Friday, August 27, 2010 9:37:14 PM
Someone who most of y'all dont know has been working with us "behind the scenes" named Lee Abbott. Here is part of our presentation to the Trustee that helped get us approved. Lee gets most of the credit for actually putting this letter together that contains the crux of our argument. There are TONS of supporting Docs as well. The format got a little messed up when copy/pasted from word, but here it is.
Our share count has gone up a good bit since this was filed.
CPRKSA
Copper King Shareholders Association
Members of the Steering Committee:
Lee Abbott Chuck Dawson
Frank Firek Scott Harmer
David Wright
August 9, 2010
Ms. Laurie A. Cayton
Office of the U.S. Trustee
Department of Justice
405 South Main Street
Suite 300
Salt Lake City, Utah 84111
Re: Request for the appointment of an Official Equity Security Holders Committee to support the interests of public shareholders in the Chapter (Ch.) 11 Bankruptcy proceedings of Copper King Mining Corporation (Case Number: 10-30002-WTT), and Western Utah Copper Company (Case Number: 10-29159-WTT).
Dear Ms. Cayton:
My name is Lee Abbott. I am listed as an equity shareholder in Copper King Mining Corporation (CPRK); and its subsidiary, Western Utah Copper Company (WUCC). CPRK and WUCC are currently undergoing Ch. 11 Bankruptcy proceedings in the State of Utah.
On account of these proceedings, a group of CPRK shareholders have recently formed an Ad Hoc committee identified as the CPRK Shareholders Association (CPRKSA). CPRKSA is an ever growing group of individual investors seeking fair and just recovery of their investments. Membership grows daily and our investment interests now total more than 40% of all outstanding shares at this time.
For clarification, CPRKSA is not, at present, an official committee, nor is it represented by counsel. Members cannot be expected to adequately represent the legal rights possessed by individual shareholders since individual shareholders owe no fiduciary duty to any other shareholder, or to a class of shareholders. ((Beker Indus.Corp., 55 B.R. 945, 949 (Bankr. S.D.N.Y. 1985))
Yet as a group, CPRKSA shareholders respectfully request you, as Trustee, to appoint individuals from CPRKSA as an Official Equity Security Holders Committee for the purpose of representation in the aforementioned bankruptcy proceedings, pursuant to 11 U.S.C Section 1102 (a) of the Bankruptcy Code.
CPRKSA urges your support in this matter for the following reasons:
1. There is sound cause to believe the debtors? estate, as presented to the court, is indicative of conservative figures which do not reflect true market value of the assets in the current state of the economy. Debtors have focused on a portion of the assets held by the company and presented a valuation standard that severely understates the value of the stated assets. Should valuation reflect current standards, value could increase towards hundreds of millions of dollars in excess of what is reflected in the debtors schedules.
2. The burden of representation of management and/or the Debtor?s Board of Directors for the interests of equity holders may prove conflict of interest. Even if certain directors or managers hold substantial equity positions, a conflict exists to proper equity representation as they are subject to conflicting fiduciary duties to all stakeholders. Further, there is a reasonable expectation that the Debtors will favor the interests of significant creditor claims, as their relations are important to the Debtors for future business interactions. Also, an official creditor?s committee cannot be relied upon for equity representation, as the Creditor?s Committees owe their fiduciary duties to the secured and unsecured creditors, and as such, will most likely be working against the interests of equity holders. CPRKSA is distinctly concerned the Debtor and Creditors may negotiate an equity swap, or other agreement allowed by the bankruptcy code, resulting in windfall profit that would be diverted away from current equity holders. An official equity committee would give proper representation to equity holder?s interests, as an equity committee?s fiduciary duties will not be divided between stakeholders, but will only seek what is just and proper value given to equity?s interests.
An official committee charged with safeguarding the interests of the class it represents is one of the critical protections for creditors and shareholders provided in the Bankruptcy Code. Section1102(a)(2) of the Bankruptcy Code provides that, on request, the court may order the appointment of an official committee to represent the interests of equity security holders where "necessary to assure [their] adequate representation" in a reorganization case.11 U.S.C.?1102(a)(2).
Congress recognized that other parties, such as creditors, cannot be expected to adequately represent the interests of shareholders:
As public investors are likely to be junior or subordinated creditors or stockholders, it is essential for them to have legislative assurance that their interests will be protected. Such assurance should not be left to a plan of reorganization negotiated by a debtor in distress and senior or other institutional creditors who will have their own best interest to look after. [S. Rep. No. 989, 95th Cong., 2nd Sess. 10 (1978)] (emphasis added).
The legislative history indicates that Congress intended for official committees to ?be relied upon in cases in which the debtor proposes to affect several classes of debt or equity holders under the plan and in which they need representation. [H.R. Rep. No.595, 95th Cong.,1st Sess.401 (1977)]. In particular, Congress explained that official committees are to serve as "the primary negotiating bodies for the formulation of the plan of reorganization.? It is apparent from both the legislative history and Section 1103 of the Bankruptcy Code, however, that the function of committees is not limited to negotiating plans. Official committees, including equity committees, also represent creditors or equity security holders in all other aspects of the case, "provide supervision of the debtor," and ?execute an oversight function in the pursuit to protect constituents' interests." [In re Penn-Dixie Indus., Inc., 9 B.R. 941,944 (Bankr. S.D.N.Y. 1981)]. Thus, Congress recognized that in certain Ch. 11 cases, appointment of an official equity committee with wide-ranging powers and duties will be necessary in order for shareholders? interests to be adequately represented.
In the proceedings of cases 10-30002-WTT and 10-29159-WTT committees to represent both the Secured and Unsecured creditors have been formed so the interests of both of those classes of stakeholders are being represented. Shareholders deserve representation also.
3. Guidelines have been developed to determine whether an official committee is necessary to provide adequate representation for shareholders, which include the following:
A. debtor?s solvency;
B. number of shareholders;
C. complexity of the case; and
D. whether the cost of an additional committee (including financial cost and the cost of delay) would significantly outweigh the concern for adequate representation.
[In re Williams Communications Group, Inc., 281 B.R. 216, 220 (Bankr. S.D.N.Y. 2002); Albero v. Johns-Mansville Corp. In re Johns-Manville Corp., 68 B.R. 158, 159-60 (S.D.N.Y. 1986); In re Emons Indus., Inc., 50 B.R. 692, 694 (Bankr. S.D.N.Y. 1985)].
A.(1) While it is a fact that the Debtors in these cases have little or no cash flow, this situation has existed since the founding of the company. The Debtors are a start-up mining operation and the debts incurred to date have been incurred as a function of starting up a mining operation which has yet to reach what could be considered ?cash flow.? The test of insolvency in this case, as in other similar cases, is not a test of cash flow but a test of total liabilities versus total assets. The prevailing evidence shows that the assets far outweigh the liabilities in these cases.
The Debtors have declared that they do not believe the company to be hopelessly insolvent and are requesting the approval of DIP financing (See Declaration of John A Bryan Docket # ck 21 & Declaration of John A. Bryan Docket # ck 23 Pg 7 para. 16,). A major portion of the DIP financing is designated by the Debtors for the purpose of ?confirmation drilling,? metallurgical testing and mineral production. As the Debtor?s illustrate in in Docket # ck 23 beginning on page 14 production of minerals would produce cash flow especially with current metal prices.
