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BEFORE THE INTERNATIONAL CENTRE FOR SETTLEMENT OF
INVESTMENT DISPUTES
ICSID Case No. ARB/21/29
In the Matter of Arbitration Between:
x — — — — — — — — — — — — — — — — — — x
:
:
Kaloti Metals & Logistics, LLC,
:
:
Claimant,
:
and
:
THE REPUBLIC OF PERÚ,
:
:
Respondent.
:
x — — — — — — — — — — — — — — — — — — x Volume 5
Friday, July 28, 2023
The World Bank Group
1125 Connecticut Avenue, N.W.
Conference Room C1-450
Washington, D.C.
The Hearing in the above-entitled matter
came on at 9:02 a.m. before:
PROF. DONALD MCRAE
President of the Tribunal
PROF. DR. JOSÉ CARLOS FERNÁNDEZ ROZAS
Co-Arbitrator
PROF. DR. ROLF KNIEPER
Co-Arbitrator
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ALSO PRESENT:
MS. CATHERINE KETTLEWELL
Secretary to the Tribunal
Realtime Stenographer:
MR. DAVID A. KASDAN
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporting/Worldwide Reporting, LLP
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
SRA. MONIQUE FERNÁNDEZ
SR. RODOLFO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
Interpreters:
MR. DANIEL GIGLIO
MS. SILVIA COLLA
MS. MONIQUE FERNÁNDEZ
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APPEARANCES:
On behalf of the Claimant:
MR. HERNANDO DÍAZ CANDIA
MR. RAMÓN AZPÚRUA
MS. GABRIELLA HORMAZABAL
MR. SEBASTIÁN ORDOÑEZ
MR. MIKEL del VALLE-CORONA
WDA Legal
848 Brickell Avenue
Suite 1000
Miami, Florida 33131
United States of America
Party Representatives:
MR. [Redacted]
Founder
MS. [Redacted]
Finance Manager
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APPEARANCES: (Continued)
On behalf of Respondent:
MS. VANESSA RIVAS PLATA SALDARRIAGA
President, Special Commission that
Represents Peru in International
Investment Disputes
MR. JHANS PANIHUARA ARAGÓN
Counsel, Technical Secretariat to the
Special Commission that Represents Peru in
International Investment Disputes
MR. GINO CAMPAÑA ALBÁN (remote)
SUNAT's Representative before the Special
Commission
MR. JUAN FALCONÍ GÁLVEZ (remote)
Ministry of Justice's Representative before
the Special Commission
MR. PATRICIO GRANÉ LABAT
MS. MÉLIDA HODGSON
MR. ÁLVARO NISTAL
MS. KATELYN HORNE
MR. TIMOTHY SMYTH
MS. CRISTINA ARIZMENDI
MR. PETER SABAN
MS. ANDREA MAURI PARICIO
MS. PALOMA GARCÍA GUERRA
MR. AGUSTIN HUBNER
MR. ANDRÉS ÁLVAREZ CALDERÓN
Arnold & Porter, LLP
601 Massachusetts Avenue, N.W.
Washington, D.C. 20001
United States of America
MR. JORGE LAZO (remote)
MR. ROCHAR ALLEMANT (remote)
MR. JOSE JARAMILLO (remote)
Lazo Abogados
Pardo y Aliaga 699, San Isidro Lima
Gobierno Regional de Lima LIMA, 27
Peru
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APPEARANCES: (Continued)
On behalf of the United States of America:
MR. DAVID BIGGE
MS. MELINDA E. KURITZKY
Office of the Legal Adviser
United States Department of State
Washington, D.C. 20520
United States of America
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C O N T E N T S
PAGE
PRELIMINARY MATTERS...................................1081
WITNESSES:
ALMIR SMAJLOVIC
Direct examination by Ms. Hormazabal............1087
Direct presentation.............................1088
Cross-examination by Mr. Smyth..................1119
Redirect examination by Ms. Hormazabal..........1238
Recross-examination by Mr. Smyth................1256
Questions from the Tribunal.....................1259
DARRELL CHODOROW and FABRICIO NUÑEZ
Direct examination by Mr. Smyth.................1270
Direct presentation.............................1271
Cross-examination by Ms. Hormazabal.............1304
Redirect examination by Mr. Smyth...............1403
Questions from the Tribunal.....................1407
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1
P R O C E E D I N G S
2 PRESIDENT MCRAE: If the Parties are ready,
3 I think we can proceed.
4 Good morning, everyone. I apologize, my
5 voice, I'm succumbing to heat-cold, air-conditioning
6 and non-air-conditioning syndrome in Washington.
7 Are there any issues to be raised by the
8 Claimant this morning before we start?
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13 PRESIDENT MCRAE: Anything from Respondent
14 this morning?
15 Then we can start with the Expert Witness.
16 ALMIR SMAJLOVIC, CLAIMANT'S WITNESS, CALLED
17 PRESIDENT MCRAE: Good morning,
18 Mr. Smajlovic. I'm probably mispronouncing your name.
19 I apologize.
20 THE WITNESS: Last name pronunciation is
21 Smajlovic.
22 PRESIDENT MCRAE: I will certainly try to do
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1 that.
2 You may have been here for the other expert
3 presentations or you may have done this before on
4 other occasions, but you know the system is that you
5 make a statement, we'll then have you briefly
6 introduced by counsel for the Claimant, and then you
7 will be cross-examined by counsel for the Respondent.
8 There may be a redirect, and maybe questions from the
9 Tribunal.
10 I think we have to start with you making the
11 Declaration, which should be in front of you. I would
12 ask you to read that out.
13 THE WITNESS: Do you need me to read it?
14 PRESIDENT MCRAE: Please. And read it into
15 the record.
16 THE WITNESS: Will do.
17 I solemnly declare upon my honor and
18 conscience that my statement will be in accordance
19 with my sincere belief.
20 PRESIDENT MCRAE: I think that's the
21 Witness's declaration. Can you turn it over--that is
22 the Expert one? Okay. Thank you very much.
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1 Please proceed with your statement.
2
DIRECT EXAMINATION
3 BY MS. HORMAZABAL:
4 Q. Good morning, Mr. Smajlovic. Could you
5 please state your full name for the record.
6 A. Almir Smajlovic.
7 Q. And you're here to provide your expert
8 opinion in quantum damages; is that correct?
9 A. That's correct.
10 Q. Are those your two quantum Expert Reports on
11 your desk?
12 A. Yes.
13 Q. Please advise if you would like to provide
14 any corrections or changes to either of your Reports.
15 A. I do.
16 As part of my review in preparation for the
17 Hearing, I have identified several points which
18 require some corrections and you will get the errata
19 sheet which indicates on the left-hand side what was
20 actually written. On the right-hand side is the
21 actual correction that I would like to make.
22 So, as you will see, most of these refer to
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1 the reference to EBITDA. Instead of EBITDA, it should
2 be unlevered free cash flow.
3 And I also referred to Financial Statements
4 of Kaloti as audited. I would like to make a
5 correction, those are not Audited Financial
6 Statements. They were reviewed and compiled.
7 And I believe we made a reference one time
8 for 1.8 billion in sales revenue. The correct number
9 is 1.33 billion in sales revenue.
10 None of these corrections, I would like to
11 iterate, changes my conclusions in any way.
12 That would be it.
13 MS. HORMAZABAL: We're distributing the
14 physical copies.
15 PRESIDENT MCRAE: You finished, and he can
16 now start his presentation.
17 MS. HORMAZABAL: (Nods.)
18 PRESIDENT MCRAE: Thank you.
19 Please go ahead, Mr. Smajlovic.
20 THE WITNESS: Thank you, Mr. President.
21
DIRECT PRESENTATION
22 THE WITNESS: Good morning. Again for the
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1 record, my name is Almir Smajlovic, I'm a managing
2 Director at Secretariat International and I'm a
3 quantum expert hired by counsel for the Claimant to
4 calculate damages to the Claimant in this matter.
5 Mr. President and Members of the Tribunal,
6 thank you again for me giving me this opportunity to
7 present to you my valuation findings.
8 Slide No. 2 shows our Agenda which includes,
9 as you can see, 12 topics that I will be going over.
10 I will next summarize excerpts from my CV.
11 Of note, I would like to highlight that I'm
12 a Certified Public Accountant, or CPA, and a Certified
13 Valuation Analyst, or "CVA." I've spent also four
14 busy seasons at PricewaterhouseCoopers, one of the big
15 4s, where I audited public companies. I also assisted
16 privately-held companies in their IPOs, and while at
17 my previous employer, Alvarez & Marsal, I was involved
18 in several restructuring engagements. The training
19 and experience that I've gained on these engagements
20 provided me with an in-depth understanding of
21 financial reporting, especially U.S. GAAP, as well the
22 construction of the Financial Statements. These
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1 skills, I believe, are of particular importance in
2 this matter, which calls for the interpretation of the
3 financial records of a unique business that operated
4 for a relatively short period of time, experienced
5 high growth upon commencement of its initial
6 operation, but ultimately reached a state of economic
7 distress.
8 My instructions are outlined extensively in
9 my two Reports. In my First Report, I was asked to
10 calculate the loss suffered by the Claimant due to the
11 full expropriation of the business interest and
12 property of KML. In my Second Report, I was asked to
13 respond to the Expert Report of Brattle, including
14 updating my conclusions, if needed.
15 I received several instructions from counsel
16 regarding my calculations. All of these instructions
17 relate to either factual or legal matters, which are
18 outside of my expertise. I summarized them here for
19 your convenience, and these are set out in details in
20 my Report under the same heading. I would like to
21 reiterate, however, that I have not taken any
22 instructions which are within my expertise.
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1 In addition to the legal instructions
2 regarding my assignment, I want to discuss two
3 instructions from counsel which affect my
4 determination of damages. First relates to the issue
5 of causation. This is a factual matter that is to be
6 decided by the Tribunal. In this presentation, I will
7 explain the financial impacts on KML as a result of
8 lower gold purchase volumes. The Claimant alleges
9 that these lower volumes are due to the Measures,
10 while the Respondent suggests that there might be some
11 alternative causes. It is ultimately for the Tribunal
12 to decide whether the Measures ultimately caused the
13 lower purchase volumes and KML's eventual exit from
14 the Peruvian gold market.
15 Second, we make no legal determination on
16 the title of the seized gold, and I have been asked to
17 assume that KML has title to the gold and thereby was
18 a bona fide purchaser of the gold. In this
19 presentation, I will explain the financial impacts on
20 KML as a result of the seized gold as well.
21 As you have heard many times throughout this
22 week, the Claimant in this matter is Kaloti Metals &
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1 Logistics LLC, a limited liability company based in
2 Miami, Florida. As further background, I want to
3 discuss the arrangements that KML had with [Redacted].
4 [Redacted] was KML's primary purchaser of gold and, as I
5 understand, provided the necessary staff training and
6 financing to KML. [Redacted] also provided KML with a letter
7 indicating a willingness to purchase up to 45 tons of
8 gold for a period of three years.
9 It also committed the resources needed for
10 KML to achieve this target. This is evidenced by an
11 ongoing financing arrangement that [Redacted] provided to KML
12 as shown on the top right-hand side of this Slide 10.
13 Next, I will touch upon KML's actual
14 performance between 2012 and 2018. On this Slide 12,
15 I provide an overview of KML's operations prior to and
16 following the Measures, which initially occurred, as
17 you know, in November of 2013. KML's operations
18 commenced in 2011, and KML entered the Peruvian market
19 in 2012. Initially, they purchased only 256 kilograms
20 which was followed by 14,011 kilograms in 2013. That
21 was an increase of 54 times. From 2011 to 2013, KML
22 also experienced a substantial growth from other
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1 countries. This growth in volume is presented in the
2 first chart on the top of this Slide 12.
3 In terms of financial performance, KML's
4 actual sales revenue and cash flow, that gold
5 sale--cash flow increased. For example, the revenues
6 increased from 800 million in 2012 to 1.3 billion in
7 2013. Cash flows went from 3 million in 2012 to
8 1.4 million in 2013. However, I would like to note
9 that, in 2013, approximately 4.4 million of gold
10 inventory was seized. But for the seizure, 2,000 cash
11 flows would have been increased to approximately
12 $6 million in a single year. This figure is important
13 to remember because, in a single year, which is 2013,
14 KML would have generated approximately $6 million of
15 positive cash flows.
16 Following 2013, you will notice a decline in
17 volumes from all countries and corresponding decrease
18 in the cash flows. You will note, however, despite
19 the Measures, KML continued to operate as a going
20 concern and generated positive cash flows in 2016 and
21 2017.
22 On this Slide 13, I showed various metrics
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1 indicating KML's actual performance from 2012 to 2018.
2 Of note, I want to highlight that, despite lower
3 volumes, which affect profitability, KML was able to
4 generate higher EBITDA margin in 2016 and 2017, which
5 contributed to the positive cash flows I noted on the
6 previous slide. Besides EBITDA, the Return on Capital
7 employed also indicates improvements in 2016 and 2017,
8 compared to prior two years. Despite the efforts to
9 maintain its operations, the impact of the declining
10 volumes compounded by the inventory seizures made it
11 impossible for KML to satisfy its financial
12 obligations in November of 2018. Now, I would like to
13 briefly discuss the three heads of damages I've
14 included in my assessment of damages.
15 I have been asked to quantify three heads of
16 damages suffered by KML. The first head of damages I
17 calculated is from January, 21, 2014, through
18 30th November of 2018. Throughout my Reports and
19 presentation, I will refer to it as "lost profits" or
20 "historical losses." In this calculation I apply two
21 alternative Pre-Award Interest Rates to the estimated
22 losses to bring it to a present date.
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1 The second head of damages is the Fair
2 Market Value of seized inventory. I calculate this
3 value based on the Inventory Net Volume and the
4 prevailing gold price. In accordance with my
5 instructions, I provide two alternative calculations
6 as of two different dates: One as at the Valuation
7 Date of 30th November 2018, and second as of what I
8 would refer to as close as to the "current date,"
9 which is close to my Report issuance date. Obviously,
10 I cannot--upon request, I can update these calculation
11 if needed. The third head of damages is determined
12 based on the Fair Market Value of the expropriated
13 business or Expropriated Vale of KML as at Valuation
14 Date. Later in this presentation I will discuss
15 specific of each of these heads of damages.
16 In this section of my presentation, I will
17 discuss my top-down approach for estimating lost
18 profits, or damages head No. 1, and the Expropriation
19 Value, damages head No. 3, and the key inputs into my
20 determination of damages. Specifically, I will be
21 addressing my approach to estimating but-for sales
22 revenue based on estimated gold volumes and gold
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1 prices and the resulting cash flows to KML.
2 In this slide, I discussed my estimates of
3 the but-for gold volumes of KML which apply to both
4 heads of damages. To determine the but-for volumes, I
5 relied upon Perú's "reported gold production volumes"
6 from 2010 to 2019. I then considered that [Redacted]
7 expressed interest to purchase up to 45 tons of gold
8 annually from KML's Peruvian branch, and I used that
9 to determine KML's share of the estimated reported
10 production in Perú. This should not be confused with
11 the Market Share, as the counsel for the Respondent
12 portrayed it on Monday.
13 Considering the substantial growth in
14 purchased volumes KML achieved in 2013 up until the
15 seizure of gold in November of 2013, I assumed that
16 KML would achieve two years of linear growth whereby
17 their purchases will reach the maximum of 32.5 tons in
18 Perú. This two-year growth is then followed by
19 continuous decline in purchase volumes all the way up
20 to 2048. Figure 10 shown on this bottom-right of the
21 slide shows the decline in volumes which I used.
22 My approach to volumes is conservative. I
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1 only rely--and I repeat this: I only rely on the Gold
2 Reserves which existed as of 2018. As such, for
3 30 years into the future, I did not consider any new
4 developments that will be made, any new discoveries of
5 gold which would have increased the total volumes, or
6 any of the additional gold inventory that was sitting
7 that was not part of the production volumes that I
8 relied upon.
9 The next thing put to my calculation of
10 damages is the gold price. In terms of lost profits,
11 I relied on the actual prices realized by KML during
12 the historical period. This is needed to ensure that
13 the price difference does not create any damages. We
14 have the same price in the but-for and the actual
15 world. In terms of my calculation of KML's Enterprise
16 Value or Expropriated Value, I'd been asked to prepare
17 my damages calculation under the assumption of an
18 unlawful expropriation, whereby the Claimant is
19 entitled to an increase in the value of the assets or
20 business from the date of taking and the date of the
21 Award. This differs from a typical valuation where a
22 valuator only considers information known or knowable
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1 as at the Valuation Date. Consistent with my
2 instructions, I used spot prices past 30th November of
3 2018. Throughout my Report dates, then I also rely
4 after those spot prices expired, I rely on the futures
5 prices as reported from Capital IQ.
6 Early-period high gold prices from my model,
7 which is shown over here in the red line, represent
8 the main difference between my actual gold prices and
9 Brattle's prices which is in the blue line on this
10 Figure 12.
11 I would like to reiterate that, as part of
12 my Second Report, I have not made any pricing updates.
13 For conservative reasons, I have maintained the same
14 pricing curve that I used as part of my First Report,
15 despite higher prices as of the Second Report.
16 In this Slide 19, I discussed at high level
17 how I arrived at the but-for profits and cash flows of
18 KML. Each input to my cash-flow calculation set out
19 in my DCF Model AS-68, specifically Tab 3.2 BF. "BF"
20 stands for but-for modeling inputs.
21 In Annex 1 of my First Report, I set out in
22 detail why the operating margins of KML were affected
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1 by lower gold volumes and why this existence must be
2 carefully considered in estimating KML's but-for
3 operating profits and cash flows. In other words, it
4 will be inappropriate to use financial metrics from
5 the actual world, where the volumes were low and the
6 metrics worsened as part of the but-for world. This
7 is exactly what Brattle has done.
8 I specifically observe that due to the
9 Measures and materially reduced gold volumes, KML
10 experienced a higher cost on a per-unit basis, higher
11 cost of financing and deteriorating working capital.
12 For illustration, Figure 21 on this slide
13 presents total operating expenses as a percentage of
14 revenues and on a per-unit basis. This clearly shows
15 that when volumes decline, the cost on a per-unit
16 increases. You have heard this term many times, I'm
17 sure, and it's referred to as "economies of scale,"
18 which refers to a proportional saving in cost gained
19 by an increased level of production.
20 As a further support, at the bottom of this
21 Slide 19, you will see excerpt from a contemporaneous
22 document evidencing that [Redacted] was offered--offered to
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1 KML more favorable refining charges based on higher
2 volumes. The same is true in case of the financing.
3 So, as shown here, it is essential to
4 maintain higher volumes in this business.
5 In this section, I discuss the results of my
6 lost-profits calculation, and I highlight some
7 observations from these results for the Tribunal to
8 consider.
9 To determine the lost profits, I estimate
10 the cash flows that KML would have achieved absent the
11 Measures and deduct the actual cash flows that were
12 achieved under the Measures. The graph on this
13 Slide 21 shows a comparison between the but-for cash
14 flows I estimated, which is in the red bars, and the
15 KML's actual cash flows, which is represented in the
16 blue bars. To arrive at lost profits, I take the
17 difference between these two, and then I apply
18 Pre-Award Interest up to a present date.
19 I also want to highlight to the Tribunal two
20 observations that are obvious and important in the
21 actual cash flows of KML. The 2014 actual cash flow
22 shown in first circle on the left, the bottom left,
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1 was negative, and this is primarily driven by the
2 seizure of inventories and its effect on the Company's
3 Working Capital, which had a negative 8.3 million
4 impact on the business in that year.
5 Second, KML generated positive cash flows in
6 2016 of 3 million and 2017, 3.7 million, and these
7 cash flows serve as an offset to this head of damages.
8 My conclusion is lost profits are
9 approximately 27 million, which is based on the
10 but-for volume from all countries, Perú and other; and
11 approximately 12.7 million from Perú only.
12 I will now discuss head Number 3 since it
13 relates to expectation damages just as Number 1
14 discussed on the previous slide.
15 Like in lost profits calculation, to
16 calculate Enterprise Value, I estimate the cash flows
17 that KML would have achieved absent the Measures.
18 Since KML ceased its operation in November of 2018, I
19 have no actual scenario to calculate which could be
20 used to offset the value. The graph on this Slide 23
21 shows declining cash flows due to my assumption of the
22 declining volumes which I already mentioned earlier.
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1 I also want to highlight to the Tribunal two
2 observations, which are linked with KML's cash flows.
3 The average volumes I assumed from Perú are less than
4 20,000 kilograms per annum--not 45,000 kilograms but
5 20,000. And this is from 2019 all the way to 2048.
6 This can be found again in my AS-68 Tab 3.3 "Damages,"
7 specifically Row 19.
8 Same thing: Because of this, my average
9 cash flows I calculate from Perú around 1.75 million
10 per annum.
11 In terms of volumes from other markets, and
12 those represent at least 18 countries as shown in
13 Appendix 3.9.2, I have maintained the observable ratio
14 of the volumes between Perú and other markets which
15 existed in 2013. Out of all possible modeling
16 options, I considered this approach to be the least
17 subjective of all; in other words, 18 countries are
18 assumed to provide approximately 53 percent of the
19 total gold purchased by KML.
20 To arrive at Expropriated Value, I discount
21 all the future cash flows, which are shown here as
22 declining in each year, to the Valuation Date. I then
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1 apply Pre-Award Interest to bring them to a present
2 date. Considering that during 2013 KML would have
3 generated close to $6 million in a single year,
4 positive cash flows, absent the Measures, our
5 calculation of 30-year cash flows is supportable.
6 My conclusions on the Expropriated Value of
7 KML are approximately 70 million before tax, which
8 includes gold volumes from Perú and other countries as
9 well. This number decreases to 28.4 million should
10 the Tribunal find that only lost gold volumes from
11 Perú should be taken into account. Brattle, on the
12 other hand, presents an Expropriated Value of
13 3.40 million, 30 years of cash flows are valued at
14 3.4 million. I would like to remind you that this
15 value is actually lower than the cash flow KML
16 generated during 2017 under the Measures. I believe
17 that Brattle has never stepped back and reassessed
18 their findings. Had they done that, they would have
19 realized that their valuation conclusions are
20 unreasonable.
21 On the issue of taxation of a non-taxable
22 entity will be discussed next.
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1 There seems to be some confusion on the part
2 of Brattle as to whether the earnings of KML should be
3 taxed; and, if so, how to account for these taxes. I
4 reiterate that KML is a Florida-based Limited
5 Liability Company; and, therefore, the Claimant is not
6 liable for any Corporate Income Tax.
7 We could just stop here.
8 In case of LLCs, as the Company generates
9 positive income, the taxes are levied at the members
10 level, not the Claimant's level. This is the approach
11 I have taken. In my First Report, I applied
12 29.5 percent Tax Rate to KML's before-tax cash flows.
