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EVY Hambro came to the 2013 Mining Jamboree hunting for more gold.
At the conference, featuring lingerie models strutting before a South African sunset, the BlackRock fund manager scouted for a mining company needing financing. His search led him to double down on an earlier bet — a gold miner named Banro Corp. he knew had troubled operations in a troubled African country.
Mr Hambro is discovering just how troubled. Falling gold prices have battered Banro, as have operational setbacks. It has faced sometimes-violent unrest around its mines in the Democratic Republic of Congo (DRC) and questions about payments it made to entities controlled by a government official. Local residents blame it for several deaths.
Mr Hambro’s 2013 deal was part of a largely overlooked facet of the commodities boom-turned-bust. Eager for exposure to rising prices, conservative investors who once shied away from large bets on small miners in volatile places piled in.
Those wagers sometimes came with risks that exacerbated the pain of falling markets.
Banro’s biggest investor was BlackRock, through funds that London-based Mr Hambro managed. In exchange for a cash investment, the Canada-based miner in 2013 agreed to pay a dividend to a BlackRock trust — separate from the funds — which he co-managed and whose investors include Yale University and the Ohio Public Employees Retirement System.
Two weeks after Banro announced the deal, it ousted its chief executive, who had raised corporate-governance concerns and suggested investigating Banro’s finances, including payments Banro made to entities controlled by a Congolese official, say people familiar with the episode.
Banro’s current CEO, John Clarke, a board member now and at the time, wrote in a September email that Banro couldn’t disclose why his predecessor left and that it is "complete nonsense" that there were internal corporate-governance concerns. He said Banro had not made any improper payments and had not been involved in the deaths locals allege.
By early 2014, Banro was near insolvency, said Richard Brissenden, who became its chairman last year, in a June interview. "When I arrived I didn’t realise how bad the situation is," he said. "It was scary."
BlackRock’s Mr Hambro knew in 2013 that Banro routinely missed production forecasts because of operational missteps. But he didn’t know, people familiar with BlackRock say, of deadly accidents around its mines, of concerns over payments or of the extent of local unrest.
BlackRock says it "has a rigorous investment process and a strict set of criteria that is adhered to before any investment is made", adding: "These allegations, if found to be true, would be entirely contrary to BlackRock’s values."
Banro’s shares fell 22% after its prior CEO left and are down about 90% since the 2013 deal, valuing BlackRock’s holdings at about $4.6m, down from $66.4m at the end of 2011 when it owned fewer shares, according to FactSet.
Political and operational risks have long been part of investing in small mining companies. Until recently, those risks were too great for many big fund managers. But as commodities boomed, small miners became attractive. "During the boom days, they were quite aware of political risks, and had greater appetites to swallow them," says Daniel Litvin, managing director of Critical Resource, a London firm researching on-the-ground risk for companies and investors. "Quite often they made substantial mistakes."
Cobalt International Energy, an oil company whose investors have included Vanguard Group and Janus Capital Management, according to FactSet, disclosed in 2013 that the US Justice Department was investigating it on bribery allegations in Angola dating back several years. Cobalt denies wrongdoing, says it is co-operating with the investigation, and that the US Securities and Exchange Commission dropped a parallel investigation. Vanguard, Janus, the Securities and Exchange Commission, and the Justice Department declined to comment.
The Kyrgyz government and several non-governmental organisations alleged over the past four years that Centerra Gold, whose backers, according to FactSet, have included Franklin Templeton Investments and USAA Investment Management Co., engaged in corrupt dealings and polluted an area around a Kyrgyzstan glacier. Centerra says the allegations "are unfounded and without merit". USAA declined to comment. Franklin fund managers didn’t respond to inquiries. Banro’s Congo operations show the kinds of risks investors can face in developing-world mining.
For years, BlackRock avoided volatile stock investments. A 2006 deal with Merrill Lynch & Co. brought risk-taking fund managers like Mr Hambro. He is a banking-family scion and son of an investor in Russian gold mines.
Mr Hambro, 43, turned BlackRock into a mining-investment powerhouse, becoming well-known for the publicly listed BlackRock World Mining Trust. It did well during the commodities boom but lost 61% in net asset value in the three years ended September 30, compared with the Euromoney Global Mining Index’s 54% loss. The trust, while receiving dividends from Banro, does not hold stock in the miner; several BlackRock funds do, making the firm Banro’s largest investor.
BlackRock’s Banro foray began 10 years after Banro entered Congo, then called Zaire. Banro, under founder Arnie Kondrat, in 1996 acquired rights to mine gold near the Rwanda border, a region that erupted into war soon afterwards. In 2006, Banro deployed exploration teams to the mountainous Twangiza region, where violence continued even after the war ended in 2003. Mr Kondrat did not respond to inquiries. Banro had listed on the Toronto Stock Exchange, and one of Mr Hambro’s BlackRock funds bought about $10m of its stock, a 3% stake.
Banro soon disclosed big estimated reserves at Twangiza, and BlackRock’s stake gained about 50% in value over the next months.
Mr Hambro was a commodities evangelist. Chinese demand meant a sustained boom, he was cited as saying in a 2007 interview, describing his due diligence: "I physically go into mines and get my hands dirty."
Tensions mounted around Banro’s Congo operations. In 2006, an exploration team drilling near the village of Katombwe dislodged a rock that killed a local pastor’s mother, say the pastor and other local leaders. Starting in 2010, after the government approved Banro’s plan to mine near Katombwe, about 1,000 people were relocated from a fertile hillside where Banro would build its mine to Cinjira, a barren mountaintop. Cinjira residents say crops will not grow well there.
Banro built homes, a market and a water system for the displaced. It provided some with cash compensation. Banro’s Mr Clarke wrote that the relocation "was voluntary", that Banro did not choose the relocation spot and that "the Cinjira site was chosen by the community".