A.(2) There are numerous reports available on the assets included in the Estate of the Debtors. The most credible asset reports, completed by top firms and recognized experts, testify to an incredibly high mineral content of the assets of the debtor. In addition, shareholders have obtained informal opinions from mining experts indicating that if the ?state of the art? mill, now mostly complete, were in production it would be worth approximately $60 Million.
The ability to process ore, extract the minerals from that ore and produce a market ready product such as copper, gold, and silver concentrates is critical to the successful operations contemplated by the Debtors. The existing mill is a major link in that process and enhances the value of the mineral holdings assets but the major assets of the Debtors are the mineral holdings, claims and leases.
As an equity security shareholder in CPRK, I understand the perceived necessity Mr. Bryan (current C.E.O.) felt to value the assets of the Debtors at what is essentially liquidation value. Mr. Bryan stated that ?my team and I have prepared a valuation model of the Debtor?s assets today, based on current factors (e.g., no operations and no ability to extract and efficiently process ore).? (Refer Docket # ck 23, Declaration of John A. Bryan Jr., Pg 4 Para. B. 8). This valuation raises several legitimate questions about the methods used to determine asset value and certainly runs contrary to the proposed valuations used by management pre-petition.
A large number of the shareholders who are members of CPRKSA are sophisticated investors. When members purchased shares, they knew the Company (Debtors) was not yet producing commercial quantities of Copper or other metals. Members bought shares based on the value of the underlying assets (i.e., the mineral holdings, and a ?state of the art mill? that was ?soon? entering production).
While it is true the Mill is currently not in ?production?, shareholders are of the opinion production failure is due to a lack of operating capital;rather than, ?the ore mining facility does not have the equipment or technical capacity at this time.? (e.g., J.A. Bryan, Docket #23, Pg5). In fact, mine and milling experts recognize any mill requires a ?dialing-in? process.
Additionally, the Debtors mill has produced copper concentrate, yet shareholders were told it was ?not economical? to produce concentrates when the mill was in production. (CPRK Press Release, May 3, 2010, Author: Marcus Southworth, President & CEO). John Bryan and Dave McMullin (Officer & Board Chairman) recently informed the CPRKSA Steering Committee that the mill was ?fired up? for testing and that it was in ?a lot better condition than we expected.? Tetra-Tek stated it was in ?excellent? shape. In the Declaration of Michael G. Nelson, Ph.D. (Docket # ck 26), the following statement was made in reference of the mill:
?Optimization of the operation of the flotation mill will require 6 to 8 months. During this time, the mining plan and ore blending schemes will be determined, flotation reagent schemes will be optimized, and the methods for removing moisture from concentrates and tailings will be finalized. Such a startup time is typical for flotation mills like this one. I have worked in such mills in the U.S., Australia, Chile, Mexico, and South Africa.? [Declaration of Michael G. Nelson, Ph.D., Docket Number 26, Pg 4, para 4. (Emphasis added)].
A.(3) NI 43-101 may not be the correct standard for the valuation of assets, designated by the Debtors post petition. National Instrument 43-101 Standards of Disclosure for Mineral Projects, is a reporting standard adopted by Canadian Securities Administrators for the basic purpose of investor protection. Investors who are contemplating investing in minerals projects need a standard upon which they can rely in making informed investment decisions. NI 43-101 was adopted in an effort set a clear standard upon which unsophisticated retail investors could depend. The intent of NI 43-101 is to minimize any instances of misrepresentation or investment fraud in the Canadian Securities industries. Because of the comparatively friendly mining securities laws in Canada, many small United States mining companies list their securities on the TSX-V stock exchange in Canada. Therefore, NI 43-101 has become a sort of de-facto standard for small United States mining companies when it comes to the governance of securities transactions and investors relations. However, the Debtors in this case are not involved in the issuance of new Canadian securities nor in the promotion of new securities of any kind. These Debtors are involved in a bankruptcy proceeding where the true market value of the assets of the Debtors is much more important than if those assets meet the standards of the Canadian Securities Administrators.
In bankruptcy proceedings there is ample reason to question the need for mineral assets to meet the high bar set in NI 43-101. In fact, a recent press release from the Canadian Securities Administrators indicates that Canadian Authorities are contemplating repealing and replacing NI 43-101. One of the reasons stated for the proposed repeal is ?the challenges the current mining disclosure rules pose? to the operations of market participants. (Exhibit A, attached)
Yet, in the Declaration of Mr. Bryan (Docket # ck23), NI 43-101 was identified as the required standard the mineral assets of the Debtors needed to meet to obtain any value. Failure to comply with the standard of ?Measured Resources?, as set in NI 43-101, does not in any way mean the mineral asset does not exist.
A.(4) Assets vs. Liabilities: Shareholders are unable to obtain critical information to enable an independent evaluation or valuation of the assets of the Debtors. Though I am a member of CPRKSA, shareholder, and a former officer of one of the Debtors (Western Utah Copper), I do not have access to the books and records of the company. Additionally, for the past three or four years I have obtained very limited access to the properties upon which, and in which, assets of the company are located. For the past several months the Debtors have denied shareholders unencumbered access to the properties. Permission is only granted under the strict supervision of guided, and guarded, tours.
However, CPRKSA posses convincing evidence of huge deposits of mineralization, and therefore asset value, throughout the properties controlled by the Debtors. CPRKSA has obtained hundreds of documents and volumes of reports, all of which are readily available upon request.
For the purposes of this letter, below are references to documents that have been introduced into the bankruptcy proceedings of the Debtors.
Summary of Schedules of Debtor Western Utah Copper
This 25 page document (Exhibit B, attached) indentifies claims and land holdings of the Debtor. The document lists 923 claims and leases, most of which are in the Beaver County mining districts of Beaver Lake, Rocky, and San Francisco. These claims constitute a large land position of approximately 66 Square Miles or 43,000 Acres (Map 1 - Exhibit C, attached). The holdings in these districts are not all of the holdings of the Debtors but they will suffice for the purposes of this letter.
Regarding assets of the Debtors, please refer the following documents on record in this bankruptcy proceeding: The Declaration of John Bryan (Docket # ck 23 mentioned earlier), Declaration of O. Jay Gatten (Docket # ck 27 - Exhibit D), Declaration of Michael G. Nelson, Ph.D. (Docket # ck 26 - Exhibit E), and Declaration of David Hartshorn (Docket # ck 25 - Exhibit F). For the most part, these statements focus upon small faction Debtors holdings.
References in these documents to the Hatch Report (see supplemental material) are numerous. The Hatch Report is a report prepared for the Debtors and delivered on April 8, 2008. The Hatch Company, based in Canada, is a worldwide supplier of technical and strategic services to the Mining, Metallurgical, Energy, and Infrastructure industries. The Report Hatch prepared for the Debtors was based on a report completed in 1998 by Mine Development Associates. The Hatch Report focuses on four mines (or deposits) and some on-property stockpiles. These four mines are: The Hidden Treasure, The OK, The Maria, and The Copper Ranch. The approximate locations of these mines are marked in blue on Map 6 (Exhibit C). These mines represent a small portion of the land holdings of the Debtor.
The Declaration of JA Bryan mentions the Bawana Mine (also shown in blue on Map 6 as a primary target). (Please note that the holdings maps, including Map 6 DO NOT include all of the mines or ?targets? within the holdings. For example, the Candy B, the Sunrise, the Old Hickory and the Valley are not identified on Map 1 or Map 6.