13 This is simply done to allow me to compare KML's
14 metrics against other companies which are paying
15 taxes. After arriving at the damages, I next applied
16 a gross-up to bring the damages to a pre-tax
17 equivalent in line with LLC's tax treatment.
18 Battle has criticized my Tax Rate and
19 gross-up and suggested in Paragraph 213 of their First
20 Report that "instead of using a U.S. Tax Rate," I have
21 incorrectly applied the "Peruvian Tax Rate." As part
22 of their First Report, Brattle seemed to be suggesting
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1 that U.S. taxation is applicable onto KML's earnings.
2 It is not.
3 In my Second Report, to eliminate any
4 confusion regarding taxation, I removed the estimated
5 U.S. tax which I originally applied. This eliminated
6 the need for any gross-up. The results--this results
7 in the same economic position as presented in my First
8 Report.
9 As part of their Second Report, however,
10 Brattle takes a completely different position on
11 taxation. In Paragraph 301 of their Second Report,
12 Brattle states that rather the Peruvian Tax Rate now
13 should be applied.
14 I note, Brattle added Peruvian taxes in KML,
15 despite zero evidence on record that KML generates any
16 positive Peruvian-sourced income. Brattle has no
17 basis for this artificial taxation.
18 Next, I discuss the reasonability of my
19 Discount Rate, which was also. Brattle and I agree
20 that there is no publicly-traded company that is
21 comparable to KML's operation. As I explained in my
22 Reports, KML is not a company that is engaged in
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1 mining of precious metals; and, as such, it is not
2 exposed to any--to many risks faced by mining
3 companies. From a standpoint of WACC calculation,
4 specifically determination of beta, which is a measure
5 of the systematic or market risk, in my view, instead
6 of a precious metals company beta, KML's beta more
7 closely resembles some of the financial services on
8 non-banking sector. Using the Capital Asset Pricing
9 Model, or "CAPM," which is a financial model that
10 calculates the expected Rate of Return for an asset,
11 and applying capital structures of the firm, and I use
12 the beta from the precious metals industry, I
13 calculate a WACC of 4.4 percent. This calculation is
14 shown on this Slide 27. Despite this calculation, I
15 applied a higher WACC of 5.2 percent.
16 Additionally, as discuss in Paragraph 6.131
17 of my Second Report, my Discount Rate is highly
18 supportable, considering that for its operation in
19 Perú, Barrick Gold, a mining company, estimated WACC
20 of 3.8 percent. That's in Exhibit AS94. Brattle
21 suggests that 3.8 percent WACC is most likely a real
22 WACC. Assuming they're correct, often adding
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1 inflation to the WACC, the WACC increases for the
2 precious metal company to 5.8 percent. In my view,
3 the 5.2 percent WACC I assumed for KML, compares to
4 5.8 for a mining company, serves as a support that my
5 calculation of WACC is reasonable.
6 Last, I discuss the remaining head of
7 damages, which is the value of seized inventory.
8 The value of seized inventory is based upon
9 my legal instruction that KML has title to the seized
10 gold. As mentioned, I provide two alternative
11 calculations based upon the net weight of
12 448.6 kilograms, which I derive from a KML's receiving
13 document. My first calculation calculates the value
14 of the gold as at the Valuation Date using the gold
15 spot rate at that particular date. This value is then
16 brought forward to a current date to account for
17 Pre-Award Interest. As of the Valuation Date, I
18 determined the gold to have a value of 17.7 million
19 roughly, before Pre-Award Interest.
20 My alternative calculation is to calculate
21 the value of the gold at the current date. At the
22 time I prepared my Second Report, I used November 2022
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1 price. Use of a subsequent price results in a higher
2 value for the gold inventory due to higher gold prices
3 at that time. I calculated a value of the gold to be
4 24.6 million.
5 Now, I would like to spend some time
6 discussing some specific comment or issues raised by
7 Brattle in their Reports. I cannot cover all of those
8 due to time restrictions, but will discuss some of the
9 most relevant topics which are affecting damages.
10 To start, I want to discuss Brattle's
11 estimates of KML's share of Perú's gold production.
12 Brattle maintains a status quo for KML; in other
13 words, assuming they will only have access to small
14 and artisanal and other Suppliers for 35 years into
15 the future. They assume no access to large or medium
16 producers in Perú based on this actual Supplier mix
17 which existed in 2013.
18 This mix tends to change from year to year.
19 This reduction in volumes has a detrimental impact on
20 KML's value.
21 Additionally, Brattle assumes that the
22 proportion of small to large Suppliers will remain
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1 unchanged over the entire period. In other words,
2 that existing contracts between large producers and
3 their customers at the time will remain unchanged for
4 30 years, therefore, restricting KML access to any of
5 those. This is unsupported.
6 In fact, their own data contradicts this
7 important assumption. For instance, I note in 2019
8 Newmont, one of the big producers, has canceled its
9 existing Supply Contract and has contracted with
10 different Parties. This is shown in Brattle's
11 Exhibit 73. Clearly, Brattle has no basis for these
12 unsupported assumptions.
13 As shown in my Second Report, specifically
14 Figure 3 and also as discussed in Paragraph 5.20 of my
15 Second Report, the actual Market Share of the three
16 producers, which were chosen by Brattle as an
17 example--specifically Newmont, Barrick,
18 Buenaventura--was cut in half by 2019. This means
19 that the composition of large, medium, and small
20 producers of gold in Perú changes. For your
21 convenience, I've included some graph demonstrating
22 this in Annex 1 of this presentation.
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1 I want to point out that although Brattle
2 criticizes me for using ex post prices in my
3 calculations, Brattle too uses ex post information in
4 their damages calculation. In fact, their use of ex
5 post informations spills over the period of 30 years.
6 Specifically, Brattle's 2019 volume forecasts starts
7 with 33,858 kilograms, which corresponds to the actual
8 2019 gold production allocated to small and other
9 producers from Perú. I remind you, Brattle assumes
10 KML can only transact with these small type of
11 producers.
12 Next, Brattle allocates 31.59 percent share
13 of this submarket to KML, to forecast total small and
14 other producers' volumes for 2020 to 2048, Brattle
15 starts with this 33,858 kilograms from 2019, and for
16 each year thereafter up to 2048. They linearly
17 decrease this ex post 2019 production to estimate
18 their but-for volumes by--they linearly decrease this
19 figure by 2.5 percent. This can be found in BR-108,
20 Tab C-1, Cell L16. As shown, Brattle has also used ex
21 post information where convenient.
22 Next, I want to discuss Brattle's position
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1 regarding KML's capital structure. As will be
2 demonstrated on this Slide 33, Brattle's analysis
3 lacks basic due diligence. Brattle assumes that,
4 during 2012 and 2013, KML did not have any debt
5 outstanding, and its sole financing was 800,000 in its
6 Members' equity.
7 As a valuator, you need to take a step back
8 and assess what is within the realm of possible.
9 Specifically, you should ask yourself can a firm fund
10 1.33 billion in sales revenue using 365 days of
11 operation using only $800,000? Of course not.
12 Applying a simple math, for instance, and considering
13 as demonstrated in Figure 1 of my First Report, that
14 lead time, from the time you purchased and then you
15 sell and received cash, is at minimum three days. At
16 the optimal situation, business cannot churn more than
17 100 million in sales revenue from this 800,000 in
18 capital. Brattle never bothered to investigate the
19 financing source of the remaining 1.23 billion, which
20 is a difference between 1.33 billion, which they
21 achieved in the actual world, minus maximum
22 100 million, which they can achieve with 800,000.
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1 This is where the Revolving Credit Facility is used to
2 abridge the financing need of KML. The nature of a
3 revolver is that you draw down on it when you need the
4 cash or finances to purchase the gold, for instance,
5 and you pay it down when you sell the gold or when you
6 ship the gold. The outstanding balance fluctuates
7 daily, and interest is charged based on the average
8 balance outstanding.
9 Furthermore, in case of a revolver, Balance
10 Sheet is not the best source to verify outstanding
11 balance. That is because the Balance Sheet is a
12 snapshot at a particular point in time; and, by its
13 nature, revolver changes daily. However, we can
14 detect from the Income Statement the interest charges
15 paid by KML over the course of the year, which I
16 present in the chart on this slide, that could easily
17 tell us the outstanding balance, debt balance,
18 throughout the year.
19 The chart on this page shows you that,
20 although the Balance Sheet showed no debt as at
21 31 December 2012 and '13, KML reported financing costs
22 that increased from 330,000 to 760,000 respectively.
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1 This happens to correspond to an increase in gold
2 sales which also increased from 800 million to
3 1.33 billion. I have to apologize. Excuse me for
4 this.
5 (Witness drops clicker on floor.)
6 THE WITNESS: Brattle's suggestion that
7 there's no evidence of any debt is, therefore, clearly
8 incorrect.
9 Another topic I need to address is Brattle's
10 flawed calculation of the returns implied by my model.
11 Part of their error comes from their misunderstanding
12 of KML's financing I just discussed in the previous
13 slide. Their incorrect calculations are then compared
14 to those of Apple stock to suggest my DCF conclusions
15 are somehow unreasonable. For all the reasons I set
16 out in my Reports, the comparison of the returns of
17 KML and Apple do not make sense. Nevertheless, even
18 if you accept the comparison of these two companies as
19 reasonable, Brattle calculates the returns
20 incorrectly.
21 In their First Report, Brattle compares
22 Apple's equity--I repeat this--equity returns, on
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1 their public stock, to their return, which are derived
2 from KML's free cash flows to the firm. I remind you
3 that free cash flows to the firm represents cash flows
4 which are attributable to both debt and equity
5 investors. At the start, they're not even comparable.
6 Further, in their attempt to calculate the return,
7 Brattle ignores the debt/capital of KML. They
8 erroneously state that the debt does not exist.
9 Ignoring debt results in alleged 221 percent return on
10 capital.
11 As part of their Second Report, however,
12 Brattle provides an updated calculation of this return
13 which now includes a debt of 2.3 million but only in
14 2011. This new calculation shows a decline in the
15 alleged return from the original at 221 percent down
16 to 120. Brattle should not have stopped there, but
17 they did. On my previous slide, I showed you how
18 KML's business requires debt, which I estimate in
19 excess of 12 million. The fact that Brattle ignores
20 these debt figures results in this artificial
21 inflation of the KML's returns.
22 This Slide 35 provides some points regarding
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Brattle's Market Approach to value KML, which it prefers over the Discounted Cash Flow Method. Brattle uses transactions involving two refineries--I repeat, two refineries--Rand and Valcambi, which are based in South Africa and Switzerland, respectively--and they use those to estimate the value of KML. The fact is KML is not a gold refinery, and this, alone, makes their approach unreliable.
In Sections 6(b)(4) and 6(b)(14) of my Second Report, you will find all the reasons why Rand and Valcambi transactions are not appropriate, so I will not repeat them here.
Brattle has made some updates in their latest report, but their suggested approach still remains unreliable. Specifically, Brattle uses, again, equity multiples from these two transactions to derive KML's Enterprise Value. These two are very different values. Brattle's application of the equity multiples is evident in their application of the Control Premium which is, by the way, only applicable to equity share of the firm's value.
Next, Brattle should have, at the very
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least, added the debt, but they did not, which explains why they have materially lower values.
Furthermore, Brattle makes no adjustments to the multiples they use to account for the inherent differences shown in the table of the Slide 34.
In summary, their entire calculation should be disregarded.
On this Slide 36, I will discuss Brattle's proposed deductions against the but-for value of KML.
In their First Report, Brattle suggests the actual value of KML was 195,000, and they used this amount to reduce any but-for value. In their Second Report, however, Brattle changes their approach. Now they claim to calculate KML's actual Enterprise Value, which they suggest is worth 565,000. Neither of these deductions are appropriate. Brattle proposes that they--that their calculation continues to rely on--sorry.
I know that Brattle's calculation continues to rely on the Book Value of reported debt and equity, which is not in line with the Enterprise Value formula shown in Figure 11 of my Second Report. For example,
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although they are correct in assigning a Fair Market Value of zero to inventory in 2018, they assign a Fair Market Value of 12.6 million to KML's debt.
I remind you, over here they assigned a value to debt, but before, for the previous years when they calculated returns, they stated there is no debt. I disagreed with this value that they assigned to debt. In essence, Brattle assigns 100 percent value of the loan that any prudent or willing buyer would consider non-performing and, thus, worthless. As such, Brattle grossly overstates the actual value of KML, especially if we assign Fair Market Value of debt to nil. Correcting for these errors results in a negative Enterprise Value of 14 million as shown in this slide.
In my calculations, however, I conservatively make no deduction for the negative value of KML, and I maintain zero value.
With this, I conclude my presentation.
I just want to mention that in the back you will see the artisanal and other producers in Perú annex that I mentioned previously in my presentation.
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Thank you very much.
PRESIDENT MCRAE: Thank you.
We will take a moment while we remove the podium, I think, and then we can start the cross-examination.
MR. SMYTH: Just a quick point of order in the meantime, Mr. President. Mr. Smajlovic ran over the 45 minutes slightly by maybe a minute or two. In the spirit of cooperation and in order to avoid interrupting his presentation, we made no objection, but we would just respectfully ask that should Brattle overrun in their presentation, that we have the same indulgence.
PRESIDENT MCRAE: Any comment?
MS. HORMAZABAL: I'm sorry, can you please repeat?
MR. SMYTH: Of course. I was just explaining that Mr. Smajlovic slightly overran the 45-minute time limit. We didn't raise any objection in order to avoid interrupting him. And in the spirit of cooperation, we would just respectfully request that the same indulgence be provided to Brattle should
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they overrun slightly.
MS. HORMAZABAL: That's fine.
MR. SMYTH: Thank you.
(Pause.)
PRESIDENT MCRAE: So, Respondent, when you're ready.
MR. SMYTH: Yes.
Q. Good morning, Mr. Smajlovic. My name is Tim Smyth, counsel for Perú and I'm going to be asking you some questions about the two Reports that you have submitted in this Arbitration. You should have both of those Reports in front of you.
I will also direct you to certain documents which will be displayed on the screen in front of you.
To start with, I would like to ask a couple of questions about your background and experience. As looking at the experience you referred to in your Reports and couldn't see any reference to you having worked in the gold and precious metals sectors. Is it correct that you haven't previously been employed in
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those sectors?
A. That's correct.
Q. I also couldn't find any examples of where you've testified in arbitration cases involving the gold or precious metals sectors; is that correct?
A. That is correct.
Q. And, nonetheless, are you familiar with certain terminology that's used in the industry, such as off-take agreements, long-term supply agreements, and the like?
A. Yes.
Q. And you also have some experience of cases involving financial institutions; is that correct?
A. That's correct.
Q. So, you have some understanding of how financial institutions operate.
A. Which one in particular?
Q. Just as a general matter.
A. I've done seven, eight banking valuations. So, if that's what you refer to, I would say "yes," then.
Q. Okay. Thank you.
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I would like to talk about the issue of causation. So, you're aware that in this Arbitration Kaloti argues that Perú's actions caused their loss; correct?
A. Yes.
Q. Please, can we pull up Exhibit AS-25, which is one of the exhibits to your First Report: This is a forensic valuation and services practice aid published by the AICPA. If you go to the next page, you can see that in the top left-hand corner. What does AICPA stand for?
A. American Institute for Certified Public Accountants, I believe, or something like that.
Q. Thank you.
And you're a CPA; correct?
A. That's correct.
Q. And you exhibit this document with your First Report, so you accept that the principles referred to in it are applicable to this arbitration?
A. Yes.
Q. On the third page of the PDF, if I could go to that, please, under the heading "causation," it
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says, and I will read it to you so it's in the record: "The plaintiff's damages are to be approximately caused by the defendant's act. The plaintiff carries the burden to prove that but for the wrongful conduct of the defendant, the plaintiff would likely have realized the lost profits or other economic income. Experts may be asked to assume causation or opine upon causation. If an expert assumes causation, the expert should understand the causation theory and be able to explain how the computed economic damages are attributable to the alleged cause. For matters in federal court, experts should be familiar with the 2000 comments to Rule 702 of the Federal Rules of Evidence that specifically identify as one test of reliability 'whether the expert has adequately accounted for obvious alternative explanations' for the plaintiff's damages."
So, first of all, you would agree, based on this, that damages experts can opine on causation as an economic matter?
A. Assuming there is sufficient information for it, yes.
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Q. Right.
And, in this case, you were instructed to assume causation as established; correct?
A. I've assumed causation was established for certain things, for some of those I actually was able to identify the impact of certain Measures.
Q. So, have you assumed causation or not? It's really a "yes" or "no" question.
A. I have assumed causation. And as part of my work, I believe it was Annex 1 of my First Report, I identified the impact of inventory-taking or the negative impact of inventory-taking on the cash flows of Kaloti Metals & Logistics, on the financing charges which increased as a result of inventory-taking, and as on operating performance of the Company, which deteriorated specifically increasing Working Capital which really was one of the most, I would say, impactful of all negative impacts of the Measures.
Q. And so, if we just go back to this extract from the AICPA guidance, it says that, in the last sentence, where causation is assumed, one test of reliability is whether the Expert has adequately
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accounted for obvious alternative explanations for the Plaintiff's damages.
So, you would agree that, if you're instructed on causation, you need to adequately account for alternative causes for the Plaintiff's damages; correct?
A. Yes.
Q. And do you consider that you have done that in your Reports?
A. Considering the information that was available, to extent of the information that was available, that's exactly what I have done.
Q. Okay. And if we go to Paragraph 2.31 of your Second Report, if we could get that up on the screen, 2.31. If you could scroll through--bear with us--so, here it says--this is under your legal instructions, and it says: "Last, I have not seen evidence provided by Brattle to suggest that the loss of KML's gold Suppliers was caused by a different factor."
So, where in your Reports do you analyze the alternative causes raised by Brattle and the evidence
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that they put forward?
A. I do not analyze them. All I have done is the proposed suggestions for alternative reasons such as--I will give you one example. Brattle states that affiliation with [Redacted] is likely the reason why business went under. I did not--there was no information that was provided by Brattle that would indicate that that alternative cause which they suggest is an alternative cause, should be considered.
They provided competition as part the--potential for competition as part of the reasons.
When I analyzed--first of all, the competition has always been impacted--exists in every world, and the competition existed in 2012 and 2013. That was not the reason why the volumes have decreased.
And on top of my head, I can't remember all the other reasons, but all of the reasons that they proposed, I analyzed them, I looked at it, I looked at the evidence that they exhibited. There was nothing that would convince me that the alternative--based on what they stated, that would make me change my numbers, and that's basically what I stated here.
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Q. Mr. Smajlovic, that was a rather long answer. I would just urge you, in the interest of time, to, where possible, keep your answers short.
You described certain information alternative causes that you say you analyzed, but my question was much narrower than that.
Where are those alternative causes analyzed in your Reports?
A. Specifically which alternative causes?
Q. Any of them.
A. Give me one.
Q. Where is it analyzed in your Report?
A. The--you have to give me one, with due respect. You have to give me which causes you're referring to.
There are million things that, as a valuator, there are hypothetical million things that we have to consider. So, unless you have something specific, I--really it's hard for me to answer that.
But, in relation to what Brattle was suggesting, I have not disregarded their comments, I looked into it, I looked at the evidence which in many
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cases referred to some articles which, as a CPA, as somebody who abides by the regulations, the articles were not sufficient for me to say that there is alternative causes.
Q. Okay. We will come to some specifics.
In terms of your specific legal instructions on causation, you were instructed that Perú's actions met a loss of Suppliers both in Perú and in other countries, correct?
A. That's correct.
Q. And you were also instructed that Perú's Measures caused the termination of banking relationships; correct?
A. That's correct.
Q. And, in terms of the Measures that Kaloti alleges caused these terminations, this is the seizures of gold, the first that took place on 27th of November 2013 and further seizures on 9th of January 2014. Does that sound about right?
A. I believe it was 7th of January and 8th of January.
Q. But early January? We agree on that?
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A. Yes, yes.
Q. So, I would like to look at the first of the two issues that we identified, so starting with Suppliers. If we pull up Paragraph 5.3 of your First Report--and this is on PDF Page 29--here, you state that your "damages framework is primarily centered on KML's loss of customers/Market Share." When you refer to customers here, do you mean Suppliers of gold to Kaloti?
A. That's correct, yes.
Q. And so your assumption that KML lost Suppliers due to Perú's actions is central to your damages calculations; correct?
A. That would be correct.
Q. And so, if it emerged that Perú's actions did not cause Supply Contracts to be lost, this would have a big impact on your damages calculations; is that fair?
A. If that's the finding, yes.
Q. If we go to Paragraph 9.1 of your First Report--this is at PDF Page 73--it says: "Any additional information and documents produced after
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the date of this Report may have a material impact on the analyses and conclusions contained herein." Do you stand by that statement?
A. That's the standard--I do--standard boilerplate that I always use.
Q. Yes, but as part of your Reports?
A. Yes.
Q. So, Paragraph 3.6 of your Second Report, if we could just pull that up, please--it's PDF 23--you say that you understand that there were "numerous cancellations of Claimant's Supply Contracts."
Have you seen such Supply Contracts?
A. I have seen the--not necessarily the Contract per se. I have seen, I believe they referred to such as open orders and things like that, with ongoing orders with the customers, but I have not seen the actual long-term Supply Contracts.
Q. Okay. And do you know that such long-term Supply Contracts exist?
A. During the initial 15 months of operation where they dealt primarily with small and artisanal producers, they have not engaged in these long-term
[Page 1130]
contracts as far as I know.
Q. Okay. And just to clarify something for the record, I think you mentioned that you had open orders, ongoing orders with customers. Are those listed in your Annex AS-2, which is the list of documents that you looked at? Do you know? Do you recall it? We can go to it, but I'm just curious if you know off the top of your head.
A. What exactly was the list? Sorry?
Q. I was looking at the words you used, so open orders, ongoing orders with customers, and I think you said that you had seen these. I just wanted to establish they are actually referred to in Annex 2 of your Report.
A. I'm not sure whether they referred to as Annex 2, but I have exhibited some of the examples.
Q. Okay. Just for the sake of good order, could we just go to AS-002. And we can just scroll through it quickly, and perhaps you could identify which documents you're referring to. Zoom in a bit, I think it's all quite small.
So, if we just scroll through it slowly, and
[Page 1131]
if you could just let us know when you find--
A. You can skip all the way to AS-7 is all the modeling. You are going to have pause there, please, I have to read it.
(Witness reviews document.)
A. Scroll down, please.
(Witness reviews document.)
A. Scroll down.
Maybe 53, if I remember--maybe 53 is one example. If you don't mind opening 53.
