Maybe Gammon Gold?

Be careful wishing for Gammon Gold.....

The following is from The northern Miner June 1, 2008 Mining Markets...

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While Ocampo was ramping up to commercial production, Gammon acquired 100% of Mexgold Resources, owner of the producing El Cubo-Las Torres gold-silver mine complex in Guanajuato state, and the Guadalupe y Calvo advanced exploration property in Chihuahua state.

Then, on a “very proud day” in early January 2007, Gammon announced that Ocampo, its flagship mine, had reached commercial production and that the company was on track to produce 400,000 gold-equivalent ounces from Ocampo and El Cubo. The milestone was described as “a tremendous achievement,” by chairman and president Fred George. Shareholders responded by lifting the stock to record highs.

The reality turned out to be shockingly different. Total annual production, at 218,734 gold-equivalent ounces, was almost half what the company had projected. To make matters worse, each ounce cost the company US$650 to produce — compared with an industry average of around US$400 per oz.

As the problems in Mexico mounted, heads began to roll at head office in Halifax. The first to go was Gammon founder and CEO Brad Langille, who stepped down in early April to be replaced by Russell Barwick, former COO of Wheaton River Minerals and later Goldcorp (G-T). The following month, Colin Sutherland resigned as CFO to be replaced by Glenn Hynes. And in June, COO John Thornton lost his position to Dave Keough. George stayed on as chairman and president.

The first public disclosure that Gammon’s operations were falling short of promise came in early May 2007, when first quarter results were released just weeks after the company closed a $200-million public offering at $20 per share. While analysts — using management guidance — were expecting quarterly production to come in at around 75,000 oz. gold-equivalent at cash costs of below US$270 per oz., actual production was significantly lower. Even more troubling was that cash costs, at US$575 per oz., were more than double expectations.

“The guidance relating to the company’s Ocampo and El Cubo operations proved to be wrong,” wrote mining analyst Wendell Zerb of Canaccord Adams in a May 2007 research report. With the first hint that some kind of legal action might be forthcoming, Zerb went on to say that analysts at Canaccord found it “difficult to comprehend how the company would not have understood at least the basic shortcomings the Q1/07 quarter would bring.”

After digesting the first quarter results, Canaccord slashed its 12-month target price for Gammon from $22.15 to $14.65 per share. Even that significant downgrade proved to be optimistic. In the coming months, Gammon shares would sink to a 52-week low of $5.80 as the scope of the company’s problems became increasingly apparent.

More heads would roll. By the end of September 2007, Barwick — just a few months into the job — was on a plane back to Australia to be with his family. He was replaced by Rene Marion, former CEO of Highland Gold Mining, who later completed his team by appointing his Highland colleagues Scott Perry and Russell Tremayne as CFO and COO, respectively. But by then, shareholders were furious enough to take action. The first lawsuit came in the form of a complaint filed by U. S.-based Midas Funds with the court of Southern District of New York. In the complaint, Midas claimed Gammon overstated its target production making “repeated and public misrepresentations” to induce investors to buy common shares in the April 2007 public offering at $20 per share.

Midas is a longtime Gammon investor. The fund first bought shares in 2004 and sold them for a profit. Based on reports of positive cash flow, Midas reinvested in the up-and-coming producer, buying 400,000 more shares for US$8 million. The fund is seeking $3 million in damages for its losses and $10 million or more in punitive damages, plus court costs.

The latest legal action to hit the company is an $80-million class action suit on behalf of shareholders that alleges Gammon manipulated stock options and made unrealized production forecasts leading up to the $200-million offering. The company’s executive, directors and three financial institutions that provided underwriting for the stock are also named in the suit.

Gammon says both lawsuits are without merit and that the class action suit is simply a copycat of the Midas claim.

Leading the class action is Ed McKenna, who became a Gammon Gold shareholder by participating in the public offering in 2007 and subsequently took a significant loss on his investment. McKenna is “deeply dissatisfied with the level of disclosure contained in the April 2007 prospectus” for the offering, says his lawyer Dimitri Lascaris of London, Ont.-based Siskinds.

McKenna also accuses the company of manipulating stock options used to reward management. His statement of claim alleges that, “in a striking pattern that could not plausibly be the result of chance. . . grant dates of stock options charted below were either immediately followed by a sharp increase in Gammon’s stock price, and/or coincided with a date on which Gammon’s stock price was at or near a monthly low.”

After McKenna filed his statement of claim, ScotiaMcLeod — who sold the Gammon shares to McKenna and is a defendant in the suit — forced McKenna to close out his brokerage account, says Lascaris. “We feel that this simply added insult to injury.”

An annual loss of more than $100 million, a market capitalization slashed in half, three management teams in less than a year, and angry shareholders demanding compensation: how did things go so wrong for a company considered a rising star among the junior golds?

While management cites a dizzying array of startup problems — including equipment availability, insufficient underground development and processing gremlins — at Ocampo, the problems are deeper and more fundamental than that: the deposit is simply not as rich, nor as cost-efficient, as it was projected to be.

Two sources in the Toronto brokerage community who spoke off the record say they chose not to cover Gammon because they could see that the mine plan was unrealistic and costs were underestimated given comparable operations in Latin America. Since energy costs rise exponentially as the crush size for the heap leach gets finer, crushing to a 3 /16 particle size using an on-site generator became a significant contributor to cash costs. Grade also turned out to be disappointing, forcing the company to slash its resource estimates.

As a result of the discrepancies between the resource estimate for Ocampo prepared in 2005 by Tuscon-based Mintec and the company’s actual mining experience, total reserves and resources have been cut from 10.8 million goldequivalent oz. at the end of 2005 (4.19 million oz. in reserves, a subset of 10.78 million in resources), to about 6.2 million gold-equivalent oz. today (2.84 million in reserves and 3.38 million in resources), though the company says the 2005 and 2007 numbers are not directly comparable. "