Declaration of O. Jay Gatten, points out that he is a ?licensed professional geologist? who owns North American Exploration and has 46 years of experience. He states that he is ?very familiar with the mineral resources on the properties owned or leased by CPRK Mining Corporation and Western Utah Copper Company.? Mr. Gatten goes on to say (bottom of page 3):
?My findings and conclusions, based upon my experience, research and evaluation, were and continue to be as follows:
There are large, high-grade copper resources on the WUCC properties. ... These deposits and resources were accurately measured with consistent results by three qualified companies. While this information does not meet current (NI 43-101) requirements, the data cannot be ignored.
The projections of Dr. Michael Nelson ... concluding that the Debtors have a highly profitable project are reasonable given the additional drilling noted above and the effective operation of the existing (CPRK) flotation mill.? (Page 4, paragraph c.)
?The Debtors control many thousands of acres of contiguous mining claims. This area hosts numerous occurrences of copper with precious metal content, there are at least 15 exploration targets that could be tested and developed to provide additional reserves and enhance the value of the Debtors? assets.? (Pg 4, para d. emphasis added)
Dr. Michael G. Nelson?s credentials portray impressive accomplishments. Dr. Nelson is a university professor (University of Utah) and a consultant with over 25 years of experience. He has been granted 7 patents and 7 of his new technologies have been commercialized. He is the author and co-author of 7 books, 30 peer-reviewed publications, and more than 20 other publications. He states that 2 of his patents are ?related to processes in flotation mills and may be relevant to operations of CPRK Mining Corporation.?
Dr. Nelson was a consultant to the Debtors from April 8, 2008 to June 26, 2009 and is familiar with the ore reserves and the operation of the mill. He states the following beginning at the bottom of page 3:
?The Debtors? properties currently have sufficient ore reserves for the flotation mill to process approximately 3,700 tons per day for at least 2 years.? (Emphasis added)
Beginning at the top of page 4 (para b):
?With this input, the flotation mills should produce an estimated $5 to $6 million of pre-tax revenues per month at steady state, based on copper at $2.81/lb., silver at $18.04/oz, and gold at $1040/oz.? [Current Prices (LME), as of August 6th for these metals are: Copper $3.35/lb., Silver $18.43, Gold $1195.40].
Paragraph 8(A), page 4:
?The mining rate and ore grades for the first two (2) years were based on the analysis in the Hatch report, PR H328548, rev I, p.48, dated April 8, 2008. That report shows a total of 2,505,395 tons of ore reserves, with an average grade of 1.173%.?
It is important to note that the Debtors have continued to drill, assess and assay ore bodies for the past three years. As far as I know, none of the data gathered as a result of that drilling is included in the Hatch Report.
Back to Dr. Nelson - Paragraph 8(B), bottom of page 4:
?I did not make an independent analysis of the drill data, nor of the mining plans that support the data in the Hatch report. However, I have reviewed the Hatch report in detail, and I am confident that it is correct, according to prevailing industry and regulatory standards. Moreover, Hatch is an industry leader in conducting independent verifications and analysis of mining-related projects and their reports are regularly relied on by experts and industry leaders.? (Emphasis added)
Here are a couple of important statements from the Declaration of Dr. Nelson, who is an expert in the design and operation of flotation mills (page 5, para e):
?I did review the detail and design bases for the mill, including the mass and water balances, the calculations for sizing equipment, and the design of the flow sheet. In my opinion, the design of the mill is sound, and is suitable for the ore types at WUCC. The mill is designed to be flexible, to allow processing of many ore types, with varying contents of copper oxides, copper sulfides, and magnetite.
The operating and shipping costs used in the analysis were provided to me by employees of WUCC, as were the criteria for smelting and refining contracts and charges. Again, these parameters are reasonable, based on my criteria for smelting and refining contracts and charges. These parameters are also reasonable, based on my experience with other similar projects.?
In summary, Dr. Nelson?s Declaration states that the mill is the correct mill, and that it will take some time to ?optimize? the operation of the mill but it should profitably process the ore in the Debtor?s holdings.
Dr. Nelson also made statements that are pertinent to the value of the assets. He stated that the mill should produce ?$5 to $6 million of pre-tax revenue per month at steady state.? He goes on to state that the parameters under which he arrived at the revenue numbers allowed for the operating and shipping costs and the criteria for smelting and refining contracts and charges. It is safe to assume that when Dr. Nelson uses the words ?pre-tax revenue? he is proffering an earnings number (or EBIT) from which operating and shipping costs, smelting and refining contracts, and charges have already been deducted. Before arriving at a net profits number, still left to be deducted are things like royalties, debt service, administrative overhead, and taxes.
Let?s be generous (assume the operators are heavy spenders) and say that only 10% of our ?pre-tax revenue? is ?net profit.? (It should be much higher than 10%). $600,000.00 per month in net profit equals annual net profits, or after-tax earnings, of $7,200,000.00. Similar small mining companies trade with a P/E ratio of about 27 (refer http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pedata.html). Using a P/E ratio of 27, a net profit of that amount would make the company worth approximately $195 million dollars ? a far cry from the $7 million liquidation value posited with the Court, and justification for an Official Equity Security Holders Committee to represent shareholders.
David Hartshorn (Exhibit F) is a consulting geologist by profession with over 32 years experience in gold and base metal exploration and mining, and has been working with the Debtors for 6 years (since February 2004) as a consultant. Mr. Hartshorn has designed and mined 9 open pits and 2 underground operations. Additionally, Mr. Hartshorn was an exploration geologist for Gulf Chemical and Metallurgical and a mine manager for Jumbo Mine Co. He is also a manager and Principal of Nevada Trend Exploration, LLC, a company engaged in acquiring and managing mining properties.
Mr. Hartshorn states that his principal responsibilities were and currently are as follows:
a. Managing all exploration on WUCC properties, including all drilling and identification of areas worth drilling to discover and/or confirm copper and other metal deposits;
b. Providing pit calculation and pit designs;
c. Supervising quality control in the pit mining operations;
d. Supervising the analytic lab which is responsible for all exploration drilling evaluation, blast hole and mill assays;
e. Confirming and improving previous pit designs completed by Mine Development Associates (?MDA?) completed in late 1998 and 2005;
f. Providing key inputs to the identification and evaluation of additional properties that could be added to the WUCC holdings;
Mr. Hartshorn further states, ?in the course of my assignments, I reviewed the work of a number of other consultants and mining companies, principally including the Hatch Report of 2008, the MDS feasibility reports, and North American Exploration reports completed by O. Jay Gatten (most recently in 2009) and many other reports and information provided by third parties and the Debtors.? (Exhibit F, pg 3 # 7)
Mr. Hartshorn goes on in his Declaration to explain some of the industry standards used in valuing mineral properties. He talks about NI 43-101 and points out that reserves are classified according to ?increasing geological confidence into Inferred, Indicated and Measured categories.? Measured reserves are the highest standard and are commonly referred to as ?proven? or ?bankable? reserves. Mr. Hartshorn goes into a detailed explanation of the three classifications and then goes on to state:
?In my opinion, the Debtor currently has Measured Resources of 111,054,000 pounds of Copper. (Ibid page 5 Para 10 a.) (Emphasis added).