Q. Of course.
A. And also, I do recall in some instances the--there were bundles, they were repetitive, but bundles of documents that I had and their counsel, so I'm not sure whether in some cases referred to counsel because some of them were duplicates, so there might be some references to C-documents as well where some of the information is listed.
Q. Yes, but you listed C-documents in your Annex AS-2; right? So, the documents you just referred to, are they listed in AS-2 as C-documents that you reviewed when preparing your Reports?
[Page 1132]
A. Let's start with 53 first, I guess--
Q. Well, can you answer that question?
A. I do not know.
Q. You don't know.
A. I don't know. The difficulty that had with many of these Cs, is you just have a C-53. Generally my other cases, you will see exact name behind, so it's difficult for me to say--ah, this is easier, since you're pointing out to my particular appendix, I can see what it is, but the bundle itself has just a number--
Q. Just so I'm clear, you're unsure of whether AS-2 lists all of the C exhibits that you looked at? Is that correct?
A. No, no, that's not what I said. No. What I said is that in some cases we may have referred to those documents were not maybe exhibited by me but were exhibited by the Claimant's counsel.
Q. Okay. But where you've referred to those documents you have done so in the footnotes to your Report; is that what you're saying?
A. Yes.
[Page 1133]
Q. But you're unsure whether Annex A--
(Overlapping speakers.)
Q. So, if I've understood correctly, you said that you may have referred to certain C exhibits in your Reports, but you are unsure of whether your list of exhibits at AS-2 captures all of those C exhibits referred to in your Reports?
A. That could possibly be an explanation, yes.
Q. Okay. And if we just quickly look at AS-53, which you mentioned, this is an agreement for the sale and purchase of precious metals between KML and Stedson's Jewellery. It says on the cover page here it's dated 12th of May 2017.
Do you see that?
A. Yes.
Q. So, this is a contract that post-dates the relevant Measures. It's not from prior to the Measures? Would you agree?
A. We could scroll--
Q. That was it. I think we were overlapping slightly. So, that was a "yes"; correct?
A. Yes.
[Page 1134]
Q. Okay.
So, that's the Supply Contracts. Have you seen any communications, written communications from Suppliers canceling contracts?
A. Sorry, can you repeat that?
Q. We were talking about Supplier Contracts just now, and you've confirmed you were instructed that certain Supplier Contracts were terminated. Have you seen communications from Suppliers canceling or terminating those Contracts?
A. I have not.
Q. Okay. So, you have seen no documentary evidence to support the assertion that Suppliers canceled those contracts because of Perú's Measures?
A. During my visit of their offices in Miami, I do recall seeing a WhatsApp message which indicated that one of the Suppliers was not willing to communicate with them or deal with KML any longer. I do not recall what year that was. I know it was sometime between 2013 and 2018, and that was the only thing that I have seen, a WhatsApp.
Q. One WhatsApp?
[Page 1135]
A. One WhatsApp, and they suggested they also had the whole office with all the records that we can go through and identify those, but that was not part of my tasks.
Q. Right.
A. So, I have not done that.
Q. And this office was in Miami?
A. In Miami, yes.
Q. So, Claimant represented to you that there was a whole file of documents in that office that you could review, if you wished to?
A. If I wish to review, yes.
Q. But you didn't ask to do so.
A. That was not part of my scope.
Q. Okay. And these files, to your understanding, as communicated to you by Claimants and their counsel, they included communications with Suppliers canceling Contracts; is that right?
A. I do not know what they included. They included all the financial records and the way they communicate about the Orders which I understand a lot of time was through WhatsApp and other means.
[Page 1136]
Q. Yeah, but they might have been--you think that they could have been relevant to Suppliers' cancellations of those Contracts; is that right?
A. For the purpose of what I have done, I didn't need those because I actually had the financial records. For the purposes of cancellations, possibly.
Q. Okay.
If we take a look at Exhibit C-30, please. This is a list of Kaloti Suppliers, and it's broken down by purchases, total purchases for each year from 2012 to 2018, if we could scroll down a little bit.
Have you seen this document before?
A. Yes.
Q. But it's not included in your Annex AS-2; correct?
A. I believe total volumes that I used in the actual world correspond to these numbers.
Q. Right. But you don't refer to this document in your Reports; is that correct?
A. I do not recall, but yeah.
Q. Okay.
So, if we go to PDF Page 5, this is the list
[Page 1137]
of Suppliers for 2013, so this is largely before the relevant Measures; correct?
A. Well, what date is it?
Q. 2013. So, this compiles--
A. That would be incorrect. That's inclusive of Measures.
Q. I used the word "largely"--
(Overlapping speakers.)
So, if we accept that the first of the Measures was 27th of November in 2013, you would accept that this period of 2013 was largely before the relevant Measures?
A. I agree with that.
Q. Yeah.
So, let's look at some of the Suppliers for that year. Do you see, second entry down, we will focus on the pure weights here, you have A&M imports (gold), and you have an entry, pure weight of around half a million grams.
Do you see that?
Pure quantity.
A. Yes.
[Page 1138]
Q. And then, a little bit further down, you have BRG exports and imports, and here it has a figure for pure of 1.5 million grams.
Do you see that?
A. I do.
Q. And that's quite a big Supplier compared to the other Suppliers you see on this list; is that fair?
A. I mean, I have seen 5 million, I see 3 million AC trading--yes, I guess, generally, I would say, yes. At least on this sheet.
Q. Sure.
And then, if we go over the page, about halfway down, we see an entry for Mohamed Enterprise and an entry of 3.2 million grams.
Do you see that?
A. I do.
Q. And that's about 10 percent of the total purchase of the year. Would you agree?
A. I cannot agree with that. You have shown me--
Q. Sure, we can scroll down to the total which
[Page 1139]
is on Page 3.
So, you see grand total is just short of 30 million, pure quantity.
A. Yes, yes.
Q. And let's look over the page at 2014.
So, would you agree that this is after the first of the Immobilizations of gold, 2014?
A. Yes.
Q. And that the subsequent Immobilizations we've discussed were in early January, so is it fair to say that most of the Suppliers on this page were likely carried out after those relevant Immobilizations?
A. Yes.
Q. Thank you.
And so, if you see here we have entries again at the top for A&M Imports, and then a little bit further down, we have an entry for BRG again.
So, both of these companies, it appears, continued to trade with Kaloti after the seizures; correct?
A. Correct.
[Page 1140]
Q. And then over the page, about halfway down, you see that Mohamed Enterprise supplied 5.981 million grams pure in 2014.
Would you accept that that's nearly double the 2013 amount?
A. Nearly. What was it?
Q. It was 3.2. This is 5.9.
A. Okay. Yes. Nearly.
Q. Nearly, yes.
So, you would accept that these Suppliers do not appear to have continued trading with Kaloti as a result of those Immobilizations; correct?
A. Sorry, can you repeat that?
Q. So, would you accept that these Suppliers that we've just looked at continued to trade with Kaloti after the relevant Immobilizations; correct?
A. Yes, that's what the data shows.
Q. Okay. And do you know if Mohamed Enterprise continued to trade in subsequent years after 2014?
A. Yes.
In fact, I asked questions to [Redacted] specifically about Mohamed Enterprises.
[Page 1141]
Q. But the answer to my question, is that yes?
A. Yes.
Q. You're aware it continued to trade until 2018?
A. Yes.
And I can give you some additional information if you would like to.
Q. I think counsel for the Claimant may direct you to that on direct, but we can move on for present purposes.
Have you heard of the companies Darsahn 2, Darsahn International, [Redacted], Titanium and Axbridge?
A. Yes, I have.
Q. Okay. If we go to the Supplier List for 2013, I think if we start on PDF Page 5, and do you see those companies are listed here, so we have Axbridge near the top, Darsahn 2 is about a third of the way down--or sorry, three-quarters of the way down the page there, and then we have [Redacted] and Titanium over the page. [Redacted] and then Titanium. So, you see those four companies are included on the Supplier List for 2013? Do you agree?
[Page 1142]
A. Agree.
Q. And based on the figures there--I'm not going to ask you to precise math at that point, but would you accept that they supplied a large proportion of Kaloti's gold?
A. I think you can say that, yes.
Q. Okay. So, would it also be fair to say that a large amount of Kaloti's success in 2013 was due to its Supplier relationships with these companies?
A. Well, I believe that's really a question for [Redacted]. Judging from the numbers, you can say that they were impactful, yes.
Q. They were impactful from an economic perspective; correct?
A. Yes.
Q. "Yes." And were you aware that all of these companies were either dissolved or ceased exporting gold in 2014?
A. Yes.
Q. Okay. And you are aware that these same companies were the subject of a criminal investigation in relation to alleged money-laundering by members of
[Page 1143]
the Chamy family in Perú?
A. I've heard that, yes.
Q. But you didn't consider this issue in your Reports, whether the criminal investigations could have affected their ability to continue trading with Kaloti?
A. The trades that they executed, company executed, with any of these companies that you just mentioned, directly serve as an offset to damage, so I did consider them because company in the actual world, company was making positive cash flows. So, any of these Transactions that you just pointed out serve as a direct offset to damages.
Q. What about the fact that they discontinued trading with Kaloti in 2014? Did you--did you consider that fact?
A. I did.
Q. In the actual scenario, you're saying.
A. In the but-for scenario.
Q. "In the but-for scenario."
And then taking a step back for a moment and considering the Peruvian gold market as a whole, from
[Page 1144]
what you have seen, is it common for Suppliers of gold to continue trading in the market for a long period?
A. I cannot answer that question because the information that was available, there was insufficient information that was availability that would allow me to answer that question.
Q. Okay. Well--
A. All I can talk is what we have seen with Kaloti Metals.
Q. Yes. I can take you to a document, so this is Exhibit R-251. And this is an article by Victor Torres entitled "The illegal gold economy in Perú: Socioeconomic impact." And if we go to Page 2 of the PDF, it talks about certain exporters who carry out gold export activity just a few times and are never heard from again. And then there's a table, if we zoom in a little bit for Mr. Smajlovic.
The table on the page indicates that out of a total of 167 Suppliers in 2013, 68.3 percent of them only supply for one or two years. Do you agree?
MS. HORMAZABAL: Objection. This is not a part of his Report.
[Page 1145]
MR. SMYTH: This is a question about the volatility in the market, and Mr. Smajlovic has confirmed that he did consider alternative causes in his Reports and the evidence put forward--
MS. HORMAZABAL: He does not opine on that in his Report.
MR. SMYTH: He does not opine on alternative causes? He just confirmed that he did.
MS. HORMAZABAL: On this article.
MR. SMYTH: I don't believe he's mentioned this article, but he has given testimony about alternative causes. This goes to one of those alternative causes.
MS. HORMAZABAL: I maintain my objection.
PRESIDENT MCRAE: It seems to me the information in this article is relevant to what he was saying. He may not have seen the article. He's not being asked to do anything other than look at the figures there and relate that to what he said, so I don't see this is a problem.
MS. HORMAZABAL: I've read Brattle's Report. This was also not a subject in Brattle's Report. But
[Page 1146]
I will drop the objection, if that's what you prefer.
PRESIDENT MCRAE: Please proceed.
MR. SMYTH: Thank you, Mr. President.
BY MR. SMYTH:
Q. So, 68.3 percent, would you agree that that's--that the figures in this table represent a high churn rate of Suppliers in the gold market in Perú?
A. I do not know what these are, to be honest. I do not see a word "churn" anywhere.
Q. Okay. We'll phrase it a different way.
So, do you accept--if you assume that this information in this table is correct, that a Supplier List for a company would change a lot from year to year?
A. I think that's by its nature, this line of business requires changes in Suppliers.
Q. So, you accept Suppliers change, they come and go frequently in this market; correct?
A. It happens, yes. Some of them will maybe not have sufficient volumes from you in this particular year, so it's not worth to engage in the
[Page 1147]
small volumes, so in 2014, let's say, you and I will not transact. You may have next--enough volumes from me that was economical for me to deal with you, in 2015, we will transact again.
Q. Understood.
And you didn't examine whether or not Kaloti's changes in its Supplier List were caused by turnover in the market generally, did you?
A. There was no information that was submitted of the Peruvian market and the churns and turns--I forgot the term they use--they would not enable me to determine what you're asking. That's just simply not information. Brattle has that information. Brattle makes assumptions about these things, based on information that they have, which again is articles and things of that nature that do not have enough information. If I had information, I would certainly analyze and study it.
Q. So, you didn't analyze that issue because you didn't have the information. Is that fair?
A. The--first of all, I think it's important to understand that I do--my assessment is not taken from
[Page 1148]
a standpoint of an individual Supplier. The assessment, as I refer to in my presentation, a top-down approach, assumes that the Company will have access and will be able to compete in Perú and have access to all of the Suppliers other than those that have entered into long-term contracts.
So, I have never gotten to a level of details which was not necessary to say they will maintain this customer, this customer will provide this much volume--it's just impossible. It's too speculative for somebody to even try to do that. What you could do is estimate the share of the volumes the Company will have.
What production, annual production, will be done by individual Supplier is not known, but in--on a portfolio level, we could estimate what the volumes are going to be.
Q. To be clear--and this really was my question--you did not analyze the volatility in the market and whether that might have caused the turnover of Suppliers at Kaloti; correct? It's really a "yes" or "no" answer.
[Page 1149]
A. The volatility is reflected in the annual production which is taken without--from the actual world. We know exactly what they produced, what Perú production was, and my job was to estimate what portion of the production, without which--without any assumptions of what the production is. We do have the tangible numbers up to 2019. And then I make an estimate of what portion of that would have been attributable to Kaloti Metals.
Q. You don't analyze any specific Suppliers and the reasons they stopped supplying to Kaloti; is that correct?
A. I do not.
Q. Okay. So, we were talking about alternative causes earlier that are discussed by Brattle, so let's have a look at some of the documents in relation to that issue.
So, if we go to Exhibit BR-11. This is an article by Global Witness dated February 2014.
Have you seen this article before?
A. I have.
Q. And if you look at the right-hand column on
[Page 1150]
the first page, which is at PDF Page 3, this mentions a leaked Audit Report by Ernst & Young in relation to [Redacted], and it reports certain findings from that Report, including Kaloti's failure to report suspicious cash transactions of [Redacted] $5.2 billion. [Redacted] knowingly accepting up to four tons of gold coated with silver exported from Morocco with falsified paperwork, and [Redacted] [Redacted] lack of adequate supply chain information for high risk gold from Sudan.
And you said in your Second Report and the extract that we've looked at, at Paragraph 2.31, we can take you back to it if you wish, that you've not seen evidence of alternative causes for Kaloti's loss.
What analysis did you conduct to conclude that matters such as those included in this article did not cause Kaloti's loss?
A. Well, starting with this article, and we are talking about [Redacted] based in Dubai; right? This is what you're asking me.
Q. Well, I think before we start on what I think may be your answer--
[Page 1151]
(Overlapping speakers.)
Q. I wish to clarify the question. You asked me a question, so I'm just going to clarify what my question was.
So, what analysis did you conduct, it's about the analysis that you conducted when you were compiling your Reports. What analysis did you conduct to conclude that matters such as those included in this article did not cause Kaloti's loss?
A. Several.
The first thing that I have done is to assess the risk as Brattle, I believe, refers to it as alternative reason why volumes have gone down because they are sister company or affiliated company or things like that.
The first point says that the Company [Redacted] was involved in illicit purchases, and this one says "failed to report suspicious cash transactions worth in total 5.2 billion in 2012."
Well, I looked at this and say, what happened to Kaloti Metals & Logistics in 2012? If their proposition is correct, I would see a massive
[Page 1152]
leave of all the customers if they truly believed that these are identical companies or affiliated companies.
Nothing happened to Kaloti. In fact, they purchased 256 kilograms in 2012. If this was correct, I would expect to see much less but, in fact, the volumes increased by multiple of 54 times. So, that first point, it's not what caused--it's not legitimate point.
They were taking some tons. I'm not sure exactly what happened. I believe everything that I've read here, it's not really clear, but everything is from 2012. If [Redacted] in summary--without going to each detail--if [Redacted] had such a detrimental impact on KML, I would expect to see that detrimental impact in 2012 and 2013. 800 million in revenue has been recorded by KML in 2012, and 1.33 billion in 2013.
This is what I'm referring to when I said that I see articles and I see just soundbites of things, zero evidence that I can actually say yes, this is tangible, this is correct, I would need to make corrections.
Q. If we can scroll up a little bit just so we
[Page 1153]
can get the date of this article. It's February 2014, so you were talking about looking at the impact in 2012 and 2013. That's irrelevant to whether these issues reported in this article caused any impact on Kaloti's business--correct?--because this postdates the uptick in revenues you were talking about.
A. I believe your question was that whether the impact of the alleged illicit trades and underpayments from [Redacted] have had a negative impact on KML. All I said is, when I looked at it--and it's relevant, 2012 is relevant, 2013 is relevant--nothing--you could see no negative impact on KML for any of these alleged illicit trades of whatever you want to call it, that they accuse of [Redacted].
Q. Your position is that KML's volumes were lower in early 2014 than before. That's a simplification, but is that correct?
A. That's a factual thing.
Q. Yes.
And this article is dated February 2014; correct?
A. That's what it looks like, yes.
[Page 1154]
Q. So, you haven't analyzed whether this article had any causal link with those lower volumes in early 2014; correct?
A. I'm sorry, I just explained that I considered the exhibit that were submitted by Brattle, and the data that I found, information that I found, did not support the allegations that were made by Brattle, that affiliation with [Redacted] somehow impacted, that the so-called "bad acts of [Redacted]" may have impact and may have resulted in a loss of customer base. Those are the statements they have made sourcing this document.
And if you look at the document--let's look at how are we going to do this as an expert; right? You will look at it and say here is the allegation 2012. I should see the impact on the financial records. None. Let's look at the next two, maybe there's a spillover, maybe it takes time for this to--for the information to come about. Actually, volumes have gone up. No impact on KML.
So, in the context of this information, I do not see any connection between any of the alleged bad
[Page 1155]
1 acts of [Redacted] to the financial figures that we can see
2 are performance of KML.
3 Q. I've been reading through the Transcript of
4 your answer to my question. I didn't find it. So, I
5 will ask it in a different way.
6 So, this article is February 2014, and you
7 accept that KML's volumes were lower in early 2014
8 than they had been before. You understand that KML's
9 position is that the reason those volumes were lower
10 is because of the initial seizures. Can we at least
11 agree on that?
12 MS. HORMAZABAL: This was asked and answered
13 earlier by the Witness.
14 PRESIDENT MCRAE: I think his point was, as
15 I understand it, he didn't see any answer in what was
16 said. I certainly heard, but I haven't looked back at
17 the Transcript to see that, but it's just clarifying
18 what I think was the question and seeing if--
19 MS. HORMAZABAL: Okay. I will drop the
20 objection.
21 BY MR. SMYTH:
22 Q. So, I guess I will cut to the chase: We
[Page 1156]
1 agree that there were lower volumes in early 2014, and
2 the question is: What caused that? So, KML's
3 position is that that was caused by Perú's Measures
4 with the initial seizures of gold. We also have this
5 article from February 2014 which reports certain
6 matters in relation to the [Redacted]
7 My question to you is: Have you analyzed
8 what caused those lower volumes in early 2014 and
9 whether it was the Immobilizations or these reports in
10 relation to the [Redacted] If you can give a short
11 answer, I think that would allow us to move--
12 A. These volumes have decreased in 2014
13 immediately, and they have--the decline has occurred
14 in 2014--I cannot tell you exactly in which month
15 because I don't have the granular data. So, over the
16 course of the year, volumes have decreased. And all I
17 can say is that I can tell that, based on the
18 information that was provided, that I could not see
19 any link to [Redacted]. Whether there are any alternative,
20 that's up to the Tribunal to decide, but I cannot
21 see--my analysis didn't show any negative effect of
22 Kaloti Metals being affiliated with [Redacted].
[Page 1157]
1 Q. And did you see any negative effect on
2 Kaloti's business from the Immobilizations?
3 A. Yes.
4 Q. Where is that reflected in your Reports?
5 A. I would refer to Annex 1 of my First Report,
6 and I believe in my presentation I have referred to
7 negative 8 million that, right after the taking of the
8 inventory, in 2014, company experienced a massive cash
9 outflow.
10 I believe that--I recall counsel saying on
11 Monday that it was only a certain percentage of the
12 gold that was taken. Members of the Tribunal, it was
13 100 percent of the Working Capital of the Company that
14 was taken, regardless of the size or reference to the
15 total volume. The Company was experiencing
16 significant cash outflows as a result of paying for
17 the gold and not having that gold to be put into the
18 Working Capital.
19 Q. So, we've been talking here about volumes,
20 okay? So, we're not talking about the issues that are
21 mentioned in Annex 1 to your Report here. Let's focus
22 on volumes.
[Page 1158]
1 Have you seen any evidence that the
2 Immobilizations affected KML's ability to source
3 purchase volumes in Perú?
4 A. Other than--other than the Witness
5 Statements, factual Witness Statements referring to
6 that, I have not personally.
7 Q. Okay. Thank you.
8 And we were talking about the links between
9 [Redacted] and KML, and I believe your testimony
10 was that those links--you haven't seen any evidence
11 that those links would have affected KML's business?
12 Is that a fair summary? I'm paraphrasing.
13 A. That would be correct, yes. In fact, I have
14 seen only positive things that came out of it. And
15 the reason why companies survived all the way through
16 2018 is because continuous funding of Kaloti Metals &
17 Logistics by [Redacted].
18 Q. Do you accept that reports of the matters
19 that we just saw arising from the EY audit of [Redacted]
20 [Redacted] could have adversely affected the reputation
21 of [Redacted]?
22 A. [Redacted]?
[Page 1159]
1 Q. Yes.
2 A. Possibly, yes.
3 Q. And do you not accept that they could also
4 have adversely affected Kaloti Metals & Logistics's
5 reputation, given the similarity in names between the
6 two?
7 A. The short answer is I did not see that, so i
8 really cannot answer that question. I did not see any
9 evidence that that actually--that that occurred.
10 Q. And if we could go to Paragraph 39 of
11 [Redacted] First Witness Statement, which I believe
12 you've reviewed. Paragraph 39, here [Redacted]
13 explains that he specifically asked [Redacted]
14 to provide a letter evidencing [Redacted]
15 intention to purchase 45,000 kilos of gold from KML,
16 and this was to be shown to third parties as needed.
17 And we understand that that would include Suppliers.
18 If Suppliers were shown the letter intending
19 to buy 45,000 kilos of gold, they would know that the
20 gold that they supplied could ultimately be purchased
21 by [Redacted]
22 A. I think that's a fair statement, yes.
[Page 1160]
1 Q. And given the types of allegations that
2 we've just discussed, would that potentially be a
3 source of concern to Suppliers?
4 A. I have not seen any evidence of that, but,
5 in theory, yes.
