More hot water for Baja Mining

Without additional funding by mid-June, the advanced-stage Boleo project in Mexico will have to be suspended, Baja Mining (BAJ-T, BAJFF-O) has warned shareholders. The announcement comes two weeks after the company declared a 22% increase in funding requirements for the project to the tune of US$246 million.

That sum climbs to US$438 million after exhausting existing contingency and cost overrun facilities of US$192 million, according to calculations by Mount Kellett Capital Management, which owns 19.9% of Baja’s outstanding shares.

Boleo’s projected burn rate is US$60 million in May, US$75 million in June and US$60 million in July, but the project has only US$41 million in cash and another US$24 million available through a restricted intermediary account, Baja outlined in a May 7 press release.

Even if a funding solution is found, Baja noted, “an approval process in regards to potential funding solutions being investigated may not be completed as quickly as required even if approved by the Consortium.” Baja owns 70% of the project in Baja California Sur, Mexico and a Korean industrial consortium holds the remaining 30% stake.

Financing for the Boleo project was based on a 2010 projected go-forward funding requirement of US$1.14 billion.

Mount Kellett Capital Management has been openly critical of Baja’s management for many months, demanding changes to the board and accusing the company’s Chief Executive Officer, John Greenslade, of nepotism. On May 4 Mount Kellett said it had filed a petition with the Supreme Court of British Columbia requesting that Ernst & Young be appointed as an independent inspector of the Vancouver-based company.

“In particular, Mount Kellett is asking the Court to empower Ernst & Young to investigate and produce a report for the Court, available to all Baja shareholders in advance of the annual general meeting, upon the following two questions,” Mount Kellett stated in a news release.

First: “What are the actual projected cost overruns in respect of the Boleo copper-cobalt-zinc-manganese mine project and have they been reported accurately to shareholders.” And second: “From Oct. 1, 2011 onwards, what did senior management know about the escalation of the projected cost overruns.”

According to the petition, Mount Kellett noted that it has “reasonable grounds to believe that management was aware of substantial cost overruns at least as early as January 2012.”

Jonathan Fiorello, Mount Kellett’s Chief Operating Officer, added that “there are too many unanswered questions about Baja’s business and operations for shareholders to make an informed investment decision,” and said its petition is also requesting the Court to ensure that Baja does not postpone an annual general meeting scheduled for June 21.

Mount Kellett has separately demanded the immediate release of the ICA Fluor report and related materials on the project’s cost overruns.

On the same day Baja disclosed that the project would have to be halted if additional financing isn’t found soon, it also announced changes to its board of directors, including the appointment of two nominees backed by Mount Kellett, Stephen Lehner, the private investment firm’s managing director and co-head of the New York investment team, and Lorie Waisberg. Mount Kellett had launched a proxy contest late last year in an attempt to have both Lehner and Waisberg named to Baja’s board, but lost in a vote on Apr. 3.

In addition to the appointments of Lehner and Waisberg, two former board members of Baja Mining (Tom Ogryzlo and Wolf Seidler) have agreed to rejoin the board after resigning on Apr. 21.

Despite these changes, Mount Kellett is still calling for the resignation of Greenslade, Baja’s chief executive.

In a press release on May 3, Mount Kellett said Ogryzlo “has indicated … that, following the resignation of John Greenslade, he would be willing, as needed and as may be appropriate, to serve as interim chief executive officer of Baja while a search is carried out for a permanent replacement.”

Baja met with members of the Korean consortium in Seoul last week and discussed “various potential minimally dilutive funding alternatives,” including a subordinated debt financing to fund a significant amount of the cost overruns. The company also delivered confidentiality agreements to several third parties for possible participation in the project, and said it has started preliminary discussions with the brokerage community. It also confirmed that members of the consortium “remain supportive of the company and the project.”

Baja says it has implemented an aggressive cash flow management strategy and is reviewing further cost-saving measures in an effort to reduce or defer costs. Among the steps the company is contemplating is a deferral of the cobalt and zinc circuits that could result in savings of about $85 million.

The project is scheduled for copper commissioning this year and copper production in the first half of 2013.

Shares of Baja have lost about half their value since the company first announced the cost overrun on Apr. 23.

At presstime in Toronto, Baja closed at 38.5¢ per share within a 52-week range of 34¢-$1.29. The junior has about 340 million shares outstanding.

According to a feasibility study published in 2010, the Boleo project could be developed economically with an after-tax net present value of US$1.3 billion at an 8% discount rate and a 25.6% after-tax internal rate of return.