SolGold investigating $US4.6m misappropriation scandal over exploration invoices in Ecuador

The company, backed by BHP and Newcrest, says it has found more than $6m in fraudulent invoices at its operations in Ecuador.

SolGold's operations in Ecuador. SolGold told the London stock exchange late on Friday that it had discovered a four-year fraud on the company in which $US4.6m of false invoices were run through its Ecuadorean books.

SolGold’s newly appointed chief financial officer Ayten Saridas will have her work cut out for her when she starts her new job in late June, as the new management team sorts through the fallout from a $US4.6m ($6.6m) misappropriation scandal in Ecuador.

SolGold counts BHP and Newcrest Mining as its two biggest shareholders, and the scandal – discovered late last year by its rejigged board and new management team – will ring alarm bells at its big-name shareholders, threatening to overshadow its progress in developing one of the most closely watched copper exploration assets on the market.

SolGold told the London stock exchange late on Friday that it had discovered a four-year fraud on the company in which $US4.6m of false invoices were run through its Ecuadorean books.

The company said the alleged rorting was discovered by the company’s internal audit team in late 2021, after it tightened financial controls and beefed up scrutiny of its Ecuadorean operations following the appointment of former BHP executive Darryl Cuzzubbo to run the company in November. It said on Friday it had restated the value of its exploration properties to reflect the fraudulent invoicing.

While SolGold says it immediately appointed forensic investigators from EY’s Ecuadorean branch to investigate the discrepancy, the company’s half-year accounts – released in February – included no indication of the looming problem.

“The forensic investigation revealed that during the years 2017 to 2021 $US4.6 million was misappropriated. The investigation brought to light the material misstatement of exploration assets as a result of false expenses being capitalised,” the company said. “The investigation brought to light additional controls and failures in the risk management framework, which need further investigation.”

An Ecuador-based employee had been dismissed over the allegations, and SolGold was seeking to recover the misappropriated cash, sources told The Australian.

Interest in SolGold’s Cascabel copper and gold project – tipped to produce up to 210,000 tonnes of copper a year at peak output in the mid-2030s in a recent feasibility study – has been generated not just by its grade and production profile, but also by the competitive tension on its register between BHP and Newcrest, who were drawn into a minor bidding war over their respective stakes in the company in 2016.

SolGold’s Cascabel copper and gold project is tipped to produce up to 210,000 tonnes of copper a year at peak output in the mid-2030s in a recent feasibility study.

Both own about 13.5 per cent of the emerging miner, and one or the other is heavily tipped to make a play for SolGold – or bid for a significant equity stake in Cascabel as part of the funding mix for the project – as SolGold proves up plans for the deposit, still the subject of drilling and further studies that may improve its size.

While details of the alleged fraud are not yet clear, SolGold said its investigations were continuing, saying it had not yet determined whether there was a “material weakness” in its internal controls over its spending and financial reporting in Ecuador.

Despite the swift action by SolGold’s new management team, the company had only $US38.1m of cash at March 31, and ongoing investigations into the false invoicing may overshadow its ability to return to the market to raise additional cash.

And, in a move that will sound alarm bells at its two major shareholders, the company said it was commissioning an “independent anti-bribery and anti-corruption assessment” of its Ecuadorean operations, as well as beefing up its oversight into its spending in the South American country.

The company said it was also restructuring its finance division in Ecuador, as well as recruiting an in-house lawyer and procurement manager in the country, with an internal audit “analysing further specific processes relating to the Ecuadorean entity”.

Until SolGold’s December 15 annual shareholder meeting the company’s external auditor was BDO. In early 2021 the company hired KPMG to conduct a special audit to “help identify where the control environment needed enhancing as part of the board’s focus on strengthening internal controls and good corporate governance”. “This behaviour is an extremely serious matter and it has no place in SolGold. SolGold management is enhancing its risk, governance and controls environment and is acting on both the recommendations of KPMG (special audit) and EY (forensic audit) and our own observations,” the company said on Friday.

SolGold’s incoming chief financial officer Ayten Saridas. Picture: Hollie Adams

Mr Cuzzubbo replaced Brisbane-based Nick Mather, who stepped down as the company’s executive director after a long-running stoush between the company and BHP and Newcrest over corporate governance – brought to a head by a succession of decisions under Mr Mathers leadership to take on high-cost debt to fund SolGold’s exploration and development work rather than tap existing shareholders for additional funds.

Mr Mather announced his decision to step down from board and management roles in early 2021, after he only narrowly avoided being voted off the SolGold board after a backlash from BHP, Newcrest and other shareholders over the lending deals at the company’s 2020 annual meeting.

But, despite that decision, SolGold directors, including current chairman Liam Twigger, still suffered a shareholder backlash at SolGold’s 2021 annual meeting. Long-term chairman Brian Moller was voted off the board, with Keith Marshall and Jason Ward also suffering substantial votes against their re-election.

Despite leading talks to restore relationships between the company and its biggest shareholders, just over 16 per cent of votes were cast against Mr Twigger’s re-election, indicating that one of either BHP or Newcrest voted against his reappointment. There is no suggestion that Mr Mather, or other members of the board, were aware of the invoice fraud.

On Friday SolGold said Mr Ward had resigned from the board as it looked for a new head of its Ecuador operations, but would remain with the company as its head of exploration. Former chief financial officer Priy Jayasuriy resigned from the company in November 2021, with the company announcing Ms Saridas, a former Oil Search and Coronado Global Resources finance boss, as his replacement last week.

She left Oil Search in late 2021 after only three months and is suing the company over allegations of bullying and harassment.

Originally published as SolGold investigating $US4.6m misappropriation scandal over exploration invoices in Ecuador