This shareholder update, dated March 31, 2017, is being provided to the shareholders of Cerro Dorado, Inc. and the general public, by way of posting on the company’s website. This information and additional updated information will be provided directly to the company’s shareholders in April 2017, through a shareholder mailing that will include a Notice of Annual Shareholders meeting to be scheduled in May 2017, an accompanying Information Statement and Proxy materials, and a Private Placement Memorandum.
1. Resignation of Patrick Day as Officer and Director
In February 2014, Christopher Day was appointed as a director of Cerro Dorado by William Hoffman and B Thom Clark, the remaining directors of Cerro at that time. Messrs. Hoffman and Clark subsequently resigned and later in February Patrick Day was appointed as a second director.
At the time of their appointments, the state of Cerro’s governing documents was such that very little action could have taken place to clean up the company and therefore super-voting preferred shares were issued to aid in the ability to guide the company in a positive direction (i.e. negotiating and settling outstanding claims, writing off debt that exceeded the statute of limitations, bringing financial statements current, investigating and confirming ownership of mining claims, and reviewing actions of prior management). As a result of the Days’ efforts, including those of corporate counsel Michael Labertew, the company eliminated all of the debt outstanding on financial statements delivered to the new board, began to publish periodical reports and turned its focus to adding value to the company.
In May 2016, following Christopher Day’s resignation as an officer and director, Cerro’s shareholders elected Jose Manuel Borquez and George Young as additional Directors for the company at the company’s annual shareholder meeting, approved a 1-for-15 reverse stock split and approved the pursuit of additional projects with the goal of increasing the value of the company. Mr. Borquez and Mr. Young are both mining attorneys, who have collectively over 50 years of international mining experience with both private and public companies.
Unfortunately, as is wont to happen with a company whose assets do not generate revenue, individual investments (and Patrick’s ability to personally advance funds to Cerro), which had allowed Cerro to pay its way through 2014 and 2015, ceased in 2016 leaving Cerro unable to pay its service providers, renew its agreement with OTC Markets, and therefore keep its public reports current.
In recent months, the alleged actions of Les Price as related to Medinah Minerals have had rippling effects with Cerro, in that Mr. Price had a long-standing relationship with both Medinah and Cerro. Although Mr. Price has not been associated with Cerro in any capacity other than shareholder since the spring of 2016, his alleged actions with Medinah have caused concern with shareholders of Cerro. In addition, Mr. Price worked closely with Christopher and Patrick Day related to Cerro and, as a result, there have been allegations that Mr. Price’s actions have tainted those of Patrick Day.
Following the revelations of Medinah’s under-reporting of outstanding equity, Mr. Day conducted an internal audit of Cerro’s outstanding equity and found no aberrations. None were expected, as Mr. Price’s role with Cerro was that of a liaison between Cerro U.S and Cerro Chile, and he was not involved in the day-to-day operations as he was with Medinah. Regardless, due to Mr. Price being issued millions of shares of Cerro in the past for services, and his veracity being called into question, an administrative hold was placed on all of Mr. Price’s shareholdings in Cerro, just as they were with Juan Jose Qujiano Fernandez in 2015, when Mr. Labertew accused Mr. Quijano of numerous misrepresentations and breaches of his fiduciary duties to Cerro, following months of due diligence and the assistance of Mr. Borquez.
Mr. Labertew has reviewed numerous communications between Mr. Day and Mr. Price, along with a review of the company’s financials, including its Statement of Equity, and previous transactions between Cerro and Mr. Price. Mr. Labertew has found no evidence of wrong doing of any kind as it relates to Mr. Day and Cerro, or between Mr. Day and Mr. Price. It is important to note that Mr. Labertew has never represented Mr. Day personally in any matters, legal or otherwise.
Nevertheless, Mr. Day has determined that it is in the best interests of the shareholders of Cerro to tender his resignation, effective March 31, 2017, as an officer and director of the company. His preferred shares of the company will be transferred to Mr. Borquez, and Mr. Borquez will be appointed as President of Cerro. The company will be seeking to appoint an additional director at the May 2017 meeting of shareholders to fill Mr. Day’s position.
2. Status of negotiations with Auryn Holdings related to the Auryn Mining capital call
In mid-February 2017, Cerro learned that Auryn Mining Chile, SpA would be holding a shareholder’s meeting to vote on the question of effectuating a capital call to all of its shareholders which would require Cerro to invest $300,000 in order to maintain its 5% interest. Under the terms of the capital call, if no amount was invested by Cerro as part of the capital call, Cerro would face dilution in Auryn Mining down to less than 1%. The terms of the Capital Call allowed Cerro to subscribe to the Call at a second meeting, held on March 15, which it did. Doing so allowed Cerro 30 days to raise the needed capital.
