This is the NASDAQ memorandum. Obtained from ABQ bankruptcy courtScanned with an OCR that is not 100%
Memorandum
~~ Exhibit A to
1~. aration of Herbert M. Campbell II
To: From: Date: Subject:
Nasdaq Listing Qualifications Panel
Andrew Labadie
August 4, 1997
Solv-Ex Corporation
SOLV: Common Stock, (par value $0.01)
Based upon our review of the Company's public filings, its Press Releases and its responses to our comments, the staff has concluded that Solv-Ex Corporation no longer qualifies for inclusion in the Nasdaq Stock Market. We believe that the Company's management has failed consistently to inform its public shareholders sufficiently about the construction status and the uncertainties involved in the operation of its crude oil (bitumen) recovery plant in Fort McMurray, Alberta. As a result during the past twelve months, the public shareholders were led, as far as we can ascertain, on an "adventure" that appears to have been driven as much by a contempt for distracters as a desire to build and operate an economically viable recovery facility. The staff contends that this situation was exacerbated by the Company's lack of sufficient product and process testing and preparation prior to beginning the construction of the plant, and by management's penchant to focus excessively on potential derivative technologies and processes. The staff is basing its decision on the public interest policies of the Nasdaq Stock Market as described in Marketplace Rules 4300 and 4330 (a)(3).'
The staff believes that the deficiency comprises four interrelated concerns, which seem to have surfaced as substantive issues in the following order. The staffconcluded that Solv-Ex
(a) did not adequately prepare and test the process and product plan to support the construction of a bitumen recovery facility;
(b) misled the investment community by claiming that its processes and "technology" were unique and by masking the effects on operating costs from changes in projected production volume and process and plant modifications;
(c) failed to adequately inform public shareholders of the potential operating and economic uncertainties associated with its 'initial stage plant"; and
(d) focused excessive attention on promised derivative and ancillary technologies and processes to what the staff believes was the detriment of constructing and completing an operating facility.
' In acccrdance with Marketplace Rules 4300 and 4330 (a)(3), The Association may deny inclusion or apply additional or more strin~ent criteria for the initial inclusion of a particular security based on any event. condition, or circumstance which exists or occurs that makes initial or continued inclusion of the security in Nasdaq inadvisable or unwarranted in the opinion of the Association, even though the security meets all enumerated criteria for initial or continued inclusion.... if the Association deems it necessary to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, or to protect investors and the public interest."
NASD.0389
Background:
In September of 1995, Solv-Ex completed a feasibility study supporting the recovery of bitumen from its oil sands property located in the Athabasca region near Fort McMurrav, Alberta. The property and right to recover minerals is being leased for 21 years from the Alberta government at a nominal fee. The lease arrangement requires the lease holder to build an operating plant capable of producing 10,000 barrels of bitumen per day by the lease expiration date, December 31, 1997. In late 1995 and early 1996, Solv-Ex began clearing ground and seeking funding to build a recovery facility.
Prior to completing the feasibility study the Company had operated a pilot plant, at its corporate headquarters in Albuquerque, New Mexico, where it had processed 400 tons of oil sands from the Athabasca region. The goal, which it achieved, was to recover a bitumen product by reducing the agitation of the oil sands and without using caustic soda. The Company asserted that the absence of caustic soda resulted in a process water that was clear of the fine clays that were part of the mined material and environmentally clean sand. Thus the water and the tailings could be re-introduced into natural setting without additional processing. The Company was also studying ways to develop a chemically stable upgraded bitumen product with sufficiently low viscosity to be transported in a pipeline.
During the first quarter of 1996, the Company obtained the bulk of its financing, $73 million, for the facility from European investment funds managed by Deutsche-Morgan Grenfell. As plant construction proceeded, the Company began product testing to either develop a chemically stable upgraded bitumen product or commercial grade bitumen. Due to its inability to obtain sufficient additional financing, the Company concluded that the plant would initially produce commercial grade bitumen, which it would sell to a large oil product distribution and marketing firm. During the Fall of 1996, the Company continually stated that the plant would begin initial operations at the end of the first quarter of 1997, and that the production of commercial grade bitumen would generate cash flow in excess of operating cash requirements. While the Company encountered problems in the construction process, many of which did not seem extraordinary, the Company continued to assert that the it would meet the proposed operating commencement date and would be able to generate positive cash flow.