Mr. Hartshorn then makes the statement in paragraph 10 - d. on page 5 that a $5 to $7 Million drilling budget could be ?reasonably? expected to move 15,994,000 pounds of Copper in the Sunrise Deposit and 192,040,000 of Copper in the Candy B to the Measured status(proven). Optimization of the mill should allow 85 to 90% recovery.
Mr. Hartshorn then points out that there are ?at least 10 targets of known copper mineralization within the existing exposed areas. This indicates in the areas already exposed by the mining activities of the Debtors, there are major deposits waiting to be Measured.
Finally, the Debtors? geological team is gathering historical drilling data, in conjunction with Southern Utah University, conducting fluid inclusion and isotope studies to determine the location of the possible copper porphyry that is the source of the copper in the skarn. Copper porphyry deposits are very important and highly valued since they usually contain vast deposits of copper that average about 0.5 to 1% copper by weight that can be worked on a large scale at low cost.? (Ibid. Pg 6, para 10 - h.)
According to Mr. Hartshorn, the properties of the Debtors have huge potential. Refer to his opinion that the Debtors have 111,054,000 pounds of copper already in the Measured Resources category and another 208,034,000 million pounds of copper that are ready to be moved into the Measured category. That asset alone gives the Debtors 319,088,000 pounds of copper. At an 85 to 90% recovery rate these particular properties, controlled by the Debtors, would produce a minimum of 285,000,000 pounds of copper. At today?s copper prices ($3.34) that is gross revenue of $ 959,178,528.00.
Mr. Hartshorn does not give sufficient information in his Declaration to allow a calculation of ore needs to be processed to produce the copper but, for the purposes of this letter, the assumption is made.
Obviously, the capacity of the mill may be a limiting factor but if we assume it will take 5 years to produce 285,000,000 pounds of copper the Debtors will produce 57 Million pounds per year and revenue (not including silver, gold or other minerals) of $190,380,000.00. If we apply some industry standards to these numbers $190 million in revenue should produce about $34,000,000.00 in profit per year. $34 Million in profit could produce a valuation for the company in the $900 Million Dollar range.
Please be assured that I am NOT predicting a valuation for the company in the $900 million dollar range during the next 5 years.
What I am suggesting is:
1) The value of the Debtor Companies is much higher than the $7 million posited by the referenced documents filed in this proceeding.
2) The potential for windfall profits to be diverted from the current shareholders is very real.
3) The Shareholders need and deserve an Official Equity Security Holders Committee to represent their interests.
4) There are several different scenario?s under which the Debtors are not insolvent and there are several scenario?s under which the Shareholders are ?in the money.?
A (5) Despite the considerable available data I and other shareholders have gathered proving, on an assets vs. liabilities basis, that the Debtors are not ?hopelessly insolvent? the issue of insolvency should not be the primary criteria under which a request for an Official Equity Security Holders Committee should be based.
Whether or not the debtor is solvent is not a controlling or even determinative factor. [In the Matter of Mansfield Ferrous Castings, Inc., 96 B.R. 779, 781 (Bankr. N.D. Ohio 1988)] (rejecting debtor?s insolvency as barring appointment of equity committee, and stating that court would be guided by all of the facts and not just the issue of solvency). This is largely because, as one court rightly pointed out, equity security holders ?might possibly have a different view on the issue of insolvency than [creditors].? Emons, 50 B.R. at 694. Indeed, one court went so far as to find that the issue of insolvency is in fact ?irrelevant? since the Bankruptcy Code specifically authorizes the formation of equity committees and equity?s interests cannot be determined until a plan has been formulated. [In re White Motor Credit Corp., 27 B.R. 554, 558 (N.D. Ohio 1982)] (dismissing appeal of an order appointing equity committee on grounds that bankruptcy court did not err in excluding evidence of debtor?s insolvency).
B. Number of Shareholders. CPRKSA membership is variable. I have included in Exhibit G (Docket # ck18) the list of Shareholders included in the Summary of Schedules filed in these proceedings. That list shows 476 Shareholders holding 5,839,173,422, Shares with 2,656,939,535 of those Shares listed with some form of restriction. I have also included a list of Shareholders (see Exhibit G) sent to me by Mr. Frank Firek of CPRKSA. This list shows 392 Shareholders holding over 2.4 Billion Shares. Please also see the letter from Mr. Firek requesting the appointment of an Official Committee.
The Shares of CPRK are actively traded on the Pink Sheets and the Debtor has indicated a desire to qualify to move to a higher level within the stock trading community by producing the required financial statements and other documents. The status of the bankruptcy proceedings will have an effect on the ability of the Debtor to make such a positive move.
C. Complexity of the Case. The foregoing components of this letter, the exhibits, the supplementary documents and information and the on-going litigation between the Debtors and NSRC highlight the very complex nature of this case.
All bankruptcy cases of multi-million dollar businesses are undeniably factually and legally complex.
It is apparent that any Plan of Reorganization will be a complex plan which will be highly negotiated and will require much give and take between all stakeholders. The equity shareholders deserve a seat in these complex negotiations via the appointment of an Official Equity Security Shareholders Committee.
D. The final determining guideline in the appointment of an equity committee is a question of whether the cost of an additional committee (including financial cost and the cost of delay) would significantly outweigh the concern for adequate representation.
Considering the costs and expenses the Debtors have projected for Administration in this case, (see note below), the complexity of the case, and the very real potential that without an Official Committee the shareholders may be disenfranchised the costs associated with the establishment of an Official Committee of Shareholders can be easily justified. (See Docket # ck 44 & and Nevada Court docket # 90 WU )
(Note: ?Phase 1 Expenditures? as proffered by Debtors: ?Management of the Estate? $175,000/month plus $15,000/month for expenses related to ?Management of the Estate? - ?Corporate Management? $23,000/month for management of the company including Dave McMullin and Marcus Southworth - ?$25,000/month retainer for Edwin Davis? - $8,400/month for Administrative Personnel - $1,500 / month for Stockholder Relations and another approximately $65,000/month for ?Key Personnel? - total over $300,000/mo for what is essentially administrative expenses? (See Nevada Docket # 90 WU entitled Erratum To Motion For Reconsideration of Order Denying Motion for Order Shortening Notice Period ... ) (Exhibit H)
Conclusion
According to the Declaration of Marcus Southworth (Docket # ck24) the shareholders have contributed, through the purchase of the stock of the Debtors, approximately $20 Million dollars in capital investment. This amount is almost twice the amount of the principal (amount not including interest and penalties) ?invested? by the First, Second and Third lien-holders combined. We understand the reasoning behind the positioning of priority liens for creditors and we understand the shifting of the fiduciary duty of the officers and directors of the Debtors toward secured and unsecured creditors. However, we believe justice is not served when shareholders are disenfranchised and may be forced into a 100% loss without the right to even have a voice in the proceedings. We request that the Trustee?s office give us that voice and thereby allow shareholders to participate in determining the future of their investment.
In summary, this case meets the applicable statutory and case law criteria for the appointment of an Official Equity Committee, and accordingly, this is the very type of Chapter11 case where public investors should receive the important protections afforded by such aforementioned committee.
I encourage the U.S. Trustee?s office to take notice of the formation of an unofficial committee in the form of the CPRK Shareholders Association and to immediately order and facilitate the formation of an Official Equity Security Holders Committee together with the requested counsel and other needed professional assistance. An Official Equity Committee is essential to preserving the value of current equity holders, as well as, and in the interest of justice.
