A junior mining company has been ordered to pay $406,558 to its former president, Port Coquitlam-based geologist Johan Shearer, following a recent B.C. Supreme Court ruling.
Shearer started working for Jazz Resources Inc., a publicly traded mining company, in 2004. At the time, Jazz was looking to exploit a claim at the Teddy Glacier site – a mountainous mine south of Revelstoke and east of Arrow Lake.
Shearer’s services were provided through his company, HomeGold Resources Ltd., which operated out of Tyner Street in Port Coquitlam.
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With Jazz unable to generate enough revenue, the company’s then-president Bryan Glen loaned money to Jazz through a third company: Glen Developments.
Following Glen’s death in 2014, Shearer eventually took over as president, paying $135,000 for all of Glen Developments’ shares except for $75,000 of the debt Jazz owned to Glen.
Shearer served as company president from 2015 until 2017.
“When Jazz no longer had a source of funds to finance its operations, Mr. Shearer resigned,” wrote Justice Steven Wilson.
Crossing the bridge
In early 2015, Shearer met Robert Klenk, a potential investor who was also experienced in raising money for publicly traded companies.
Shearer told Klenk Jazz had a large pile of ore – extracted but not processed. A major stumbling block was an old bridge on the road between the ore pile and the processing facility which: “had fallen into disrepair and needed to be replaced,” according to the court judgment.
Klenk was willing to invest as much as $175,000 to fix the bridge on the condition that Jazz insiders reduce their debt level, according to the judgment.
Shearer and another shareholder who was owed money each agreed. Shearer assigned Klenk $100,000 of his outstanding debt.
Into the mines
Jazz’s highest priority was the Teddy Glacier mine. There was a bulk sample of 2,000 tons of ore containing zinc, lead, silver and gold that had been sitting high in the mountains.
Jazz initially planned to process that sample but eventually opted to sell the raw ore to a buyer in China.
Jazz eventually struck a deal with a company called Neolife where Jazz would pay Neolife a fixed price per tone of ore processed.
Goujon Zhao, a “friend or associate” of Shearer’s, agreed to supply a two-stage flotation mill procured from China and supplied through Neolife.
The mill arrived in the summer of 2015.
“However, there were concerns with certain components of Neolife’s mill, in particular the Chinese-made motors that were not approved for use in Canada,” Wilson wrote.
No ‘trifling matter’
The Ministry of Energy and Mines slapped a stop-work order on Jazz on Jan. 24, 2016, halting work at the Teddy Glacier mine.
Shearer tried to persuade the ministry to lift the order, according to the judgment.
“However, he remained unsuccessful when he resigned at the end of March 2017,” Wilson wrote.
Jazz previously had a permit for a mill but that permit expired at the end of 2014.
During the trial, Shearer “sought to downplay or minimize the significance of the lack of a permit and the resulting stop work order,” according to Wilson. “However, I cannot accept that it was a trifling matter.”
Wilson found that “Shearer deliberately withheld information” relating to the permit issue.
Zhao of Neolife testified: “Shearer had assured him that he was able to proceed with the construction of the mill,” Wilson wrote.
Wilson also noted that Shearer prepared a news release dated April 30, 2015. The release confirmed the mill had been ordered but made no mention of the permitting issue.
In 2016, Jazz publicized its management’s discussion and analysis, stating: “The study has been completed and the company has obtained a permit for a pilot mill and tailings pond from the BC Ministry of Energy and Mines. The mill will be used to process bulk samples from the Teddy Glacier property.”
This cannot be “interpreted as a truthful statement,” according to Wilson.
“At best, Mr. Shearer was overly optimistic in thinking that a renewal of the expired permit would be a routine matter. At worst, it was an active attempt to conceal the permit’s expiry without renewal,” he wrote.
The company’s directors, including Zhao and Klenk, “all believed that the necessary permits were in place,” Wilson wrote.
“I am satisfied that Mr. Shearer was the only person at Jazz who knew this was not so. Despite that, he permitted construction of the mill to start and did nothing to correct the erroneous impression left with the other directors, managers, contractors and indeed the public,” the justice stated.
After the stop-work order
Jazz ultimately persuaded the ministry to let the work continue. However, the company was required to post a $481,525 reclamation bond with the ministry before getting back to work. (The bond is the estimated cost of a site cleanup in the event of a failure.)
“Because Jazz did not have the funds to post the reclamation bond, the permit was never obtained,” Wilson noted.
The company eventually abandoned its Teddy Glacier claim.
Invoices
An overarching concern in the case related to HomeGold invoices from which Jazz “derived little or no benefit,” relating to the mill and tailings facility.
HomeGold’s invoices are for Shearer’s time, charged at the rate of $700 per day.
The case also touched on Shearer’s claim for cash he stated was owed to him as a result of his purchase of the debts Jazz owed to Glen Developments. That debt grew as Glen Developments kept funding Jazz “by way of sporadic injections of cash.”
In making his case, Shearer cited a 2012 loan agreement in which Jazz acknowledged a debt of $311,205, with five percent interest.
Dispute
Jazz disputed the claim, contending the loan agreement “was accepted for filing but never approved by the [TSX Venture] Exchange.”
Shearer argued that Jazz had agreed to pay Glen Developments $6,500 per month for management services. However, Jazz contended there were no management fee invoices after Aug. 31, 2011.
“In the absence of invoices, the debt cannot be considered to have crystallized,” Jazz contended.
Wilson did not accept that argument as there was already a contractual obligation.
“A landlord does not need to issue a physical invoice for rent to a tenant each month when the obligation is set out in their lease agreement,” Wilson wrote.
Objection
A key factor in the case was Jazz’s financial statements.
Jazz objected to the admissibility of the company’s own audited financial statements.
“Jazz argues that some of the information provided to the auditors was either wrong or incomplete, or not provided at all,” Wilson wrote.
Wilson noted that, while Jazz appeared to disavow the accuracy of its own audited financial statements, “it has done nothing to correct them.”
Wilson ultimately found it would be: “difficult to conceive of financial documents that would be more reliable than Jazz’s own audited financial statements.”
Judgment
Wilson ultimately found that Jazz owes Shearer $406,558, based on the audited financial statements for 2015 and the years following.
Excluding money already paid, Jazz also owes approximately $57,400 going toward Shearer’s company HomeGold Resources Ltd.
