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Dawney & Co Posts Letter To Top Hillgrove Resources Ltd Shareholders

2016-05-04 07:00
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-- Highlights Board Underperformance
-- Raises Questions For Shareholder Consideration
-- Announces the Nomination of Dawney & Co Founder and Managing Director Mitch Dawney for Hillgrove Directorship

BRISBANE, Australia, May 4, 2016 /PRNewswire/ --

The letter was as follows:

DAWNEY & CO PTY LTD
A.C.N. 168 708 503

3 May 2016

RE: HILLGROVE RESOURCES

Fellow Remaining Shareholders,

You may recall my attendance at our Annual General Meeting (AGM) last year where I repeatedly asked for cash flow figures and for Board and financier cash flow models to be released to the market so we could make an informed decision about the viability of Kanmantoo. This was refused.

By background, I am a stockbroker and private investor. Through personal entities, I have been a shareholder of Hillgrove Resources since 2013. Like all of you, I have watched my investment almost disappear. Other shareholders have jumped ship, driving the share price to new lows. There are many reasons our shares now trade at concerning levels. The most critical being that the Board failed to meet key cash flow and operational targets and mistimed and underestimated capital expenditure. These mistakes are unacceptable because frankly, the Directors only had one job to do: oversee the successful operation of our Kanmantoo project. Hillgrove is not a diversified miner stretched across jurisdictions, currencies and commodities where a Board may be forgiven for neglecting a lesser asset. Now, as a direct result of mismanagement, our company is in dire straits and we are paying the price.

The 31 March 2016 announcement to change the mining plan AGAIN is the final straw. At the time of writing, our company's market capitalisation is a miserable $8 million. Putting this in perspective, $10 million was raised through the 3 for 11 rights issue in May last year. At that time, we were told considerable value remains in the project as is (with exploration upside) and the primary focus was "returning value to shareholders". The change of mine plan announcement is virtually identical, but with further substantial delays in cash flow available for distribution. Hillgrove's auditor Deloitte Touche Tohmatsu made this disturbing comment about our company in their FY15 report: "These conditions, along with other matters as set forth in Note 1(a)(i), indicate the existence of material uncertainties which cast significant doubt about the ability of the company and the consolidated entity to continue as going concerns and whether they will realise their assets and discharge their liabilities in the normal course of business".

Thoughts to consider:

  1. The Chairman's letter in last year's rights offer document stated: "The total financing package will also ensure an adequate buffer is available as we advance the Giant Pit cutback to access higher grade ore". We now know the capital raised was not enough. Who was responsible for calculating the adequate buffer?
  2. The change of mine plan announcement admits "the anticipated near term production levels coupled with the need to continue the pre-strip and cut-back of the Giant pit are likely to result in a cash shortfall in 2016 and 2017 at current performance levels and commodity prices". According to the FY15 annual report 8,479 tonnes of copper hedging matures in less than 12 months and 7,997 tonnes matures between 1-2 years. If a cash shortfall occurs during a period of favourable hedging, what happens when over 50% matures in less than 12 months? How does our company fare in an unhedged, sustained low copper price environment?
  3. The change of mine plan announcement also mentions "Hillgrove has begun discussions with key stakeholders including employees, major contractors, suppliers and service providers, financiers and the South Australian Government" and that "pre-emptive action [is] being taken". Considering the company breached financial covenants, I would say the action being taken is more reactive than pre-emptive. The change of mine plan update on 15 April 2016 says "senior management has carried out discussions with all key stakeholder groups and it has received strong support for the project and the stakeholder response has been very positive". However, to cover all bases, lets assume this new undertaking proves to be as overly optimistic as the rights documentation and stakeholders cannot deliver sufficient cost reductions. How will the Board proceed? Will we be asked to participate in another rights issue, be heavily diluted, take on additional debt or forfeit the asset to our financier?
    Equally worth noting is that Directors' salaries increased year on year. Clearly, the "fee reduction" in December was again, a reaction, after realising there are fundamental problems at the company.
  4. Despite a series of blunders, the Board decided it would not make any change to the carrying value of the asset. In what theory can free cash flow be postponed and not impact the net present value?

Hillgrove now represents a small part of my investment portfolio and I have mentally prepared for it to go to zero. Nevertheless, while we still have a fighting chance, I am committed to pursuing the best possible outcome for shareholders. Given the remuneration report was voted down at the 28 May 2015 AGM, it is likely that the Board will be spilled at the upcoming AGM on 26 May 2016. As we were refused important financial information last year, my intention is to become a Director to obtain this and be briefed on all issues facing our company. I am a stark supporter of shareholder interests and value preservation and will do everything I can to avoid total loss. If you are as frustrated as I am, I ask that you vote as follows:

  • AGAINST Resolution 1 -- To Adopt the Remuneration Report
  • FOR Resolution 3 to elect me, Mitchell David Dawney as a Hillgrove Director
  • FOR Resolution 7 -- Spill Resolution
  • If the spill resolution passes, I support the re-election of Mr Maurice Loomes at the subsequent Spill Meeting (to be held within 90 days of the AGM).

I welcome all enquiries.

Regards,

Mitch Dawney
Managing Director
Dawney & Co Pty Ltd
mdd@dawneyco.com.au
Twitter: @MitchDawney

Source: Dawney & Co Pty Ltd

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