Results were not as expected. Late in 1996, the Company determined that it would need a filtration system to produce commercial grade bitumen (bitumen with less than 0.5% water and solids). Upon commencement of operations, the filtration system was only minimally tested and of insufficient size to produce the volumes needed to make the plant economically viable. By the end of march 1997, the Company had spent approximately $100 million on a plant that is not commercially operable. During the past four months, the Company has used the facility to -demonstrate" its technology, spending roughly S 15 million to produce 500 barrels of bitumen with 2.9% solids and 20% - 25% water, operating 2 - 4 hours per day.
In late April and early May the Company was deluged with a large number of construction liens. Management discovered that the former engineering and construction manager had failed to send a number of invoices to the head office for payment, and as a result the Company had $3.5 million in liens and $8 million in accounts payable that were due immediately. On July 14, the Company has sought protection from creditors with respect to its oils sands project under the Canadian Creditors Arrangement Act. and as a result trading has been halted pending our receipt of financial statements as of the date that the petition was filed.
NASD.0390
j ~
(a)
Solv-Ex did not adequately prepare and test the process and product plan to
support the construction of a bitumen recovery facility.
Solv-Ex pursued its stated goal of producing commercial grade bitumen in two distinct steps. The Company completed a feasibility study in September of 1995, which outlined the construction of a plant facility to recover bitumen from the oil sands in northern Alberta. and the production and marketing of an oil product that could be upgraded sufficiently to be transported through a pipeline. Well after the commencement of construction, the Company initiated product testing to arrive at either a stable oil product with sufficiently low viscosity to flow through a pipeline or a sufficiently pure bitumen that had a ready market demand.
In the staff's opinion, the study provided more of a framework for defining and testing a production process to produce a potentially marketable product. The focus of the study appeared to be on an opportunity to exploit the Company's oil sand holdings rather than on constructing an operating and economically viable recovery facility. The study lacked detail about specific construction components and methods of operation; it did not include cost sensitivity analyses, based on varying production volumes or process approaches, these points being difficult to address as the Company had yet to detertnine a final composition and quality of a final product. From the beginning of the plant construction in late 1995 until the commencement of operations, the Company worked with outside parties to develop a process to recover a marketable product. The testing involved the use of small amounts of a heavy crude oil that had been produced at the Company's pilot plant. Consequently, no one was in a position to evaluate the economic viability of the process, or of producing a certain marketable product, until the construction of the recovery facility was well underway. In staff's opinion, the Company pursued the development of an "upgraded" product or of commercial grade bitumen in such a way that only upon the commencement of operations would management have any idea of whether the path they had chosen would meet with success.
During the eight months prior to the study's completion, the Company employed an outside consulting firm, Pace Consultants (Pace), to ;;audit" the i bitumen extraction and upgrading facility, including utilities and offsites." The audit was more of an analytical review; Pace observed a portion of the process and asked questions and made recommendations. Pace concluded that the "oil extraction, upgrading, utilities and offsites portions of the proposed facility, as presented by Solv-Ex, are feasible from the standpoints of technical merit, potential for successful marketing of the products, and the opportunity for financial success." without knowing the chemical composition or purity of the resulting oil product.
Pace spent three days at the pilot plant in lanuary of 1995, at which time they observed a portion of the proposed bitumen recovery process. At the time. the emphasis seems to have been focused on producing ';environmentally-clean" tailing sands, as the efficiency of the extraction operation as judged by the clean sand produced was excellent.... The water and fines withdrawal from the separator and subsequent processing steps were not operational at the time but have been successfully operated in the past." Yet based on the Company s public filings and in the literature obtained from Syncrude, the handling of the water and fine clays was and still is clearly the environmental sticking point and a major cost issue for anyone seekino to recover bitumen from tar sands on an economically viable scale. Solv-Ex contended that since its primary bitumen recovery process involved substantially less agitation of the oil sands in combination with hot water and steam and did not entail the use of caustic soda, the used water and tailings could be re-introduced into natural settings without further processing.