Cinjira residents say police came to their homes and said they must leave. The local government leader, Esperance Barahanyi, says an official from Congo’s capital made the site decision. Attempts to reach Congo’s mining ministry were unsuccessful.
Banro says it follows "conflict-free gold standards" from the World Gold Council trade group. Banro’s Mr Clarke said in a July interview its charitable foundation had spent millions of dollars helping communities near its mines. The foundation this year reported spending more than $5m on education, health care and other programs from 2004 through 2014. Last month, Banro won a Congo mining-industry award for social investment.
In 2010, BlackRock increased its Banro stake to 7%. In 2012, Mr Hambro sent a deputy, say people familiar with the trip, who met Banro officials including then-CEO Simon Village and helicoptered in to inspect the mine site. That year, a bulldozer working on a Banro waste pile dislodged a rock that struck 16-year-old Bukuze Kabalabala, who died hours later, say locals. Villagers stormed Banro’s gate. "It created an enormous animosity," says Crispin Mutwedu, a Banro employee in Congo who handles community relations. He says he offered Ms Kabalabala’s father two cows’ value and that they settled on $16,000, about eight cows’ value.
In his email, Mr Clarke wrote that "at no time has Banro been directly or indirectly involved" in the deaths. "Notwithstanding the mystery surrounding the death of the 16-year-old girl, and indeed the lack of any connection to Banro," he wrote, the company "completely out of good faith, and, most importantly, out of sympathy for the family’s loss, agreed to compensate the family".
Production slowed during the rainy season when ore became too wet. An ore-crushing mill broke. Banro told investors the rains were "unseasonably heavy". In the July interview, Mr Clarke said Banro could have "implemented" its equipment better. "They’re not excuses," he said, "they’re just embarrassing facts."
A new Banro mine, in Namoya, was on a jungle road that militia leader William Yakutumba says he controlled. Last year, a United Nations committee reported, his militia attacked villages and boats, stealing money and raping women. A Banro contractor agreed to pay Mr Yakutumba’s men to let their drivers pass, say people involved in the convoys.
Mr Clarke wrote: "At no time did Banro ever pay money, or pay tolls, or provide any favour to ANY armed rebel, to gain some sort of road access."
Mr Yakutumba says his group helped Banro workers travel the route but "never taxed Banro". He denies the UN allegations, saying "we respect women and human rights".
Banro made payments to a company controlled by Ms Barahanyi, the traditional chief near the Twangiza mine, that provides services such as labour, and made payments to her nonprofit company, Banro and Ms Barahanyi say. She goes by the title Mwamikazi.
"Traditional community chiefs such as the Mwamikazi are recognised under DRC law but not," Mr Clarke wrote in his email, "as some sort of elected government official or civil servant appointed by Kinshasa or some sort of representative of the central government, but rather as protectors of cultural identity and traditional values."
A Congolese-government information-ministry official, when asked about Ms Barahanyi, said: "The Mwamikazi is the local chief recognised by Kinshasa", "takes orders from Kinshasa" on governing the local area and is in charge of the local apparatus of the Kinshasa-based government. At the February 2013 Mining Jamboree, the mood was tense among Banro executives attending, say people familiar with the group. Operational delays and gold’s falling price had crimped revenue; Banro needed cash.
Mr Hambro was looking to offer cash for a slice of a miner’s production. A BlackRock analyst met Banro’s Mr Village at the jamboree. Over the next weeks, they discussed Banro’s potential and its operational problems, say people familiar with the talks, and Mr Village promised stronger management.
On February 21 2013, Banro announced the BlackRock trust would pay it $40m for a dividend based on production and gold price. The investment was later reduced to $30m. Mr Village sent documents to Banro’s board outlining corporate-governance concerns and actions to address them, say people familiar with the matter. He suggested sidelining the founder, Mr Kondrat, who was still involved in management, and changing the board, say people familiar with the documents. The documents raised concerns about financial issues, including payments involving Ms Barahanyi.
Mr Village proposed an outside audit. Instead, Banro directors ousted him.
Mr Clarke in July said he was not aware of the audit proposal. In his September email, he wrote that it is "complete nonsense" that "there were internal conflicts about corporate governance at Banro in early 2013" and it is "incorrect" that documents Mr Village submitted to the board raised corporate-governance concerns and outlined measures for improving governance.
"Banro does NOT make, and never did make, any illegal or improper payments" to Ms Barahanyi, Mr Clarke wrote. After Mr Village’s departure, members of Mr Hambro’s team held a call with Mr Clarke, who succeeded Mr Village as CEO, demanding to know what happened. Mr Clarke in July said he explained that Banro "closed out the contract" of Mr Village and that "we weren’t going to bad-mouth" Mr Village. Mr Clarke said "it was a necessary time for change". In Twangiza, tensions continued. On May 29, Ishara Chasinga, then 18, left home and saw protesters blocking Banro’s gate. Villagers say a Banro truck and mine police pulled up.
"They just got off the car and started shooting," said Mr Chasinga five days later at the hospital.
A bullet pierced his leg, he said, showing his bandaged thigh. Protests continued for two days. Mr Clarke in July said the shot was a warning and hit Mr Chasinga accidentally, but was "inexcusable".
In August, Banro reported gold production was up but that it lost $48.7m in the quarter ended June 30, versus a $3m year-earlier loss. In September, the New York Stock Exchange warned that, barring a sustained increase in Banro’s share price, it would delist it from its small-cap exchange. Mr Clarke declined to comment on the NYSE notice.
The BlackRock trust, which Mr Hambro still co-manages — he also still manages funds with Banro stakes — has written down its $30m Banro investment by 30% amid falling gold prices.
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