Breaking up the board

Genco Resources’ (GGC-T, GNCC-O) largest shareholder and former director wants to overthrow three of seven company directors in a proxy vote on June 26, claiming that they are overpaid and putting their own interests ahead of the company’s.

James Anderson, who along with his wife Karen, holds 12.2% of Genco shares, has begun a proxy solicitation process to replace Genco chairman Robert Gardner and directors Gordon Blankstein and Brian Smith. All three are longtime Vancouver business partners, and it was Gardner and Blankstein that first brought Genco’s La Guitarra silver mine to the company.

To alert shareholders of his concerns about the company and his plan of action, Anderson has created the website www.savegenco.com.

Genco has responded on its own website, www.gencoresources.com, with a new opening page featuring a red stop sign with a message stating: “Stop James Anderson from taking control of your company without paying for your shares,” that links to a PDF file of the company’s side of the argument.

It didn’t take long for Anderson to put out another letter to share- holders negating Genco’s defence.

Genco operates La Guitarra, in Mexico, which Blankstein says now operates at 250 tonnes per day with the potential to reach 340 tonnes per day. The company is currently working towards a feasibility study and plans to expand operations to 3,000 tonnes per day to produce about 6 million oz. of silver, plus gold, by 2010.

Anderson believes Genco’s stock is performing below its true potential; it is currently trading at around $1.70 per share with a 52-week rolling high of $4.70.

The board replacements would be: Anderson; a lawyer from Sioux Falls, S. D., who first invested in Genco in 2005 and was an independent director between July 2007 and May 2008; and two of Anderson’s colleagues, a banker and an oil and gas geologist who owns two companies.

Haywood Securities analyst, Andrew Kaip, says Anderson’s concerns have merit but he doesn’t think the new board members would be the best thing for the company’s expansion plans due to their lack of technical knowledge.

“The potential board revisions could jeopardize the company’s transformation through attrition of key development personnel and further erode shareholder value,” Kaip wrote in a June 12 report.

Comparatively, Gardner is a former lawyer, Blankstein was in the telecommunications business and Smith held posts as Attorney General of British Columbia, chair of BCHydro and Canadian National Railway.

Anderson says that both Gardner and Blankstein are grossly overpaid with performance-based bonuses that were determined when they headed the compensation committee with one other director in 2006. Anderson first realized what they were earning in May 2007.

Genco has two consulting contracts with Gardner and Blankstein under which each receive a base pay of US$144,000 per year, plus 2% of Genco’s annual net income and a performance bonus of up to US$250,000 per year; the performance bonuses have not yet been paid for 2006 or 2007.

“The reason we haven’t taken the bonus is because we needed the cash in the company for the past two years,” Gardner explains. “They’re accrued; they’ve been approved by board, (they are) in all financial statements.”

In addition, both would receive a merger bonus of 1.5% of the increased market capitalization from Oct. 1, 2006 to the date of any such (hypothetical) merger — more than $1 million at today’s stock price.

Genco isn’t exactly rolling in dough, although technically it’s still in a development phase. Revenue in 2007 was $6.2 million with an operating profit of $132,618 when the company produced 304,000 oz. silver and about 5,000 oz. gold.

Anderson says he was shocked when he saw those figures.

“I became disturbed at that point. I thought it was too much, I couldn’t see how it was arrived at,” Anderson says.

Blankstein says he and Gardner are not overcompensated for their work.

“We are on a compensation plan that pays us a smaller salary but if we’re successful, we get paid more,” he says.

According to Blankstein, the packages are in line with compensation of companies of similar size.

But analyst Kaip, of Haywood Securities, agrees with Anderson.

“Mr. Anderson has unmasked a trend within the junior mining sector of excessive compensation,” Kaip wrote in his report. He referred to a June 4 report in the Vancouver Sun on B. C.’s top paid executives that showed miners were well represented.

By August last year, Anderson joined the board as an independent director hoping to make a difference in the company. In addition to compensation, he was concerned that Genco had not yet reached full capacity of 340 tonnes per day at La Guitarra.

Anderson says the mine is operating without an official plan and he wonders whether the mine will be able to run successfully at 3,000 tonnes per day — let alone eventually ramp up to 5,000. If elected back on the board, he would hire an independent mining consultant to help get mine operations up to speed.

Blankstein says the company is not operating without a plan, emphasizing that the true focus is the expansion. Genco has completed 75,000 metres of drilling over the last two years and will be using the information for an upcoming feasibility study. He says the company has kept the mine running to create employment for the community.

Blankstein calls Anderson opportunistic and says he is trying to take control of the project for his own interests.

“Asset stripping is quite common and people tend to try to do asset stripping when things are quite successful,” he says.

There’s a lot of silver at stake. Since acquiring the mine in 2003, Genco has increased proven and probable reserves to 6.5 million silver-equivalent oz. from 1.6 million oz. Inferred mineral resources have grown to 143.3 million silverequivalent oz. from 44.7 million oz., and the company has also defined a measured and indicated resource of 4.2 million silver-equivalent oz.

Conflicts of interest is another one of Anderson’s concerns — in particular a US$4.9-million transaction in March this year, whereby Genco bought control of a Utahbased mining company, Chief Consolidated Mining, with the intention of flipping it to Vancouver-based Andover Ventures (AOX-V, AOVTF-O) for about the same amount, plus 1.5 million shares and a 6% net profit interest on all metals produced from certain deposits (or another 1.5 million shares).

Blankstein, Gardner and Smith sit on Andover’s board and are significant shareholders. Another Andover director, Brian Mountford, worked as an independent mining consultant for Chief over the last two years, and was involved in the assessment of the assets.

Blankstein insists that the company didn’t do anything illegal — it had the independent directors, including Anderson, negotiate the final deal.

Anderson disagrees, calling the transaction odd and distracting: “I was kind of uncomfortable with the whole thing because it was conflicted.”

It was the way the transaction happened, Anderson says, that got to him. He says the independent board members were kept in the dark, learning from a press release that Genco and Andover were in talks to sell Chief stock.

“This was before, I, as an independent director, was notified of any meeting,” he says.

“I began calling Gardner repeatedly to get the story — when are we going to meet? I couldn’t get a return call.”

Anderson says Blankstein signed a nondisclosure agreement that forced Genco to sell Chief to Andover — without any authority.

This was the final straw for Anderson. He decided withdrawing from the board was the best way to address the long list of problems. In addition to the proxy vote, Anderson has filed a complaint with the Toronto Stock Exchange and the British Columbia Securities Commission regarding contract back
dating and disclosure matters.

Blankstein has been accused of putting himself ahead of shareholders before. A decade ago, he was named in a class action suit for depriving GST Telecommunications, which he chaired, of a business deal worth more than US$200 million. The claim alleged that Blankstein transferred the deal to a shell corporation he controlled called Global GST Telecommunications, later Global Light Telecommunications, without compensating GST. The judge threw out the claim, ruling that there were no facts to substantiate a claim against the individual directors.

On the other hand, Blankstein, Gardner and Smith lost a lot of cash in the Getty Copper (GTC-V, GTCDF-O) fiasco, when the resource at the company’s Getty South project, in B. C., turned out to be substantially lower than the company had claimed. Blankstein was an investor and promoter and Smith and Gardner were directors. Gardner gave RCMP investigators documents from a questionable business transaction completed by then-president and chairman, John Lepinski, and both eventually asked him to resign and bring in a law firm to investigate Getty.