Metallon’s Inordinate Ambition With Lekoil

By Yemisi Izuora
On 15, November 2020, Lekoil received a notice from Strand Hanson of its resignation as nominated adviser, with effect from close of business 20, November 2020. On the same date that Strand Hanson’s resignation took effect, Lekoil received a letter from Metallon requesting an extraordinary general meeting.
“The meeting must be held within 28 days from the date the meeting is convened,” Metallon insisted in its letter. Additionally, Metallon hinted that the Chairman of Lekoil was going to be removed while Michael Onochie Ajukwu, Thomas Donald Richardson and George Maxwell were to ascend Lekoil’s Board during the meeting it was proposing. Metallon also proposed a special resolution relating to restrictions being placed on the affairs of Lekoil’s principal subsidiary, LEKOIL Nigeria Limited.
To justify these proposed changes, Metallon pointed to corporate governance issues which it identified with Lekoil’s current management and board. It cited the unfortunate fake loan incident of January 2020, lack of growth in productivity at Otakikpo, unmet market expectations, the Board’s loose interpretation of the dissemination of price sensitive information and issues with executive remuneration.
However, Metallon’s advance and proposition have been deemed an opportunistic attempt to take control of Lekoil without paying a premium for the value of the shares and the assets of the company. In a detailed response, Lekoil’s Board addressed each issue raised by Metallon while noting that it is not the right organisation to proffer changes to the structure of Lekoil, considering its poor performance in the markets where it operates. This is especially so because Metallon has exhibited low capacity in managing its own affairs, prompting analysts to question its capacity to identify and right the wrong it purportedly identified in Lekoil.
Portrait of underperformance
Since inception in 2002, Metallon has described itself as a private natural resources and infrastructure company focused on gold mining with major operations in Zimbabwe. Unfortunately, Metallon’s gold mining operations have fared poorly over the years and contracted from four mines in 2016 to just one at present.
While the company claims to be a natural resources and infrastructure company, there is little evidence of its interests in infrastructure, especially in its 2018 financials.
The company has been known to have running battles with the law in the major market where it operates. In 2018, Metallon violated foreign exchange control regulations in Zimbabwe and suffered a loss for the year of approximately $78 million as indicated in its annual report. In the same year, Metallon’s short term liabilities were almost twice its revenues.
At present, the company faces winding-up petitions from several creditors, including American Express Services Europe Limited and UK’s Her Majesty’s Revenue & Customs. It was also sued by the Zimbabwean government for violating foreign exchange control regulations.
In April 2019, Metallon filed for business rescue for two of its Zimbabwe-based subsidiaries, Goldfields of Mazowe Limited, and Goldfields of Shamva Limited, in order to protect the companies’ assets from being seized by creditors. The Shamva mine has been sold and there are speculations that the Mazowe Mine will follow the same path.
Metallon’s gold mines now comprise a single working operation in Zimbabwe. Its other remaining mine, Redwing near Penhalonga, has been idle for over a year and is also up for sale.
Beyond these visible cracks, the company has well documented labour relations issues. According to the Associated Mine Workers Union of Zimbabwe, some 1,400 workers employed at Metallon Corporation’s mines were owed $40million in salaries, benefits and unremitted pensions.
In addition to these issues, Metallon has no expertise or track record in oil and gas development, prompting analysts to question its suitability to proffer board changes and business strategy for Lekoil, a company that has been in the oil and gas business for a decade.
Obvious gaps
As a result of its records, it is doubtful that Metallon has the resources to advance the development of Lekoil’s assets. Analysts in the oil and gas industry in Nigeria believe that associating Metallon with Lekoil could significantly hamper the ability of the latter to raise funds to finance asset developments in Nigeria, as financiers are expected to be weary of a Metallon inspired leadership which has failed to deliver on its projects across Southern Africa.
Indeed, if all the propositions of Metallon are acceded to, Lekoil’s board would be composed of 50% Metallon appointees and they would have the upper hand in voting.
As expected, Lekoil’s board does not believe that it would be appropriate for a 15% stakeholder to enjoy that level of board representation and control over the company as this would amount to handing Nigerian oil and gas assets to a company controlled by interests in South Africa. This is even more worrying as Mr. Ajukwu is on the board of MTN, another company which has its origins in South Africa.
A Spirited response
As promised in a statement released on 23 November 2020, the board of Lekoil promised to issue a detailed response to Medallion’s allegations.
Metallon alleges that Lekoil has raised over $264million of equity from shareholders since listing in 2013 and that the company’s shares were suspended on 23 November 2020 with a market cap of $13m. In reality, the company has raised $275.5 million of equity since listing in 2013.
Lekoil is not alone in suffering such significant declines in its share price. By way of comparison with its peers, at the time of Lekoil’s admission to trading on AIM, Tullow Plc, a London listed oil and gas company with assets in Africa, had a market capitalization of $11 billion. Today, Tullow Plc has a market capitalization of $450 million. And this has been the case for several other companies with similar operations as Lekoil.
Indeed, the company’s performance should be considered against sector-wide macroeconomic and structural issues, largely resulting from an oil price decline from $103 per barrel of oil at the time of Lekoil’s admission to trading on AIM to today’s $52 per barrel of oil.