NASD.0391
- '-
:H - {:
To a large extent, deciding upon a final product had to do with the amount of available financing. The money for the plant came to Solv-Ex in an unusual manner. In October of 1996, Deutsche Bank, through the misadventures of its British investment banking subsidiary, Morgan Grenfell, admitted that it had become a 12.4% beneficial owner of the Company. According to the Company, in December of 1995 or lanuary of 1996, a publicly-traded investment entity, United Tri-Star Resources, provided information about Solv-Ex and its "new technologies" to a London-based broker/dealer, FIBA Nordic. FIBA Nordic was apparently providing investment ideas to two portfolio managers at Morgan Grenfell. The introduction resulted in the purchase of approximately $73 million in debt and equity securities for the benefit of two large investment funds managed by Morgan Grenfell, in the Winter and Spring of 1996. While the Company indicated to the staff that it has no idea of what information the fund managers had relied upon in making the investments; it did state in the 1996 Form 10-K, that ". . . The Pace Consultants report has been of considerable assistance to the Company in obtaining financing during the fiscal year ended June 30, 1996." According to press reports, the fund manager who made the commitments was seeking investments in companies with new and innovative technologies.
What was new or innovative about the Company's efforts to extract crude oil from tar sands is unknown to the staff, especially in light of Syncrude's successful on-going commercial operations and research efforts. For all that the staff knows, the Company's feasibility study or construction plans were not used as a basis of obtaining financing for the plant. Thus an element of critical review that is faced by companies that are seeking financing to design and build a capital-intensive facility was missing.
While the Morgan Grenfell financing gave Solv-Ex the impetus to move forward with the plant, the Company was still refining a process to develop a marketable product. In July and August of 1996, the Company engaged a Dr. Logwinuk who was associated with the Hydrocarbon Technologies to complete the testing of the upgrading process in the hope, perhaps, of developing a chemically stable oil product with sufficiently low viscosity to transport in a pipeline. On the other hand, if further financing was unavailable, the consultant along with others were to develop a filtering system which would render a bitumen product with no more that 0.5% water and solids content, that is, commercial grade bitumen. The bitumen processed in the pilot plant contained 10% water and solids, an impurity level that was apparently acceptable for the proposed upgrading process. At least six months prior to the commencement of operations, the Company announced that it would initially produce a commercial grade bitumen and in lower quantities than were discussed in the feasibility report. Yet, the Company remained confident that the plant was economically viable and would generate cash flow to cover operating costs, solely from the production of commercial grade bitumen.
The staff contends that Solv-Ex should have designed, tested and decided upon a process that would yield a consistently marketable product, before betting the public shareholders stake in the Company on a project that was to carry the Company from a developmental to an operating stage enterprise. Simply, the process itself was never tested using a sufficient quantity of bitumen to determine whether it would operate effectively and continuously to yield a marketable product. The upgrading process was evaluated from processing four barrels of bitumen; the filtering process to achieve commercial grade bitumen, from two barrels. The filtering process, the key to removing the excess water and solids, not only had the effect of dramatically slowing down the output but also reduced the quantity of marketable product, and more importantly severely constrained the potential for profitable operations. The filtering system was never considered in the feasibility study; if anything, it represented a necessary measure to meet the expectations of the public of a much promised profitable recovery facility.
NASD.0392
(b)
Solv-Es misled the investment community by claiming that its processes and
"technology" were unique and by ma~ king the effects on operating costs from
changes in projected production volume and process and plant modifications.
One of the more interesting aspects of the Company s description of its plant and the processes in the Form 10-K for the fiscal year ending June 30, 1996, was an emphasis on new technologies and the possibility of licensing its bitumen recovery process. In addition, the Company was planning to develop different approaches to recovering industrial metals from the tailings. The staff considered these claims questionable because, in the case of bitumen recovery, the unique qualities of these new process could easily be duplicated by the current producers, or, in the case of the metals extraction from the tailings, were merely laboratory procedures, which could be duplicated, but as yet had no economic significance. The staff got the impression that one of the Company's implicit aims was to seek ways to approach a process differently and to avoid building upon methods that others were using with commercial success. And yet, the Company had abandoned material aspects of its patented process for recovering bitumen in favor of methods currently being used by commercial producers.
While the Company identified some of the difficult environmental problems in processing oil sands, some of which resulted from the use of caustic soda in the primary extraction phase, it failed to indicate the purpose in using this chemical and the efforts that the existing producers had undertaken to separate the fine clays out of the process water. The Company gave the impression that its efforts and work in both bitumen recovery and industrial metals extraction were singular. The work of others, be it Syncrude in its efforts to isolate the ultra-fine clay particles in the liquid tailings, or the Alberta Chamber of Resources in its two year study of removing industrial metals from the processed sands, are never mentioned. Information about these efforts was available to the public prior to the release of the Company 1996 Fonn 10-K. The staff questions the integrity of a public company that suggests that it could license a technological process from which it had not demonstrated profitable operations and all aspects of which were clearly in the public domain, and pioneer efforts to recover industrial metals from the tailing sands without discussing the merits of the work completed by the Alberta Chamber of :-Resources.
