Augen Capital vs. Augen Gold

As Augen Gold (GLD-V) shareholders get set to vote on who will guide the junior explorer into the future, investors can be forgiven if the whole matter seems a little more than confusing.

Part of what makes the situation complicated is that one of the key dissidents, Peter Chodos, is president and chief executive of Augen Capital (AUG-V) – a merchant bank that not only founded Augen Gold, but was itself founded by the very man that the dissidents seek to remove from Augen Gold, its current chief executive, David Mason.

Mason lost both his position as chief executive and as a director of Augen Capital earlier this year, although he contests his removal.

The fight between Augen Gold management and dissidents associated with Augen Capital began to grab headlines in the summer when Augen Gold’s incumbent board postponed a shareholder meeting at which the dissident’s proposed removal of Augen Gold’s board was to be voted on.

Chodos is confident that the dissidents had the votes to win, and believes that to be the motivation for Augen Gold’s postponement. For his part, Mason says the decision to postpone had to do with his desire to save shareholders from legal fees that would have ensued from such a vote.

Both sides say they are confident they will win this time around – the date of this shareholder’s meeting was set by a judge after the postponement of the last, so ostensibly at least, its date should hold up.

Chodos is banking on the fact that the companies affiliated with the two leading dissidents – Augen Capital and Envoy Capital – control 19.1% of Augen Gold shares, while Augen Gold management only controls 1.75% of the company.

Some of the key points the dissidents raise in favour of their proposal to remove the incumbent board are Augen Gold’s inability to have a compliant resource completed on its flagship property; its mishandling of its Canadian Exploration Expense (CEE) in connection to flow through shares, and a high turnover of directors and officers.

The dissidents believe their slate of directors, which includes Stephen Johnson, Hugh Aird and Judith Baker along with Chodos, will do a better job of guiding Augen Gold’s Jerome Gold Mine exploration project to a fuller market valuation.

“We want to get a NI 43-101 compliant resource as soon as practically possible,” Chodos says. “Right now the market is relying on a conceptual geological model and while we think the project should be worth more than the market says, the market won’t pay if it doesn’t have a compliant resource to base its valuation on.”

On the other side of argument sits David Mason. While Mason agrees with Chodos that Augen Gold is grossly undervalued and that the company messed up in its handling of the CEE issue, he disagrees with the blame being laid at his feet.

“I came back as chief executive at the end of December 2008 and helped to raise $16 million in total for exploration,” Mason says. “There have been a lot of problems to solve since that time. The dissidents put the CEE problem on me but that’s not true….the problem occurred with other people and I’ve been solving it since coming back.”

The problem with the CEE stems from the fact that Augen Gold wanted to have drill results as it went into its IPO.

To do so, however, it had to spend capital on a drill program before flow through shares were issued, meaning that the expenditures didn’t qualify as a CEE. Since that spending didn’t qualify, the company had to come up with another $3.3 million in exploration expenditures otherwise flow through share holders would not qualify for tax breaks.

To an extent, that is what happened and Augen Gold had to pay roughly $800,000 in taxes and indemnifications to shareholders as a result.

Mason points out, however, that Augen Gold managed to raise $4.5 million in May of this year through a private placement which included flow through shares, and as a consequence was able to meet a CEE deadline at the end of June allowing flow through shareholders to get a write-off.

While Chodos and Mason, dissidents and incumbents, continue to argue about who is to blame for the company’s dramatic drop in market value – the company’s shares entered the secondary market in June of 2008 at $1.05 but fell quickly from there and closed in Toronto on Sept. 16, 2010 at 18¢ – what is perhaps most interesting about the case is where the dissidents came from.

Chodos was only able to become president and chief executive of the company that Mason founded by way of an agreement signed by Augen Capital (while Mason was still at the helm) with Integrated Asset Management Corp. (IAM), a large alternative asset management company.

A deal was made back in on March 1 of 2009 that saw Orereserve Asset Management (a subsidiary of IAM) come in to manage Augen Capital’s business.

Mason was given a 26% stake in the new managing entity and was held on as president and chief executive. At the time, Mason was quoted as saying, “we expect the management agreement to help Augen Capital contain its overhead costs and allow us to focus on building our core merchant banking business.”

Augen agreed to pay AIM a manager fee of $1.1 million per year and bring AIM’s chief executive, Victor Koloshuk on to its board.

But the relationship between Mason and the new managers soured when a loan facility for Augen Gold was proposed by the incoming group.

The dissidents contend that Augen Capital, now under the new management regime, provided a loan facility of up to $1.1 million to Augen Gold so that it could meet its CEE requirements. Augen Gold, under Mason’s stewardship, only drew down $300,000 from the facility and as a result, according to the dissidents, had to pay penalties for not meeting CEE deadlines.

In its dissident’s circular, the dissidents point out that if Augen Gold drew down more than $500,000 from the facility, Augen Capital would have the right to put two nominees on Augen’s Gold board. By taking just $300,000 Augen Gold only had to put one Augen Capital nominee on its board.