Boleo cost increase triggers Baja share sell-off

VANCOUVER — Markets have recently demonstrated that when cost optics or feasibilities suddenly shift on an advance-stage mining project, the company in question will inevitably face investor-driven wrath. So the story goes for Vancouver-based developer Baja Mining (BAJ-T) and its copper-cobalt-zinc Boleo project outside of Santa Rosalia, Mexico.

Baja announced a 22% increase in project funding requirements on April 23 — totalling US$246 million the company does not have — triggering a sell-off that saw shares tumble 37% to a 57¢ close on an aggressive 6.7-million unit trade volume.  

Baja owns 70% of the Boleo project, under subsidiary Minera y Metalurgica del Boleo, in a partnership with a Korean industrial consortium. The partners had jointly raised US$1.2 billion in estimated capital required to fund mine development; a number established in a definitive feasibility study filed in March 2010.

According to company reports the cost increase is associated with “a variety of pressures including change of scope, design improvements, and price increases in key consumables such as steel and fuel.”

Three of Baja’s board members announced resignations in conjunction with the news, including: Graham Thody, Tom Ogryzio and Wolf Seidler. Baja’s board now stands at just three members, two of which are independent and a third being John Greenslade, the company’s president and chief executive officer.

To complicate matters the capital expenditure increase comes at a time when Baja is staving off allegations of nepotism and mismanagement from institutional shareholder Mount Kellett Capital, which holds 19.9% of Baja’s outstanding shares.

Mount Kellett initiated a proxy contest late last year in an attempt to have its managing director Stephen Lehner named to Baja’s board of directors,

“Based on the evidence of problematic governance practices in the recent past,” wrote Mount Kellett’s chief operating officer Jonathan Fiorello in a letter to shareholders preceding the vote, “including exorbitant equity grants to directors, the dissident has made a compelling case that change is warranted at the board level.”

Since the spat first hit the boardroom, Baja has accused Mount Kellett of insidious actions aimed at usurping company control,

“Mount Kellett launched this proxy contest after the Board rebuffed its secret attempts to obtain special status and control,” wrote Baja’s independent chair Giles Baynham in a competing note to shareholders. “Mount Kellett, according to the dissident circular, sees the potential for a five-fold increase in the value of Baja over the next eighteen months. It wants to capture as much of that gain as it can.”

Baja won the proxy vote by what was described as a “narrow margin” on April 3, thereby retaining its position. One of Mount Kellett’s reported targets, Gerald Prosalendis, announced his resignation from Baja’s board shortly after the proxy vote, raising the tally of lost directors to four in just over two weeks.

It is still unclear how the funding shortfall will be covered — Boleo’s existing debt agreements stipulate that Baja and its joint-venture partners must cover any increase in required capital. The company has been in negotiations with potential off-take suitors regarding the project’s manganese credits, and drew down an additional US$80 million worth of credit in late March, bringing total senior and subordinated debt facilities to US$823 million.  

According to a project update in late March, Boleo’s process plant and site infrastructure continue as scheduled, with roughly 37% of project development complete. Baja also reported completion of 92% of its engineering activities at the site, and 84% of necessary procurement measures. The project remains scheduled for production during the first half of 2013.

Baja’s feasibility study on the project in 2010 established an after-tax net present value of US$1.3 billion at an 8% discount rate with a 26% internal rate of return under the original US$1.2 billion capex figure.