Augen Gold vs. Augen Capital

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 positions as chief executive and 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 this summer after Augen Gold’s incumbent board postponed a shareholder meeting at which the dissident’s proposed removal of Augen Gold’s board was set to be voted on.

Chodos is confident the dissidents had the votes to win, and believes the prospect of such an outcome to be the motivation for Augen’s postponement. For his part, Mason says the decision to postpone had to do with his desire to protect the shareholders from excessive 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, the Sept. 30 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 not having 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 initial public offering.

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 shareholders 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 2010 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 choose as to whether they will take payments from the company in lieu of tax write-offs or take the write-offs themselves. Mason says the company is in the process of settling with those shareholders.

While Chodos and Mason, dissidents and incumbents, continue to argue about who is to blame for the company’s drop in market value — the company’s shares entered the secondary market in June 2008 at $1.05 but fell quickly from there and closed in Toronto on Sept. 16 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 that had worked with Augen Capital in the past on aspects of its flow-through business.

A deal was made in March 2009, that saw Orereserve Asset Management (a subsidiary of IAM) come in to manage Augen’s business. Chodos, who formerly worked for IAM is still with the privately held Orereserve.

Mason was given a 26% stake in the new managing entity and was kept 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.”

He thinks differently now. “In retrospect,” he says of the deal with IAM, “it was a mistake on my part.”

A mistake from Mason’s perspective because not only would IAM be entitled to a management fee of $1.1 million per year, but it also opened the door to IAM taking control of Augen Capital. It’s a process that began with IAM’s chief executive, Victor Koloshuk, coming on to Augen Capital’s board at the time of the deal.

According to Mason, more IAM affiliated parties followed until it got to the point where Mason was turfed from the company he founded some 15 years earlier.

The acrimony between Mason and the new managers can largely be traced back to a loan facility for Augen Gold that was proposed by the IAM affiliated group.

Mason opposed the facility because of its “draconian terms,” which included a 12% interest rate, Augen Gold’s claims being held in escrow until repayment and the placement of two more IAM affiliated people on Augen Gold’s board — which would have given Augen Capital, and by extension IAM’s associated parties, a majority on Augen Gold’s board.

The dissidents contend that the $1.1-million loan to Augen Gold would have allowed it to meet its CEE requirements, thus avoiding the $850,000 in charges it faced by not spending the required capital in time.

Augen Gold did draw down $300,000 from the facility which allowed for Augen Capital to appoint one member to Augen Gold’s board, but Augen Capital was unable to get a majority, leading to its current move to oust the entire Augen Gold board.

“This is an attempt to take over the board and not give shareholders of Augen Gold a chance to look at an offer (from another company) that might be much more appealing,” Mason says. “At Jerome (Augen Gold’s flagship property) there’s up to 1.1 million oz. of gold (non NI 43-101 compliant) and nowadays companies are paying $50 an oz. in the ground which would put the value of Augen Gold at $55 million. That is not currently reflected in our share price of 20¢ but we have to have the time to assess what is out there. We’re not adverse to looking at a takeover offer, but it has to be a fair one.”

Mason touts the current board’s combined industry experience of 84 years, which is significantly more than that of the proposed dissident’s board, as a key reason why shareholders should entrust Augen Gold’s slate with unlocking Jerome’s value.