Baja Mining clings to life

Nearly two months after Baja Mining (BAJ-T, BAJFF-O) initially disclosed cost overruns of US$246 million at its Boleo copper-cobalt-zinc project in Baja California Sur, Mexico, one of the company’s largest shareholders, Louis Dreyfus Commodities Metals Suisse, has launched litigation in the Supreme Court of British Columbia.

Louis Dreyfus is seeking an independent investigation of the cost overruns and Baja’s timing in disclosing them, as well as the removal of officers and directors who may have been responsible. Vancouver-based Baja said it intends to “vigorously” defend the action. News of the lawsuit followed the company’s request in late May for arbitration with the London Court of International Arbitration over a financing deal with Baja Mining.

The financing deal dates to June 2010, when Baja and Louis Dreyfus signed a letter of intent under which the latter agreed to provide a US$35-million letter of credit to satisfy Baja’s equity cost overrun requirement for its project finance package, and committed to offtake agreements that would see it purchase, on commercial terms, 70% of Boleo’s annual copper and cobalt production for a 10-year term from the start of production.

The privately held French group with interests in bulk agricultural commodities, telecommunications, shipping and real estate also agreed under the letter of intent to subscribe for common shares of Baja in a proposed future financing, and made good on that commitment in November 2010 when it acquired 36 million of Baja’s common shares at a price of $1.10 apiece.

“The letter of credit was to be the last increment of an overrun facility that would be used if and when required,” Tom Ogryzlo, Baja’s interim CEO, explained in a telephone interview. “I think they have concerns at this point in time, with the current cost overruns, [that] we would be able to use that US$35 million.”

But Ogryzlo — a director at Baja who took the helm of the company after John Greenslade resigned on May 14 — added that the junior couldn’t consider accessing the US$35-million letter of credit until it has the other financing it needs to continue the project.    

Baja announced on June 20 that it had funded a US$21-million cash call to shareholders that will let it continue its critical-path activities, including work on the project’s copper circuits. It also obtained a 45-day standstill agreement from lenders.

“It’s all part of the same process,” Ogryzlo explained. “We didn’t want to proceed [with the cash call] if the banks didn’t agree to a standstill agreement.”

The cash call “is coming out from cash we had in our treasury and the Koreans’ continued support of the project,” Ogryzlo added. A consortium of Korean industrial companies owns 30% of the Boleo project and Baja owns the remainder.

When asked whether the Korean consortium might be interested in upping its stake in the project, Ogryzlo confirmed that the question had been brought up, but that everyone was waiting for an engineering report on the project that is being conducted by SRK Consulting. “Potential investors and others are going to be extremely interested in the conclusions of that report, and the Koreans are certainly one of them,” he said.

Speaking at the company’s annual general meeting (AGM) on June 21, Baja chairman Lorie Waisberg took a less optimistic note on the possibility of the Koreans increasing their stake. “The fact of the matter is they’re not mining operators,” Waisberg said. “They want access to the metals. They see themselves more as investors.”

Ogryzlo noted that Baja has signed a number of confidentiality agreements, and said that “you never can tell whether people are just kicking the tires, or how serious they are, but some of them seem genuinely interested.”

He also confirmed that Baja has engaged BMO Capital Markets to look into funding solutions, and believes recommendations should be forthcoming by early July. “There’s no way we could have a deal in place by that time, but we could have a good, strong memorandum of understanding to serve as a basis for bridge financing in the interim,” he speculates.

When asked if he would consider taking on the job of CEO at Baja permanently, Ogryzlo said no. “I’ve got a limited shelf life,” he replied. “A few months are okay, but I really have other things I need to do.”

Financing for the Boleo project was based on a projected go-forward funding requirement in 2010 of US$1.143 billion. The funding shortfall of US$246 million was estimated after considering existing cost-overrun facilities of US$100 million and approximate cost contingencies of US$54 million, suggesting a total estimated cost overrun closer to US$400 million.

Now facing project delays, the company said at its AGM that it estimates the total cost will increase by another US$50 million to US$150 million because of extra financing costs, deferral costs and general cost escalations. Overall, the project could cost upwards of US$1.72 billion.

The SRK report, which is due in a couple weeks, will give potential investors a better grasp on the total capital costs, but the numbers won’t be public until the SRK report is National Instrument 43-101 compliant. The process will likely take months, and only those who have signed non-disclosure agreements will be allowed to view the report in the meantime.

The company also expects operating costs to go up, but does not yet know by how much.

“We don’t have a good handle on what the operating cost number will be,” Waisberg said at the AGM. “But we’re confident it’s going to be more than the original estimation.”

The project had been scheduled for copper commissioning in 2012, with copper production in the first half of 2013.
Boleo has an estimated mine life of 23 years, and during its first six years of production was forecast to produce 125 million lb. copper annually at a copper grade of above 2%, along with 3.7 million lb. cobalt and 55.8 million lb. zinc sulphide.

The company is, however, deferring building the cobalt and zinc circuits to delay spending US$85 million and allow the already stretched team to focus on getting the copper operation running as fast as possible.

As to other legal issues facing Baja, Baja stated that it did not fire Kendra Low, the daughter of former Baja CEO Greenslade, as she claims in a wrongful-dismissal suit. Baja said that she quit, and that the company offered her the opportunity to return to work more than once.

On the question of whether the company would pursue legal action against Greenslade, Waisberg said it was not a priority for the company.

“I joined the board on May 7, and since that time myself and my colleagues have been working very hard trying to save the company. We don’t believe that it’s a fruitful use of our resources to be looking behind us, because we have a finite window to get through here, and so we haven’t spent a lot of time on that question. But I can say that nothing we have seen thus far suggests we have any claim against him.”

At presstime Baja traded at 21¢ within a 52-week trading range of 15¢–$1.28 per share. The company has 340 million shares outstanding.

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