#BlackRock’s unfortunate #Banro bet on @WSJ

How a BlackRock Bet on African Gold Lost Its Luster

Justin Scheck in Luhwindja, Congo, and Scott Patterson in London

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 Inc.


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 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.

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.

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 can’t disclose why his predecessor left and that it is “complete
nonsense” that there were internal corporate-governance concerns. He
said Banro didn’t make any improper payments and wasn’t 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 realize how bad the situation is,”
he said. “It was scary.”

BlackRock’s Mr. Hambro knew in 2013 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 $4.6 million, down from
$66.4 million 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 Inc.,


an oil company whose investors have included Vanguard Group and
Janus Capital Management LLC, according to FactSet, disclosed in 2013
that the U.S. Justice Department was investigating it on bribery
allegations in Angola dating back several years. Cobalt denies
wrongdoing, says it is cooperating with the investigation, and that the
U.S. Securities and Exchange Commission dropped a parallel
investigation. Vanguard, Janus, the SEC and the Justice Department
declined to comment.

The Kyrgyz government and several NGOs alleged over the past four years that Centerra Gold Inc.,


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.

Warming to risk

Banro’s Congo operations show the kinds of risks investors can face in developing-world mining.

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 years old, 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 Sept. 30,
compared with the Euromoney Global Mining Index’s 54% loss. The trust,
while receiving dividends from Banro, doesn’t hold stock in the miner;
several BlackRock funds do, making the firm Banro’s largest investor.

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
after. In 2006, Banro deployed exploration teams to the mountainous
Twangiza region, where violence continued even after the war ended in
2003. Mr. Kondrat didn’t respond to inquiries.

Banro had listed on
the Toronto Stock Exchange, and one of Mr. Hambro’s BlackRock funds
bought about $10 million 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 won’t 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 didn’t 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 weren’t successful.

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 has spent millions of dollars helping communities
near its mines. The foundation this year reported spending more than $5
million on education, health care and other programs from 2004 through
2014. Last month, Banro won a Congo mining-industry award for social

A greater stake

In 2010, BlackRock increased its Banro stake to 7%.

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.”

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 U.N. allegations, saying “we respect women and human rights.”

made payments to a company controlled by Ms. Barahanyi, the traditional
chief near the Twangiza mine, that provides services such as labor, 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 recognized 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, asked about Ms. Barahanyi, says: “The
Mwamikazi is the local chief recognized by Kinshasa” and “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

executives attending, say people familiar with the group. Operational
delays and gold’s falling price had crimped revenue; Banro needed cash.

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 Feb. 21, 2013, Banro announced the
BlackRock trust would pay it $40 million for a dividend based on
production and gold price. The investment was later reduced to $30

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.

Clarke in July said he wasn’t aware of the audit proposal. In his
September email, he wrote 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

“Banro does NOT make, and never did make, any illegal or improper payments” to Ms. Barahanyi, Mr. Clarke wrote.

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.”

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.

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.”

August, Banro reported gold production was up but that it lost $48.7
million in the quarter ended June 30, versus a $3 million 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.

BlackRock trust, which Mr. Hambro still co-manages—he also still
manages funds with Banro stakes—has written down its $30 million Banro
investment by 30% amid falling gold prices.


Write to Justin Scheck at justin.scheck@wsj.com and Scott Patterson at scott.patterson@wsj.com

How a BlackRock Bet on African Gold Lost Its Luster – WSJ

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