RESPECTFULLY SUBMITTED,
__________________
Our share count has gone up a good bit since this was filed.
CPRKSA
Copper King Shareholders Association
Members of the Steering Committee:
Lee Abbott Chuck Dawson
Frank Firek Scott Harmer
David Wright
August 9, 2010
Ms. Laurie A. Cayton
Office of the U.S. Trustee
Department of Justice
405 South Main Street
Suite 300
Salt Lake City, Utah 84111
Re: Request for the appointment of an Official Equity Security Holders Committee to support the interests of public shareholders in the Chapter (Ch.) 11 Bankruptcy proceedings of Copper King Mining Corporation (Case Number: 10-30002-WTT), and Western Utah Copper Company (Case Number: 10-29159-WTT).
Dear Ms. Cayton:
My name is Lee Abbott. I am listed as an equity shareholder in Copper King Mining Corporation (CPRK); and its subsidiary, Western Utah Copper Company (WUCC). CPRK and WUCC are currently undergoing Ch. 11 Bankruptcy proceedings in the State of Utah.
On account of these proceedings, a group of CPRK shareholders have recently formed an Ad Hoc committee identified as the CPRK Shareholders Association (CPRKSA). CPRKSA is an ever growing group of individual investors seeking fair and just recovery of their investments. Membership grows daily and our investment interests now total more than 40% of all outstanding shares at this time.
For clarification, CPRKSA is not, at present, an official committee, nor is it represented by counsel. Members cannot be expected to adequately represent the legal rights possessed by individual shareholders since individual shareholders owe no fiduciary duty to any other shareholder, or to a class of shareholders. ((Beker Indus.Corp., 55 B.R. 945, 949 (Bankr. S.D.N.Y. 1985))
Yet as a group, CPRKSA shareholders respectfully request you, as Trustee, to appoint individuals from CPRKSA as an Official Equity Security Holders Committee for the purpose of representation in the aforementioned bankruptcy proceedings, pursuant to 11 U.S.C Section 1102 (a) of the Bankruptcy Code.
CPRKSA urges your support in this matter for the following reasons:
1. There is sound cause to believe the debtors? estate, as presented to the court, is indicative of conservative figures which do not reflect true market value of the assets in the current state of the economy. Debtors have focused on a portion of the assets held by the company and presented a valuation standard that severely understates the value of the stated assets. Should valuation reflect current standards, value could increase towards hundreds of millions of dollars in excess of what is reflected in the debtors schedules.
2. The burden of representation of management and/or the Debtor?s Board of Directors for the interests of equity holders may prove conflict of interest. Even if certain directors or managers hold substantial equity positions, a conflict exists to proper equity representation as they are subject to conflicting fiduciary duties to all stakeholders. Further, there is a reasonable expectation that the Debtors will favor the interests of significant creditor claims, as their relations are important to the Debtors for future business interactions. Also, an official creditor?s committee cannot be relied upon for equity representation, as the Creditor?s Committees owe their fiduciary duties to the secured and unsecured creditors, and as such, will most likely be working against the interests of equity holders. CPRKSA is distinctly concerned the Debtor and Creditors may negotiate an equity swap, or other agreement allowed by the bankruptcy code, resulting in windfall profit that would be diverted away from current equity holders. An official equity committee would give proper representation to equity holder?s interests, as an equity committee?s fiduciary duties will not be divided between stakeholders, but will only seek what is just and proper value given to equity?s interests.
An official committee charged with safeguarding the interests of the class it represents is one of the critical protections for creditors and shareholders provided in the Bankruptcy Code. Section1102(a)(2) of the Bankruptcy Code provides that, on request, the court may order the appointment of an official committee to represent the interests of equity security holders where "necessary to assure [their] adequate representation" in a reorganization case.11 U.S.C.?1102(a)(2).
Congress recognized that other parties, such as creditors, cannot be expected to adequately represent the interests of shareholders:
As public investors are likely to be junior or subordinated creditors or stockholders, it is essential for them to have legislative assurance that their interests will be protected. Such assurance should not be left to a plan of reorganization negotiated by a debtor in distress and senior or other institutional creditors who will have their own best interest to look after. [S. Rep. No. 989, 95th Cong., 2nd Sess. 10 (1978)] (emphasis added).
The legislative history indicates that Congress intended for official committees to ?be relied upon in cases in which the debtor proposes to affect several classes of debt or equity holders under the plan and in which they need representation. [H.R. Rep. No.595, 95th Cong.,1st Sess.401 (1977)]. In particular, Congress explained that official committees are to serve as "the primary negotiating bodies for the formulation of the plan of reorganization.? It is apparent from both the legislative history and Section 1103 of the Bankruptcy Code, however, that the function of committees is not limited to negotiating plans. Official committees, including equity committees, also represent creditors or equity security holders in all other aspects of the case, "provide supervision of the debtor," and ?execute an oversight function in the pursuit to protect constituents' interests." [In re Penn-Dixie Indus., Inc., 9 B.R. 941,944 (Bankr. S.D.N.Y. 1981)]. Thus, Congress recognized that in certain Ch. 11 cases, appointment of an official equity committee with wide-ranging powers and duties will be necessary in order for shareholders? interests to be adequately represented.
In the proceedings of cases 10-30002-WTT and 10-29159-WTT committees to represent both the Secured and Unsecured creditors have been formed so the interests of both of those classes of stakeholders are being represented. Shareholders deserve representation also.
3. Guidelines have been developed to determine whether an official committee is necessary to provide adequate representation for shareholders, which include the following:
A. debtor?s solvency;
B. number of shareholders;
C. complexity of the case; and
D. whether the cost of an additional committee (including financial cost and the cost of delay) would significantly outweigh the concern for adequate representation.
[In re Williams Communications Group, Inc., 281 B.R. 216, 220 (Bankr. S.D.N.Y. 2002); Albero v. Johns-Mansville Corp. In re Johns-Manville Corp., 68 B.R. 158, 159-60 (S.D.N.Y. 1986); In re Emons Indus., Inc., 50 B.R. 692, 694 (Bankr. S.D.N.Y. 1985)].
A.(1) While it is a fact that the Debtors in these cases have little or no cash flow, this situation has existed since the founding of the company. The Debtors are a start-up mining operation and the debts incurred to date have been incurred as a function of starting up a mining operation which has yet to reach what could be considered ?cash flow.? The test of insolvency in this case, as in other similar cases, is not a test of cash flow but a test of total liabilities versus total assets. The prevailing evidence shows that the assets far outweigh the liabilities in these cases.
The Debtors have declared that they do not believe the company to be hopelessly insolvent and are requesting the approval of DIP financing (See Declaration of John A Bryan Docket # ck 21 & Declaration of John A. Bryan Docket # ck 23 Pg 7 para. 16,). A major portion of the DIP financing is designated by the Debtors for the purpose of ?confirmation drilling,? metallurgical testing and mineral production. As the Debtor?s illustrate in in Docket # ck 23 beginning on page 14 production of minerals would produce cash flow especially with current metal prices.
A.(2) There are numerous reports available on the assets included in the Estate of the Debtors. The most credible asset reports, completed by top firms and recognized experts, testify to an incredibly high mineral content of the assets of the debtor. In addition, shareholders have obtained informal opinions from mining experts indicating that if the ?state of the art? mill, now mostly complete, were in production it would be worth approximately $60 Million.