6 Q. Okay. I would like to spend a little bit of
7 time now focusing on KML's banking relationships.
8 PRESIDENT MCRAE: Could I just ask you what
9 your plan is in terms of time? Because we're close to
10 a break for 15 minutes, and you suggested you're going
11 to start a series of questions.
12 MR. SMYTH: I would say we could either take
13 a break now or we could take a break in, say, half--20
14 minutes/half an hour. We're in your hands.
15 REALTIME STENOGRAPHER: No.
16 PRESIDENT MCRAE: I think we should take the
17 break now. I didn't even look at David to reach that
18 conclusion.
19 MR. SMYTH: Fine. Thank you.
20 PRESIDENT MCRAE: So, let's take a 15-minute
21 break.
22 Mr. Smajlovic, since you are giving
[Page 1161]
1 testimony, you have to keep isolated for this period
2 of time, and you will be taken to a room and you can
3 get coffee and so on.
4 THE WITNESS: I understand that. I will be
5 sitting outside over here.
6 PRESIDENT MCRAE: Right, okay. Thank you.
7 So, 5 after 11:00 we will reconvene. Thank
8 you.
9 (Recess.)
10 PRESIDENT MCRAE: Whenever you're ready,
11 Mr. Smyth.
12 MR. SMYTH: There is just one point of order
13 before we begin, Mr. President, which is just that we
14 noticed there is a discrepancy between the version of
15 Mr. Smajlovic's PowerPoint presentation that was
16 emailed to us a little over an hour before we began
17 today, and the hard copies that were handed out, and I
18 believe the presentation was actually used during the
19 presentation. We don't raise any objection at this
20 point because we will need to examine the nature of
21 the changes and differences, but we reserve the right
22 to raise an objection.
[Page 1162]
1 PRESIDENT MCRAE: Thank you. That's noted.
2 BY MR. SMYTH:
3 Q. As I said before the break, Mr. Smajlovic, I
4 would like to spend a little bit of time focusing on
5 KML's banking relationships.
6 First of all, would you agree that access to
7 banks is one of KML's biggest risks?
8 A. I would disagree with that.
9 Q. Could we pull up your First Report
10 Paragraph 5.24.
11 A. It is one of them, not the one--
12 Q. I said one of the biggest risks. Would you
13 agree with that statement?
14 A. I would agree with that.
15 Q. Okay. Thank you.
16 If you could go to 3.6 of your Second
17 Report, please. Here, you note that Perú's Measures
18 led to "the loss of financing arrangements with many
19 banks."
20 Just to clear up one issue here, you
21 mentioned financing arrangements. Are you talking
22 about loans from banks?
[Page 1163]
1 A. No.
2 Q. "No."
3 So, are you referring to KML's allegation
4 that banks decided to close KML's accounts?
5 A. That's correct.
6 Q. Okay. So, if we go to the document that
7 Claimant relies on in support of that argument, it's
8 Exhibit C-27.
9 This is a bundle of letters from banks with
10 whom KML had an account. So, if you go to the next
11 page, please.
12 Have you seen this document before?
13 A. Yes, I have.
14 Q. Is it listed in your Annex AS-2?
15 A. It might be. I do not recall.
16 Q. Well, I can represent to you that it is not.
17 Is it listed in the footnotes to your
18 Reports at all, as far as you're aware?
19 A. If it's not on the scope of review, it
20 should not be in my Report.
21 Q. Okay. Thank you.
22 So, this document is a collection of letters
[Page 1164]
1 sent over the span of four years to Kaloti. So, if we
2 take a look at this first letter from BB&T, this is
3 dated August 2018; correct?
4 A. Yes.
5 Q. And that's nearly five years after the
6 initial Immobilizations of gold; is that correct?
7 A. Approximately, yes.
8 Q. "Approximately, yes." Thank you.
9 And does this letter indicate that Perú's
10 Measures are the reason the bank is closing Kaloti's
11 account?
12 A. I do not see reference to Perú.
13 Q. Thank you.
14 And then, if we go to the next page, PDF
15 Page 2, this is a letter from Fifth Third Bank dated
16 9 May 2017.
17 Does this mention the Measures by Perú being
18 the reason for the closure of the accounts?
19 A. I do not see any reference to Perú or [Redacted].
20 Q. Okay. To save time, I can represent to you
21 that none of the letters in this bundle refer to
22 Measures taken by Perú.
[Page 1165]
1 That being so, would you accept that the
2 letters are not, in fact, evidence that the bank
3 closures were linked to Perú's Measures?
4 A. Sorry, can you rephrase the question again?
5 Q. Would you accept that the letters are not,
6 in fact, evidence that the bank closures were linked
7 to Perú's Measures?
8 A. I would accept that the reference to Perú's
9 Measures is not listed in there, but whether that was
10 a reason, I really cannot opine on that.
11 Q. You can't opine on that. Okay. Thank you.
12 So, if we could go to Exhibit R-260, this is
13 a news article from Convoca, dated 21 September 2020,
14 and it's entitled "Suspicious payments from U.S. gold
15 collector to Peruvian companies investigated for"
16 money-laundering--sorry, just "laundering and illegal
17 mining."
18 Have you seen this document before?
19 A. I have not.
20 Q. Okay. And if you go to Page 3, it
21 discusses--if we zoom in a little bit for
22 Mr. Smajlovic--it discusses banks, including JPMorgan,
[Page 1166]
1 Standard Chartered, and Deutsche Bank, and says that
2 they made reports regarding "suspicious million-dollar
3 transactions carried out by [Redacted]
4 Dubai and Kaloti Metals & Logistics.
5 Do you see that?
6 A. That's what the Article says, yes.
7 Q. Thank you.
8 And if you go to Page 4, so this is a
9 redacted version of a Suspicious Activity Report, or
10 "SAR," submitted by JPMorgan in February 2013. About
11 halfway down, it mentions concerns that Kaloti Metals
12 & Logistics's account with JPMorgan is a pass-through
13 account.
14 Do you see that?
15 A. I do.
16 Q. And then, in the highlighted section at the
17 bottom of the page, it says that the types of entities
18 that benefited from Kaloti Metals & Logistics wires
19 included entities located in banking secrecy havens,
20 Peruvian and Bolivian gold dealers, and shell
21 companies without a public-domain presence and who
22 were in scrap gold, a high risk industry, and that
[Page 1167]
1 these factors combined reduced transparency regarding
2 the destination of the funds.
3 And this SAR was dated February 2013, so
4 before the Measures that Claimant alleges caused the
5 damage; yes?
6 A. I would take that--I do not know--
7 Q. If we go to the previous page, we could say,
8 penultimate paragraph, in February 2013, so the SAR is
9 dated before the relevant Measures; correct? At least
10 according to this Article.
11 A. So, you're asking me to assume that the SAR
12 that you show at the bottom refers to the one that is
13 from February of 2013?
14 Q. Correct.
15 I mean, you can read the Article to see if
16 you disagree with that, but can we proceed on that
17 basis?
18 A. Sure.
19 Q. So, it was before the relevant Measures.
20 A. Yes.
21 Q. "Yes."
22 And are you aware that KML's accounts with
[Page 1168]
1 JPMorgan were closed at around this time?
2 A. Who closed it?
3 Q. So, KML's account with JPMorgan was closed.
4 We can get on to who closed it, but are you aware that
5 it was closed?
6 A. I was not aware of that.
7 Q. You were not aware of it.
8 A. Yes.
9 Q. Okay. And if we go to AS-61, this is KML's
10 2012 Balance Sheet. If we go to PDF Page 10, at the
11 top there you'll see there is an active balance listed
12 with JPMorgan.
13 A. Yes.
14 Q. And then, if we go to BR-58, this is KML's
15 2013 Financial Statement. Page 3 near the bottom,
16 there should be a reference to JPMorgan there, I
17 believe, with a "Zzz" in front of it and then a dash.
18 Do you see that?
19 A. I do.
20 Q. And then, if we go to AS-62, which is the
21 2014 Balance Sheet and PDF Page 4, here, there is no
22 mention of a bank account with JPMorgan; correct?
[Page 1169]
1 A. Where exactly are you referring?
2 Q. Well, we have certain bank accounts listed,
3 and there is no mention of a JPMorgan account.
4 A. It's not listed there.
5 Q. Okay.
6 A. I believe the previous year had a zero
7 balance like it shows.
8 Q. So, does it appear to you that JPMorgan's
9 account was closed, based on these Financial
10 Statements?
11 A. Now that you mention it, I actually remember
12 that. We had a discussion over these accounts. I do
13 recall [Redacted] and Ms. [Redacted] testifying that the
14 charges they were charged from this company, from
15 JPMorgan, were very high, I believe it was Wachovia as
16 well, if I remember, and a few other banks, they were
17 charging very high rates of fees which promulgated
18 Company to find a different relationship with
19 different banks around the time. Not only did they
20 charge higher fees, they were very slow in the
21 payment. And [Redacted] one of his--the way he
22 portrayed to me, one of his comparative advantages
[Page 1170]
1 over the other one was always to make these prompt
2 payments and facilitate the payments very quickly,
3 which, with JPMorgan, I believe, Wachovia, was not
4 possible.
5 Q. Thank you.
6 When did you have this conversation? Was
7 this before this Hearing, or was this during the
8 Hearing?
9 A. That was August of last year.
10 Q. Okay.
11 A. I was visiting their offices for the third
12 time, I believe.
13 Q. Yeah--
14 (Overlapping speakers.)
15 Q. August, when? Sorry, August '22, of last
16 year, so before you compiled your Second Report; is
17 that right?
18 A. Yes.
19 Q. And you seem to have a very clear
20 recollection of the events, which is admirable, but I
21 don't think you mentioned this particular issue in
22 your Second Report; is that right?
[Page 1171]
1 A. That's correct, but also you have to--you
2 have to understand that this issue was never brought
3 up until the Second Brattle Report, where they
4 indicated that there is a closure of account.
5 The only thing that Brattle can see here is
6 there's a zero balance, but to go a step further and
7 to say that the banks have closed the relationship was
8 so aggressive and unsupported. In order for me to
9 make a statement that the banks have made a closure, I
10 would need to have a paper that says "we're closing
11 you for X, Y, and Z reasons." The only thing that you
12 can see in the Balance Sheet is the actual balance of
13 cash.
14 So, I couldn't answer that question. The
15 issue was never brought up until the Second Brattle
16 Report.
17 Q. Right.
18 A. Which promulgated me to go back to look at
19 these things, so it was never an issue.
20 Q. The Second Report, that was the Second
21 Brattle Report, that's May 2023; correct?
22 A. That's correct.
[Page 1172]
1 Q. But you were saying you had this detailed
2 discussion about the JPMorgan account back in August
3 2022, even though it hadn't been brought up in
4 Brattle's First Report; is that right?
5 A. That's right.
6 As part of my analysis and forecasting,
7 modeling, we went through each of these balance sheets
8 and accounts, to the extent possible, to enable me to
9 forecast the but-for cash flows.
10 Q. Okay. Are you aware that, in his testimony
11 during this Hearing, [Redacted] also testified that
12 JPMorgan did not tell KML why it closed the account
13 with KML? Do you recall that?
14 A. I do not recall that.
15 MS. HORMAZABAL: Objection.
16 THE WITNESS: I do not--
17 MS. HORMAZABAL: Objection. That's
18 misrepresenting the testimony of [Redacted]
19 MR. SMYTH: If it would help the Tribunal,
20 we can show the testimony on the screen.
21 MS. HORMAZABAL: Yes, please.
22 PRESIDENT MCRAE: Well, I think you would
[Page 1173]
1 have to, actually.
2 MR. SMYTH: Yeah, understood. That's
3 absolutely fair.
4 So Day 2--if you could please give us a
5 minute, we will bring it up.
6 So, we're looking for Page 497.
7 BY MR. SMYTH:
8 Q. Okay. And I think we're looking for
9 Lines 15 to 17.
10 So, you will see from Line 10 it talks about
11 JPMorgan's assessment of suspicious activity, and then
12 counsel for Perú asked whether this SAR, which is the
13 same one we had been looking at, refreshes
14 [Redacted] recollection as to why the account with
15 JPMorgan was closed, and Mr. [Redacted] testified:
16 "They don't tell us. I don't know."
17 Does that not contradict the--
18 MR. DÍAZ-CANDIA: Can we continue the
19 objection? The objection that this statement that
20 he's reading, first, [Redacted] is not considering
21 that that account was closed unilaterally by the bank,
22 and he clarified very explicitly this position in the
[Page 1174]
1 redirect. So, if it's going to be shown this
2 isolated, I think he should be also shown the part of
3 the redirect where [Redacted] made the clarification.
4 Or we will show it to Mr. Smajlovic during the
5 redirect.
6 PRESIDENT MCRAE: I think that's fair
7 because I remember hearing [Redacted] saying that as
8 well, so I think if you're going to put one to them,
9 you should put both.
10 MR. SMYTH: Understood.
11 BY MR. SMYTH:
12 Q. Starting with this one, you see this
13 testimony here. So, [Redacted] is asked whether this
14 SAR reflects his recollection as to why the account
15 with JPMorgan was closed, and [Redacted] says: "They
16 don't tell us."
17 MS. HORMAZABAL: Again that's
18 misrepresenting the testimony.
19 MR. SMYTH: Well, if you want I can just
20 read it word-for-word.
21 MS. HORMAZABAL: Sure.
22 BY MR. SMYTH:
[Page 1175]
1 Q. So, Perú's counsel asked: "Does this
2 refresh your recollection as to why the account with
3 JPMorgan was closed?"
4 [Redacted] testified: "They don't tell us.
5 I don't know."
6 MS. HORMAZABAL: He didn't say that he
7 closed the account. And if you can go to Page 187,
8 starting with Line 13 and forward, if you would like
9 to read that as well.
10 Thank you.
11 MR. SMYTH: Okay.
12 MS. HORMAZABAL: Day 2, Page 187, starting
13 with Line 13.
14 PRESIDENT MCRAE: That's the redirect, is
15 it? I thought you were going to go to the redirect.
16 MR. SMYTH: Do you mind if before--either
17 before or after there is another part of the testimony
18 that I would like to take Mr. Smajlovic to.
19 PRESIDENT MCRAE: As long as you're going to
20 go to the testimony--that's fine, yeah.
21 MR. SMYTH: First of all. If we could go to
22 Page 493. Right at the bottom, and we have a question
[Page 1176]
1 from Perú's counsel: "Okay. Do you know why the bank
2 accounts with JPMorgan was closed?"
3 And then, Line 2 on the next page from
4 [Redacted] he says: "I don't know."
5 BY MR. SMYTH:
6 Q. So, [Redacted] does not challenge here
7 whether or not the bank account was closed by
8 JPMorgan; is that right?
9 A. But clearly bank account was closed.
10 Q. But he doesn't suggest here that it was
11 closed by KML. He doesn't--the suggestion by counsel
12 in the question is that the account was closed and he
13 says he doesn't know why. So, he doesn't put forward
14 the answer that you gave just now, which we will go to
15 in redirect, that it was actually KML who closed the
16 accounts. He's saying he doesn't know. Do you accept
17 that?
18 A. I accept that he stated here that he doesn't
19 know the reason why the bank account is closed.
20 Q. Okay.
21 A. When I was in Miami, Mr. [Redacted] runs
22 the business. However, when it comes to anything
[Page 1177]
1 related to the trading, anything related to specific
2 accounting, [Redacted] is not the person that you
3 would go to. He relies on his accountants that--to
4 answer the questions.
5 So, when I was referring to the bank
6 accounts of Wachovia, bank account of JPMorgan that I
7 inquired, the answers came from his accountant,
8 Ms. [Redacted], who was running the accounting side of
9 the business, if you will. And she managed the
10 software.
11 So, those answers came from Ms. [Redacted].
12 The fact that [Redacted] himself didn't know--from
13 what I have seen, he, back then, he wasn't involved in
14 that detail when I was talking to them in August.
15 Q. And do you know for a fact that [Redacted]
16 does not handle the accounting issues for KML?
17 A. I do not know for a fact, but a few times I
18 asked the questions about certain treatments, he would
19 refer me to Ms. [Redacted].
20 Q. Okay.
21 A. So, my assumption is base on--and from what
22 I have seen, each document that I ever needed, the
[Page 1178]
1 explanations of the certain bookings, would come from
2 Ms. [Redacted] and not from Mr. [Redacted].
3 Q. Understood, and just to kind of close the
4 loop on this, we can now take you to the redirect
5 testimony that counsel for Claimant referred to, just
6 so you can see that.
7 MS. HORMAZABAL: The exact page number is
8 529, PDF Page No. 187, Paragraphs, starting from
9 12-13.
10 BY MR. SMYTH:
11 Q. So, you will see the Transcript there on the
12 page.
13 A. Yes.
14 Q. Yes, okay. I think we can move on.
15 MS. HORMAZABAL: This ends on the next page.
16 If you would like, I could go ahead and read it.
17 Or, please read it, Mr. Smajlovic.
18 THE WITNESS: If I remember correctly, we
19 had some issue with the speedy--
20 PRESIDENT MCRAE: Just a second. Counsel
21 can take him to it, but I don't think you can ask him
22 to read it out. If you want to do that, you have to
[Page 1179]
1 wait for your redirect.
2 MS. HORMAZABAL: Not a problem.
3 MR. SMYTH: Thank you, Mr. President.
4 BY MR. SMYTH:
5 Q. So, we were looking at the concerns of
6 JPMorgan and there were other banks mentioned in the
7 Article as well.
8 Is it conceivable to you that these sorts
9 concerns might have led banks to close Kaloti's
10 accounts?
11 A. Sorry, what particularly are you referring
12 to? These sorts of--
13 Q. We saw in R-260, the same concerns that were
14 listed in JPMorgan's SARS, so there was a concern that
15 Kaloti's account was being used a pass-through
16 account, that money was going to tax havens, and there
17 were other issues mentioned as well. So, the concerns
18 in that Article.
19 Is it conceivable to you that concerns such
20 as these would have led banks to close their accounts
21 with Kaloti?
22 A. It's really not--not my expertise to
[Page 1180]
1 determine--I do not deal with SARs, whether who
2 submits those and how often. So, it's not my
3 expertise, really--within my expertise to answer that
4 question.
5 Q. I struggle a little bit with this,
6 Mr. Smajlovic, so hopefully you can help me. So, you
7 say in your Reports, and we saw this extract earlier
8 that you've seen no evidence that the alternatives
9 causes put forth by Brattle caused Kaloti's loss, and
10 you accept that the issues in relation to potential
11 money-laundering and so on were one of the alternative
12 but--and you said you saw no evidence, but now you
13 seem to be saying something different which is that
14 these issues are beyond your expertise. Which is it?
15 MS. HORMAZABAL: Objection. He already
16 answered, and this question calls for speculation.
17 MR. SMYTH: With respect, Mr. President, he
18 did not answer that question. She has interrupted
19 before he could answer the question.
20 PRESIDENT MCRAE: I think there is a
21 difference in what he said and what is in his Report.
22 I think it's legitimate to pursue that.
[Page 1181]
1 MS. HORMAZABAL: Understood, Mr. President.
2 PRESIDENT MCRAE: I don't know how long,
3 he's asking the same question, though. So, I think
4 there is a limit on what you can do there.
5 BY MR. SMYTH:
6 Q. Would you like me to repeat the question?
7 A. Please.
8 Q. I will find--to update the Transcript. Bear
9 with me one second.
10 So, I struggle with this issue a little bit
11 because we saw in your Reports and the extracts that
12 we saw earlier that you say there was no evidence to
13 support the alternative causes put forward by Brattle,
14 and so money-laundering concerns and so on. Now you
15 seem to be saying something different, which is that
16 those issues are outside of your expertise. Which is
17 it?
18 A. I have not seen--the SARs you pointed out
19 was from 20--
20 Q. '13.
21 A. '13.
22 I have not seen any negative impact from the
[Page 1182]
1 SARs. In fact, if you look at the--starting in
2 February, I believe you said February 2013, the
3 revenues have skyrocketed starting from 2013, so I
4 have not seen any negative impact of that particular
5 SARs. I have only seen growth in sales revenue,
6 growth in volumes during 2013.
7 In terms of banking documentation that was
8 provided, it's correct. There is not a single
9 mention, Perú is the reason why we're shutting it
10 down. But there is at the same time not a single
11 mention that [Redacted], relationship with [Redacted] is the reason
12 why we're shutting it down.
13 So, what the ultimate reasons for the
14 closures are is for the Tribunal to decide, but I have
15 not seen personally any evidence that will make me
16 conclude that was the reason why it was shut down--it
17 was the relationship with [Redacted], which is what Brattle
18 suggested in their Report.
19 Q. And equally, you see no indication in the
20 evidence you have seen that it was Measures taken Perú
21 that prompted the closures?
22 A. That's a fair statement because there is not
[Page 1183]
1 a mentioning of Perú or anybody else in that--in those
2 letters--closures.
3 Q. Thank you.
4 I would like to move on to a different topic
5 now, which is some of the relevant inputs in your
6 damages calculations and specifically your projections
7 in relation to gold volumes in the but-for scenario.
8 And when we refer to these volumes we are
9 talking about the amount of gold that KML sources to
10 then sell on to its customers; correct?
11 A. That's correct.
12 Q. And these volumes are a key driver to your
13 damages model because they form the basis of your
14 forecasted cash flows in the DCF, along with other
15 inputs, of course; is that fair?
16 A. That's a fair statement, yeah.
17 Q. So, just as a matter of pure arithmetic, the
18 higher the predicted volumes, the greater the
19 projected cash flows will be, all else being equal.
20 A. I agree with that statement.
21 Q. And the opposite is also true. So, if the
22 volumes of lower, the cash flow and therefore the
[Page 1184]
1 value of the Company will be lower, again all else
2 being equal.
3 A. That's a fair statement, yes.
4 Q. So, if we could turn to Figure 11 in your
5 First Report--and this is on PDF Page 47--so, this is
6 your projection of how KML's volumes sourced from Perú
7 would evolve, and I believe you forecast from
8 around--well, you have the figures for 2013, but then
9 your forecasting is from 2014 through to 2048. And
10 so, you predict that volumes will go from
11 14,000 kilograms in 2013 up to a peak of around
12 33,000 kilograms in 2016; that is correct?
13 A. That's correct.
14 Q. And the 14,000--to be clear, that is the
15 amount in 2013, whereas 33,000 is a projection;
16 correct?
17 A. That's correct.
18 Q. So, you project that, within two years,
19 volumes will more than double their highest level
20 prior to the Measures; is that correct?
21 A. That's correct.
22 Q. And that's despite the fact that, as we
[Page 1185]
1 discussed earlier, various major Suppliers linked to
2 the Chamy family disappeared in 2014; correct?
