Axmin continues to fall on hard times

 Toronto-based Axmin (AXM-V, AXMIF-O), with its key assets in the Central African Republic (CAR), has had to survive a bevy of bad news over the last year, the most recent being that yet another suitor has withdrawn an offer for the company.

Axmin’s woes can be largely traced to the activity of the government of CAR, or more precisely, its lack of activity.

While Axmin controls the economically attractive Passendro gold project in the country, it had to take $40.5 million write down on the property, largely due to the government’s refusal to issue a mining permit for the project.

Axmin has been waiting for a mining licence for over a year, but revisions to the country’s mining code, made in the middle of last year, have complicated the process.

While Axmin’s early mover status in the country means it has the right to have the changes grandfathered in, the company’s president and chief executive Mario Caron says the terms of the new mining code are affecting Axmin right now.

“The terms of the new mining code gives a flavour for what they are expecting,” Caron says of negotiations between the company and government over what interest the government would have in the project. “We’re very much in favour of giving them as much as we can but not to point where a project isn’t financeable.”

Revisions to the mining code brought a right for the government to take a 15% free-carry interest in projects and an 18% net smelter return royalty.

Adding to the company’s frustration over the failure to get a mining licence was a government decision to revoke all of the company’s licences for metals that are not gold.

While the ruling didn’t affect Passendro, it did affect other iron ore projects Axmin had discovered in the country, and perhaps just as importantly, it damaged the country’s reputation in the eyes of international investors.

“It does create uncertainty in the markets when a government withdraws rights without prior consultations,” Caron says. “The market doesn’t react kindly to such a gesture, and it makes it difficult to raise money and do work in the country.”

That inability to raise money led the company into a strategic review that began last March. Its search for a solution led it to the Guernsey-based privately held gold explorer Toro Gold.

In November of last year Axmin announced that Toro was offering 14.5¢ per share in an all cash takeover bid. 

While the sum was a long ways off when its shares were trading in the $1.00 range from mid-2006 until early 2008, given the uncertainty around the mining licence, it was the best shareholders could have hoped for.

But it would appear that hope was all that they had. Toro failed to come through with the funds by the required date, and began to re-negotiate with Axmin at a much lower price – just 3¢ per share.

Axmin believed it could get slightly more from another un-named suitor, but on January 8 it announced that negotiations with that party had broken off as well. Axmin said the second suitor was offering 4.5¢ per share.

While it’s hard to imagine that a company with a solid gold project in a high gold price environment could be in such dire straights, it shows how seriously investors should take political risk.

The initial bankable feasibility study on Passendro —  done in April of 2008 — envisaged a mine that would produce 203,000 oz. of gold per year over 5.9 years at cash costs of US$379 per oz. Axmin put the net present value of the project at US$311 million with an internal rate of return of 47%.

Strong numbers on paper, but on paper they will remain unless the government of CAR wakes up to certain economic realities….and soon.

In Toronto on Jan. 8 Axmin shares were trading for 8¢ on 568,000 shares traded.