The ability to process ore, extract the minerals from that ore and produce a market ready product such as copper, gold, and silver concentrates is critical to the successful operations contemplated by the Debtors. The existing mill is a major link in that process and enhances the value of the mineral holdings assets but the major assets of the Debtors are the mineral holdings, claims and leases.
As an equity security shareholder in CPRK, I understand the perceived necessity Mr. Bryan (current C.E.O.) felt to value the assets of the Debtors at what is essentially liquidation value. Mr. Bryan stated that ?my team and I have prepared a valuation model of the Debtor?s assets today, based on current factors (e.g., no operations and no ability to extract and efficiently process ore).? (Refer Docket # ck 23, Declaration of John A. Bryan Jr., Pg 4 Para. B. 8). This valuation raises several legitimate questions about the methods used to determine asset value and certainly runs contrary to the proposed valuations used by management pre-petition.
A large number of the shareholders who are members of CPRKSA are sophisticated investors. When members purchased shares, they knew the Company (Debtors) was not yet producing commercial quantities of Copper or other metals. Members bought shares based on the value of the underlying assets (i.e., the mineral holdings, and a ?state of the art mill? that was ?soon? entering production).
While it is true the Mill is currently not in ?production?, shareholders are of the opinion production failure is due to a lack of operating capital;rather than, ?the ore mining facility does not have the equipment or technical capacity at this time.? (e.g., J.A. Bryan, Docket #23, Pg5). In fact, mine and milling experts recognize any mill requires a ?dialing-in? process.
Additionally, the Debtors mill has produced copper concentrate, yet shareholders were told it was ?not economical? to produce concentrates when the mill was in production. (CPRK Press Release, May 3, 2010, Author: Marcus Southworth, President & CEO). John Bryan and Dave McMullin (Officer & Board Chairman) recently informed the CPRKSA Steering Committee that the mill was ?fired up? for testing and that it was in ?a lot better condition than we expected.? Tetra-Tek stated it was in ?excellent? shape. In the Declaration of Michael G. Nelson, Ph.D. (Docket # ck 26), the following statement was made in reference of the mill:
?Optimization of the operation of the flotation mill will require 6 to 8 months. During this time, the mining plan and ore blending schemes will be determined, flotation reagent schemes will be optimized, and the methods for removing moisture from concentrates and tailings will be finalized. Such a startup time is typical for flotation mills like this one. I have worked in such mills in the U.S., Australia, Chile, Mexico, and South Africa.? [Declaration of Michael G. Nelson, Ph.D., Docket Number 26, Pg 4, para 4. (Emphasis added)].
A.(3) NI 43-101 may not be the correct standard for the valuation of assets, designated by the Debtors post petition. National Instrument 43-101 Standards of Disclosure for Mineral Projects, is a reporting standard adopted by Canadian Securities Administrators for the basic purpose of investor protection. Investors who are contemplating investing in minerals projects need a standard upon which they can rely in making informed investment decisions. NI 43-101 was adopted in an effort set a clear standard upon which unsophisticated retail investors could depend. The intent of NI 43-101 is to minimize any instances of misrepresentation or investment fraud in the Canadian Securities industries. Because of the comparatively friendly mining securities laws in Canada, many small United States mining companies list their securities on the TSX-V stock exchange in Canada. Therefore, NI 43-101 has become a sort of de-facto standard for small United States mining companies when it comes to the governance of securities transactions and investors relations. However, the Debtors in this case are not involved in the issuance of new Canadian securities nor in the promotion of new securities of any kind. These Debtors are involved in a bankruptcy proceeding where the true market value of the assets of the Debtors is much more important than if those assets meet the standards of the Canadian Securities Administrators.
In bankruptcy proceedings there is ample reason to question the need for mineral assets to meet the high bar set in NI 43-101. In fact, a recent press release from the Canadian Securities Administrators indicates that Canadian Authorities are contemplating repealing and replacing NI 43-101. One of the reasons stated for the proposed repeal is ?the challenges the current mining disclosure rules pose? to the operations of market participants. (Exhibit A, attached)
Yet, in the Declaration of Mr. Bryan (Docket # ck23), NI 43-101 was identified as the required standard the mineral assets of the Debtors needed to meet to obtain any value. Failure to comply with the standard of ?Measured Resources?, as set in NI 43-101, does not in any way mean the mineral asset does not exist.
A.(4) Assets vs. Liabilities: Shareholders are unable to obtain critical information to enable an independent evaluation or valuation of the assets of the Debtors. Though I am a member of CPRKSA, shareholder, and a former officer of one of the Debtors (Western Utah Copper), I do not have access to the books and records of the company. Additionally, for the past three or four years I have obtained very limited access to the properties upon which, and in which, assets of the company are located. For the past several months the Debtors have denied shareholders unencumbered access to the properties. Permission is only granted under the strict supervision of guided, and guarded, tours.
However, CPRKSA posses convincing evidence of huge deposits of mineralization, and therefore asset value, throughout the properties controlled by the Debtors. CPRKSA has obtained hundreds of documents and volumes of reports, all of which are readily available upon request.
For the purposes of this letter, below are references to documents that have been introduced into the bankruptcy proceedings of the Debtors.
Summary of Schedules of Debtor Western Utah Copper
This 25 page document (Exhibit B, attached) indentifies claims and land holdings of the Debtor. The document lists 923 claims and leases, most of which are in the Beaver County mining districts of Beaver Lake, Rocky, and San Francisco. These claims constitute a large land position of approximately 66 Square Miles or 43,000 Acres (Map 1 - Exhibit C, attached). The holdings in these districts are not all of the holdings of the Debtors but they will suffice for the purposes of this letter.
Regarding assets of the Debtors, please refer the following documents on record in this bankruptcy proceeding: The Declaration of John Bryan (Docket # ck 23 mentioned earlier), Declaration of O. Jay Gatten (Docket # ck 27 - Exhibit D), Declaration of Michael G. Nelson, Ph.D. (Docket # ck 26 - Exhibit E), and Declaration of David Hartshorn (Docket # ck 25 - Exhibit F). For the most part, these statements focus upon small faction Debtors holdings.
References in these documents to the Hatch Report (see supplemental material) are numerous. The Hatch Report is a report prepared for the Debtors and delivered on April 8, 2008. The Hatch Company, based in Canada, is a worldwide supplier of technical and strategic services to the Mining, Metallurgical, Energy, and Infrastructure industries. The Report Hatch prepared for the Debtors was based on a report completed in 1998 by Mine Development Associates. The Hatch Report focuses on four mines (or deposits) and some on-property stockpiles. These four mines are: The Hidden Treasure, The OK, The Maria, and The Copper Ranch. The approximate locations of these mines are marked in blue on Map 6 (Exhibit C). These mines represent a small portion of the land holdings of the Debtor.
The Declaration of JA Bryan mentions the Bawana Mine (also shown in blue on Map 6 as a primary target). (Please note that the holdings maps, including Map 6 DO NOT include all of the mines or ?targets? within the holdings. For example, the Candy B, the Sunrise, the Old Hickory and the Valley are not identified on Map 1 or Map 6.