3 A. Yes.
4 Q. And if we go to Figure 12 on the next page,
5 this shows the projected Market Share versus actual
6 Market Share from 2013 to 2018, and your model shows
7 that from a Market Share of 9.25 percent in 2013,
8 KML's Market Share will increase nearly 6 percent in
9 2014 and a further 6 percent in 2015 to reach
10 21.2 percent. It's this projected increase in Market
11 Share that is the basis for the projected increase in
12 volumes from 14,000 kilograms in 2013 to
13 33,000 kilograms in 2016; correct?
14 A. That's correct.
15 Q. And then, following the increase in Market
16 Share to 21.2 percent, the volume assumes that such
17 Market Share will be maintained until 2048; correct?
18 A. That would not be exactly correct. If we're
19 speaking from a standpoint of Market Share. We're
20 speaking from a standpoint of the volumes I have
21 assumed, yes, that would be correct. Volumes which
22 existed as of 2018 and, as I mentioned in my
[Page 1186]
1 presentation, do not include new discoveries, anything
2 like that. From that standpoint, it's 21.25. That's
3 not to be confused with the Market Share in Perú of
4 21.25 percent.
5 Q. But to be clear, the Market Share that you
6 use is based on the production data that you referred
7 to. So, if we're looking at what is your projection
8 of the overall market in 2048, it's those production
9 volumes, and the percentage that Kaloti captures is
10 21.2 percent?
11 A. That's correct.
12 Q. Okay.
13 A. From the actual production, reported
14 production, which involved some estimates.
15 Q. And then, if you go to Paragraph 3.16 of
16 your First Report--it's Page 15 of the hard copy, but
17 the PDF number may be different--and it says: "I have
18 been asked to calculate damages to Claimant assuming
19 Claimant's Market Share in Perú (and other markets)
20 grew at the anticipated rate absent Respondent's
21 Measures, reaching a peak in 2016 with
22 32,512 kilograms of gold) 21.25 percent of the
[Page 1187]
1 Peruvian gold market)."
2 So, the projected purchase volumes in your
3 DCF model are based on an instruction; is that
4 correct?
5 A. That is not correct.
6 Q. No, it says here: "I have been asked to
7 calculate damages to Claimant, assuming Claimant's
8 Market Share in Perú (and other Measures) grew at the
9 anticipated rate absent Respondent's Measures."
10 That's not an instruction?
11 A. That's not instruction. The language--you
12 can interpret it in different way, but what that meant
13 is that I have taken into account 45,000 kilograms
14 demand letter that was given to--that was given by [Redacted]
15 to KML, and using that letter, I decided instead of
16 45,000 kilograms, I decided that 32.5 should be the
17 maximum that should be attributable to KML in 2016, at
18 which point, as you show in the graph, it declines
19 rapidly all the way through 2048.
20 Q. So, to be clear, your projections of
21 volumes, that's an independent assessment, is that
22 your testimony?
[Page 1188]
1 A. That is my independent assessment, yes.
2 Q. Okay. And in order to reach that
3 assessment, did you review any business plans of KML
4 to reflect that projected performance from 2014 to
5 2016?
6 A. The Business Plan--Business Plan did not
7 exist. The Business Plan was in the draft form, and
8 it was planned--planned to be submitted or to be
9 completed.
10 And when I asked about the Business Plan,
11 the 15 months of operation in Perú were not--what I
12 was told is that was insufficient for them yet to go
13 with the full-blown, they had the plans to go with
14 that taking into account 45,000 kilograms, but the
15 Business Plan did not exist.
16 Q. To your knowledge, do you refer to this
17 draft Business Plan in your Reports?
18 A. I do not because I never rely on it.
19 Q. Okay. But you reviewed it?
20 A. There is really not much to it, other than
21 the template that the Kaloti Metals & Logistics had in
22 order to forecast the volumes and forecast--there were
[Page 1189]
1 some studies of the market--I do recall that, studies
2 of the market--competitors and things of that nature,
3 but I have not seen any numbers per se. Generally
4 those are accompanied by the numbers but they have
5 never--allegedly never gotten to that point.
6 Q. Okay. We can take this in stages. So, that
7 document that you referred to, that did not form part
8 of the basis of your independent assessment of Market
9 Share; correct?
10 A. That's correct.
11 Q. And which document is it that you're
12 referring to? Do you recall if it has an Exhibit
13 Number in this Arbitration?
14 A. Sorry, which document?
15 Q. This draft Business Plan that you have been
16 discussing.
17 A. There is not a plan. There's other than--
18 Q. Well, you described it as a draft Business
19 Plan.
20 A. Yes, which had nothing in it.
21 Q. "Nothing in it."
22 A. Like I said, there's really no--other than
[Page 1190]
1 the study of the market. There's no numbers that I
2 can rely on.
3 Q. So, there's a draft Business Plan that has
4 no numbers that you could rely on to support your
5 independent assessment; correct?
6 A. That's correct.
7 Q. Just to clarify, is this Exhibit AK-002, if
8 we could bring that up, perhaps that could refresh
9 your recollection as to which exhibit this is.
10 AK-002.
11 So, we have AK-002. This is analysis of the
12 Peruvian gold industry.
13 If you could just scroll down a little bit.
14 Was this the document that you're referring
15 to?
16 A. You're going to have to scroll a little
17 more.
18 Q. Yeah, we can scroll a little more, of
19 course. And maybe just pause on the Table of Contents
20 because that will summarize the content.
21 A. That's not it because it says specifically
22 "Business Plan."
[Page 1191]
1 Q. Okay. Okay.
2 And where did you view that Business Plan?
3 Was that in Miami?
4 A. Yes.
5 Q. And was it a hard copy or was it digital?
6 A. It was a hard copy.
7 Q. So, you mentioned the letter from [Redacted]
8 This is the letter in relation to the
9 45,000 kilos of gold; is that correct?
10 A. Yes.
11 Q. Okay. So, let's take a look at this letter.
12 It's Exhibit C-47. If we go down to the one and only
13 page.
14 So, in the penultimate paragraph there it
15 says: "We will channel the necessary resources to
16 support the exponential growth in quantities by
17 pledging the required resources technically and
18 financially to meet and satisfy your need to cater to
19 your client base in Perú so you can achieve the
20 forecasted target of 45 tons per year for coming two
21 to three years averaging three to 4 tons monthly."
22 This letter, it's not a contract, is it?
[Page 1192]
1 A. It's not a contract.
2 Q. No. It's not an Off-Take Agreement or a
3 Long-Term Supply Agreement.
4 A. No, it's not.
5 Q. Okay.
6 A. It is a letter indicating the demand for
7 certain volumes, which, by the way, continues to get
8 repeated throughout all the way through, I believe,
9 2017 or '16. The last thing I have seen, some of the
10 financing arrangements, which [Redacted] continues to fund
11 the business, continues to ask for higher volumes from
12 Perú.
13 Q. And so this letter, does it contain any
14 terms in relation to price of the gold that would be
15 purchased by [Redacted]?
16 A. No, it does not, but there is really no need
17 for that.
18 Q. Does it refer to delivery terms?
19 A. No, it does not.
20 Again, there is no need for it. I assume
21 that they use the same system that was the same supply
22 chain that existed, already existed, and it was very
[Page 1193]
1 effective, as I showed in my Report.
2 Q. And did you review any contracts between KML
3 and [Redacted] laying out terms in relation to
4 issues such as price, volumes, duration?
5 A. I have not seen the Contracts per se. I did
6 see, like I say, on some of the documents, I have seen
7 the discounts they would offer to--or premiums, if you
8 will, on the other way, to Kaloti Metals & Logistics
9 should they exceed 2 tons, 3 tons per month and
10 volumes of that nature. I have seen that, but
11 particular contract, no.
12 Q. "No," okay.
13 And what about contracts with other
14 purchasers of gold?
15 A. I have seen some contracts in which, for
16 example, price-fixing takes place. I believe Mohamed
17 Resources is one of those that I have exhibited as
18 part of my Report, or maybe it was part of one of the
19 C Exhibits, I do not recall. But you could clearly
20 see that the Companies entering into certain
21 arrangements and for the delivery of gold at the
22 future point of time.
[Page 1194]
1 Q. So, you just remember that one Contract with
2 Mohamed Enterprise; is that right?
3 A. Yes. But there were many contracts that I
4 have seen of that nature, fixing, price-fixing and so
5 forth. And for the purpose of what I have done, I
6 have not relied on individual contracts per se
7 because, like I said, in each year, deliveries from
8 certain parties will change, and the only thing that I
9 have seen, the Contracts for the actual volumes that
10 they had on hand, so Mohamed Resources had certain
11 volumes which they transacted with Kaloti Metals &
12 Logistics, and they entered into a contract in which
13 they decided the terms for the delivery in the future,
14 future time.
15 Q. I just want to make sure we're not talking
16 across purposes here.
17 So, Mohamed Enterprises was one of the
18 Suppliers to KML. Here, I'm talking about a different
19 part of the supply chain, so this is purchasers who
20 would buy gold from KML. Does Mohamed Enterprise fit
21 into that category, or not?
22 A. No, it does not.
[Page 1195]
Q. Okay. And [Redacted] was the biggest purchaser of gold from KML; correct?
A. That's correct.
Q. And you've confirmed that you haven't seen a contract with--between KML and [Redacted] for the purchase of gold; correct?
A. I have not seen it myself, but the way I was explained, the way it was explained to me, there was ongoing relationship in which the communication was done daily or through messaging and those sorts for the volumes they were transacting.
So, they would enter the actual--the actual invoicing or transacting for the particular load, was basically each day was what served as a contract, if you will.
Q. Okay. And if we go back to this letter, we've established there was no mention of the price that [Redacted] would pay for the gold, so is there anything in this letter that would stop [Redacted] demanding a very low price for the gold that it was intending to purchase, pursuant to this letter?
A. I mean, if they demand the price below the
[Page 1196]
cost, you will not transact with them, but, yeah--no.
Q. But there is nothing to stop them from doing that?
A. This is a letter, it's not a contract.
Q. Understood. So, if [Redacted] demanded that Kaloti provide gold to it for 1 dollar per kilo, there is nothing in this letter to stop them from doing that; correct?
A. No, but there is no incentive for them to offer a dollar. Their incentive is, as a refinery, to get as much as they can. And you can see throughout that, even as they--like I said, as they continued to finance the business, they keep stressing that the volumes are insufficient. 2 tons for Kaloti--from what I have seen at least, 2 tons a month for them are insufficient. They're asking for even more.
So, you can see in my presentation one of the slides, I've actually--I've listed how important these higher volumes were worth to them, and what type of discounts or premiums that Kaloti Metals & Logistics would have received had they achieved higher demand.
[Page 1197]
So, there's no incentive--I guess my point is there was no incentive for them to offer because you're not going to transact with them.
Q. They've got to get the gold from somewhere; right?
So, hypothetically, if there was another intermediary like KML who could provide the same purchase volume at a lower price than KML was offering, [Redacted] could go with that intermediary; correct?
A. I understand that the volumes that were provided by KML are not even 10 percent of the total volumes churned by [Redacted]. So, [Redacted] does have multiple, multiple relationships. I have never valued [Redacted], but considering the amount that they supplied to them, which was communicated to me by the Claimants--Claimant, that's not feasible. What you're suggesting is not feasible.
Q. But if they could get that same volume of gold from a different Supplier at a lower price, potentially they would do that; correct?
A. Everybody is in the business to pay less
[Page 1198]
than they can, yeah.
Q. Thank you.
And your damages model projects volumes up to 2048; correct?
A. That's correct.
Q. And this letter here, this only relates to the next two to three years, so that would take us up to, say, 2015, 2016; correct?
A. With that letter, yes.
Q. And do you consider it important for KML to have a committed Buyer in order to succeed?
A. Yes, very important.
Q. But even if we accept that this letter shows [Redacted] was a committed Buyer, it's only for two to three years; correct?
A. Yes.
As of 2013, the letter was for two-three years. I have actually made that inquiry.
Q. Okay.
A. And the way I was--the way it was explained to me that the standard arrangements in case of gold because, clearly, the shipments changed daily and
[Page 1199]
monthly. You don't go past three years. It just doesn't make sense.
Q. But to be clear, you haven't seen evidence that there was a committed Buyer beyond that two to three years?
A. I have not.
Q. And if we look at Figure 15 on Page 46 of your First Report--sorry--yeah, Figure 15, Page 46, and if we could bring that up please. And we've looked at this before, and we've seen that projected volumes for 2016 were approximately 70,000 kilograms for Perú and elsewhere.
This letter only suggests purchases--the letter we were just looking at suggests purchases of 45,000 kilograms from Perú, so it would not cover all of the projected volumes for 2016; correct?
A. That's correct.
Q. And the letter only talks about volumes from Perú. So, even though you testified that one of the most important factors in the business is to have a committed Buyer, Kaloti didn't have a committed Buyer for its volumes outside of Perú, did it?
[Page 1200]
A. I do not know that, whether they had a committed Buyer other than [Redacted]. I do see [Redacted] as the biggest purchaser, but I really cannot answer that question.
Q. Okay. And the fact that KML may have had demand from a particular customer for its gold, that doesn't automatically mean that Kaloti would be able to source the relevant gold; correct?
A. The risk of sourcing is always there.
Q. Right.
And you also refer at Paragraph 6.25 of your First Report--if we could pull that up, please--to the actual performance of KML, which you say makes--its forecast of achieving 45,000 kilograms per year is reasonably and well-grounded. And just want to drill into that in a little bit more detail.
So, if you could pull up Exhibit C-43.
So, this is a summary of KML's transactions from Perú broken down by month. And if we could go to Page 1 of the PDF. Do you see it lists volumes month by month?
Well, first of all, have you seen this
[Page 1201]
document before?
A. I have. I have seen this document.
Q. Okay. And based on this, you can see that KML only started recording volumes in October 2012; correct?
A. Based on that document, yes.
Q. And that's around a year before the relevant Measures began?
A. Yes.
Q. So, your projections about future volumes beyond the Measures, were based on just a single year of business before the Measures; correct?
A. Based on 15 months of the actual experience prior to the Measures, right.
Q. In fact--
A. I would say 15 months but November it was impacted--
Q. Okay, 14 to 15 months, fine.
And looking at these documents and listed purchase volumes for 2013, the highest figure recorded is October 2013 for 2.8 kilos.
Can you zoom in a bit just so I can check I
[Page 1202]
got that right?
Ah, in fact, in pure quantity, it's 2.6, so that's 2,600 kilos.
The figure for the next month is 1,600 kilos. And then there's a similar amount listed for December, just slightly less than that November volume.
So, what we see there is that from October to November there is a drop of approximately 1,000 kilos; correct?
A. Yes.
Q. And that's before the relevant Measures; correct?
A. Well, November was already impacted.
Q. But only at the very end of the month; right?
A. Yes, but we don't know how many contracts were canceled, how many of those deliveries were scheduled for the later, at the end the month, so I really cannot answer the question.
In other words, you could deliver in the last five days lot more than what you have delivered
[Page 1203]
in the initial 20 days. It really depends on the supply chain--
(Overlapping speakers.)
A. Can I please--
Q. Yes, you can.
A. Let me explain why.
In order to optimize the supply chain, Kaloti wouldn't take the load and ship it immediately. They were actually--they contracted with a vaulting company and stored the goods and inventory in Perú until it was economically for them to ship it, so you wouldn't just simply take it and ship it immediately as you receive something.
So, we really don't know how much of that was sitting--goods were sitting and how much was supposed to be sent at the end of the month, so it's really difficult--based on these numbers, it's really difficult to ascertain that.
Q. But you don't know whether there was that, say, million grams sitting there at the end the month that was due to be shipped at the end of the month but wasn't because of the Measures? You don't know;
[Page 1204]
correct?
A. I do not know, but I do know that some of the--some of the stuff--some of this stuff there was actually already purchased is sitting, which is not reflected over here. What you're showing is only what was actually sold. This is incomplete.
Q. If we could focus on the--well, would you scroll up to the top of this page.
This is all purchases. This is not talking about sales; correct?
A. I believe this talks sales. It refers to, as I understand, sales numbers.
Q. So, why does it say "Transaction Summary of All Purchases"?
A. I don't know that, but I will tell you that just looking at the number, that's how I judged it by, 14,000--at the bottom, if you scroll down to 2013, 14,10-800, that's actually sales. That tells me that the gold that was actually purchased and hasn't been shipped is not reported over here.
Q. And the shipment that was immobilized at the end of--at the end of November 2013, do you know how
[Page 1205]
much that shipment, how much was in that shipment?
A. In grams, I believe--actually, you could open my Report, there is a table, we can identify which shipment it was. I don't recall.
Q. Would you accept that it's not a million grams, it wouldn't reflect the entire amount of the drop that's recorded from October to November?
A. The portion of the--just related to the Cs, I don't know. No? We could open it up and see what that is. But there's, like I said, there are other things that could have been purchased but haven't been shipped or could be in the transit that are not reflected in the sales revenues.
Q. To be clear, have you analyzed the reasons for that decline in volumes between October and November?
A. The information that I have seen upon interviewing the management of Kaloti Metals & Logistics, the simple answer was this is just a part of a business. You don't--you don't always just increase, every month you get more and more. It really depends--like you asked earlier, it really
[Page 1206]
depends on the supply side as well because sometimes you will have a supply side bottlenecks that will result in lower numbers.
It doesn't mean that you're not buying; that you cannot transact. It just means at that particular month you purchase less for whatever reason.
Q. Right.
So, that drop in purchase volumes, that could have been because of a supply chain bottleneck; correct?
A. That was not what I was told. I was told that, generally speaking, towards the end of the year, there is a tendency of those volumes to decrease, but it's not necessarily happening every single year.
Q. Okay. So, there's a tendency of volumes to decrease towards the end of each year?
A. Yeah.
Q. Okay. But, typically, you didn't--and other than speaking with KML's management and establishing that there was a tendency for a decrease at the end of each year, you didn't investigate the causes of that decline towards the end of the year; correct?
[Page 1207]
A. There were no--there is no information that says--there is literally no information that you can use that will say that--or that would indicate that volumes decreased by, what did you say, a million grams. The only thing that happened is that large amount of gold that was already purchased is not there. If you add that, that number will increase.
Large amount of shipments that were purchased, or in the process of being purchased, they were supposed to be sent to the U.S., had not been sent. So, this information, like I said, I repeat this, it's incomplete. So, there is no need to--if you had the full information, then maybe you can try to--to assess what happened, but I have not seen any information that would indicate that other than the Measures for seizure of the gold resulted in decline in the volumes in November.
Q. But did you investigate whether the Measures were the cause of that decline?
A. Yes, they were.
Q. They were? Even though the decline is from October to November, which is largely before the
[Page 1208]
Measures?
A. I'm sorry, can you repeat that?
Q. So, you're saying you investigated whether or not that drop from October to November was caused by the Measures, and you're saying that, even though it was before the Measures, it was somehow caused by the Measures; is that correct?
A. It's not before the Measures. This is entire month of November, which is missing a big chunk of gold, that but for the Measures and shipping would have been reflected here.
Q. That big chunk, you're referring to Shipment 1?
A. Shipment 1.
Q. Yes.
A. Number 1.
Two, not Shipment 2, but Point No. 2, is that there are some purchases that were made, they were eventually in December reached the Miami premises, that due to transit were not reflected here.
Q. Just a moment, Mr. Smajlovic.
(Pause.)
[Page 1209]
Q. We just think it would be helpful to pull up the weight of Shipment 1, just to have a look at that.
So, if you look at Table 5 in your First Report.
So, Purchase No. 1, we have the net weight declared grams 100,000, and the decline that we just saw was 1 million. So, this shipment, Purchase 1 that was held up, that couldn't possibly account for the entirety of that 1 million decline; correct?
A. That's just a part of it, yes.
Q. And just staying on the topic of events in December 2013, or around the end of 2013, if we go to Paragraph 6.146 of your Second Report--I believe it's Page 111. 6.146, here you say: "KML's diminution of value initially started in November 2013 followed by a loss of four additional inventory purchases in January 2014, which occurred five years before [Redacted] was created."
And if you go over to the next paragraph, it says that: "KML's loss of potential sales revenues started in 2013 and was particularly observable starting in 2014 onwards."
[Page 1210]
You stand by this testimony; correct?
A. I do, and if you switch back to--
Q. If we can just stick to the question for now.
So, your view, then, is that KML's diminution in value started with the Immobilizations in late 2013, early 2014; correct?
A. Yes.
Q. Okay. I would like to talk now about your projections regarding KML's Market Share from 2018 to 2048.
So, your model projects that KML would be able to maintain a Market Share--and we've established the entirety of the market is those projections of Perú production that you rely on--would retain that Market Share of 21.2 percent; is that right?
A. It requires clarification. As of 2018, I'm sitting in 2018, and I need to forecast the but-for values of KML. What I have done is I sit down and I say what are the total reserves that exist as of 2018 in Perú. I got the total figures estimates which is based on known and knowable reserves. Based on that,
[Page 1211]
I forecasted the production of that gold starting in 2019 all the way through 2048, totally depleting those reserves by 2048.
In other words, what it was at the time, that's all I have taken into account.
Based on the depleted volumes which gets you to zero by 2048, I then estimate what portion of those annual production will be attributable to KML.
Q. Okay. So, for KML to maintain that 21.2 percent or 21.25 Market Share, it would need to not relinquish any of that Share to its competitors; right?
A. That's correct.
Q. And did you review any documents indicating what KML's strategy was for maintaining that Market Share over the 30-year period?
A. I believe the relationship that they had with [Redacted] is the best evidence that I had of record.
Q. But you didn't review any documents indicating what KML's strategy was for maintaining purchase volumes in Perú over that period; correct?
A. Well, you have to keep in mind that, in
[Page 1212]
2018, there is no strategy. Business is going under, the debt became due. They're barely surviving throughout, and they were--depleted cash and the debt became due. So, as of 2018, the last thing that was on the plan of the Company from the communication that I had with them was through forecast 2019 to 2048.
The goal was to sustained and stay in the business throughout.
So, I have no information, if that's your question--I have no but-for information for contemporaneous forecasts or anything like that that was done by the management.
Q. What about in the actual scenarios? If we look before the relevant Measures, have you reviewed any documents dating from that time that would indicate what KML's strategy was for maintaining Market Share?
To be clear, this is a narrow question: Did you review documents?
A. There's no document. There are no documents per se.
Q. "There are no documents." Okay. And would
[Page 1213]
you accept that the Peruvian gold market has low barriers to entry?
A. It does not.
Q. "It does not have low barriers to entry."
A. I'm sorry, which market?
Q. So, the Peruvian gold market that KML was operating in, does that have low barriers to entry?
A. Well, it depends how you defined "barriers to entry."
Q. So, if we look at your Second Report Annex 1, this is on Page 154, we're looking for Paragraph 2.12. And, here you say: "While there are many reasons for this occurrence, despite low barriers to entry, existing firms that already have significant economies of scale (which are perhaps mainly exploited) would deter new entrants."
