Republic Metals Corporation – Discrepancies in Precious Metals Inventory Accounting Ultimately Culminate in Chapter 11 Filing

November 2, 2018 – Republic Metals Corporation (“RMC” or the “Company”) and two affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 18-3359 [Docket No. 1]. The Company, a refiner of precious metals with a primary focus on gold and silver, is represented by Susan F. Balaschak of Akerman. Further board-authorized engagements include Paladin Management Group (“Paladin”) as financial advisor. RMC’s petition notes between 1,000 and 5,000 creditors; estimated assets of $174.8 million; and estimated liabilities of $265.1 million. Documents filed with the Court list RMC’s three largest unsecured creditors as (i) Laurelton Sourcing LLC, a subsidiary of Tiffany & Co. ($17.1 million), (ii) Couer Mexicana SA ($9.7 million) and (iii) Sumitomo ($8.8 million).

Events leading up to the Chapter 11 filing

In a declaration in support of the Chapter 11 filing (the “Avila Declaration”) [Docket No. 2], the Company’s chief restructuring officer Scott Avila (who is a principal at Paladin) detailed the events leading up to RMC’s decision to seek bankruptcy protection.

According to the Avila Declaration, in April 2018, RMC discovered a significant discrepancy in its inventory accounting as part of its preparation of 2017 year end financials and quarterly financials for the first quarter, 2018. On June 20, 2018, accounting firm Eisner-Amper delivered a final report that confirmed inventory discrepancies in the Company’s books and records. The Avila Declaration does not specify the exact nature of the discrepancies (eg just how much gold and silver was not properly accounted for), but those discrepancies clearly alarmed the Company’s senior lenders (the “Senior Lenders”), who served termination notices on the Company on July 10, 2018 and effectively demanded immediate payment of much of the outstandings under the Company’s approximately $177.4 million of senior debt. One of the Company’s Senior Lenders (ICBC Standard Bank Plc) also exercised rights under a further agreement with the Company that ended the Debtors’ ability to service customer deliveries via “Loco London” credit transactions, effectively resulting in the Company’s inability to do business in the critical London precious metals market. 

 

The Company briefly saw a path through its crisis, entering into negotiations with a major, strategic metals refiner (Switzerland’s Valcambi SA, the “Potential Buyer”) about the possible acquisition of the Company as a going concern; these negotiatians proceeding as far as the Company receiving a letter of intent from the Potential Buyer. This development resulted in the decision of the Senior Lenders to forbear on their termination of credit arrangements with the Company and the re-opening of its access to the London market. Prior to the Company’s filing for bankruptcy, however, negotiations between the Senior Lenders, the Company and the Potential Buyer took several dramatic turns with (i) the Senior Lenders once again pulling the plug on RMC (and their support of the acquisition by the Potential Buyer) on October 18, 2018 and (ii) RMC and the Potential Buyer forging ahead towards an improbable deal anyway, with the Potential Buyer issuing a press release on October 29, 2018 announcing that it had reached an understanding to acquire the Company “subject to completion of the final steps of due diligence.” 

 

Frantic efforts to close a deal failed, however. The Avila Declaration comments “Unfortunately, the Potential Buyer, Debtors and Lenders were unable to finalize the terms of an acquisition by the end of the day, October 31. With limited cash, and the inability to trade metals or deliver refined goods, the Debtors commenced these proceedings on November 2, 2018, to run an orderly sale process of their assets and operations. It is the Debtors intent to attempt to sell the Company as a going concern, but if unsuccessful, the Debtors will engage in a process to liquidate their assets and inventory for the ratable benefit of their creditors.”

 

 

The Avila Declaration notes that the Company has more than $86 million in metal obligations, comprised of precious metals that have been sent to the Company by suppliers for refining. These metals have not yet been paid for, by transfering the value of the refined material to a supplier’s designated account, or transferred to that supplier’s designated metal account. These suppliers (the top three, including a subsidiary of Tiffany & Co, noted above) will find the Company’s disclosure in the RMC Petition and Avila Declaration that the Company has $174.8 million in assets and $177.4 million in senior debt, quite alarming. They will also be alarmed to see themselves listed in RMC’s 11 Petition as “unsecured creditors” in respect of precious metals that they have sent to RMC. If you sent gold to a refiner to have it refined, who’s gold is it? The Avila Declaration does not directly address this point (beyond clearly listing the metal obligations as liabilities separate from its senior debt), although it notes in respect of arrangements with its senior lenders that, “The Senior Lenders assert blanket liens on all assets of RMC, RMRC, and RCC, including all personal and real property, instruments and intangibles.”