise investment and continue the current good work being conducted on the beneficiation project by CMMC and NSL. In addition to the CMMC process the Company has the ability under the HOA to continue to pursue other sources of funding. The Company has generated significant interest from a variety of different funding parties. These parties include multiple Chinese State Owned Enterprises, Chinese private investors, Korean Investors and other international investors.”
  • After this nothing happened regarding the Heads of Agreement
  • At 15th September 2011 NSL completed $4.3m capital raising
  • Cash at 30th September 2011 was $4.709m
  • At 4th October 2011 NSL announced that the construction phase has commenced on the iron ore beneficiation project under the schedule to initiate first stage commissioning by year’s end and deliver maiden revenues in 1H 2012.
  • Per Quarterly Report of 31st January 2012: “There is a potential for saleable product to be produced during the first quarter commissioning cycle which would generate the first of anticipated wider sales and maiden revenue.”
  • Cash at 31th December 2011 was $3.186m
  • At 30th March 2012 NSL announced that “the Company is aiming at a Phase one initial steady production rate of 200,000 beneficiated tonnes per year and remains on track for revenue from Kurnool in the 1H 2012” + “the Phase 2 wet beneficiation plant process with a capacity of an additional 200,000 tonnes per annum will be brought into operation later in 2012 with completion and first sales contribution in the first half 2013.”
  • Cash at 31th March 2012 was $2.565m
  • At 19th April 2012 NSL announced the production of first saleable beneficiated iron ore. “Currently, 58% Fe iron ore sells domestically at the mine gate for approximately 4500INR/t (approx. US$90/t).”
  • At 18th May 2012 NSL announced first sales and said: “the Company expects a gradual ramp up in production and sales tonnages from now towards the targeted Phase 1 production capacity of 200,00 tonnes per annum in the third quarter. Final commissioning on the dry separation circuit is expected to occur prior to June 30, 2012.”
  • At 31st May 2012 NSL announced the commencement of mining at Mangal
  • At 7th June 2012 NSL announced the “transition of construction based power supply and capabilities to full operating power capability for the ramp up of Phase 1 dry separation circuit production at its Kurnool iron ore plant, is now complete and operational.”
  • At 25th June 2012 NSL announced that “the Company successfully conducted the first complete full load test of NSL’s Kurnool dry separation iron ore plant.”
  • Cash at 30th June 2012 was $1.455m
  • At 12th July 2012 NSL announced that “the Company completed commissioning of the Kurnool dry separation iron ore plant and has commenced the full production phase.” + “NSL has received a number of expressions of interest from local steel mills in regards to off-take agreements for the Kurnool iron ore. Kurnool represents an attractive iron ore supply solution for these steel mills due to its close proximity. The Company is currently negotiating potential agreements.” + “Phase 1 Kurnool iron production is expected to achieve a consistent grade of 54-58% iron. Such ore can be sold ex gate to these domestic steel mills for between INR 3700 – 4900 per tonne, depending on the final grade. Using a six month average exchange rate this represents approximately US$70 – 93 per tonne ex gate (as compared to anticipated steady state cash costs of production of approximately US$18 per tonne).”
  • At 30th July 2012 NSL announced that “the Company has received multiple Purchase Orders directly from domestic steel producers for trial quantities […] of iron ore produced at the Kurnool dry separation iron ore plant.” + “Domestic demand and pricing for iron ore remains strong with NSL continuing to receive numerous approaches from industry players seeking to secure off-take from the Kurnool project.”
  • Cash at 30th September 2012 was $2.959m
  • At 8th August 2012 NSL announced a A$2.5m unsecured Convertible Note from Resources First with an additional marketing agreement for NSL’s iron ore. Mr. Goode said: “This package provides flexible, low cost expansion funding for our early iron ore production period. It will allow NSL to potentially bring forward both the development of Phase 2 at Kurnool, and to fully focus on optimising production rates, as we are now more than fully funded for our requirements into next year.”
  • Per Quarterly Activities Report NSL announced that “the ramp up has been slower than anticipated due, in part, to the monsoon season which has seen consistent sporadic showers impacting the plants operations and output. As a result, production tonnes are much lower than internal forecasts, impacting revenue from operations.”
  • Cash at 31th December 2012 was $1.920m
  • At 25th January 2013 NSL announced the execution of a Heads of Agreement to establish a Joint Venture with Vijay Group. Vijay will pay INR 700,000,000 (approx. US$13.1) for the Joint Venture and will earn a 40% interest at the Joint Venture. Mr. Goode said: “The signing of this HOA with Vijay Group reflects the sector’s recognition of the success and calibre of our approvals and project development pathways in India.”
  • Quarterly Activities Report of 31st January 2013: “Rain continued for the most part, having a major impact on the ability to ramp up the plant and fully establish the limits of its capability. The prolonged monsoon […] finally passed in December, providing access to dry material for processing.” + “ Stockpiling of ROM material for plant feed has been ongoingduring this period, with approximately 40,000 tonnes stockpiled at both Kuja and Mangal for dry and wet plant feed.” + “During the quarter, the Company encountered some unsatisfactory performance levels compared to our stated goals during the beneficiation test programs. These performance concerns revolved around the crushing and screening circuit having continuous breakdowns with poor mechanical reliability, and the dry separations not being able to process the design throughput rates. This obviously impacted NSL’s initial expectations for output rates.” + “ Due to the December quarter delays, NSL has acted to slow its earlier planned development of a Phase 2 wet beneficiation plant, until such time as Phase 1 achieves desired levels of performance consistency.” + “Significant interest has been shown from both large scale Indian companies and offshore steel producers for securing offtake from the plant in Kurnool.”
  • At 13th March 2013 NSL announced that “the Company has formally executed a Joint Venture Agreement. Vijay will pay INR 658,844,636 (approx. US$12.2m in multiple staged, tranches:

On or before April 6th 2013 – INR 50,000,000

On ore before April 29th 2013 – INR 100,000,000

On ore before July 6th 2013 – INR 150,000,000

On ore before October 4th 2013 – remaining balance INR

  • + Mr. Goode said: “The First Trance funds will be immediately utilised in completing the purchase, construction and commissioning of the Phase 2 wet beneficiation plant.”
  • Cash at 31st March 2013 was $0.973m
  • At 15th April 2013 NSL announced that “Vijay have informed the Company that due to unanticipated delays associated with the Indian Financial Year (April to March) close, they have been slightly delayed in making the first tranche JV payment, however committed investments of INR 150,000,000 by April 29th (total/timing of Tranche 1 and 2) from Vijay are forecast to start flowing into the JV, in a staggered manner. The payments will fit within the overall schedule agreed in the recently signed JV agreement.”
  • At 16th April 2013 NSL announced that “the Company has now received into Company’s account a first staggered payment as part of the committed investments, totaling INR 150,000,000 by April 29th (total/timing of Tranche 1 and 2) from the Vijay Group.”
  • At 30th April 2013 NSL announced that “with Vijay requesting, and the Company granting an extension in timing to Vijay on the balance.”
  • Quarterly Activities Report of 30th April 2013 :”During the quarter the Company mined approximately 17,500 tonnes of material from Kuja and Mangal. The Company reduced mining rates to align expenditure on mining during the quarter with the phase one shutdown and expansion project.” + “[…] the Company had approximately 2,500 tonnes of saleable material stockpiled and ready for sale.”
  • At 30th May 2013 NSL announced that “it is envisaged, Vijay as a mining contractor will be fully operational in June, and the arrival of quality mobile equipment and personnel will enable higher Run of Mine (ROM) production and transport rates from the mine(s) to the stockyard for processing.”
  • At 21st June 2013 NSL announced that “the Vijay Group has begun full time mining at the Company’s Mangal mine and stockpiling Run of Mine (ROM) at the Kurnool plant. In order to maximize production from the plant, plant operations will be suspended for an estimated 30 days until such time an appropriate stockpile has been built up to facilitate full time running to maximise throughput and output rates.” + “No further funds have since been received under the JVA. While the Company believes funds will be paid, the Company is investigating alternative funding solutions.”
  • Cash at 30th June 2013 was $0.474m
  • At 3rd July 2013 NSL announced a capital raising (23.010m shares @ $0.02 for $460,200 + 23.010m options @ $0.04)
  • At 26th July 2013 NSL announced that “due to Vijay’s failure to provide the agreed upon funding, NSL has today served on Vijay (Defaulting Party) a notice of breach in accordance with the JVA. In accordance with the JVA, the Defaulting Party must remedy a breach within 15 days of notice of the breach, to the satisfaction of the Non Defaulting Party.”
  • Quaterly Activities Report of 31st July 2013: “Vijay commenced full time mining operations at Mangal at the end of the quarter.” + “The Company continues to progress several other opportunities for alternate Project financing and/or joint venture farm-in structured agreements in India and Australia. These opportunities remain ongoing.” + “During the quarter the Company implemented cost reduction programmes in both India and Australia. This included a reduction in overhead costs relating to the number of employees and associated salaries of remaining employees, in conjunction with reducing monthly operating expenses. Australian based Directors and employees have agreed to either forgo or defer between 40-50% of their fees and salaries.”
  • At 12th August 2013 NSL -announced that “if the breach is not remedied to the satisfaction of the Company, the Company may terminate the JVA forthwith. In addition the Company is in active and progressed discussions with multiple other parties to replace Vijay in the JV.”
  • At 30th August 2013 NSL said the same as above and added that “under the commitments of the JVA, Vijay equipment and personnel remain on site. Mining operations are currently on hold due to equipment breakdowns.”
  • At 3rd October 2013 NSL announced that “Vijay has advised the Company they expect to transfer some funds in the near term. Mining continued until excavator breakdowns in August. Mining has not yet recommenced to date. The Company has progressed discussions with various other parties to replace Vijay in the JV. These parties are currently engaged in further discussions and conducting due diligence. The parties range from Indian high net worth individuals and companies to multinational companies.”
  • Then the announcement of the 102m share placement was announced.