Declaration of O. Jay Gatten, points out that he is a ?licensed professional geologist? who owns North American Exploration and has 46 years of experience. He states that he is ?very familiar with the mineral resources on the properties owned or leased by CPRK Mining Corporation and Western Utah Copper Company.? Mr. Gatten goes on to say (bottom of page 3):
?My findings and conclusions, based upon my experience, research and evaluation, were and continue to be as follows:
There are large, high-grade copper resources on the WUCC properties. ... These deposits and resources were accurately measured with consistent results by three qualified companies. While this information does not meet current (NI 43-101) requirements, the data cannot be ignored.
The projections of Dr. Michael Nelson ... concluding that the Debtors have a highly profitable project are reasonable given the additional drilling noted above and the effective operation of the existing (CPRK) flotation mill.? (Page 4, paragraph c.)
?The Debtors control many thousands of acres of contiguous mining claims. This area hosts numerous occurrences of copper with precious metal content, there are at least 15 exploration targets that could be tested and developed to provide additional reserves and enhance the value of the Debtors? assets.? (Pg 4, para d. emphasis added)
Dr. Michael G. Nelson?s credentials portray impressive accomplishments. Dr. Nelson is a university professor (University of Utah) and a consultant with over 25 years of experience. He has been granted 7 patents and 7 of his new technologies have been commercialized. He is the author and co-author of 7 books, 30 peer-reviewed publications, and more than 20 other publications. He states that 2 of his patents are ?related to processes in flotation mills and may be relevant to operations of CPRK Mining Corporation.?
Dr. Nelson was a consultant to the Debtors from April 8, 2008 to June 26, 2009 and is familiar with the ore reserves and the operation of the mill. He states the following beginning at the bottom of page 3:
?The Debtors? properties currently have sufficient ore reserves for the flotation mill to process approximately 3,700 tons per day for at least 2 years.? (Emphasis added)
Beginning at the top of page 4 (para b):
?With this input, the flotation mills should produce an estimated $5 to $6 million of pre-tax revenues per month at steady state, based on copper at $2.81/lb., silver at $18.04/oz, and gold at $1040/oz.? [Current Prices (LME), as of August 6th for these metals are: Copper $3.35/lb., Silver $18.43, Gold $1195.40].
Paragraph 8(A), page 4:
?The mining rate and ore grades for the first two (2) years were based on the analysis in the Hatch report, PR H328548, rev I, p.48, dated April 8, 2008. That report shows a total of 2,505,395 tons of ore reserves, with an average grade of 1.173%.?
It is important to note that the Debtors have continued to drill, assess and assay ore bodies for the past three years. As far as I know, none of the data gathered as a result of that drilling is included in the Hatch Report.
Back to Dr. Nelson - Paragraph 8(B), bottom of page 4:
?I did not make an independent analysis of the drill data, nor of the mining plans that support the data in the Hatch report. However, I have reviewed the Hatch report in detail, and I am confident that it is correct, according to prevailing industry and regulatory standards. Moreover, Hatch is an industry leader in conducting independent verifications and analysis of mining-related projects and their reports are regularly relied on by experts and industry leaders.? (Emphasis added)
Here are a couple of important statements from the Declaration of Dr. Nelson, who is an expert in the design and operation of flotation mills (page 5, para e):
?I did review the detail and design bases for the mill, including the mass and water balances, the calculations for sizing equipment, and the design of the flow sheet. In my opinion, the design of the mill is sound, and is suitable for the ore types at WUCC. The mill is designed to be flexible, to allow processing of many ore types, with varying contents of copper oxides, copper sulfides, and magnetite.
The operating and shipping costs used in the analysis were provided to me by employees of WUCC, as were the criteria for smelting and refining contracts and charges. Again, these parameters are reasonable, based on my criteria for smelting and refining contracts and charges. These parameters are also reasonable, based on my experience with other similar projects.?
In summary, Dr. Nelson?s Declaration states that the mill is the correct mill, and that it will take some time to ?optimize? the operation of the mill but it should profitably process the ore in the Debtor?s holdings.
Dr. Nelson also made statements that are pertinent to the value of the assets. He stated that the mill should produce ?$5 to $6 million of pre-tax revenue per month at steady state.? He goes on to state that the parameters under which he arrived at the revenue numbers allowed for the operating and shipping costs and the criteria for smelting and refining contracts and charges. It is safe to assume that when Dr. Nelson uses the words ?pre-tax revenue? he is proffering an earnings number (or EBIT) from which operating and shipping costs, smelting and refining contracts, and charges have already been deducted. Before arriving at a net profits number, still left to be deducted are things like royalties, debt service, administrative overhead, and taxes.
Let?s be generous (assume the operators are heavy spenders) and say that only 10% of our ?pre-tax revenue? is ?net profit.? (It should be much higher than 10%). $600,000.00 per month in net profit equals annual net profits, or after-tax earnings, of $7,200,000.00. Similar small mining companies trade with a P/E ratio of about 27 (refer http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pedata.html). Using a P/E ratio of 27, a net profit of that amount would make the company worth approximately $195 million dollars ? a far cry from the $7 million liquidation value posited with the Court, and justification for an Official Equity Security Holders Committee to represent shareholders.
David Hartshorn (Exhibit F) is a consulting geologist by profession with over 32 years experience in gold and base metal exploration and mining, and has been working with the Debtors for 6 years (since February 2004) as a consultant. Mr. Hartshorn has designed and mined 9 open pits and 2 underground operations. Additionally, Mr. Hartshorn was an exploration geologist for Gulf Chemical and Metallurgical and a mine manager for Jumbo Mine Co. He is also a manager and Principal of Nevada Trend Exploration, LLC, a company engaged in acquiring and managing mining properties.
Mr. Hartshorn states that his principal responsibilities were and currently are as follows:
a. Managing all exploration on WUCC properties, including all drilling and identification of areas worth drilling to discover and/or confirm copper and other metal deposits;
b. Providing pit calculation and pit designs;
c. Supervising quality control in the pit mining operations;
d. Supervising the analytic lab which is responsible for all exploration drilling evaluation, blast hole and mill assays;
e. Confirming and improving previous pit designs completed by Mine Development Associates (?MDA?) completed in late 1998 and 2005;
f. Providing key inputs to the identification and evaluation of additional properties that could be added to the WUCC holdings;
Mr. Hartshorn further states, ?in the course of my assignments, I reviewed the work of a number of other consultants and mining companies, principally including the Hatch Report of 2008, the MDS feasibility reports, and North American Exploration reports completed by O. Jay Gatten (most recently in 2009) and many other reports and information provided by third parties and the Debtors.? (Exhibit F, pg 3 # 7)
Mr. Hartshorn goes on in his Declaration to explain some of the industry standards used in valuing mineral properties. He talks about NI 43-101 and points out that reserves are classified according to ?increasing geological confidence into Inferred, Indicated and Measured categories.? Measured reserves are the highest standard and are commonly referred to as ?proven? or ?bankable? reserves. Mr. Hartshorn goes into a detailed explanation of the three classifications and then goes on to state:
?In my opinion, the Debtor currently has Measured Resources of 111,054,000 pounds of Copper. (Ibid page 5 Para 10 a.) (Emphasis added).
Mr. Hartshorn then makes the statement in paragraph 10 - d. on page 5 that a $5 to $7 Million drilling budget could be ?reasonably? expected to move 15,994,000 pounds of Copper in the Sunrise Deposit and 192,040,000 of Copper in the Candy B to the Measured status(proven). Optimization of the mill should allow 85 to 90% recovery.
