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Attention Business/Financial Editors:
ST. GENEVIEVE RESOURCES LTD AND KWG RESOURCES INC.
EXPLAIN FINANCIAL POSITION
MONTREAL (QUEBEC), Dec. 5 /CNW/ - St. GeneviŠve Resources Ltd. (''SGV'')
and KWG Resources Inc. (''KWG''), (collectively, the ''Companies'') wish to
explain the events that lead up to the current financial difficulties
experienced by the Companies and explain the course of action which is
intended to be taken in order to ensure the future survival of the Companies.
AMETISTOVOE GOLD DEPOSIT
The Ametistovoe gold deposit located in the Russian Federation (the
''Deposit'') is the primary source of the financial difficulties currently
being experienced by the Companies. Initially, the Deposit was indirectly
held by Far East Gold Inc. (''FEG''), a company resulting from an amalgamation
in the form of a reverse take-over. FEG was initially capitalized by way of a
CDN $8.8 million private placement. The Deposit has demonstrated reserves
which indicate that it is a property of merit which is ready to enter the
production phase.
In January 1997, SGV raised a total of CDN $25 million through a special
warrant offering, with CDN $21 million of the proceeds being used to finance
the development of the Deposit and the remaining CDN $4 million being retained
by SGV in order to pay commissions and provide SGV with working capital.
Contemporaneously with such financing, KWG concluded a share exchange bid for
all of the shares of FEG, with the result that FEG ultimately became a wholly-
owned subsidiary of KWG
Following the closing of the financing referred to above, the Companies
prepared a business plan in order to seek debt financing to replace the equity
financing already in place. This business plan was ultimately concluded on
March 15, 1997 and indicated that the current capitalization of FEG was
insufficient to allow for the proper development of the Deposit and that an
additional US $18 million of financing was required. Shortly after this
realization, a royalty financing company with which the Companies were
negotiating announced to the Companies that it had decided not to move forward
with its earlier proposal of a CDN $5 million financing on which the Companies
were up to that point relying. In the financing company's opinion, the
Deposit was not sufficiently advanced for its nature of financing.
As a result of these developments, the Companies engaged two agents in
order to assist them in raising the required capital. At that time, the price
of gold was approximately US $350 per ounce. Given this market price and the
perceived quality of the Deposit, the Companies were assured by these agents
that they should not encounter any difficulties in receiving the necessary
financing. However, shortly thereafter, the price of gold began a gradual and
steady descent to its current level of below US $300 per ounce. This descent
had very real consequences for the Companies. Every time that a financing
appeared ready to close, the market price of gold would suffer another
decrease and the closing would be postponed as a result. A further
complicating factor was the entire ''Bre-X affairs'' which served to erode
confidence In the mining sector and further hinder the ability of mining
companies in general to raise capital.
Against this backdrop of a scarcity of financing, KWG was facing a
further problem in connection with the preservation of the license in respect
of the Deposit (the ''Licence''). Under the terms of the Licence, the holder
was required to have on site, by no later than December 31, 1997, sufficient
mining equipment in order to be able to mine a total of 200,000 tons per year,
failing which the Licence could be revoked. At that time, a total of
approximately CDN $29.8 million had been invested in the Deposit (CDN $8.8
million of initial capitalization of FEG and CDN $21 million from the SGV
special warrant financing) and an additional CDN $72 million had been invested
by KWG though its share exchange bid referred to above; therefore, losing the
Licence would have caused KWG extreme prejudice. As a result, faced with this
prospect of losing the Licence and its investment, and unable to then raise
the required financing from outside sources given the declining price of gold
and difficult mining conditions faced by the mining Industry, SGV turned to
the other members of its group of companies which had positive cash balances
in order to purchase and deliver to the Russian Federation the required
equipment and maintain the Licence. Specifically, between the months of July
and August, 1997, three boat loads of equipment were delivered to the Russian
Federation at an aggregate cost of approximately US $4 million, US $3 million
and US $3 million, respectively, US $4.6 million of which was borrowed from
the treasury of Genoil Inc. (''Genoil''), and US $3 million of which was
borrowed from the treasury of Emerging Africa Gold (EAG) Inc. (''EAG''). At
the time that these borrowings were made, they were intended merely as a
bridge loan facility which would enable KWG to preserve its valuable Licence
until such time as the market dynamics reversed themselves and the Companies
once again became able to raise the required financing.