So, you have that Clause. I just want to look at that one part of the sentence, "despite low barriers to entry." So, you appeared--and correct me if I'm wrong--to accept that the market has low barriers to entry?
A. That would be mischaracterization of what I
[Page 1214]
have written in there.
Q. How else do we interpret "despite low barriers to entry"?
A. Can I explain, please?
So, if you scroll up, you will see that this is an annex that talks about hypotheticals. It doesn't talk about Peruvian, KML or anything of that sort. What he does, I'm talking about the competition and what the importance of supply chains and how you can create accreted value. And I say that that, even in these situations, if they are despite, even if there are low barriers to entry, I never say that there is a low barriers to entry. Brattle has misquoted me twice for this same thing.
If you scroll up, please, you will see that that's what I'm talking about. I'm not talking about Perú, or low barriers to entry in Perú. I did not appreciate that comment.
Q. Do you think that the market KML was operating in had high barriers to entry?
A. Barriers to entry, for sure. Every market has barriers to entry.
[Page 1215]
Particularly, in case of this business, anybody can come in. You can try to get in, if you think that you know how you deal with the business, but if you don't have the supply chain arranged, if you don't have the financing that is needed, if you don't have the customer that you're transacting, if you don't have the banking relationship, it becomes very difficult to do this, but anybody--sure, anybody--that's why I say you have to define what you mean by it. Anybody can start the business and try to do that.
Q. And KML was able to disrupt the market and enter it.
A. KML never--
Q. Among other things, by offering a higher price to Suppliers than market incumbents; correct?
A. That is incorrect. KML never disrupted the market. I've covered this extensively in my Second Report, another complete misrepresentation by Brattle. I believe they used a word that [Redacted] has used.
And in my--also to clarify, in my calculation, I have never seen an assessment, I have
[Page 1216]
never seen any market disruption.
In fact, Mr. [Redacted] mentioned Metalor as somebody that they disrupted, that they impacted, and I presented, based on his Witness Statement, I presented the financial metrics. Brattle was very clear in pointing out that it was just an accounting adjustment that caused it. There is no market disruption. So, I'm not sure exactly what Mr. [Redacted] referred to when he says it's a "market disruption," but in the economic sense, it never existed.
Q. Okay. Just for the record, we have Paragraph 38 of [Redacted] First Statements. He talks about--
(Off microphone.)
Q. Could we get that up on the screen, please, Paragraph 38 of [Redacted] First Witness Statement.
So, he says: "Prior to KML entering the Peruvian gold market, existing Buyers controlled such market and dictated the price of gold; but I was effectively able to disrupt their strategy."
You accept that [Redacted] himself asserts
[Page 1217]
that he disrupted the market.
A. I'm sorry, is it a strategy or market? What is it?
Q. Well, could it not be both, disrupt their strategy. Is that the issue you have with Brattle's Report, that they're not delineating between disrupting strategy and disrupting market?
A. That is Brattle's interpretation. All I know--and we went through this discussion--the strategy was to pay certain percentages. When [Redacted] as I understand, came into the market, he offered much higher fees, if you will, much higher price for the gold, which disrupted the strategy of the previous one. That doesn't mean that the market was disrupted.
Q. Um-hmm.
A. But those are two completely different things.
Q. Okay. I'm curious, you used the word "fees" there.
A. That was incorrect.
Q. "That was incorrect."
[Page 1218]
A. It's the actual price that was paid.
Q. Thank you.
A. I apologize.
Q. And you mentioned that [Redacted] was able to offer a higher price than its competitors. Is it fair to say that if KML's competitors started paying more to KML's Suppliers for gold than KML was offering, it could end up losing those Suppliers or its margins could be squeezed. Would you agree with that?
A. I would disagree with that.
Q. So, you think that if a Supplier came along--sorry if a competitor to Kaloti came along and offered to pay a higher price to one of Kaloti's Suppliers for the same volume of gold, they would stick with Kaloti, they wouldn't go with the higher price?
A. Well, Brattle has made the statement. Had they done a basic financial assessment--in fact, they do, right below there. They say there was, I believe, NTR Company or something like that, who offered 99.5 percent. And that company went bankrupt. They
[Page 1219]
could not sustain it. If you put 99.5 percent into the model, you cannot even break even, so you're losing money.
So, to make an allegation that somebody can offer more, the margin is so thin that you are solely dependent on these volumes. If somebody offers more, and I believe Brattle suggested that if you just make the change into my model, the business is loss-making.
So, it's just not possible. It's not sustainable to offer more than what Kaloti Metals & Logistics is talking about.
Q. We were talking about economies of scale earlier, and I think it partly relates to that issue.
But if someone had sufficient economies of scale to offer a higher price and take a lower margin, wouldn't that end up with Kaloti either having to lose that particular Supplier or squeeze its margin?
A. Based on the numbers that I have seen, that's not possible. Hypothetical world? Everything is possible. But, based on the factual numbers, that is not possible.
Q. Even if they had economies of scale from
[Page 1220]
other jurisdictions.
A. When you say "economies of scale," I mean, this is based on getting, as you mentioned, 60, 70,000 kilograms from all of the markets, and if you add that, make the changes Brattle did, gets you to negative numbers. So, I don't know what bigger number or what competitor would have higher numbers than those numbers that I've used.
Q. So, in other words, you're saying that Kaloti had the thinnest possible margin that you could achieve?
A. I'm not saying that. All I'm saying is that the margins that they had were very sensitive to volumes and to actually provide even higher incentive would actually be--would be very difficult.
Q. And do you know why NTR went bankrupt?
A. I do not know.
Q. Okay.
PRESIDENT MCRAE: Mr. Smyth, could I ask a question about timing?
MR. SMYTH: Of course you can.
PRESIDENT MCRAE: We're a little over what
[Page 1221]
the Schedule was, but I know you don't have to stick to that, but just to get a sense of where we're going.
MR. SMYTH: So, I would say I'm probably three quarters of the way through. I would not--it depends on what time we take lunch. If the plan is to take lunch at 1:00 p.m., it's possible I will finish by then. If it's earlier than that, probably it's not going to be achievable.
MR. DÍAZ-CANDIA: Mr. President, no objection whatsoever, but that may take us into Saturday with Brattle.
PRESIDENT MCRAE: So, you would try to finish by 1:00. That's possible, you say?
MR. SMYTH: I think it's possible, but obviously it depends on the answers in the cross-examination.
PRESIDENT MCRAE: Of course. Then we were originally going to break at 12:40 I think or 12:55.
Do you want to take a five minute break and we'll continue to 1:00?
REALTIME STENOGRAPHER: Yes.
PRESIDENT MCRAE: So, let's take a five
[Page 1222]
minute break and then we'll schedule lunch for 1:00 and see how we go.
MR. SMYTH: Thank you.
PRESIDENT MCRAE: Thank you.
(Brief recess.)
PRESIDENT MCRAE: If you're ready, Mr. Smyth, but I understand if you want to wait for Mr. Grané.
MR. SMYTH: Yes. Our team is not quite complete. So, maybe we could give him another 30 seconds, and if not, we can resume.
(Pause.)
MR. SMYTH: I think we will make a start, Mr. President, in the interest of time.
PRESIDENT MCRAE: Go ahead.
MR. SMYTH: I'm going to try and speak a little more slowly for the benefit of the Interpreters and Court Reporters.
BY MR. SMYTH:
Q. I would like to look briefly now at your projections of purchase volumes from outside of Perú.
Now, in order to project those volumes, you
[Page 1223]
took the ratio between gold sourced from Perú and outside of Perú in 2013, and assumed that the same ratio would apply throughout the period for which you modeled damages; correct?
A. That's correct.
Q. And you explained that at Paragraph 6.34 of your First Report, that the ratio of Perú versus non-Perú volumes in 2013 was 47 to 53. We can go to the paragraph if you like, but I will just put it to you, this means that 53 percent of your projected volumes are from outside of Perú; correct?
A. Sorry, if we're talking damages on a hundred-percent basis, that is correct, yes.
Q. At the moment I'm talking about volumes, so 53 percent of your projected volumes are from outside Perú?
A. Correct.
Q. And such volumes account for more than half of your damages prior to Pre-Award Interest? This is leaving aside the injury claim.
A. That's correct.
Q. And so, would you agree that by holding the
[Page 1224]
Perú-non-Perú volume ratio fixed, you assume the same 132 percent growth from 2013 to 2016 for non-Perú volumes that you assumed for Perú volumes?
A. I agree with that, just it requires some explanation.
While I'm maintaining the growth, I'm maintaining the decline because I'm linking the decline from Perú based on known and knowable reserves and maintain the ratio in an effectively declining other market volumes as well.
Q. You heard, Mr. Smajlovic, which everyone is eager to wrap up before lunch. So, if you could keep your answers short, that would be appreciated and stick to the precise question asked.
Obviously, my colleagues over the aisle can ask you to expand on anything, should they see fit.
So, unlike your forecasted volume growth for Perú, you were not given an instruction about--let me rephrase.
You were not given an instruction about volume or share growth outside of Perú; correct?
A. I was never given instruction on the share
[Page 1225]
growth. I was always given instructions on the document to rely upon to forecast the volumes.
Q. So, you were not given an instruction in relation to the volumes to be forecast from outside Perú; correct?
A. That's correct.
Q. So, they're your independent projections; correct?
A. That's correct.
Q. In order to compile those projections, did you review any Business Plans for KML's business outside of Perú?
A. I mentioned that Business Plan was non-existent.
Q. Any contracts with Suppliers from outside of Perú?
A. I have seen the Contracts--sorry, I have seen the settlements which predicate that there were some type of precious metal purchase and sales, but the Contracts themselves, I've never gotten to that granular level.
Q. And did you, in your Reports, analyze any of
[Page 1226]
the markets from which Perú--from which KML would source its gold outside of Perú?
A. I have not.
Q. And you have not analyzed how much of those markets would actually be available to KML; correct?
A. Well, the, as you mentioned, 53 percent of the total volumes come from 18 countries, whereas 47 percent comes from a single country. So, 18 countries certainly had a lot more volumes than what I forecasted as part of KML's purchases.
Q. But to be clear, you haven't analyzed the markets in any of those 18 countries; correct?
A. I have--I have looked into the reserves and volumes that they had, but I've never "analyzed," as you say, to the level of each individual Supplier from each country. I have not done that.
Q. Right.
And you don't say which countries the growth in volume from outside Perú would come from, do you?
A. I have provided a list of countries as part of my AS-68, I believe, it was Exhibit 3.9.2, that shows the list of all the countries from which the
[Page 1227]
but-for volumes would have come.
Q. Could we pull that up, please. 3.9.2 of Exhibit AS-68.
So, first of all, where did the information in this table come from?
A. These--I believe these were actual purchases by KML from each country between 2012 to 2017.
Q. And where did that information come from?
A. It came from the financial system--can you please show me 2013 numbers? Remember the 14,011 or 29,941? There you go. It ties--those numbers tied to the actual volumes purchased by--in the actual world, purchased by KML, so those are the purchases broken down for each jurisdiction or country in which they are buying gold.
Q. I think that the answer to my question was contained in the first part of that. You say this information came from the financial system. But what financial system is that?
A. I forgot the name of it. I believe it's tied to NEO, which is the trading platform that they used, but it's NEO/Financial Statements that come out
[Page 1228]
of that--I believe it's called "NEO."
Q. Called "NEO," and that's accessible from Miami; correct?
A. Yes.
Q. And it contains information in digital form?
A. Yes.
Q. Do you--if you can't remember, that's okay, but what sort of information is available on that system?
A. You can see the Transactions they were entered into with, if I recall correctly, I have seen 200 plus different Parties that they were engaging over the course of the years.
You can see whether the position that--the actual price that was paid, the quantity of volumes, whether something was actually delivered or to be delivered, whether the price was settled on the date of the Transaction or whether it was what's called "open," which means that the Seller or producer of the gold decided not to sell on that particular date but decided to wait and settle the price in the week or two or whatever they decided. Those type of things
[Page 1229]
you actually are able to see.
It's a very sophisticated software that was, I believe, designed in India.
Q. "In India"?
A. Yes.
Q. Okay. Thank you.
So, looking at this tab again, you have figures for various different countries, I believe you said 18 different countries, and you have the volumes there. That's volumes in the actual world; correct?
A. That's correct.
Q. Yeah.
So, it doesn't contain any projection of volumes in the but-for world.
A. It does not.
Q. He does not?
A. He does not--it does not.
Q. Oh, "it does not."
A. These are the actual purchases from 18, I believe, countries.
Q. Yes.
A. I say "18." It had "other" which includes
[Page 1230]
some other countries but they're not--volumes were not, I believe, as significant.
Q. To be clear, your projections don't delineate where particular volumes will be sourced from in the future; correct?
A. It's from an individual country's standpoint, they do not.
Q. Thank you.
We can move on to a different topic now, possibly the final topic, which is KML's barrier of entry, so what we've been referring to is the Five Shipments.
You said during your presentation that you had been instructed to assume that KML was a bona fide Purchaser and had valid ownership of the Five Shipments; is that correct?
A. That's correct.
Q. So, if KML was not a bona fide purchaser or did not have legal ownership of the shipments, what impact would that have on damages?
A. That is a legal issue, but if the Tribunal decides that that number needs to be removed, it would
[Page 1231]
have an impact of value of the inventory, I guess, would in that case would be zero.
Q. Okay. Thank you.
And you haven't carried out any analysis of your own to determine whether KML did have legal ownership of that inventory; correct?
A. That's correct. That's outside of my expertise.
Q. And then, if we could pull up Paragraph 5.82 of your Second Report--we have it there--it says: "As part of my First Report, I provided documentary evidence (KML's financial statements) which shows that KML has legal ownership of the seized gold."
So, here you're saying that KML did have legal ownership of the gold?
A. What I said that the Financial Statements reflect the view that they that had legal ownership of the gold.
Q. That's not quite the wording you use here.
You said it "shows that KML has legal ownership of the seized gold." Are you saying that that should be amended to say "reflects" rather than "shows"?
[Page 1232]
A. You can say that, but generally you cannot book, from an accounting standpoint, you cannot recognize something on your balance sheet unless you actually--unless you possess the ownership, regardless of whether you pay for it or not.
Q. Okay. And if we could pull up one of those balance sheets, which you helpfully confirmed were unaudited and saved me a question or two, AS-66, this is the 2018 balance sheet.
So, it's unaudited, but you understand this balance sheet to be correct? You understand that's correct?
A. Yes, I've actually, as part of my analysis, I went through the balance sheet and Income Statement and analyzed for the--for the accuracy.
Q. Yeah.
A. So, I do--I do--I will represent to you that I believe that these are accurate numbers.
Q. Understood.
And if we see towards the top under "current asset," there is an entry for inventories, and there is a figure of $12.698 million.
[Page 1233]
Do you see that?
A. I do.
Q. That's the inventory figure in the 2018 Balance Sheet; correct?
A. Yes.
As of--it says December 31, 2018.
Q. Yes, yes. And do you accept that this figure does not include the value of Shipments 3 and 5; correct?
A. That's correct. Only three shipments are reflected there.
Q. And the fact that shipments are not included in inventory, does this make it questionable whether or not KML owned them?
A. It would not.
Q. Did doesn't make it questionable?
A. It does not.
Q. Okay. So, if we could go to Paragraph 5.82 of your Second Report.
A. And I can explain, if you--
Q. I will show you the Paragraph first, and then perhaps you can explain.
[Page 1234]
So, this is the same paragraph we were looking at before, and it's the second sentence.
So: "If the legal ownership of these inventory volumes is indeed questionable, the associated inventory would not be reported on KML's current asset account."
So, having accepted that the 2018 Balance Sheet does not include Shipments 3 and 5, does that not mean that the ownership is questionable?
A. That's not--the way I see it, it's not that the ownership is questionable. It's the actual--the issue of whether to record and maintain those numbers on the Financial Statements or not. That's a separate issue. But that doesn't mean that--just because that inventory is actually not there, it doesn't mean that the legal ownership of that gold is not--does not belong to KML.
And again, I'm not providing--I'm not providing a legal opinion of that. All I'm saying--that me personally as a CPA, if you ask me to go back, and say "how would you treat this?" I would have treated that differently.
[Page 1235]
Q. Okay. And would you accept that a possible
reason why it was not included in the inventory is
because KML didn't consider it had legal ownership?
A. That's not the reason I was provided.
Under--the answer that I was given that--at the time
their accountant just simply realized that the gold is
taken, it's not there. And for those particular two
shipments, they haven't made the payment, so they just
followed the cash accounting, and they removed those
two shipments.
Q. So, you accept that those two shipments, 3
and 5, were never paid for by KML.
A. I do.
Q. Yeah. And--
A. I believe that initially, as you will see in
the Financial Statements, they were reported. The
associated liability was recorded. But for whatever
reason they decided to remove that in the subsequent
year.
Q. Okay. And it's management who has
responsibility for making those sorts of decisions;
correct?
[Page 1236]
A. I would say management, yes and--you know,
an accountant who actually is in charge of that.
Q. Yes, but the ultimate responsibility would
be with management. Would you agree with that?
A. I would agree with that. Yes.
Q. And you state in your First Report, and this
is at Footnote 9 on PDF Page 15. You say: "Note that
in case of an award, Claimant will have to compensate
its Suppliers for two additional loads of inventory
which to date are not paid. As such, total proceeds
to the Claimant will be decreased after paying for
this liability."
Here, you're referring to Shipments 3 and 5;
correct?
A. I believe so.
Q. You're not sure?
A. Can you take me to the actual statement so I
can see what the footnote is, and I would be able to
tell you.
Q. Of course.
A. Sorry, what was the Footnote No.?
Q. 9.
[Page 1237]
A. Yeah.
Q. Okay. And you referred to, if we go back to
Footnote 9, you referred to a liability here with
respect to the shipments. And if we could go back to
the 2018 Balance Sheet, that's AS-66. And then, if we
go down to "Accounts Payable," which is under heading
5, there is no liability recorded here for [Redacted]
or [Redacted], the two companies with those names, [Redacted]
and [Redacted]?
A. That's correct.
Q. And are you aware that those are the
Suppliers of Shipments 3 and 5?
A. That sounds like--correct, yeah.
Q. So, this balance sheet provides no basis for
saying that those shipments would have to be paid for
as of any Award; correct?
A. That's correct.
And I mentioned that the--previously, that
the Transaction was reversed out in the following
year, so yes, there is no liability, there is no
inventory on the books of Kaloti Metals & Logistics
associated with Shipment No. 3 and Shipment No. 5.
[Page 1238]
Q. Thank you very much. I have no further
questions.
PRESIDENT MCRAE: Claimant, do you have some
redirect?
MS. HORMAZABAL: I do. I have quite a few.
Would you like to take lunch by any chance?
PRESIDENT MCRAE: Well--
MS. HORMAZABAL: If you want me to continue,
I will.
PRESIDENT MCRAE: My preference would be not
to hold the Witness Expert in isolation during lunch.
So, if you could--if you are planning to finish around
1:00 or shortly after.
MS. HORMAZABAL: Sure, yes.
PRESIDENT MCRAE: Proceed.
Is that acceptable?
MR. SMYTH: That's certainly acceptable to
us. Yes.
MS. HORMAZABAL: Not a problem.
REDIRECT EXAMINATION
BY MS. HORMAZABAL:
Q. Mr. Smajlovic, you have confirmed that these
[Page 1239]
Financial Statements are now unaudited. Does this
change in any way your analysis of any of the numbers
or Financial Statements?
A. No, it does not.
Q (By Secretary Kettlewell)
SECRETARY KETTLEWELL: Can you speak closer
to the microphone?
THE WITNESS: No, it does not.
BY MS. HORMAZABAL:
Q. Did you review and take into account the
Witness Statements in this case concerning termination
of Supplier relationships and/or banking
relationships?
A. Yes. I believe Mr. [Redacted] goes into quite
detail about or recalls some of the examples of
cancellations of the Contracts.
Q. You said that a number of transactions were
made after the Immobilizations. Do you know if that
was after Immobilizations were actually made public?
A. I'm sorry, can you repeat the question?
Q. You had previously said that a number of
transactions were made after the Immobilizations. Do
[Page 1240]
you know if that was after the Immobilizations were
actually made public?
A. Well, I believe the documents that I was
shown, where it lists all of the volumes that were
purchased up to January of 2014, you can still see a
significant purchases and precipitous decline
following February.
So, with the seizure of the gold and we have
seen, based on the records, a decline in the gold
purchases.
Q. So, the effect wasn't necessarily the
Measures but also the publicity of the Measures?
A. I really cannot--I really cannot opine on
that.
Q. Okay. I would like to pull up one of the
articles that Respondent's counsel had projected,
R-0251.
(Pause.)
Q. I will move on.
The fact that the Measures affected KML from
gaining new Market Share due to the detrimental
articles against KML has also been taken into
[Page 1241]
consideration in your calculation of damages?
MR. SMYTH: Apologies, I believe that is a
leading question.
MS. HORMAZABAL: I will rephrase.
PRESIDENT MCRAE: I'm not sure. If you can
ask whether something is taken into account, you may
want to rephrase it.
MS. HORMAZABAL: That's not a problem.
BY MS. HORMAZABAL:
Q. Did you also take into consideration the
detrimental articles against KML in your calculations?
A. Yes, I have.
Q. Could you please show BR-0011.
Do you know if the full name of Kaloti
Metals & Logistics was mentioned in this article that
Respondent's counsel has shown?
A. As part of my review, I have not been able
to identify that, so my recollection is there was
never mentioning of Kaloti Metals & Logistics.
MS. HORMAZABAL: If the Tribunal will permit
me, if I can run a "control find" to see if the name
is mentioned? Or I can move on.
[Page 1242]
MR. SMYTH: No objection.
PRESIDENT MCRAE: I don't see any problem
with that, if you want to do that.
MS. HORMAZABAL: I will go ahead and move
on.
BY MS. HORMAZABAL:
Q. Okay. Going back to R-0251.
Mr. Smajlovic, could you please read the
dates that Perú's counsel had previously shown.
A. If you're asking about Table 4, it refers to
"Export Frequency During 2007-2013."
Q. Okay. So, this article relates to the
period from 2007 to 2013, and the Measures occurred at
the end of 2013, beginning of '14.
PRESIDENT MCRAE: Was that a question or a
comment to the Tribunal?
MS. HORMAZABAL: That was a comment to the
Tribunal.
PRESIDENT MCRAE: Maybe you should just ask
questions.
MS. HORMAZABAL: Okay.