Here is an overview from the Quarterly Cashflow Reports:

The Company had expenses in 2013 of $1.953m, the biggest part was “employee benefits” with $1.374m wherein Management costs of $990,580 are included. So, the question is: Where is all the money going to? Where are the “robust economics” of the iron ore project? Where are the revenues since the announcement of “first sales” in May 2012? Where are the predicted $800,000 of cashflow per month with a payback period of 2-3 month? The monsoon should be responsible that we should have much trouble? Does the Management forgot the climate factor by doing their due diligence and planning for the Indian iron ore project? One hint: The monsoon will come each year! And if NSL is in the Joint Venture with Vijay where Vijay will earn a 40% share, NSL would share the revenues AND the costs of the iron ore projects. If NSL can’t stand 60% of the costs, how profitable should the project be (especially if NSL would have tried to mine it alone without JV-partner)?

NSL announced that “Australian based Directors and employees have agreed to either forgo or defer between 40-50% of their fees and salaries” and I demand that the salaries of the Management that is responsible for this very bad situation and development of NSL cuts their salaries by 40-50% till NSL will reach a steady production rate of 400,000 tonnes per year (completed Phase 2 expansion with steady production and sales rate over a few month)!

In the Financial Report for the year ended 30th June 2013 it is stated:

2. Financial Risk Management C) Liquidity Risk: “As at reporting date the Group had sufficient cash reserves to meet its requirements.”

So we shouldn’t have a liquidity problem?!

The Management is still thinking that the JV with Vijay will work and hasn’t canceled it. But is it justifiable to bleed out the shareholders with such a dilutive placement under the background of this bad development (delays, mechanical problems, … in production)? Why wasn’t the Management more foresightful the last month and secured funding at a much higher share price? The funds of this placement won’t last more than 3-4 month (depending on NSLs outstanding bills before the placement). And what if Vijay won’t pay something in the next 3-4 month? Will NSL be in the same situation as two weeks ago? Will NSL then dilute even more than now? The Management lacks credibility and resoluteness if they only threaten Vijay multiple times to end the JV but do not do it. The Management should have end the JV several months ago!

This document will be published in the internet for other shareholders and/or interested people!

Kind regards,

a group of disappointed shareholders

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