Augusta Resource Corporation continued to state in regulatory disclosures filed late Monday that it expects its Rosemont Copper Company subsidiary to receive a crucial Clean Water Act permit from the U.S. Army Corps of Engineers by June 30.
The Section 404 permit is necessary before construction can commence on its Rosemont copper project. Augusta’s assurances that permitting will be complete by the end of the 2nd Quarter comes as the company is fending off a hostile take over from much larger HudBay Mineral Resources.
HudBay announced Monday it is extending its takeover deadline to May 5. HudBay already controls slightly more than 15 percent of Augusta’s stock and is seeking to purchase the remaining outstanding shares in a deal worth approximately $540 million.
Vancouver, B.C.-based Augusta has repeatedly urged shareholders to reject the HudBay offer because it expects to receive final permits clearing the way for the Rosemont project that will trigger a substantial increase in the value of the company. Augusta, while continuing to state on its website it intends to construct the Rosemont mine, is also stating it is in discussions with nine companies interested in bidding for Augusta.
Augusta, however, has not informed investors in three separate disclosure reports about a Feb. 28 Army Corps letter that raised serious concerns about Rosemont’s failure to provide a mitigation plan to compensate for damage to Waters of the United States (WUS) from its proposed open-pit copper mine that meets federal regulations.
The Corps warned Rosemont it “it is imperative Rosemont focus on restoration/enhancement of WUS to offset the direct loss of 40 acres of WUS,” Col. Kimberly Colloton, Army Corps District Engineer, stated in the letter to Rosemont President and CEO Rodney Pace.
“Unfortunately,” Colloton stated, “Rosemont has continued to present mitigation plans which provide more acres of upland and riparian preservation, with some enhancement, than acres of actual restoration/ enhancement of WUS.”
After more than two years of regular meetings between the Corps and Rosemont, Colloton set an April 1 deadline for Rosemont to submit a mitigation plan. Colloton further stated she planned to inform the U.S. Forest Service whether Rosemont has provided “adequate compensation” by April 16.
The Forest Service must decide whether to issue a Final Record of Decision (FROD) approved construction of the mine on more than 3,000 acres of the Coronado National Forest. If the Army Corps determines that Rosemont has not submitted an adequate mitigation plan, it could delay issuance of the Forest Service’s FROD.
The Army Corps will issue a separate FROD on whether to issue the Section 404 permit that requires Rosemont to provide an adequate mitigation plan. Colloton said the Corps expects to issue its FROD on June 30. The U.S. Environmental Protection Agency recommended denial of Rosemont’s mitigation plan last November. EPA has veto authority over the issuance of Army Corps 404 permits.
Augusta filed its annual Audited Financial Statements, its Management Discussion & Analysis (MD&A) report and its Annual Information Form (AIF) late Monday afternoon. The three reports included information as of March 27, 2014.
Augusta repeatedly states in the financial filings that it expects to receive the 404 permit within 90 days.
“The Company now expects the FROD and the Clean Water Act Section 404 Permit (“404 Permit”) to be issued in the second quarter of 2014,” the MD&A report states.
Augusta states it is continuing to update its Mine Plan of Operations so that it will be ready for final approval by the Forest Service upon receipt of the Forest Service’s FROD and the Clean Water Act permit.
“Project construction activities can commence on public lands following the issuance of the 404 permit, the FROD and subsequent approval by the USFS of the MPO,” Augusta’s MD&A states.
Augusta’s ongoing cash crisis was temporarily alleviated last fall when the company issued $10 million in convertible debt to its executive chairman, Richard Warke, and single largest individual shareholder, Ross Beaty.
In addition to the $10 million it received from Warke and Beaty, Augusta also received $14.1 million in draws from a $26.6 million loan expansion from RK Mine Finance approved last November. An addition $12.5 million from the RK loan will be issued when Augusta receives the Forest Service FROD ($7.5 million) and the Army Corp Clean Water Act Permit ($5 million).
Despite the infusion of $24.1 million late last year, Augusta reported only $2.7 million cash on as of Dec. 31, 2013. Augusta reported a working capital deficit of $88.3 million as of Dec. 31, 2013, compared to positive working capital of $28.8 million as of Dec. 31, 2012. The company reported spending $30.7 million on capital and permitting expenditures on the Rosemont project in 2013.
Augusta continues to walk a financing tightrope that could be seriously derailed if the permitting process does not go as planned. The company stated it is spending at least $2.5 million a month.
“Any delays in the permitting process or any unplanned expenditures may require the Company to raise additional funds to complete the process of obtaining the FROD, the 404 Permit and approval of the MPO,” Augusta’s MD&A states.
The RK loan, which has been expanded on two previous occasions, totals $109.6 million and is due on July 21, 2014. Augusta has pledged all of the assets of Rosemont Copper Company as collateral for the loan. Augusta has a one-time option to extend the due date for the loan by 90 days.
Augusta has $336 million in contingent financing from Rosemont Copper’s joint venture partner, United Copper & Moly ($106 million), and a metals streaming agreement from Silver Wheaton Corporation ($230 million).
But those funds, Augusta states in its regulatory filings, are not available until the Company receives all the Forest Service FROD, the Army Corps’ Clean Water permit and a comprehensive long term financing plan is finalized.
“The Company is continuing to advance project financing for the Rosemont Project, with a goal of completing documentation in the third quarter of 2014,” Augusta’s AIF states. “However, there is no assurance that such additional funding and/or project financing will be obtained or obtained on commercially favorable terms.”
If final financing is not in place until the 3rd Quarter, the AIF suggests Augusta is planning to extend the repayment date on the RK loan until October 21 in order to access funds from United Copper and Silver Wheaton that will be used to repay the RK loan.
Augusta’s heavy debt and pending repayment deadlines with zero operating revenue put the company in a precarious position.
In yesterday’s filing, the Company’s independent auditors, Ernst and Young, raise substantial doubt about its future. They said in the Consolidated Financial Statements that the company’s precarious financial condition, “…indicate the existence of a material uncertainty that raises substantial doubt about the Company’s ability to continue as a going concern.”