BY MS. HORMAZABAL:
[Page 1243]
Q. Respondent's counsel presented the one
article about [Redacted] that was
published in 2014. Do you remember if that became--if
that situation became public prior to 2013?
A. Sorry, can you repeat that again?
Q. Respondent's counsel has previously
presented one article regarding [Redacted]
[Redacted] that was published in 2014. Do you
remember if that became public, that situation became
public, prior to 2013?
A. I do not know. I would presume that if the
findings were from 2012, that those findings from 2012
were probably available, but I really cannot answer
that question.
Q. Would you have seen such effects prior to
the Measures, prior to the dates of the Measures?
A. As I indicated in my testimony, as Brattle
has provided that and alluded there could be some
relationship with [Redacted] that deteriorated business, and
they cited that particular document. And if that was
truly the case, there should have been a direct
correlation between the bad acts, if you will, and the
[Page 1244]
purchases of the gold. That was clearly--connection
was not there.
Q. Respondent's counsel stopped you when you
were going to discuss something about KML's Supplier.
It appears to be Mohamed. Would you like to expand on
this? If it is not relevant or important, please
advise.
A. Well, just a small remark, as I was looking,
as part of my preparation to do the forecast, but-for
forecast, and after receiving the information of
monthly or annual purchases of volumes, we have
noticed during the course of our work that certain
Suppliers, indeed, did not provide lower volumes.
Generally, that's what basically happened, and Mohamed
Resources was one of those that actually continued to
provide significant number.
And I felt compelled to inquire when I was
in Miami, and the answer that I was given is that
Mohamed Resources was a type of--they referred to
those as "customers," but it was a Supplier--that
didn't believe in allegations in Perú, didn't believe
that the gold that was seized was of illicit nature.
[Page 1245]
So, that particular company just disregarded it and
continued to deal with it--deal with KML, which
explains why over the time actually volumes had been
increasing from Mohamed Resources.
Q. It is possible that a handful or a sample of
companies such as the ones that Respondent's counsel
has presented, may have not read the articles or may
have not ceased operations?
MR. SMYTH: Again, that's undoubtedly a
leading question.
PRESIDENT MCRAE: It's speculative, I know,
but is there a problem other than being speculative?
MR. SMYTH: Well, it's a question that
suggests the answer, and in our submission that would
be a leading question.
MS. HORMAZABAL: This is a redirect.
MR. SMYTH: Exactly.
MS. HORMAZABAL: I'm going to go ahead to
the next one.
BY MS. HORMAZABAL:
Q. Is it your testimony that what is relevant
is damages are not individual Suppliers but the total
[Page 1246]
output of gold in Perú?
A. That's correct.
Understanding, if you understand the actual
underlying driving force of the business, you will
realize that the individual contracts are not
something that is always of the repetitive nature,
other than--other than--if you engage in their large
Suppliers.
Q. Do you know if SARs, Suspicious Activity
Reports, are public documents?
A. I believe they're not.
Q. Okay. We're going to go ahead and pull up
the Transcript for Day 2 of this Arbitration,
Page 529, 530. And if you could please read what the
answer was here from [Redacted] Line 4, please.
A. "--with the Suppliers. And we decide--we
decide to close the bank account for JPMorgan."
Effectively, [Redacted] here has confirmed
that what was communicated to me while I was in
Dubai--I mean, sorry, when I was in Miami.
Q. If you could scroll further down.
There is an established business
[Page 1247]
relationship with [Redacted]; is
that correct?
A. That is my understanding.
Q. Do business relationships also require
trust?
A. I would assume so.
Q. KML had to assay and do certain procedures
to the gold prior to sending it to [Redacted]y
[Redacted]; correct?
MR. SMYTH: Objection, again, I believe that
is a leading question.
BY MS. HORMAZABAL:
Q. KML had to--there were certain procedures
that may have been done by KML prior to sending it to
[Redacted] to the best of your
knowledge?
A. Yes.
Q. So, my question is: Respondent's counsel
had asked you to infer, speculate if [Redacted]
[Redacted] could have purchased from another
Supplier at a lower amount. Wouldn't the
consideration of the established business relationship
[Page 1248]
and the fact that KML owed money to [Redacted] were actually
practical incentives for [Redacted] to deal with KML and the
trust to be taken into account?
MR. SMYTH: I think that's a leading
question, again. We may differ with Claimant's
counsel on what is or is not a leading question, but
in our view that is a leading question.
MS. HORMAZABAL: I can rephrase.
PRESIDENT MCRAE: I find that a complicated
question, and maybe you can make it simpler which
wouldn't be leading.
MS. HORMAZABAL: I will make it simpler.
BY MS. HORMAZABAL:
Q. Respondent's counsel had asked you to infer,
speculate, if KML could have purchased from another
Supplier at a lower amount; is that correct?
A. I do recall him asking that question, and I
believe I provided the answer to that. That paying
more than what Kaloti was paying was not feasible
economically.
Q. Do you believe that [Redacted] had actual practical
incentives to deal with KML?
[Page 1249]
A. I do. Specifically, like I said, [Redacted] is in
the business of getting a lot more gold, and they have
an incentive to get more gold.
Number 1 And Number 2, I believe [Redacted]--not
"believe," we know that [Redacted] provided a significant
amount of capital which I believe it's on my
presentation in which, Revolving Credit Facility and
those type of things that gets you to $15 million.
So, there definitely was incentive to maintain the
relationship.
Q. Could we please show AS-0050.
Respondent's counsel had previously asked
you whether the demand letter from [Redacted]
only encompassed three years; is that correct?
A. That's correct.
Q. Does this document, AS-0050, show that there
may have been--does it suggest that, as of March 2016,
they were incentivizing KML to purchase even greater
than three tons a month?
A. Yes.
And I believe I mentioned that, even under
the Measures between 2013-2018, the pressure was
[Page 1250]
always there from the [Redacted] to get more volumes. The
way I'm reading this, they are providing them
significant incentives, and you can see this in the
column, second column, where the charges for the
financing charges will be lowered should KML provide
additional--additional volumes.
Also the refining charges would actually
decrease that [Redacted] was charging KML should they produce
higher volumes, and they would provide some additional
discounts. So, I see this as a continuation of their
willingness to work with them and get to the
quantities that they agreed to.
Q. Thank you.
Going to the question on whether the last
few months of 2013 of KML experienced a decline. To
the best of your knowledge, do you know if Perú, a
Latin American country, had their holiday or summer
vacation periods during the end of the year?
A. Yes. I mean, Christmas--Christmas, as I was
told, Christmas is a big holiday in South America.
Q. Thank you.
Please show, 6.147 of Mr. Smajlovic's Second
[Page 1251]
Report.
A. If I may just add, when I mentioned
Christmas, as we were looking at the monthly
purchases, I was inquiring and often the way I was
told that around mid-December pretty much the
deliveries shut down from the region because very
family-oriented region, and people have a tendency to
take some time off towards the end of the year.
Q. Mr. Smajlovic, I'm showing you here 6.147 of
your Second Report. Respondent's counsel had
previously touched upon this sentence, and you were
cut short. Could you please expand, or would you like
to clarify anything?
A. The 6.147 refers to the effects of the loss
of the customer base, which was by, I believe,
November, November 14th--culminated by November 14 of
2018, of the creditor requesting immediate payment for
the debt.
MR. SMYTH: Excuse me, this was not the
subject of my cross. So, it falls outside the scope
of redirect.
PRESIDENT MCRAE: Can you ask him a specific
[Page 1252]
question about 147 instead of letting him just talk
about it?
MS. HORMAZABAL: Sure.
BY MS. HORMAZABAL
Q. Respondent's counsel is asking about KML's
loss of potential sales revenues, started in 2013 and
was particularly observable starting in 2014 onward
discussing the loss of customer base. Would you like
to expand on this?
A. I believe I stated enough.
Q. Okay, thank you.
Please go to 2.11 of the same report and
2.12.
When Respondent's counsel asked you a
question about this part of the document, he did not
show you the prior page when you had asked. Would you
like to see the prior page and further clarify? Well,
this is the prior page.
A. I believe I don't need to, but I believe I
clarified that the discussion that was listed in this
particular annex is all hypothetical. I was not
referring to particular--I did not cite, if you scroll
[Page 1253]
down, I believe the language was that I admitted that
there are low barriers to entry. They just completely
misrepresented my statement. And what I stated is
that, if you read the full context, you will see that
that's not the statement I made.
Q. Thank you.
Could you please expand on the comment
Perú's counsel made about your calculations regarding
the volumes outside of Perú?
MR. SMYTH: That seems like a very
open-ended question. I mean, there were a few
questions about that issue. I think it would help
certainly if Claimant's counsel could be more precise.
MS. HORMAZABAL: It's not leading.
MR. SMYTH: That wasn't the nature of the
comment. It's more that it was just so open-ended
that it's not possible to tell whether it falls within
the scope of my cross.
MS. HORMAZABAL: Typically, in redirect, I
can leave open-ended questions.
PRESIDENT MCRAE: I'm not clear what the
question is. You want him to comment on what Perú's
[Page 1254]
counsel said?
MS. HORMAZABAL: Perú's counsel had made
certain assertions about the volume--about the nature
of the calculation of the volumes outside of Perú.
I'm asking Mr. Smajlovic to have an opportunity to
expand, if he wishes.
PRESIDENT MCRAE: Yeah, go ahead.
THE WITNESS: Thank you for the question.
I believe as we were sitting, and we are
tasked to calculate the but-for value, but-for
volumes, which leads you to the cash flows, we started
with Peruvian market. The information was there. But
then we are dealing with 18 plus other countries. And
the option was go into granularity and up--and
estimate what those volumes are going to be or at
which point of time, regardless of the numbers you put
in, you will be considered subjected. Brattle, the
Expert hired by Respondent, have used lots of ratios
from 2013, and we did the same thing. Instead of
forecasting the volumes from 18 other countries at the
different pace, we just kept a ratio. And yes, sure
enough, we grew the market, grew the volumes by two
[Page 1255]
years and then we started declining for 30 plus years,
30 something years.
So, I consider that approach to be
conservative because--and if you look at the volumes,
the volumes that we get to on an annual basis, and the
cash flows, you remember the $6 million that I
mentioned in but-for world that were made? Starting
with that in the actual world, 3 million, 3.7 million
or 3.4 million between 2016 and 2017, is a proof that
my but-for calculation, which gets you to average
1.75 million, is conservative.
Now, we can go slice and dice, "you could
have done this country, that country," but generally
speaking, if you step back and look at it, my volumes
are declining because I tied them to Peruvian volumes.
I say "my volumes," volumes from other countries.
BY MS. HORMAZABAL
Q. Thank you. I'm going to go ahead to my last
question.
If you could please show AS-0066 and show
the inventory, Respondent's counsel have--also did not
provide you with the opportunity to reply regarding
[Page 1256]
this, if you could please expand to what you were
going to say?
A. I believe I mentioned that what's shown in
the Financial Statement as of 2018 reflects three
loads, and the loads that were acquired, load No. 3
and load No. 5 which are not reflected here, were
originally reflected in the Financial Statements, and
I show that it's in one of my exhibits. Over time,
the management/accountant decided to remove it because
they followed the Cash Basis. And as I said before,
as a CPA, as long as you believe that you're entitled,
you have a legal title to that gold, that gold should
have been on the balance sheet.
MS. HORMAZABAL: Thank you very much. I'm
done with my questions.
PRESIDENT MCRAE: Thank you.
Any redirect?
MR. SMYTH: Recross.
PRESIDENT MCREA: Recross.
MR. SMYTH: Just a few short questions. I
promise to be quick.
RECROSS-EXAMINATION
[Page 1257]
BY MR. SMYTH:
Q. I wasn't sure if I heard correctly, but I
think you mentioned that you met [Redacted] in Dubai,
was that correct or was that a misstatement?
A. I think I read Dubai but I stated Miami.
Q. Understood. So, you've never met [Redacted]
in Dubai?
A. Never.
Q. "Never."
Okay. And we were talking about counsel for
Claimant asked whether you took into account
detrimental articles about Kaloti's reputation. Where
do you take those into account in your Reports?
A. In looking at the--there's no impact.
Everything was pure that I have seen that was
submitted by Brattle were pure allegations, and so
there is no effect. There is nothing to be taken
into. If they provided me with the data that shows,
clearly shows, that those allegations were correct, I
would have taken into account, but there is zero
evidence for that.
Q. So, to be clear, did you carry out your own
[Page 1258]
independent investigation of whether or not those
articles caused Kaloti to lose Suppliers or banking
relationships?
A. I have not, no.
Q. Okay. And just quickly on Exhibit C-43, if
we could pull that up. Claimant's counsel were asking
you some questions about this, specifically the
volumes at the end of certain years. And I think the
suggestion was that things slowed down at Christmas.
But, if we look at 2013, first of all. So, if we go
to--yeah, if we zoom in there, we have pure quantity
volumes November 2013, we have nearly
1.6 million grams, and then December 2013, we have
1.5 million grams. That's only a very small decrease
in December; correct?
A. Yeah, that's correct.
Q. And then in 2014, at the bottom of there,
November and December 2014, if we look at the pure
quantities, again, that's only a very small decrease;
correct?
A. In relation to those two months, yes.
Q. Yes. Okay. Thank you.
[Page 1259]
MR. SMYTH: No further questions.
PRESIDENT MCRAE: Do we have questions?
Please go ahead.
QUESTIONS FROM THE TRIBUNAL
(Off the microphone.)
ARBITRATOR KNIEPER: I have some questions
on your Reports, both Reports, and I want to quote
some of the paragraphs of your Reports. You have them
in front of you; right?
THE WITNESS: I do.
ARBITRATOR KNIEPER: So, the easiest would
be because I have no way to bring it up to the screen,
to show you to give the numbers of the paragraphs, and
then you can look at them.
MS. HORMAZABAL: If you would like, you
could tell me the page number and I can ask--
ARBITRATOR KNIEPER: Page number? I have
the paragraph numbers.
MS. HORMAZABAL: The paragraph number,
that's what I meant.
ARBITRATOR KNIEPER: If that's okay?
MS. HORMAZABAL: Yes, absolutely.
[Page 1260]
ARBITRATOR KNIEPER: Now, let me start with
one. My first question, today I recall in your
presentation you said that KML does not refining; is
that correct?
THE WITNESS: That's correct.
ARBITRATOR KNIEPER: But, when you go to
your First Report at Paragraph 3.4--it's not a test
run, but it seems--you say: "KML was a mining company
which specializes in precious metals refining," et
cetera. Would you correct that after what you have
said today? Because it may have an impact on the
value of the enterprise.
THE WITNESS: I understand that the refining
is basically as some of those purchases they have
made. They would take to refineries, local
refineries. They would do refining for them and then
they would sell it. So, that would be going under the
refining section of the revenue. They, themselves,
did not have a refine.
ARBITRATOR KNIEPER: They did not refine.
So, because, on another, which I have noted now here,
you say also in the submission is that KML would send
[Page 1261]
the gold for refining also to Dubai.
THE WITNESS: That is correct.
ARBITRATOR KNIEPER: Okay. Second point,
which might also impact the value of the enterprise,
on several occasions you talk about the beginning of
the activities of KML in Perú, the beginning of
investment in Perú, and there are four references, and
I want to bring you to four. Perhaps you know that.
There is a Paragraph 2.11 in your First Report, and
then a paragraph where you say the Investment in Perú
started in 2011. And then there is another one, 2.1,
Paragraph 2.1, where you say the Investment started in
early 2012. And then there is a third one in 3.6 of
the first--am I too fast?
THE WITNESS: No, no.
ARBITRATOR KNIEPER: 3.6 where you say that
Kaloti--no, that KML opened a local office in early
2013.
What would be the right date of all these
three?
THE WITNESS: The--I have never gotten to
the level of knowing exactly when they made
[Page 1262]
investments.
ARBITRATOR KNIEPER: Okay.
THE WITNESS: But I do recall that the
initial transacting of acquisitions of gold started in
2012, and I believe that 256 kilograms that I kept
repeating is the total volume that they acquired in, I
believe, after that from what I was told, and I
remember--believe it was in one of the Witness
Statements, these are factual issues that the Kaloti
Metals & Logistics decided to make further investment
there and open up the office there, had a place for
people to stay, to live. The Transportation Agreement
was signed, the Security Agreement was signed, they
also had the storage space dedicated for those
separate things. That's what I refer to when I say
"the Investments were made."
ARBITRATOR KNIEPER: Because, when you
define "investment"--and I want to take you to
Paragraph 318 of the First Report and also to 6.78 of
the First Report. You say--and you define the
Investment of KML as "acquisition of gold."
And then in 6.78, when we go there--perhaps
[Page 1263]
we can put it on the screen because this is a little
bit longer. You say "Claimant's business operation is
limited to purchase and sale of the already-mined
gold."
Is that how you define the Investment of
KML?
MR. DÍAZ-CANDIA: Professor Knieper, I'm not
going to object to a question from an Arbitrator ever,
that would not unwise, but we submit that whatever is
an investment for accounting purposes or other
purposes is not necessarily what controls for Treaty
purposes, and this expert has no experience -
whatsoever in international law or the definition of
what an investment is.
ARBITRATOR KNIEPER: I thought investment is
also an economic term. I'm not talking about in the
legal definitions. I'm talking about the economic
term "investment."
MR. DÍAZ-CANDIA: Okay.
ARBITRATOR KNIEPER: I had the impression
that the CPA defined "investment" as saying the
Investment is the purchase of gold, and the operation
[Page 1264]
is limited to the purchase and sale of gold. This is
what I understood, and that is what I wanted to know
more about.
THE WITNESS: As I speak about the
Investment, I purely speak from an accounting and
financial reporting standpoint, and I'm speaking by
observing the balance sheet, what's reported there.
One of those, as I referred to, the purchase and sale,
one of those was the Investment in the inventory.
Inventory, by virtue, is always considered as an
investment, and that's what I refer to, in addition to
the other investments that were made.
I do want to make a note that, in some cases
there are some certain transactions or certain
arrangements that were more on a lease basis, and I
believe that's one of the reasons why the business
actually experienced lien, what I refer to as lien
operation. If they dumped significantly a lot more
money, let's say, by purchasing a tangible office--not
office, but whatever you want to purchase--you dump a
lot of money and that makes a lot more negative impact
on your immediate cash flows as opposed to entering
[Page 1265]
into a long-term arrangements, in which you pay
monthly.
ARBITRATOR KNIEPER: Thank you.
Then another question is, in that context,
when you talk about capital expenditure in 6.78 of
your First Report--no, 6.67, I'm sorry, of your First
Report, I have not found in the whole report and in
the balance sheets the expenses for this Arbitration,
which are considerable. You talk about expenses of
$75,000 in 2018, but somewhere the money must come
from, is it a loan to KML which should be in the
balance sheet, or have you not been given information
on the costs?
THE WITNESS: I'm sorry, I didn't exactly
understand your question.
ARBITRATOR KNIEPER: The question is: This
Arbitration costs money, and it is provided by KML.
There is no third-party funding.
Now, doesn't that money has to appear
somewhere in the balance sheet?
THE WITNESS: The balance sheet that I have
is frozen as of year-end 2018.
[Page 1266]
ARBITRATOR KNIEPER: Okay.
THE WITNESS: The Company is--
ARBITRATOR KNIEPER: You've answer already
the question--
THE WITNESS: Nothing has been updated ever
since.
ARBITRATOR KNIEPER: Okay. So, the
last--also a short question concerns the damages, and
there I refer to the Second Report to two paragraphs.
One is in 5.49, and the other one is the 6.146, which
is already on the screen, perhaps it's still there,
where you talk about a red herring.
Now, you say in these two paragraphs that
the damages, the loss in value started--occurred as
from November 2013, and the unlawful and progressive
expropriation started also in November 2013. Is that
correct?
THE WITNESS: That is correct.
And when I made this statement, I referred
to the tangible information that I had on record.
ARBITRATOR KNIEPER: Yes.
You know why I asked this question, I asked
[Page 1267]
this questions because there was--the first day, I
think you were here the first day--there was a longer
debate about whether these temporary Measures at the
beginning were legal or illegal, but you seem to
confirm here or to affirm here that they were, in your
mind, illegal and unlawful from the beginning, from
November 2013. Is that what you want to say?
THE WITNESS: No, I do not provide an
opinion on that.
ARBITRATOR KNIEPER: Oh.
THE WITNESS: My calculation reflects the
instruction from a counsel, but I have no opinion
whether something was legal or illegal. That's
outside of my expertise.
ARBITRATOR KNIEPER: Okay. So, you put
these dates, November 2013, as instructed by the
Claimant; is that what you--
THE WITNESS: That's exactly correct.
ARBITRATOR KNIEPER: Okay. Thank you very
much.
PRESIDENT MCRAE: Thank you very much. I
think there are no further questions. Thank you for
[Page 1268]
your testimony, and you're now free to go.
(Witness steps down.)
PRESIDENT MCRAE: We are taking a lunch
break. Since we were starting late, we are happy to
go until 25 after 2:00 for lunch. We will do that and
then we will see how the afternoon goes.
MR. DÍAZ-CANDIA: Yes, Mr. President. We
just ask, just in case, and we don't know that Brattle
remains available tomorrow, please. Maybe we will
finish today, but we don't know.
PRESIDENT MCRAE: I think that's quite
clear.
MR. SMYTH: I believe Brattle can make
themselves available tomorrow, if needed.
PRESIDENT MCRAE: Okay. Well, then 25 after
we'll reconvene.
(Whereupon, at 1:24 p.m., the Hearing was
adjourned until 2:25 p.m., the same day.)
AFTERNOON SESSION
DARRELL CHODOROW and FABRICIO NUÑEZ,
RESPONDENT'S WITNESSES, CALLED
PRESIDENT MCRAE: I think we are probably
[Page 1269]
ready to start.
Unless there is anything from either Party,
I think we can just go ahead and start with the
experts.
I know you were both here this morning, and
you heard what I said to the previous witness.
(Witness places nameplates on table.)
PRESIDENT MCRAE: Thank you. That's
helpful. I have your names here, but I can see it
there. Thank you.
So, good afternoon, Mr. Chodorow; good
afternoon, Mr. Nuñez.
I think that, as you know, you will give
your statement, you will be cross-examined by the
Claimants, and then redirect by the Respondent, and
there may be question from the Tribunal.
Could we start by having you read the Expert
Declaration? I think it's slightly different from the
one that was read this morning.
Go ahead.
THE WITNESS: (Mr. Chodorow) I solemnly
declare upon my honor and conscience that my statement
[Page 1270]
will be in accordance with my sincere belief.
PRESIDENT MCRAE: Go ahead.
THE WITNESS: I solemnly declare upon my
honor and conscience that my statement will be in
accordance to my sincere belief.
PRESIDENT MCREA: Thank you.
I think there will be a brief introduction
from the Respondent?
