Monday, January 24, 2011

Strange Energy Deals

Something puzzling is going on in the Honduran energy field. A single company, Minerco Resources, is snapping up the rights to approved hydroelectric and wind power properties, without any cash changing hands. And it's not like Minerco is an international giant.

How does a company that in April, 2010 had just $85 in the bank, little income, and over 331 million shares of stock outstanding, whose only source of income is by issuing shares of stock, come to acquire the rights to several hydroelectric and wind generation plants, all unbuilt, in Honduras?

Let me tell you the strange tale of connections leading from a car dealership in Canada to the heart of Honduras.

Minerco Resources incorporated in Nevada on June 21, 2007 as an oil and gas exploration company.

In its first SEC filing, the stock registration form S1, on Dec. 10, 2008, it lists its sole asset as interest in an unbuilt 6 mile long gas pipeline (PMD-Duke pipeline) in Morgan County, TN. which it acquired from its CEO and sole officer (CEO, CFO, chairman of board) Michael Too, when the founding CEO stepped down. At this time it registers 23 million shares of stock, and in subsequent filings indicates that it anticipates it needs $1.7 million over the next year to acquire properties, and doesn't know how it will raise the funds. Michael Too is a car salesperson in Ontario, Canada; the company's largest stockholder, Raymond Li, sells audio equipment in Richmond Hill, Ontario. Corporate Headquarters move into Michael Too's residence in Quebec City after the first year.

The company continues to loose money through the March 22, 2010 10Q filing and by now there are over 55 million shares of stock outstanding. The next day, Michael Too resigns all offices with the company, and as a director as well.

The same day, V. Scott Vanis was appointed President, CEO, CFO, and Chairman of the Board of directors. Vanis, based in Houston, Texas, previously ran a financial services company that provided financing and acquisition services to energy companies, especially in Latin America.

Vanis, Minerco tells us in their press release, served as a consultant to the Honduran government on energy reserves and projects. That prior service seems to have greatly influenced the direction Minerco subsequently took.

On May 27, 2010, Minerco announced an agreement to buy the rights to the Chiligatoro Hydroelectric project in the southern department of Intibuca in Honduras from ROTA Inversiones S.A., a Honduran renewable energy project fund run by Marco Rodriguez. The price: 18 million shares of Minerco's stock payable over 2 years, and some royalties on the net income from the plant itself, once it's constructed and producing power. The stock involved was issued as new shares. Minerco must raise $12 million by May 28, 2012 to retain the project. Otherwise it reverts to ROTA Inversiones. The following day, on May 28, 2010, Minerco Resources appointed Marco Rodriguez to its board of directors, per the terms of the Chiligatoro agreement.

A press release tells us that Mr. Rodriguez has served as an energy advisor to Honduran presidents since 1994, and served on the energy panel of the strategic planning and infrastructure panel (none of which I can verify with available resources).

In June of last year, Minerco stock experienced a price run-up, all the way to $0.90 a share from its more normal $0.03, before settling back down. What fueled the trading binge, that reached a volume of 56 million shares? Two things: the announcement on June 1 that the Honduran National Energy Council had approved the Chiligatoro Project, and a $50,000 advertising deal to hype the stock.

Included in the June 1 press release from Minerco was a claim that V. Scott Vanis and Marco Rodriguez had been invited to meet with Porfirio Lobo Sosa in the Casa Presidencial.

By August 2010 there were 333 million shares of stock outstanding, and about $20k of cash in hand. The company plan requires them to raise $13 million in cash to pay for costs related to Chiligatoro over the next two years. In the following months, they went about amassing cash aggressively, all apparently based on the promise of future profits from Honduran energy projects.

In July of 2010, an El Heraldo article mentioned Marco Rodriguez as head of operations of Minerco in Honduras. Also in July, Sam Messina joined as CFO consultant with a salary of $6,500 per month for 1 year.

Messina was concurrently Secretary, Treasurer and member of the board of another business, Alternative Energy Development Corporation, until he resigned in October of 2010, and apparently went to work full time for Minerco. That followed the September 2010 resignation of Rodriguez from the Minerco board.

Then on October 12, 2010, Minerco Resources borrowed $200,000 interest free, payable on demand, from yet another company, Mainland International, a Belize company whose address is that of an offshoring company, International Privacy Corporation.

On December 2, 2010, Minerco entered into an agreement with Centurion Private Equity LLC to buy up to $5 million of Minerco stock over two years. This stock for cash swap enabled Minerco to access up to $300,000 at a time, up to $5 million total to finance its ongoing business.

On December 7, 2010, Minerco announced to shareholders that the board had adopted a policy that allowed for the issuance of more stock, or a reverse stock split, or the creation of preferred stock shares at the discretion of the directors. They control approximately 58 percent of the outstanding stock and so had the required votes and did not need to ask other shareholders their opinion.