Secondly, Metallon alleges that Lekoil has spent $129 million on general and administrative expenditure and invested $210 million into Oil & Gas activities but delivered no production growth at Otakikpo since first oil in 2017.
In reality, of the $275.5 million equity raised since listing in 2013, $166.2 million was invested in capital expenditure for the development of OPL 310, OPL 325 and Otakikpo, with only $73.3 million (which represents, 27%) going towards general and administrative expenditure.
To date, taking into account all sources of funding for the company (including debt and proceeds from production), general and administrative expenditure would represent 28% of total funds raised or generated. These percentages are consistent with, if not lower than, the industry average. The general and administrative costs expended by the company have been across several assets and not in respect of Otakikpo alone.
Since first oil at Otakikpo, the company has not raised any new equity capital from the public markets. Were Lekoil able to raise equity capital, the board is confident that it would have reached first oil on OPL 310 and significantly increased production at Otakikpo.
Thirdly, Metallon alleged that Lekoil’s board has continually missed the market expectations it sets, with production levels at Otakikpo averaging 5,676 barrels of oil per day (gross) in the first quarter of 2020, despite setting targets of 10,000 BOPD by 2017 year-end and 20,000 BOPD in 2020.
In response, the board notes that this is consistent with other exploration and production companies and Lekoil has experienced difficulties in raising the capital required to develop its promising assets. As a caveat, the board warned that with Metallon as a significant shareholder and with the appointees of Metallon controlling the board and the management of Lekoil, it will likely make raising capital even more challenging for the company as institutional sources of capital and funders may not wish to fund a company with a board controlled by Metallon.
Moreover, a review of Metallon’s 2018 financial statements together with the number of winding-up petitions presented against it, shows that Metallon is clearly not itself in a position to assist with the development of Lekoil’s assets.
Fourthly, Metallon alleged that the CEO of Lekoil has received total remuneration of over $10million, close to the current market capitalisation of Lekoil.  Lekoil notes that of the over $10.0 million total compensation paid to the Chief Executive Officer since admission to trading in 2013 (a period of seven years), which is included in the total general and administrative expenditure, the cash component of the Chief Executive Officer’s total remuneration is $7.0 million with the balance being in the form of shares awards and options.
Of the share and options-based compensation, most of these options and share awards were granted at a time of high oil prices and a share price that was performing well. What that means is that most of the Chief Executive Officer’s awards and options are now underwater. Furthermore, it should be noted that for a two-year period prior to admission of the company to trading on AIM and the 18 months following admission, the Chief Executive Officer agreed to receive his salary in the form of shares.
Metallon accused Lekoil board and management of poor corporate governance and stressed that that was the major reason the company fell prey to a loan scam In response, Lekoil noted that “consistent with other exploration and production companies, the Company has experienced difficulties in raising the capital required to develop its promising assets, forcing it to consider alternative funding sources and often more expensive sources of capital.
In January 2020, the company discovered that it had signed a loan agreement with certain individuals falsely purporting to represent the Qatar Investment Authority. The board regrets falling victim to this fraud and in response established an independent committee to investigate the origination of the agreement and commenced steps to recover funds paid to an intermediary.
A detailed review of the company’s wider corporate governance practices and procedures for the approval of major transactions was conducted, with the board immediately implementing improvements to the company’s corporate governance.
Additionally, Metallon alleged that in the last six months, stakeholders seeking to strengthen the board with one of the candidates it is proposing for the board were given a cold shoulder.  In response the board noted that it has never been averse to considering the appointment of new directors, with two new directors appointed in 2020.
Indeed, the board unanimously regards George Maxwell, with his extensive industry experience, as highly suitable and potentially a positive addition to the board. Following receipt of the 16 June 2020 letter from IFM Independent Fund Management, Hadron Master Fund and Hadron Master Select Fund and Zion Capital Access Fund, the company agreed to the appointment of Mr. Maxwell to the board. Mr. Maxwell however declined to be appointed at that time. Metallon was well aware long before its requisition of an EGM, of the company’s willingness to consider suitable board candidates such as Mr. Maxwell. However, the appointment of one director does not achieve Metallon’s objectives, which is to take over the company without paying a fair price.
Looking to the future with hope
“Your board believes that the Requisitioned Resolutions are no more than an ill-disguised attempt by Metallon and the other members of the Suspected Concert Party, to gain control of your Company,” Lekoil’s board and management said in a note to shareholders.
“Rest assured of the board’s continued commitment to engage fully with all shareholders, to promote the success of the company going forward,” the management and Board noted.
The Nigerian authorities, especially the Ministry of Petroleum Resources and the NNPC, should be vigilant as a company controlled by Metallon is likely to replicate its Zimbabwean experience in Nigeria. This could further depress an industry that has struggled to keep its head above water in the past few years.
Lekoil continues to be a foremost indigenous oil and gas company in Nigeria with extensive investment in the oil and gas industry. The company is committed to Nigeria’s energy future and has gone a long way to source critical funding to improve productivity in the oil and gas industry.

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