I hope that I’m not talking out of school but here goes:
The Subsoil and Subsoil Use Act (the "Act") in Kazakhstan grants the Government of Kazakhstan the first ‘right of refusal’ to purchase any direct or indirect interest in any proposed financing and, as it turned out, in making up its mind, this process took roughly eighteen months (until September 13th, 2012) as ‘the Government’ decided whether or not it would waive its pre-emptive right to participate in anticipated future financings; and, as I understand it, the reason it took so inordinately long was that as many as a dozen Kazakhstan Governmental Administrative Agencies were involved in one way or another in deciding the ultimate outcome, some of whom were very much in favor of being a major investor and solidly in support of government involvement in developing Uzboy; with participants besides MINT (Kazakhstan's Ministry of Industry and New Technology) including the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan; the Ministry of Internal Affairs of the Republic of Kazakhstan; the Ministry of Environment Protection of the Republic of Kazakhstan; the Ministry of Labor and Social Protection of the Republic of Kazakhstan; the Ministry of Finance of the Republic of Kazakhstan; the Ministry of Economic Development and Trade of the Republic of Kazakhstan; the Agency on Regulation of Natural Monopolies of the Republic of Kazakhstan; the Agency for Protection of Competition of the Republic of Kazakhstan; as well as many layers of tax authorities, - involving spirited direct discussions that very nearly resulted in an agreement for ‘the Republic of Kazakhstan’ to partner with Alhambra in developing Uzboy; in the end however, going forward broke down when it came to deciding which agency would put up all the required capital, - - - but it came very close indeed.
Then, after having just been set back (by a year and a half) and ‘finally’ able to commence discussions with other interested parties, to its credit, Alhambra decided it wanted to partner with a very specific ‘highly-respected deep-pocket world-class singularly powerful player’ and, in good faith, signed a no-shop agreement with them (inhibiting soliciting or encouraging other bids, thereby preventing Alhambra from shopping the deal to anyone else for a while); and, as previously announced, a non-binding term sheet to complete a financing was executed while they completed the due diligence process related to that financing.
• Undertaking ‘due diligence’ of Alhambra must have been no small task and presumably entailed assessing management competency and experience; signing off on an expert and well diversified board of directors; digging deep into a whole host of financial matters (including a study of how and why certain key decisions were made); sorting out complex legal and tax considerations; touching base with all relevant regulatory authorities; carefully and thoroughly reviewing geological documentation and resource reports (including analysis of the upcoming NI-43-101 compliant resource estimate and ‘updated’ Scoping Study for open pit development of oxide, transitional and primary resources at Uzboy, - in a draft stage); visiting the three ‘advanced’ sites; inspecting plans for future engineering efforts; carrying out a comprehensive technical scrutiny (as it relates to heap-leach production), evaluating the nature of vender relationships; judging information technology; looking closely at the vital area of human resources; focusing intensively on accounting policies and procedures (i.e., random audits); fastidiously examining balance sheet and P&L reporting factors and underlying methods and philosophy; having the company’s legal experts translate key documents from Kazakh and Russian; as well as painstakingly weighing and judging plans for future expansion and development.
To fully understand precisely why this exhaustive investigative deliberation ‘went down’ as it did, one must recognize that the glacial, crawling, and carefully considered pace of closing this financing (delayed as an extremely extensive and comprehensive ‘due diligence’ process lasting more than a year was meticulously carried out) reflected the delicate and frightfully problematic backdrop against which it was carried out.
The cause of this ‘overabundance of caution‘ (since the global powerhouse had its own ‘reputation’ at stake) was motivated by a truly horrific and hugely troubling disaster that had unfolded like a deadly bolt of lightning emerging unexpectedly from a cloudless blue sky on a genial sunny day; for one year prior (to when these discussions began), the ‘Real Gold’ catastrophe had left the lingering residue of a bitter and caustic taste for investors in that part of the world.
• On May 27th, 2011, the inner Mongolian ‘Real Gold Mining Ltd.’ was halted from trading and forced to respond to queries by the Hong Kong stock exchange regarding reports in the South China Morning Post that it had filed two different sets of accounts.
• Shortly thereafter, the Hong Kong’s Securities and Futures Commission obtained warrants to search this once vaulted gold company’s premises.
• Turns out that Real Gold Mining (boasting a HKD 8.1 billion market capitalization) had filed different sets of accounts with the Hong Kong stock exchange and the central government. While the company reported more than CNY1 billion of revenue to Hong Kong Exchanges and Clearing for 2009, (in contrast) its three operating subsidiaries during 2009 reported merely a pathetic CNY 3.45 million of sales between them to the State Administration of Industry and Commerce (SAIC) for the same period.
• Eventually, a year later (June 5th 2012), shares of ‘Real Gold’ sold off market at an 84 percent discount. The definition of an unmitigated disaster writ large!
• And, - adding additional fuel to the fire (as if enough combustible tinder were not already extant), a spate of additional earnings delays and accounting disputes further motivated regulators and investors to significantly increase scrutiny of companies trading in that part of the world; such as serious allegations against Longtop Financial Technologies Ltd., Chaoda Modern Agriculture (Holdings) Ltd., and Sino-Forest Corp.
Clearly, - - - in the aftermath of this palpable inadequate verification, Alhambra was being ‘subjected to’ exceptionally extra-heightened due diligence.
• This process was nothing short of jumping through hoops; and more hoops; again and again; oftentimes satisfying the same queries, only this time backwards; over and over.
• Not surprisingly, the analysts charged with carrying out this ‘examination’ tended to go overboard, excessively erring on the side of extreme caution, attempting their very best to unearth a hidden complication, seeking a diaphanous hindrance; but, given Alhambra’s attention to ‘doing things right’, they have been unable to do so.
Needless-to-say, if this prolonged period of ‘assessment’ (more than a year spent chasing imaginary shadows not there) appeared endless to investors, imagine how frustrating and trying it must have been for those actually manning the front lines.
An ‘Act of God’ comes into play when impossibility or impracticability enters into the picture; such as when an unforeseen and unavoidable occurrence (caused by two months of heavy snow blanketing the land with eight feet of snow pack) freezes cash-flow and derails things.
So, where do we go from here?
Once Alhambra gets its financial house back in order (on or before June 30, 2013), it will close a financing; this time taking into account multiple options.
Now, the sole reason that I’ve felt inclined to go into this much detail (perhaps too much) is to show that John has been doing a great job in the face of unavoidable and uncontrollable delays.