Mr. Hartshorn then points out that there are ?at least 10 targets of known copper mineralization within the existing exposed areas. This indicates in the areas already exposed by the mining activities of the Debtors, there are major deposits waiting to be Measured.
Finally, the Debtors? geological team is gathering historical drilling data, in conjunction with Southern Utah University, conducting fluid inclusion and isotope studies to determine the location of the possible copper porphyry that is the source of the copper in the skarn. Copper porphyry deposits are very important and highly valued since they usually contain vast deposits of copper that average about 0.5 to 1% copper by weight that can be worked on a large scale at low cost.? (Ibid. Pg 6, para 10 - h.)
According to Mr. Hartshorn, the properties of the Debtors have huge potential. Refer to his opinion that the Debtors have 111,054,000 pounds of copper already in the Measured Resources category and another 208,034,000 million pounds of copper that are ready to be moved into the Measured category. That asset alone gives the Debtors 319,088,000 pounds of copper. At an 85 to 90% recovery rate these particular properties, controlled by the Debtors, would produce a minimum of 285,000,000 pounds of copper. At today?s copper prices ($3.34) that is gross revenue of $ 959,178,528.00.
Mr. Hartshorn does not give sufficient information in his Declaration to allow a calculation of ore needs to be processed to produce the copper but, for the purposes of this letter, the assumption is made.
Obviously, the capacity of the mill may be a limiting factor but if we assume it will take 5 years to produce 285,000,000 pounds of copper the Debtors will produce 57 Million pounds per year and revenue (not including silver, gold or other minerals) of $190,380,000.00. If we apply some industry standards to these numbers $190 million in revenue should produce about $34,000,000.00 in profit per year. $34 Million in profit could produce a valuation for the company in the $900 Million Dollar range.
Please be assured that I am NOT predicting a valuation for the company in the $900 million dollar range during the next 5 years.
What I am suggesting is:
1) The value of the Debtor Companies is much higher than the $7 million posited by the referenced documents filed in this proceeding.
2) The potential for windfall profits to be diverted from the current shareholders is very real.
3) The Shareholders need and deserve an Official Equity Security Holders Committee to represent their interests.
4) There are several different scenario?s under which the Debtors are not insolvent and there are several scenario?s under which the Shareholders are ?in the money.?
A (5) Despite the considerable available data I and other shareholders have gathered proving, on an assets vs. liabilities basis, that the Debtors are not ?hopelessly insolvent? the issue of insolvency should not be the primary criteria under which a request for an Official Equity Security Holders Committee should be based.
Whether or not the debtor is solvent is not a controlling or even determinative factor. [In the Matter of Mansfield Ferrous Castings, Inc., 96 B.R. 779, 781 (Bankr. N.D. Ohio 1988)] (rejecting debtor?s insolvency as barring appointment of equity committee, and stating that court would be guided by all of the facts and not just the issue of solvency). This is largely because, as one court rightly pointed out, equity security holders ?might possibly have a different view on the issue of insolvency than [creditors].? Emons, 50 B.R. at 694. Indeed, one court went so far as to find that the issue of insolvency is in fact ?irrelevant? since the Bankruptcy Code specifically authorizes the formation of equity committees and equity?s interests cannot be determined until a plan has been formulated. [In re White Motor Credit Corp., 27 B.R. 554, 558 (N.D. Ohio 1982)] (dismissing appeal of an order appointing equity committee on grounds that bankruptcy court did not err in excluding evidence of debtor?s insolvency).
B. Number of Shareholders. CPRKSA membership is variable. I have included in Exhibit G (Docket # ck18) the list of Shareholders included in the Summary of Schedules filed in these proceedings. That list shows 476 Shareholders holding 5,839,173,422, Shares with 2,656,939,535 of those Shares listed with some form of restriction. I have also included a list of Shareholders (see Exhibit G) sent to me by Mr. Frank Firek of CPRKSA. This list shows 392 Shareholders holding over 2.4 Billion Shares. Please also see the letter from Mr. Firek requesting the appointment of an Official Committee.
The Shares of CPRK are actively traded on the Pink Sheets and the Debtor has indicated a desire to qualify to move to a higher level within the stock trading community by producing the required financial statements and other documents. The status of the bankruptcy proceedings will have an effect on the ability of the Debtor to make such a positive move.
C. Complexity of the Case. The foregoing components of this letter, the exhibits, the supplementary documents and information and the on-going litigation between the Debtors and NSRC highlight the very complex nature of this case.
All bankruptcy cases of multi-million dollar businesses are undeniably factually and legally complex.
It is apparent that any Plan of Reorganization will be a complex plan which will be highly negotiated and will require much give and take between all stakeholders. The equity shareholders deserve a seat in these complex negotiations via the appointment of an Official Equity Security Shareholders Committee.
D. The final determining guideline in the appointment of an equity committee is a question of whether the cost of an additional committee (including financial cost and the cost of delay) would significantly outweigh the concern for adequate representation.
Considering the costs and expenses the Debtors have projected for Administration in this case, (see note below), the complexity of the case, and the very real potential that without an Official Committee the shareholders may be disenfranchised the costs associated with the establishment of an Official Committee of Shareholders can be easily justified. (See Docket # ck 44 & and Nevada Court docket # 90 WU )
(Note: ?Phase 1 Expenditures? as proffered by Debtors: ?Management of the Estate? $175,000/month plus $15,000/month for expenses related to ?Management of the Estate? - ?Corporate Management? $23,000/month for management of the company including Dave McMullin and Marcus Southworth - ?$25,000/month retainer for Edwin Davis? - $8,400/month for Administrative Personnel - $1,500 / month for Stockholder Relations and another approximately $65,000/month for ?Key Personnel? - total over $300,000/mo for what is essentially administrative expenses? (See Nevada Docket # 90 WU entitled Erratum To Motion For Reconsideration of Order Denying Motion for Order Shortening Notice Period ... ) (Exhibit H)
Conclusion
According to the Declaration of Marcus Southworth (Docket # ck24) the shareholders have contributed, through the purchase of the stock of the Debtors, approximately $20 Million dollars in capital investment. This amount is almost twice the amount of the principal (amount not including interest and penalties) ?invested? by the First, Second and Third lien-holders combined. We understand the reasoning behind the positioning of priority liens for creditors and we understand the shifting of the fiduciary duty of the officers and directors of the Debtors toward secured and unsecured creditors. However, we believe justice is not served when shareholders are disenfranchised and may be forced into a 100% loss without the right to even have a voice in the proceedings. We request that the Trustee?s office give us that voice and thereby allow shareholders to participate in determining the future of their investment.
In summary, this case meets the applicable statutory and case law criteria for the appointment of an Official Equity Committee, and accordingly, this is the very type of Chapter11 case where public investors should receive the important protections afforded by such aforementioned committee.
I encourage the U.S. Trustee?s office to take notice of the formation of an unofficial committee in the form of the CPRK Shareholders Association and to immediately order and facilitate the formation of an Official Equity Security Holders Committee together with the requested counsel and other needed professional assistance. An Official Equity Committee is essential to preserving the value of current equity holders, as well as, and in the interest of justice.
RESPECTFULLY SUBMITTED,
__________________
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