In early fall, it became apparent to the Companies that the market
conditions were not turning around and that it would be more difficult to
obtain the required financing than originally expected. In fact, a
preliminary prospectus filed by FEG in September 1997 for a high yield debt
offering had to be abandoned by FEG due to market conditions and other
proposed private placements failed to close. As a result, KWG scaled down all
of its operations in the Caribbean. At that point, the Companies' only source
of financing was through the sale by SGV of its portfolio of securities and
through various loans arranged from various third parties.
In October 1997, the Russian government amended the Licence by extending
to December 31, 1998 the deadline by which the production capacity was
required to be in place. This amendment was obtained as a direct result of
the mobilization of the equipment referred to above.
By November 1997, the Companies' problems in raising capital became more
acute. The fixed costs at the Deposit were between US $500,000 and US
$750,000 per month. As a result, the Companies' accounts payable were
increasing. On November 26, 1997, the board of directors of Genoil demanded
immediate repayment of its inter-company loan and advised the Companies that
it was going to make a public disclosure to this effect. As a result of this
demand for repayment, the Companies applied to the Superior Court of Quebec
for protection under the ''Companies' Creditors Arrangement Act (the
''CCAA'')''.
WORKING CAPITAL DEFICIENCY
The following set of circumstances further contributed to the financial
difficulties experienced by the Companies; specifically, by placing a further
burden on their working capital.
The Cuban government approached KWG with an offer to participate in the
development of a major nickel deposit located on Cuban territory known as the
Cupey Project. The Cuban government sought the partnership of KWG because of
its prior dealings with KWG and other members of the St. GeneviŠve group,
including Genoil, a company which explores for oil and gas in Cuba. KWG viewed
this as a good opportunity to diversify itself away from gold given the
failing market price of gold and ultimately signed a letter of intent with the
Cuban government on July 5, 1997. The letter of intent called for KWG to
raise a total of US $350 million in order to finance the Cupey Project in
return for which it would earn a 50% interest in the Project. In preparation
of its public financing campaign, KWG conducted a full feasibility study of
the Cupey Project which took place from August through to November 1997 at a
total cost to KWG of CDN $3.5 million. However, during the period beginning
from the commencement of discussions with the Cuban government and ending on
the completion of the feasibility study, the market price of nickel fall from
approximately US $3.30 per pound to US $2.75 per pound. The conclusions of
the feasibility study were therefore that the Cupey Project in its then
current state was not capable of being financed and, as a result, on November
25, 1997, KWG abandoned the Cupey Project.
Throughout the events described above, while neither of the Deposit nor
the Cupey Project were yet in an operating phase, the Companies did not want
to downsize their staff out of a concern that if either of the two projects
was suddenly ready to be proceeded upon (i.e, the required funding was raised
for the Deposit or the feasibility study of the Cupey Project proved to be
positive), personnel would be required to be mobilized immediately. As a
result, the combined fixed costs of the Companies were approximately CDN $2
million per month.
INTER-COMPANY ACCOUNTS
As a result of the foregoing set of circumstances, indebtedness was
created, without authorization of the relevant boards of directors, among the
various members of the St. GeneviŠve group of companies. The proceeds from
these inter-company loans were used solely in the operations of the Companies.
Specifically, of these proceeds, CDN $14.2 million was used in the development
of the Deposit and CDN $3 million was used to effect investments in affiliates
(principally, Icelandic Gold Corporation (''Icelandic''), Ambrex Mining
Corporation and Spider Resources Inc.).
As at November 30, 1997, the balances of these inter-company accounts
were as follows:
- SGV owes to Genoil CDN $5.2 million
- SGV owes to EAG CDN $15.3 million
- KWG owes to SGV CDN $8.7 million
- SGV owes to Icelandic CDN $0.4 million
The Companies shall request of their auditors, Price Waterhouse, to
independently confirm the foregoing use of funds. A press release containing
the results of this investigation is expected to be issued within the next ten
days.