On March 11, 2017, Cerro learned that Medinah Minerals had reached an agreement whereby Medinah’s 27.5% interest in Auryn Minings would be maintained, through financing provided by a separate entity, Auryn Holdings Corp. Cerro reached out to Auryn Holdings, to determine if a similar financing could be arranged for Cerro, rather than Cerro needing to raise $300,000 itself from its existing shareholder base and/or new investors. Cerro was informed that this was unlikely, as Medinah and Cerro were in “completely different situations.” Medinah had significant investments and shareholdings by owners of Auryn Mining and Auryn Holdings; Cerro did not.
Regardless, Cerro advanced an offer to Auryn Holdings, including a position on Cerro’s board and significant stock position in exchange for a 30-month financing of the $300,000 capital call. Unfortunately, for the reasons explained above, Auryn Holdings respectfully declined these terms, but offered to finance the $300,000 until June 15, 2017, at no interest, thereby giving Cerro an additional two months to raise $300,000 or a portion thereof. Cerro accepted this offer and is awaiting the finalized agreement for signing.
As a result, Cerro will be seeking to raise up to $300,000 through a Rights Offering between April and June 10, available initially to existing shareholders only, and subsequently offered to outside investors, as explained in more detail in Section 6, below.
3. Upcoming Annual Shareholder Meeting
As explained above, Cerro will hold its Annual Shareholder Meeting in May, in Salt Lake City, at a specific date to be determined. At the meeting, the company will elect directors, discuss its financials, and will report on its developments related to fund raising for the Auryn capital call. In addition, the company will report, discuss, consider and potentially vote on additional mining opportunities in Chile and South America, including the Andacollo mine, discussed in more detail in Section 5, below. The company will also report, discuss, consider and potentially vote on acquisition opportunities, including a potential acquisition of an aesthetic laser medical device company in Georgia that has annual revenues of approximately $1.5m, to bring additional value to Cerro while it explores its mining opportunities. Cerro has no interest in losing its identity as a mining company, and is simply looking at additional prospects as separate divisions and as a means to an end, i.e., to attract capital for mining opportunities by mitigating risk to investors and potentially bringing in established, cash-flowing companies.
4. Implementation of non-dilution mechanisms for existing Cerro shareholders
Since 2016 when Cerro was issued its 5% interest in Auryn Mining, the company has been considering mechanisms that would allow for the protection of existing Cerro shareholders from future dilution. There have been discussions of creating a separate subsidiary that would hold the Auryn shares. It was determined that such a course of action would require that the subsidiary be registered with the SEC as a separate public company, so that there were not negative tax consequences to existing shareholders. This path, however, would be costly in legal, accounting and regulatory costs and filing fees, in excess of $50,000.
Cerro has determined that a much more simplistic and effective solution is to have its Auryn shares remain with Cerro, as opposed to separate subsidiary. Further, in order to protect existing shareholders from dilution related to fund raisings, acquisitions and similar events in the future, Cerro will make a dividend declaration to the shareholders of record as of the date that Cerro sends notice of it Annual Meeting of Shareholders. The dividend would not be funded until a future date when its Auryn shares are monetized, which could occur through a market sale if and when Auryn becomes public, or a private sale at acceptable market terms, or a similar liquidity event.
At the time of such event, whether it be several months or several years from now, the distribution of funds would be to only the shareholders of record that existed at the time of the dividend declaration, which would be April or May 2017. In addition, the dividend declaration would state that all funds received from a liquidity event would be distributed to such shareholder base, after deducting accounting and fund processing fees, which would be limited to no more than $10,000, which works out to less than $7 per shareholder, given Cerro’s approximate 1,500 shareholder base (including those of record and with DTC).
In addition to this anti-dilution mechanism, there has been concern from certain Cerro shareholders related to our discussions of potential acquisitions and potential fundings, that such efforts would result in substantial dilution to existing shareholders. It appears that there has been a misconception that the potential acquisition of the medical device company would be akin to a reverse merger, resulting in a more significant reverse stock split, followed by the typical 95%+ issuance of shares to the reverse merger operating company. This, however, is an incorrect assumption. The acquisition being contemplated would not be a reverse acquisition, but rather an acquisition of a company that would become a wholly-owned subsidiary, with existing (May 2017 forward) Cerro management remaining in control, and no additional reverse stock split, beyond the 1-for-15 split that was approved in May 2016.