Throughout its public filings and press releases, the Company referred to operating costs only on a per-barrel basis. The costs estimates that appeared in the 1996 Form 10-K were taken from the feasibility study and were based on bitumen production of 14,000 barrels per day. Yet at the time of the release of the 1996 Forrn 10-K, the production quantity had been scaled back to a quarter of the original projection. While it might seem reasonable for the reader to make some adjustment for potential profitability as a result of a decrease in production, the Company failed to discuss how fixed or variable costs and the economics of the project were affected by the changes in production level. Here was a project in which the product was evolving with the construction of the facility. Major equipment components used in the process had not been used previously in this particular application. In this case, discussion of operating costs. solely on a per-barrel basis was inappropriate. Investors were given no guidance as to how stated and potential changes would effect operating costs and the plant's economic viability; management only continued to claim that the process at the modified operating level would generate cash flow, which in turn would assist it in obtaining additional financing to expand production capacity and commence metals recovery from the tailing sands.
NASD.0393
(c)
Solv-Ex failed to adequately inform public shareholders of the potential operating and economic UDCertainties associated with its "initial stage plant.
The staff does not question that there are numerous difficulties in moving from a pilot project to a commercial scale production facility; the uncertainties can be daunting even with the best planning. And while it is important to keep a positive outlook, management has the duty to warn the investing public of any uncertainty that could materially affect the economic viability of a major project. The staff believes that the Company should have explained clearly how its bitumen recovery process worked in its 1996 Form IO-K, and provided update reports as circumstances changed. Within that context, the Company should have also explained how its processes differed from those currently being used by Syncrude and Suncor, the two producers who were successfully mining oil sands in the same region and manner as contemplated by the Company. Finally, the Company should have indicated which of parts of its process and equipment were untested on a commercial scale, and explained why it had chosen its particular approach.
In light of the significance of this investment to its entire operating purpose and financial condition, the Company should have provided investors with more guidance about the source and the basis for the projected operating costs. Specifically, the Company should have made available to investors a sensitivity analysis indicating the effects on aggregate and per-barrel costs resulting from changes in production processes or sub-systems and product quality and quantity. The Company should have also provided estimate ranges of potential net- back revenue and indicated how potential transportation charges would affect these estimates.
The Company stated that its reticence was due to its need to defend itself and its shareholders from short-seller activities. The staff does not accept this excuse; the Company continually indicated to us that it had a very strong and supportive public shareholder base. especially when it met with the NASD Market Regulation personnel in an effort to substantiate the concerns it had with certain institutional investors. Management's reporting responsibility during the entire construction period was to its public investors; in light of their commitment, management owed the Company's investors access to the details as to how it planned to achieve operational profitability and a frank discussion of the potential risks and uncertainties.
(d)
Solv-Ex focused excessive attention on promised derivative and ancillary technologies and processes to what the staff believes was the detriment of constructing and completing an operating facility.
The Company's longevity has been due to its persistence in promoting new technological processes. Having to operate a production facility, deal with a labor force, and sell a product in a competitive environment is entirely foreign to Solv-Ex. In its 1996 Form 10-K and through numerous press releases and three conference calls, one gets a clear impression that there is an underlying emphasis on non-operating activities, pursuing additional patents. licensing processes, exploring new ways to develop exotic products. The staff is not implying that there was no basis for such discussion, what we believe is that it should have been clearly subordinate to the task of getting the plant constructed and operational and producing a marketable product. The staff goes back to a particularly important statement the Companv made in its 1996 Form IO-K, and questions whether the Company realized its significance with respect to its shareholders:
NASD.0394
-
"Solv-Ex management is aware of the zmportance which will be attached to the operating results from the initial stage plant for bitumen extractzon, including results as to technological performance, product quality and cash operating costs, and has ~oased its projections upon the latest information available to the Company. '
The staff believes that the Company failed to fulfill its obligation to its shareholders: It failed to share material information with those who had invested in the Company and thus deprived investors of a basis from which to determine, on their own, the potential success of the Company activities and plans. This circumstance resulted to a oreat extent from the Compan,v s inability to develop a clear plan towards reaching the goal of producing a marketable product. Management's thinking appears to have been one of pursuing a vision; yet being fearful that others were only out there to harm them. Management was unable to deal directly with its competitive environment; acknowledge the efforts and work of others, which contributed to the Company's stated goals; seek assistance from those who had direct experience in the field and had successfully developed an operating plant, and worst of all; speak honestly and openly with its shareholders. Perhaps if the Company had been more forthcoming about its plans, dealing equally with the potential to address the tailings issues, which clearly had merit. and related the shortcomings, the lack of a detailed developed and tested process leading to a marketable product, a facility could have been built, with the assistance of joint partners, that would have been operable. But in the end, shareholders were left with only a promise of some grander vision. The May 2" Press Release is telling, not only of what the Company had yet to complete. but how it would again pursue its vision alone.