OTHER INDEBTEDNESS
In late September and early November 1997, with a view to generating
working capital, SGV sold to various third parties shares of KWG which it held
in its portfolio of securities, thereby raising an aggregate of CDN $5.6
million. In connection with such sales, SGV undertook to repurchase the KWG
shares between December 29, 1997 and May 8, 1998 for an aggregate of CDN $6.5
million. To date, SGV has not made any payments under these commitments.
RESTRUCTURING PLAN
In filing for protection under the CCAA, the Companies will put into
place the following restructuring plan.
(i) SALE OF NON-CORE ASSETS
SGV will sell all of its non-core assets, being its interests in Ambrex
Mining Corporation (a gold and base metals exploration company), Spider
Resources Inc. (a diamond exploration company), Icelandic Gold
Corporation (a gold exploration company), Strategic Exploration (STREX)
Inc. (a base metals exploration company) and possibly Genoil (an oil and
gas exploration company), in order to focus on Its gold properties in the
Russian Federation and the Caribbean.
(ii) SETTLEMENT OF TRADE DEBTS
Through the proceeds generated by these sales, the Companies intend to
offer a settlement to their various consolidated trade creditors holding
claims in the approximate aggregate amount of CDN $9.8 million.
(iii) SETTLEMENT OF INTER-COMPANY DEBTS
SGV is currently discussing with the board of directors of Genoil
alternatives available in respect of the settlement of the CDN $5.2
million indebtedness owing to Genoil.
As regards SGV's indebtedness toward Icelandic, similar discussions are
taking place with its board of directors and SGV is confident that a
mutually satisfactory arrangement will be arrived at.
With respect to the indebtedness owing toward EAG, it does not at present
pose an immediate problem for EAG as the company remains in a strong
financial position. SGV and EAG will work together toward a resolution of
this matter and have begun to discuss several possible scenarios,
including a possible merger.
The indebtedness owing to KWG and its wholly-owned subsidiary FEG is
similarly being discussed and may also result in a merger.
(iv) STREAMLINING OF OPERATIONS
The proposed merging of the operations of SGV, KWG, EAG and possibly
Genoil into one corporate entity, would have the result of reducing
overhead and eliminating all remaining inter-company indebtedness. A new
management team will be put into place to oversee this new company;
however, it shall not be headed by Richard Faucher as originally
contemplated for Mr. Faucher has resigned his post. A replacement is
currently being sought. The Companies are optimistic that such a merger
would be approved by the relevant shareholders as the various companies
in question have, for the most part, similar shareholders.
The restructuring would also include the scaling down or closing of
offices located in Montreal, Toronto, London, Havana, Moscow and Haiti,
the reduction of personnel and the reduction of the salaries of remaining
senior management. The new merged entity would retain only those
projects which are currently proven to be of merit. In operating these
projects, the Companies' philosophy shall be to enter into joint ventures
with experienced third party operators who shall assume all of the
associated operating risks. As a consequence, the Companies are in the
process of actively seeking a joint venture partner for the Deposit along
these lines.
(v) RIGHTS OFFERING
In order to generate additional capital, the Companies may decide to
proceed with a rights offering to their shareholders.
The Companies are working diligently toward the implementation of this
restructuring plan and will report on their progress as and when significant
developments occur. Currently, the Companies are scheduled to submit a formal
plan to their creditors on or before January 23, 1998 and to hold a meeting of
creditors on or before February 26, 1998.
St. GeneviŠve Resources Ltd. and KWG Resources Inc. are mining
exploration companies.
NO REGULATORY AUTHORITY HAS APPROVED NOR DISAPPROVED
THE CONTENT OF THIS PRESS RELEASE
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For further information: Jacques Rossignol, Lapointe Rosenstein, (514) 925-6336
This press release concerns more than one organization.
To view releases from one of these organizations, please select from below.
ST. GENEVIEVE RESOURCES LTD.
KWG RESOURCES INC.
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