On December 16, 2010, Sam Messina was appointed CFO for five years and given 30 million newly issued shares of common stock (not options), with the proviso that if the company went bankrupt or he leaves in the next two years, he has to return a portion of these shares.

On December 23, Minerco filed a new form S1 with the SEC to sell 60 million shares of common stock for Centurion Private Equity, returning about $450,000 in cash to Centurion. There are now 412 million shares issued.

On January 5, 2011, Minerco purchased all of the interests of Energetica de Occidente S.A. de C.V in the Iscan hydroelectric project (in Guata, Olancho) in exchange for 1 million shares of Minerco stock, and on the condition that Minerco raises $8.5 million within 36 months. Energetica will be paid a royalty on the adjusted gross revenues of the plant, once built and operating.

On January 11, 2011, Minerco hired V. Scott Vanis as CEO for 5 years at $180K salary with bonus clauses increasing his salary if revenues reach certain targets. He was granted 10 million shares of the new, Class A preferred stock. The company changed its articles of incorporation to authorize the issuance of up to 1 billion shares of common stock, and 25 million shares of Class A preferred stock.

On January 13, Minerco announced it had a letter of intent to acquire 30% of the interests of Sesecapa Energy Company in the Rio Frio hydroelectric project (Santa Fe, Ocotepeque). The company also acquired the ability to invest in two subsequent stages of the project. The Rio Frio project is expected to begin producing power in 2012. No terms have been announced yet.

On January 18, the company bought the interests of Energía Renovable Hondureñas S.A in the Sayab Wind Project (San Marcos, Choluteca), a 100 megawatt wind generation plant for 1 million shares of Minerco Resources common stock and interest payments on the adjusted gross income when the plant begins production. In turn, Minerco must raise $10 million in the next 18 months. A similar project by Mesoamerica Energy, financed by the BCIE, is expected to cost $250 million to construct.

What do all these deals mean?

Minerco Resources must raise a total of $22 million by June of 2012, all without a penny of income other than through issuing more shares of stock.

Under current contracts it must raise a further $8.5 million by 2014 by which time, only the Rio Frio project, with the possibility to provide up to $200,00 per year in income, will be producing power. If it fails to raise the funds, all of these projects revert to the previous owners.

Clearly, energy generation in Honduras must have a lot of potential. How else could it convert the promise of a trickle of income into such a river of investment?


John (Juancito) Donaghy said...


Thanks for all the research you've done on this. It's impressive.

I had seen an item on the Chiligatoro project and had perused MINERCO's project report.

It seemed very strange to me, especially since the Chiligatoro project was at that time (January 10) its only project.

All this sounds very strange to some other folks I've talked with here in Caritas.

First of all, Chiligatoro is a stagnant lake and not a river, according to someone who lives near there. There is a river called Manazapa but it's not close to the Languna.

Also, there is a question whether there is any relation with any mining possibilities in the regions affected.

According to the company's overview of the project it appears that they are looking for HOnduran, World Bank, IADB, and other support for the project.

All of this sounds very fishy.

RNS said...

I think the project is on the Manazapa river, and from the description sounds like it diverts water into a pipe to drive a turbine then dumps it back into the river far downstream of the intake.

Locals should know something about it since one of the approvals they already have required sign off by the local municipal government.

What Minerco says in one of their SEC filings is that they expect this project to go through with 90 % debt financing.

RNS said...

John, I found a Minerco press release from November 22, 2010 that claims they have a water contract for the Manazapa and Chiligatoro rivers along with municipal approval and that they are waiting for the SERNA environmental approval.

Anonymous said...

There's an interesting phenomenon with use of shell companies to speculate on the Chinese stock market that could explain this.

The basic idea is pretty simple. If a US company exists, and is in good standing, even if inactive, it can be used as the vehicle to "purchase" a Chinese company. The US company has a very easy path to issue shares on the US market, whereas the Chinese company would have to face much higher scrutiny.

This can be done for legitimate reasons. If the company is cash-rich, but "time-poor" (that is, the executives are busy running the company), spending a little money to buy a shell company can be a very good use of resources.

Or, it can be done for the purpose of fraud and speculation, as has been proven in some cases of Chinese companies.

A question to ask is how much is ready access to the capital markets of the US worth to a Honduran company. Suppose you have a project, but no prospect of getting funding in part because of your nation's pariah status. You have the the chance to swap 100% of nothing for the cash to build the project and royalties plus stock that might be worth something someday. Is this a good deal? Probably so, especially if all the risk for raising capital is with the person you're doing a deal with. After all, 100% of nothing is still nothing.

On the other hand, based on the description provided here, the likelihood that Minerco is a penny stock swindle is, in my guesstimation, pretty significant.