Similarly, the funding that is being discussed for additional mining opportunities is not a stock-for-cash financing, but rather debt financing, repaid from gold mining operational cash flow, with a modest stock incentive issuance, again thereby reducing stock dilution to the existing shareholder base.
At the 2016 Annual Shareholder Meeting, Cerro announced that it was exploring a mining opportunity in northern Chile called Alto Adigio, which was a gold tailings project. Cerro continued to conduct due diligence on that opportunity through summer 2016, and determined that it should not be pursued. One of the reasons was the relatively small size of the mining operation, which was not attractive to many of the existing Cerro shareholders with whom management discussed the opportunity, including John Menzies, who is not only a substantial shareholder of Cerro, but who is involved with an equity fund that invests in mining operations.
Since that time, Cerro’s management has been reviewing numerous, additional mining opportunities in Chile and South America, and is currently in negotiations for the acquisition of a mining operation in northern Chile, the Andacollo Mine, an operating mine with reported reserves of approximately 50,000 ozs in one of the most prolific gold- bearing mining districts in Chile. The mine has a plant, power, water and permits in place and the potential for the discovery of a further 200,000 ozs. It is being offered for US $ 5M, which Mr. Borquez has been negotiating to a US$ 500,000 down payment with subsequent payments coming out of the mine’s cashflow. We have had initial discussions with Mr. Menzies about having his investment group consider assisting with funding larger opportunities, and will be discussing the Andacollo opportunity in more detail in the near future.
A more in-depth report is being prepared for dissemination to Cerro’s shareholders in April, through both an additional posting on the company’s website, as well as materials in the Notice of Annual Meeting package.
6. Fund raising/PPM
Cerro intends to offer, initially to existing shareholders of the company pursuant to a Rights Offering, 30 million shares at $.01 per share, as follows:
a. For the first 14 days of the Rights Offering, only existing Cerro shareholders of record would be able to participate in the Rights Offering, which would be on a pro rata basis without risk of dilution. If, for example, Cerro had 300,000,000 shares issued and outstanding (instead of the current approximately 275,000,000), a shareholder who owned 3,000,000 shares would own 1% of Cerro’s outstanding common stock and would be permitted to purchase up to 1% of the 30,000,000 shares being offered, equivalent to 300,000 shares and a $3,000.00 investment.
b. During the next 14 days of the Rights Offering, only existing Cerro shareholders of record would be able to participate in the Rights Offering, but rather than on a pro rata basis, any existing shareholder would be entitled to purchase up to 10% of the shares remaining in the offering. For example, if during the initial 20-day period, 10,000,000 shares of the 30,000,000 shares were subscribed, thereby leaving 20,000,000 shares, then during the next 20 days, existing Cerro shareholders could, on a first-come, first-serve basis acquire up to the entire 20,000,000 shares remaining.
c. After the initial 28 days of the Right Offering, Cerro would be able to privately offer any remaining shares of its private offering to accredited investors only, outside of the existing shareholder base.
Cerro understands that a $.01 (One Cent) share price is in excess of the current market value of its shares being traded on OTC Markets. However, it believes that a more accurate valuation for purposes of the private offering is the $.01 price, given its historic pricing in the market over the past several years.
Simultaneously with the $300,000 Rights Offering, Cerro intends to raise $750,000 for the acquisition of the Andacollo Mine, through the issuance of 15%, 2-year Debentures, repaid from Andacollo’s operations, plus a common stock equity incentive, with 100,000 shares of common stock being issued for every $10,000 invested, for up to a total of 7,500,000 shares issued. At this time, the precise details of the funding are being explored and negotiated, and should be finalized by the time the Notice of Meeting is sent to Cerro shareholders in April 2017.
Cerro will be hiring a webmaster the first week of April to update the website, its information and content, and allow the company to post news and additional material on a regular basis.
8. Immediate need for funding
In order for Cerro to bring its reports current with OTC Markets, including paying OTC Markets and its accountants and an outside law firm for a Current Information Letter, and in order to process and pay for the mailing of the Notice of Meeting and holding of the Annual Shareholder Meeting itself, Cerro is in need of a cash infusion in the amount of $10,000. In exchange for this investment, Cerro would offer a convertible note, convertible at a 50% discount to market rate at the time of conversion.
Investors should be aware that funds used by the Company in the past few years have been primarily for accountants and OTC Markets costs. American Registrar & Transfer has not been paid cash since 2012; legal fees in the amount of $4,000 cash were paid in 2014; and management has received $5,000 in cash since 2014.
During the management transition phase explained above, Cerro would ask that interested investors please contact Cerro’s legal counsel, Michael Labertew, at email@example.com, to discuss this necessary funding, in order that Cerro can execute on the numerous items described above.