;'. . . [Solv-Ex's] Board of Directors has approved issuance of a public disclosure statement in Alberta with respect to construction and operation of an expanded plant to produce 80,000 barrels per calendar day of pipelineable crude oil from the Companv s two oil sands leases north of Fort McMurray."
;'. . . [The] plant is approved for approximately 1,,000 barrels per dav using four production modules and began commissioning at the end of March, 1997. Although approved for production of pipelineable crude oil, initial production has been bitumen from a single production module. Bitumen production is not pipelineable without -diluent and must be trucked to market because of the current lack of pipeline capacity into the area for any new operations.
;'Solv-Ex said it would prepare a detailed feasibility study for the large plant based upon operating results obtained at the existing plant, which will be expanded to accommodate the increased production. According to Solv-Ex chairman and CEO John S. Rendall. these operating results will play a key role in being able to obtain financing for the expansion, which would not be dependent upon diluent availability to put marketable product into the pipeline. Rendall also said that the Company would actively seek additional partners to participate in the expanded plant. primarily because of its size and preliminary estimates of capital costs (in the range of S600 million), as well as the desire to proceed on an accelerated schedule."
[According to Mr. Rendall]; . . . We will evaluate options available to us as soon as continuous operations establish consistent product quality and costs for producing bitumen at full production. which will be the basis for the detailed feasibility study.
NASD.0395
At this point, the staff has and investor should have heard enough. The company poured approximately $100 million into a project that is presently not economically viable. To date the Company has been unable to produce commercial grade bitumen and has spent approximately $15 million since April 15'to produce 500 barrels of a crude oil product, none of which has been sold. The facility has been operating only two to four hours a day, primarily to 'demonstrate" the Company's technology. The Company has sought protection from creditors with respect to its oil sands project, and is now seeking an operating partner to take control of the bitumen recovery facility.
The staff's responsibility is to protect the interests of the public investors and the integrity of the Nasdaq Stock Market. Part of this protection is accomplished by providing investors in Nasdaq-traded securities with suffcient information to judge relative merits of a particular investment. The staff believes that Solv-Ex did not provide investors with sufficient information, and at the same time, emphasized matters that were ancillary to the tasks required to develop a sustainable operating base and disclosed cost estimates that were more misleading than helpful. This situation resulted, we believe, from the absence of a well reviewed and tested process and product plan and an over-riding ambition to explore and promote new technologies and processes. Based on these circumstances, the staffconcluded that Solv-Ex should be delisted from The Nasdaq Stock Market.
A financial summary has been included for your review.
N^SD.0396
~ ~1 11dl ~_dy IVldl I~C ~
Qualifications E:xception Review ~
Company Name Solv-Ex Corporation
Issue Symbolls): SOLVQ
Business DescnDtion Comnanv is devel~nina ~ nrn~Pcc ~^ ~Drn~r~. ~; ~1-
Date Listed 07/07/80
Total Assets:
Liabilities:
Total Capital ~ Surplus
Goodwill SO
Net Tangible Assets
Balance Sheet
10-Q
0373 1/97
$ 05,45 1,134
$58378t78.1
$47,072,353
$47,072,353
I.lcome Statement
Revenue Net Income
o Y/E- 06/30/96 $0 $16,202,1771
o Y/E- 06730/95 $0 $11,079,6001
o Y/E- 06/30794 $0 $12,439i471l
o Y/E- 06730/93 $312,862 $12,249.6071:
Market Dat:a
Bid Price t07/tlf9?1: 3 3~16
Total Shares Oumstanding: 24,335,680 Public Float 16,852,011 shares
Market Capitalization: $77,569,980 Market Value
of Public Float. $53,715,785
YID Volume - 46,617,877 shares
Shareholders 825
.Market Makers 24
Operating Histors 17 years
NASD.0397
|
