Louis Dreyfus to litigate against Baja Mining

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 the timing of Baja’s disclosure of 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 off-take agreements that would see it purchase on commercial terms 70% of Boleo’s annual copper and cobalt production for a term of ten years 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 chief executive officer, explains in a telephone interview. “I think they have concerns at this point in time with the current cost overruns we would be able to use that US$35 million.”

But Ogryzlo—a director at Baja who took the helm of the company after the resignation of John Greenslade 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 today that it had funded a US$21 million cash call to shareholders that will enable it to continue its current level of 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 put to them, but that everyone is waiting to see what the final conclusions will be of 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.

Ogryzlo also noted that Baja has signed a number of confidentiality agreements. “Of course you never can tell whether people are just kicking the tyres, or how serious they are, but some of them see 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 MOU 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 2010 projected go-forward funding requirement 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 of closer to US$400 million.

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 is forecast to produce 125 million pounds of copper annually at a copper grade of above 2%, along with 3.7 million pounds of cobalt and 55.8 million pounds of zinc sulphide.

In years seven through twenty-three, Boleo is forecast to turn out about 84 million pounds of copper a year at an average grade of 1.33%, in addition to 3.6 million pounds of cobalt and 65 million pounds of zinc sulphide.

At presstime in Toronto Baja was trading at 22¢ within a 52-week trading range of 15¢-$1.28 per share. The company has about 340 million shares outstanding.