Republic Metals Corporation – Chooses Valcambi as Stalking Horse Bidder, Will $16mn Sale Forge New Future or Meltdown?

January 8, 2019 – The Debtors notified the Court hearing the Republic Metals Corporation (“RMC”) case that, pursuant to a stalking horse agreement (the “Stalking Horse APA”) entered into as of January 9, 2019, the Debtors had selected Swiss metals refiner Valcambi SA (“Valcambi”) as its stalking horse bidder. According to Court filings, the parties have agreed a purchase price of $16mn including a cash deposit of $3.2mn.

Further to the Stalking Horse APA, Valcambi shall be entitled to a break-up fee of 3% of its opening bid, or $480,000, if it is not the successful bidder at the Auction. Any further bidders must submit an initial minimum overbid of at least $16,580,000, in order to be considered a “Qualified Bid” and subsequent minimum overbids at an Auction, if held, shall be in increments of $100,000.

The Debtors and Valcambi have come close to a deal before, with Valcambi going as far as issuing a press release announcing a deal on October 29, 2018. At the time Valcambi stated that the deal was subject only “to completion of the final steps of due diligence.” Something must have been spotted during those final steps as the deal (for which terms were never announced) clearly melted down, with the Debtors filing for bankruptcy protection just days later. In its initial Court filings, the Debtors shed some light on what must have been a frantic effort to pull victory from the jaws of defeat; efforts which ended in defeat and the withdrawal of support (including of the Valcambi acquisition) by RMC’s lenders. As we cited from a declaration filed in support of the Debtors’ bankruptcy filing ( the “Avila Declaration”) [Docket No. 2], “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.”

Prepetition and Postpetition Concerns

The Debtors have faced several major issues that will have caused Valcambi concern and will continue to generate uncertainty until the acquisition is actually completed. In April 2018, RMC discovered a significant discrepancy in its inventory accounting as part of preparation of its 2017 year end and Q1 2018 financials. 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 $177.4mn 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 Valcambi which led to a decision by the Senior Lenders to forbear on their termination of credit arrangements with the Company and to 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 Valcambi took several dramatic turns with (i) the Senior Lenders once again pulling the plug on RMC (and their support of the acquisition by Valcambi) on October 18, 2018 and (ii) RMC and Valcambi forging ahead towards an improbable deal anyway.

Post-petition, things did not get any easier. Since its bankruptcy filing, RMC has seen a flood of objections related to the treatment of metals sent to the Debtors for refining; which the Debtors were trying to treat as estate property.

As we predicted upon our first glance at the Debtors’ Chapter 11 Petition, the notion that the Debtors could simply claim gold and other precious metals sent to them for processing as estate property; to be distributed to the Debtors’ senior creditors (after being melted down, commingled with other customers’ metals and sold wholesale) was never going to be viewed by those customers as the gold standard for customer care or relations. 

 

In November, we reported on the Debtors’ supplement [Docket No. 219] to a proposed sale motion that walked back treatment of certain customer metals (those that were not only prepaid, but also fully processed and packaged, “Packaged Products”), BUT only if those customers also agreed to waive their rights in respect of further (not quite ready for the mailman) metals. It would be unsurprising to find out that certain of these customers might be wishing that they had chosen to have their gold processed in Mexico. Why (beyond a desire for Karmic justice)? Because, the Mexican customers are being offered a no strings attached offer in respect of the widely defined “Product” (“including but not limited to scrap metals and refined metals”). 

 

As previously reported in respect of the Debtors’ motion to supplement their proposed sale process, “Republic Metals filed a supplement to a motion it filed on November 28, 2018 [Docket No. 219] seeking Court authority to sell $13.55mn in metal materials that have been ordered and prepaid (the ‘Prepaid Products’). Pursuant to the supplement [Docket No. 286], the Debtors now seek Court approval of a proposed set of standardized settlement procedures that it could apply in respect of  customers who have a claim in respect of $3.2mn of  ‘Packaged Products’ (those Prepaid Products which are already packaged and ready for shipment to the customers that paid for them) held by the 39 customers listed in the Schedule A filed with the supplement. 

Perhaps even more alarming to the Debtors was the threat of prosecution in Mexico. In December we reported on the Debtors filing of an emergency motion for authority to settle disputes between affiliate Debtor Republic Trans Mexico Metals, S.R.L. (“RTMM”) and certain of RTMM’s customers [Docket No. 307]. At issue in Mexico, as elsewhere, was a familiar problem for the Debtors, a hostile creditor reaction to the Debtors’ proposed treatment of Prepaid Products, this time with an important twist (in Mexico at least) where it appears that the Debtors’ employees could be liable to criminal prosecution. The Debtors’ motion explained, “Absent receiving the relief requested in this Motion, certain of RTMM’s representatives will face consequences of an already pending criminal prosecution. RTMM has been told no further continuances of the prosecution will be granted by the Mexican public prosecutor, and the party pursuing such prosecution will not agree to drop charges absent return of its Product (as defined below). Accordingly, the Debtors submit sufficient cause exists for the Court to consider this Motion on an expedited basis….Mexican law provides for the commencement of a criminal prosecution against RTMM and its representatives, and potentially criminal liability and consequences, should RTMM refuse to return a Customer’s Product. In fact, one Customer of RTMM has already commenced a criminal prosecution against RTMM and its senior representative in Mexico.