Accusations fly in Mosquito Consolidated boardroom scuffle

Weeks of mounting tension between opposing factions of the board of Mosquito Consolidated Gold Mines (MSQ-V) came to the fore at the company’s annual general meeting on Dec. 16, as shareholders finally had their say in the matter. 

In one corner stood Brian McClay, who has served as president and CEO of Mosquito for some 17 years, along with a proposed slate of seven new and returning directors. In the other stood Shaun Dykes, who has been with the company since 1994 and has served as a director and exploration manager, Hongxue Fu – absent from the meeting but who was, until two days before the meeting, chairman of the board with 16.2% of Mosquito’s outstanding shares – and three other proposed directors.

The two sides fought over directorial control of the valuable, undeveloped Cumo molybdenum project in Idaho. According to a 2009 preliminary economic assessment, Cumo has a pre-tax net present value of US$16 billion and a 36% internal rate of return, based on a 136,000-tonne-per-day operation, a 5% discount rate and US$16 per lb. molybdenum.

On the day of the voting the dissenting directors’ lawyer raised several objections, including to Merrill McPeak chairing the meeting two days after being appointed as chairman, the use of the proprietary televote system for a contested vote and the fact that the Georgeson proxy solicitation firm used by the incumbents is a subsidiary of Computershare, the voting scrutineer at the meeting. The voting, however, went ahead unmodified, as did the meeting, chaired by McPeak.

After a lengthy wait while the votes were counted, the verdict finally revealed McClay and his seven supporting nominations, including McPeak, Paul Kessler, William Jefferies, Patrick Bronson, Wayne Ash, Matt Ball and David Voyticky, who were elected to the new board.

“Shareholders have spoken, period,” McClay said shortly after the results were announced, adding that the new board has a lot of work to do as the company makes a major transition from exploration to mine development.

Indeed, it was that pending transition that helped start the boardroom infighting and ensuing public press-release battle. For years environmental lawsuits, the scale of the project and complicated permitting had delayed the advancement of Cumo. It was only in August that the company was finally awarded the drill and road permits it needed to advance the project – four years after it first applied for them.

With the permits in place, and the ramp-up of the project ready to go, Fu and Dykes rose concerns about spending and how best to move the US$2.6-billion project forward. The internal rifts eventually led McClay’s side to not nominate the two for next year’s board.

“There was a difference of opinion, a difference of approach to development of the project,” McClay said in a phone interview. “We thought it was very unsustainable moving forward.”

On Dec. 7 the “concerned shareholder group” led by Fu and Dykes put forth their own board slate, as well as the first salvo in the public opinion war. The group laid out a host of objections to McClay’s management, but concentrated on their contention that money has been diverted away from Cumo to the in-house drill company Kirkness Diamond Drilling, led by McClay’s son.

“The most damning thing in the whole thing is that basically shareholders expect the money raised to be spent on Cumo, on our flagship project,” Dykes said in a phone interview. “This year the money was clearly not spent on Cumo, it was spent on the diamond drill company.”

McClay, meanwhile, argues that spending on the drilling company is part of spending on Cumo, as Kirkness does Mosquito’s drilling on the project.

“The drilling company is Mosquito, Mosquito is the drilling company,” McClay says.

The two sides put out varying financial numbers to defend their side of the case, with significant discrepancies between the two. The statistical arguments ranged from the dissenting shareholders saying almost 66% of money raised over 15 months ending in June went to the drilling company and only 17.4% to Cumo, to McClay stating that over the same time period 110% of money raised went to Cumo.

McClay says there are no discrepancies in the spending and that “the financials are very clear,” but Dykes argues that since Mosquito’s and Kirkness’ balance sheets are consolidated, the financials don’t show the true picture, and that there should at least be separate financial breakdowns for the two. 

“They pick and choose what expenses are actually drill costs,” Dykes says, “and then the rest gets kind of merged into the expenses in one big pile. That’s why the financials don’t reflect what’s going on.”

Beyond actual budgeting, Dykes was upset that Kirkness was drilling for other companies, including in Mexico, while drill pads were available on patented land at Cumo.

“At the end of the day, we had the holes, we could have drilled, but the drills were taken off to drill for all these other companies,” Dykes says.

The dissenting shareholders proposed to sell off the drilling company and pour all resources into Cumo, but McClay says the reason the company acquired the drills in 2007 was because they couldn’t get rigs otherwise.

“It’s almost impossible to go hire a drill in the summer in the United States,” McClay says, adding that the drilling around Cumo is very technical and multiple contractors have not wanted to come back.

“In order to accomplish what we want to accomplish, you’ve got to put a lot of holes in the ground. And this is the tool to do it,” McClay says.

With tensions high and the deadline approaching both sides brought up complaints of varying importance, including: Fu’s apparent inability to speak English; the company’s purchase of a $215,000 plane with even the purchase price debated; whether a van with executive seating should be considered a limo; how many of the drilling company’s trucks are pick-ups; how many of them work; and how many trucks a drilling company could reasonably own.

Fundamentally, though, Dykes questions McClay’s and the rest of management’s ability to lead the company as it transitions to the next stage.

“All the analysts, they always say the same thing: ‘Cumo – fantastic project, no management,'” Dykes says. “And that’s the bottom line, and that’s what I ask shareholders: ‘Would you give those guys over there one hundred million dollars? Or even two-and-a-half billion dollars?'”

Dykes says he wasn’t surprised with the vote’s outcome, and that he’d be meeting with the other dissenting shareholders to consider options, including possibly going to court. He again expresses his concern over the composition of the new board.

“I don’t think they’ve got the expertise up there that can take this project to where it’s supposed to be,” Dykes says. “I don’t see any mining experience of any form up there.”

Dykes also doesn’t think the new board, which is already in the midst of reviewing the serious allegations he brought fourth, would let McClay stay on for long.

“I don’t think they can let Brian get away with what he’s been doing,” Dykes says.

McClay, however, might decide his own future as the company moves forward.

McClay speaks of big transitions following the vote, and of the company moving to prefeasibility and feasibility stages that require different capabilities and technical expertise. He maintains that his role in the future is not decided. When asked directly if he wants to remain head of the company, McClay answers that “No – I want to retire.”

Ultimately, what both sides want to see happen, and what the dissenting shareholders maintain is their primary goal, is for the company’s languishing share price to improve. Mosquito’s shares have gone from around $1.20 in February to 54¢ when the dissenting group made their proposal in early December, which shareholders have a hard time equating with the company’s “US$16-billion” asset. Everyone, therefore, ca
n be at least a little pleased, as the company’s share price climbed 10¢, or 22%, to 55¢ on the day.