MR. SMYTH: It's fine to just hand it over
to the Experts.
Maybe just one question, first of all.
DIRECT EXAMINATION
BY MR. SMYTH:
Q. You have your two Reports in front of you, I
believe.
A. (Mr. Nuñez) I do not.
Q. My question was simply, do you have any
corrections that you wish to make to your two Reports
filed in this Arbitration?
A. (Mr. Chodorow) No, we don't.
A. (Mr. Nuñez) We do not.
MR. SMYTH: Thank you.
[Page 1271]
PRESIDENT MCRAE: Then please go ahead with
your presentations.
DIRECT PRESENTATION
THE WITNESS: (Mr. Chodorow) Good afternoon,
Mr. President, Members of the Tribunal. My name is
Darrell Chodorow, and this is my colleague,
Dr. Fabricio Nuñez.
We're principals with the Brattle Group in
the international arbitration practice where we focus
on quantum. So there are some details about our
background on Slide 1 and more details in the résumés
attached to our First Report.
I'm going to start with a brief summary of
conclusions, so from the--the Claimants are seeking
damages of approximately 155 million, and we were
asked to evaluate those claims. And a summary of our
conclusions is we start by analyzing the causal link.
And based off of our analysis, we conclude that there
is no significant documentary or analytical evidence
to support the alleged causal link. And,
additionally, we found significant evidence that
suggests other alternatives that explain KML's
[Page 1272]
deterioration.
We've also been asked to evaluate the Claims
for the lost profits and alleged expropriation. Based
off of our analysis, we conclude that, in this case in
particular, given the circumstances, the DCF is
particularly speculative and unreliable. We have
analyzed the results of Mr. Smajlovic's DCF, and we've
concluded that the model itself generates
unrealistically high profitability for KML, which we
take as a sign that the DCF contains unreliable inputs
and assumptions. And, as we'll also discuss, we've
evaluated many of those assumptions and reached the
same conclusion.
And finally, assuming a causal link, we have
prepared an alternative DCF analysis that we deem to
be more plausible, but still we have concerns about
reliability given the lack of information and data
available here.
We've also been asked to look at head of
damages related to the seized shipments, and our
primary concern with this analysis is that the
evidence available seems to contradict Mr. Smajlovic's
[Page 1273]
claim that KML has to pay for two of the shipments out
of any award; and, as a result, we believe that the
failure to make an adjustment for that would lead to a
windfall.
We will also address Pre-Award Interest,
which we think that the "commercially reasonable" rate
is lower than Mr. Smajlovic, and our estimate of
alternative damages across all the heads of damages is
approximately 14.5 million.
Just briefly, we're going to start
discussing the causal link. Then we will get into the
calculations of quantum, then talk about Pre-Award
Interest and, finally, provide our ending estimate of
damages.
(Pause.)
THE WITNESS: (Mr. Chodorow) So, starting
with the claim that Perú's Measures caused lost sales,
Mr. Smajlovic starts with the assumption that KML
would have grown rapidly but for the Measures but
instead it shrunk, and that the entire shortfall
between his but-for and actual estimates results
entirely from Perú's Measures which caused the alleged
[Page 1274]
short-fall in gold volumes through two key prongs.
The first is the loss of Suppliers to provide KML with
gold, and the second is the closure of KML's bank
accounts in the U.S. As we'll explain, we consider
these assumed causal links to be speculative and see
significant evidence to the contrary.
So, I'll start with the loss of Suppliers.
As we noted in our Reports, we don't see any analysis
or documents showing that Suppliers were lost, but we
have evaluated some of the Claims that are made in the
Memorial. And, for example, in the First Memorial,
there were claims that KML was buying from certain
Suppliers, and then after a certain period of time,
they would cease to sell to KML. And we found, using
KML's own data, that that claim was incorrect.
So, example, Veta de Oro, we found, I
believe the claim was, they stopped selling in 2015
but the supply records that we have seen posted, I
think there in C-30, they actually show Veta de Oro
continuing to sell in the following years, and that
volumes much larger than were sold at prior to the
alleged Measures.
[Page 1275]
And so, there seemed to be problems with the factual record that the Claimant has been developing to support the claim.
Additionally, KML asserts that there had to be a substantial change in Suppliers as a result of the Measures. Again, there is not any kind of analytical support for this claim. We used the data to actually try and assess whether this was true because we could see what was happening to KML's Supplier base over time, and one way to analyze this is to look at the Supplier retention rate. So, if there was a significant drop, if there were substantial changes in the Supplier base, that would appear as significant losses of Suppliers that were previously supplying in prior years, and as you can see on the right, we show the Supplier retention rate, and it stays at about 50 percent for virtually the whole time, but before and after. So, this contradicts the claim of a substantial change in Suppliers.
In addition, the fact that there is a consistently relatively low rate shows that it is a
[Page 1276]
volatile market for Suppliers, and it's consistent with materials that we saw suggesting that Suppliers enter the market, and they'll trade for a short period of time, and then they will exit the market.
Now, we've also found significant evidence of other likely causes, so the first thing we will note was discussed briefly this morning, which is when you look at KML's monthly volume, there was a significant drop in the volume in November of 2013, and one of the things we heard about that, during Mr. Smajlovic's presentation, is that the slowdown was consistent with sort of a seasonal reduction. And we haven't seen any evidence of that, but when you look at the monthly data from other years, that's in, I believe, Exhibit C-30, it seems to suggest there is no consistent slowdown taking place, so that--we can't disprove it, but the evidence seems it suggest that that's not the explanation.
Additionally, you've heard discussion about the Chamy family Suppliers. During 2013, these five Suppliers in the group supplied 65 percent of KML's total volumes, and they were concentrated in a
[Page 1277]
relatively short period of time, and those Suppliers simply disappeared in 2014. So, the loss of this enormous Supplier is a very plausible explanation of what happened and could drive down KML's volumes.
We will also note that the artisanal gold production sector experienced a sharp downturn, and that's important because, as Dr. Nuñez will speak of later, there was a significant--that was a significant component of the potentially available supply for KML.
We've heard discussion about competition, and this is something we address in our Report, but part of the claim that [Redacted] raises is that KML was capturing volumes from incumbents, and it would do so by offering a higher price.
But we also see evidence that competitors were starting to respond. They're not just going to sit and let Kaloti Metals take all their share. They're going to respond, and one of their clear ways that they respond is an example that was noted in an article where they were interviewing people from NTR.
And NTR, one of the incumbents, said that after they lost some share to Kaloti to--from [Redacted]
[Page 1278]
business, they quickly tried to win him back by offering significantly higher prices. And the economic effect of that competition is going to be a squeezing of either the volumes or the margins. You can't have both.
Additionally, we will note that there is good reason to believe that the reputation of [Redacted], or [Redacted], may have had an impact on KML's business. As has been noted in [Redacted] Witness Statement, and I believe I've heard in the testimony, the so-called "[Redacted] letter" that talks about the 45,000 kilograms, that was used by [Redacted] to try and engage with Suppliers and to capture their supply.
So, in the market, KML would have been clearly connected with [Redacted]. And as we discussed in our Reports, there was a significant amount of concern about [Redacted] activity. Some of it was public, some of it was from activity of traders that were terminating relationships, banks that were reporting [Redacted] to financial crimes regulators.
And this morning, there was the presentation of an article that talked about all of the allegations
[Page 1279]
that came out in this Audit Report of [Redacted]. And while Mr. Smajlovic noted that there was nothing in--that there was no evidence in 2012 and 2013, that the allegations in these high profile articles and publications like The Wall Street Journal, had a significant effect. One wouldn't expect that because those articles only came out in February of 2014, and so you can't look back and say there was no--no impact in prior years because that information either wasn't available or certainly wasn't as high profile at the time.
And so, we put forth these alternative explanations that seem to have evidence and could very reasonably be expected to harm KML's volumes with Suppliers, and the Claimants have not engaged with any kind of analysis or evidence to prove otherwise.
Next, I will turn to the closing of bank accounts. In KML's Memorial they state, "the only reason for KML or Mr. [Redacted] to have been flagged in compliance reviews performed by financial institutions was directly and exclusively attributable to Perú." Again, this is not supported by evidence
[Page 1280]
such as the closure letters, which we saw earlier today, don't contain any explanation of why the closures occurred.
But, in addition, we know from Brattle-003 that JPMorgan was already reporting KML, not just [Redacted], but also KML to financial crimes regulators in early 2013. Long before the Measures.
Additionally, when financial institutions are considering opening an account, often times they will perform KYC, or "know your customer" due diligence. And despite the Measures, KML was able to pass KYC due diligence and opened up six new bank accounts following the Measures. And importantly, all of the closures that occurred and are noted in Exhibit C-27, they all occurred after the banks would have seen what KML was doing in its accounts, the type of counter-parties it had, the types of transactions it was doing, and banks are oftentimes cautious, and they are more than willing to close accounts so that they are not affiliated with any kind of wrongdoing. And so, just the perception of suspicion is enough to result in a closed account.
[Page 1281]
Now, we saw from the JPMorgan SAR that, even in early 2013, there were significant concerns about the ties to [Redacted], about the other counter-parties with whom KML was transacting and that JPMorgan Chase found the types of transactions occurring to be suspicious, and those were significant enough to report to regulators. And what we can see is that--also that the closings that are complained of in Exhibit C-27, those started to occur after the allegations of wrongdoing in these high- profile journals such as The Wall Street Journal.
On this slide, we just present a timeline associated with the opening and closing of bank accounts, and there are a few important things to note. The first is, as has been discussed, both the Citibank and JPMorgan accounts were closed prior to the Measures. And as was noted earlier, we don't know the exact reason. And we explained in our Report that it seemed likely to us that the explanation was the closures--although we didn't provide a specific opinion that that was the case, that they were, for sure, closed by the banks. But also, you have the
[Page 1282]
reporting by JPMorgan to the financial crimes regulators prior to this period.
The next thing to note is the boxes in yellow. Those are all of the new accounts that KML was able opened despite Perú's Measures, and you'll note that all of those openings happened after the publication of The Wall Street Journal and other articles about [Redacted]; and also, all of the closures that are contained in C-27 also occurred after that date.
And just to briefly address the alleged insolvency, KML claims that the seized shipments made it insolvent as of 30 November 2018 causing an indirect expropriation. We note that this didn't lead to a filing for bankruptcy. We explained that there was some arbitrariness in this date because it was based off of the date of a purported write-down of the inventories.
And, finally, we will note that the alleged insolvency would have been driven, in significant part, by the factors that caused KML's business to deteriorate in the period leading up to 2018. And so, we don't see a strong--we don't see a strong claim or
[Page 1283]
tie to bring this to a particular date based off of the evidence on which the opinion by Mr. Smajlovic was reached.
I'm going to turn it over to my colleague, Dr. Nuñez.
THE WITNESS: (Mr. Nuñez) Thank you, Mr. President and Members of the Tribunal.
I want to turn our attention now to the discussion of the first two heads of damages that KML claims. That's the alleged lost profits and alleged expropriation. And I want to do that in two steps.
First, I'm going to discuss Mr. Smajlovic's DCF, Discounted Cash Flow Model approach, and I will point out the significant deficiencies that render that analysis speculative and unsupported.
And then, I'm going to spend a few minutes talking about our corrected estimate.
As I said, Mr. Smajlovic estimates damages using a Discounted Cash Flow Model, a DCF Approach. But the facts of the circumstances that we have in this case made that--have all the hallmarks that make that approach speculative. On this table, on the left
[Page 1284]
column, you have--we have put.
(Pause.)
THE WITNESS: (Mr. Nuñez) --a set of criteria that increase the reliability of a DCF Approach, and on the right column we have answered whether those conditions are met in this case.
For example, a DCF Approach is more reliable when the business that has been valued has a long operating history. Well, that's not the case here. KML has not--doesn't have a long track record. It had been operating for about 15 months in Perú. The operational history is very uneven with ups and downs, and it was distorted by a few anomalous months.
Similarly, a DCF is more reliable if it's based on contemporaneous business plans that are not on the record in this case.
A DCF Approach is also more reliable if the business that is being valued operates in stable market conditions, with stable profit margins, when you can find a sustainable competitive advantage, and predictability of Suppliers and Buyers. None of those apply here. The market was not stable. [Redacted]
[Page 1285]
himself has claimed that he disrupted the market by offering Suppliers a higher price. That doesn't mean that margins would remain like that because--or remain high because competitors would respond undercutting margins in order to reclaim Market Share. That's exactly what happened here.
There was no sustainable competitive advantage because there was nothing--there was not--the business model of KML can be easily replicable. There is no predictability of Suppliers, there is no long-term or even short-term contracts.
In a market that is characterized by high turnover of Sellers that they get in and out in a matter--in a short period of time. And there is no predictable Buyers. There is no economically enforceable Contract with [Redacted] or other Buyers.
The speculative nature of the DCF that Mr. Smajlovic presents here becomes very clear once you analyze in detail the assumptions that he makes.
On this table on the left side, we show the key assumption in his model, and on the right we provide the reason why we conclude that the assumption is
[Page 1286]
speculative and unreasonable.
Take, for example, Market Share. He assumes that KML would reach a market share, a large market share, even though of the total Perú market, even though there is a large portion of the market that is not accessible to KML.
Similarly, he makes speculative assumptions about volume growth, the nature of competition, the stability of and--level and stability of profit margins, risk adjustments, discount rate, and taxes. Which I will address in the following slides.
Let me talk about market share.
Mr. Smajlovic assumes that KML will capture approximately 21 percent of the total gold market in Perú, but that fact ignores that there is a large portion of that market that is not accessible to KML. It's not addressable in economic parlance. The pie chart that you have on this table--on the slide, breaks down the total gold market in Perú by segment. The blue and the green portions corresponds to medium and large gold producers. That accounts for 70--approximately 7 percent of the market. The blue
[Page 1287]
portion, approximately 43 percent, are medium and large producers that are known to bypass intermediaries. As a matter of fact, we have put in our record in our Reports that we have confirmed that to be the case. The 27 percent in green are medium and large producers that are likely to bypass intermediaries.
To be clear, none of the companies that account for that 70 percent of the market are listed on this list of Suppliers to KML, with the single exception of a small, miniscule transaction in 2017 that accounted for a very small part of the volume traded by KML that year.
So, with this evidence, it's reasonable to conclude that the addressable market for KML corresponds to artisanal and other producers, the 29 percents that is labeled or is colored in pink and yellow.
Let me put that 21 percent Market Share that Mr. Smajlovic assumes in the context of that addressable market.
What Mr. Smajlovic assumes is that the
[Page 1288]
but-for volume would capture approximately 70 to 90 percent of that addressable market, and they will be able to do that at a pace of growth unprecedented for KML. But a Buyer or a market participant with such a dominant position of 70 to 90 percent could be unsustainable unless there is competitive advantage or barriers to entry. As I said, none of that exists here.
When economists think about barriers to entry, you think about things like intellectual property, exclusivity of Suppliers, territorial exclusivity or a business model that cannot be easily replicable. That is not the case here.
Mr. Smajlovic also assumes that the profit margins, particularly the price-fixing margin, would be 1 percent exactly, but as you can see on the slide presented on the table or the chart--on the slide, that 0.1 percent margin is excessive. The average before and after the Measures was much lower; and, as you can see, that is very volatile.
Because of the volumes and the margins that was discussed this morning are so razor thin, small
[Page 1289]
changes in that level produces a large damages impact.
And as you can see, it's not stable. The margins fluctuated significantly, and that volatility implies that there was risk, which is something that I want to talk next.
Mr. Smajlovic claims to have made a number of risk adjustments to his cash flows, but that claim is incorrect. Let's say volumes, for example. He says that he assumes that Perú volumes of 33,000 kilograms a year is the risk--is risk-adjusted because that number is below the 45,000 tons that was noted in the [Redacted] letter. But to be clear, there is no analysis of volume risk. Mr. Smajlovic has not put on the record any analysis that can justify 33,000 or any volume for that matter.
He also says that his price forecasts are risk-adjusted because he relies on future contracts, and those are risk-adjusted. Well, we agree that price--that future contracts, gold future contracts are risk-adjusted. They are, by definition, they remove the uncertainty by definition. It's a contract in which the Parties agree to transact a commodity in
[Page 1290]
the future for a fixed price or a given price. But that's not what he uses in his analysis. Future contracts are only available until 2024. After that, he relies on price forecasts for analysts. Those are certainly not risk-adjusted, and he makes no analysis of price volatility of those forecasts or anything that he does to account for that.
He also says that there is no price-fixing risk because of the strategy that KML allowed them to maintain a stable Profit Margin. I already showed in the previous slide that that is not correct either.
Finally, he says that the relationship with [Redacted] was key to KML's value and would continue until 2048. Let me leave for a moment what value that implies, but for this purpose there is--even if we assumed that is the case, if you have a single Buyer with such concentration risk, there is a risk. He does no analysis of what that implies, especially because there is no agreement with predictable terms that will prevent [Redacted] from going to a different Seller.
And as we have just discussed, [Redacted]
[Page 1291]
reputational risks endangers KML's reputation with his Supplier--with their Suppliers and their banks.
Let me turn to the issue of the Discount Rate. Mr. Smajlovic uses an approximately 5.2 Discount Rate. He arrives to that number as the sum of the U.S. Treasury rate plus a 2 percent premium. The 2 percent premium, the 2 percent risk premium is arbitrary. He talks about being connected to a country risk, but there is no analysis behind it.
He also justifies, Mr. Smajlovic justifies that low Discount Rate on the basis that the cash flows are risk-adjusted, and he can use a lower Discount Rate, but I just told you that the risk on the cash flows has not been adjusted.
By the way, that rate--the Discount Rate is below the Pre-Award Interest Rate that he uses, so that implies that KML would be better off delaying receiving the payment of an award. That is an issue that at least receives investigation. We did. We pointed that out, and that defies economic logic.
Mr. Smajlovic provides what purports to be two tests of the reasonability of his Discount Rate.
[Page 1292]
When putting into context and properly analyzed, those two--that is incorrect. First, he says that his 5.2 is below the 3.8 Discount Rate that Barrick Gold uses in his Perú operations. The rate is not quoted in real terms--it is not quoted in nominal terms, isn't in real terms, so by the time you adjust for inflation, is actually higher than the 5.2
Then he says the other benchmark that he uses is that, he claims that the Discount Rate of 5.2 is higher than the 4.2 reportedly calculated and based on data from Professor Damodaran of NYU. Well, the WACC properly applied is 8.4. The discrepancy arises because Mr. Smajlovic uses some of the inputs but changes others, changes the calculation in a way that violates the principles of finance.
Let's talk a little bit more--let me talk a little bit more about the [Redacted] relationship and the letter. Smajlovic says that the relationship with [Redacted] is one of the most important factors in the business and the DCF, his analysis, assumes a continuing relationship. But the letter only--if you believe the letter--only has 45,000 kilograms. That's below the
[Page 1293]
69 or 70,000 tons--79 kilograms noted in the letter.
(Pause.)
THE WITNESS: (Mr. Nuñez) The letter quotes 45,000 kilograms which is below the 70,000 kilograms that are in his but-for analysis in the total volumes. Perú is 33, and the rest of it is other countries.
Importantly, that letter lacks key terms of that provide certainty in medium and long-term commodity agreements. It is not an Off-Take Agreement or a long-term supply agreement. Typically, you have in those types of Contracts a mechanism to set the price, the volumes, the point of delivery, whether it's Free on Board, at the gate, includes freight and insurance, and other conditions for the allocation of risk. None of that is present in that letter.
Importantly, the Defendants and [Redacted] and as has been discussed already is risky given the allegations of wrongdoing and compliance failures, but let me stop here. And assume for the sake of the argument that that letter has value. It has value to [Redacted] and even the Shareholders of KML, but it should not be incorporated in the FMV, in the Fair
[Page 1294]
Market Value of KML because that letter is--the value of that letter is provided by family bond that cannot be passed on to a potential Buyer. It is, what in economics, we call the "strategy value." The strategic Value is not Fair Market Value.
Let me turn to the issue of taxes.
Mr. Smajlovic initially applies a Tax Rate on Perú, and in his Second Report he removed all tax liability.
Well, our conclusion is that no rational Buyer would ignore such types of liability because there is two problems. He claims that those taxes can be ignored because KML is a pass-through entity and they wouldn't have been subject to taxes. Well, a couple of problems with that. First, it doesn't--being a LLC or a pass-through entity does not insulate KML from taxes outside of the U.S.
And, second, potential buyers would discount in the Fair Market Value of the taxes that they would pay. The reason is that the corporate structure of KML does not change the tax liability. It changes, it shifts who pays for it. In this case, it certainly would pass to KML up to the Shareholders, but somebody
[Page 1295]
would pay. But because of the way Mr. Smajlovic approaches this, essentially it's a backdoor of a gross-up that would benefit provide a windfall to KML Shareholders that are not Claimants.
Let me talk about [Redacted]. We talked about this--there has been talk about [Redacted] [Redacted] formed [Redacted] before the alleged expropriations. And we have heard testimony and we have provided testimony ourselves that there was an overlap of the Suppliers that were trading or providing--supplying gold to KML as [Redacted].
And, importantly, [Redacted] ability to form [Redacted] actually depresses KML value, because for one, it confirms that there's low barriers to entry, all you have to do is form a new company and off you go. And potential Buyers would discount KML's value due to the threat of possible competition of [Redacted] or other potential new entrants.
Let me discuss now the Market Method.
Mr. Smajlovic reports to have conducted a reasonableness checks on his DCF based on a company called ALS. At the core of a Market Method is to
[Page 1296]
identify reasonable, reliable comparables. ALS is not a reliable comparable. In this pie chart on the left, we have broken down the revenue sources of ALS.
36 percent is in the commodities sector, and 64 percent is not commodity. Mr. Smajlovic's claim of comparability relies on that 36 percent, but even that 36 percent is not comparable. It has no trading activities, is not primary on gold. It's only a small share of participation in Perú, and it focuses on Technical Services.
Putting aside the issue of comparability, the method itself that he applies is not an independent check, and the reason is simple:
Anchoring both his DCF analysis as well as this comparable approach is his assumed but-for approach. Any problem or EBITDA, any problems that are present in his own analysis, in his assumption, infects, contaminates both the results of a DCF analysis as well as the results of his comparable analysis. In other words, there is not an independent check on his DCF.
In contrast, we have prepared--we have
[Page 1297]
conducted our own comparables analysis with references up to two transactions to refiners, Valcambi and Rand.
We have made clear that we understand that these are not perfect comparables but they're reasonable as a check.
When you do an analysis on a per ton of gold processed, Valcambi and Rand should be more valuable than KML, and the reason is simple: These two companies have their own refining capacity, they provided value-added services that KML does not.
But illogically, as we have shown in this chart on this slide, Mr. Smajlovic's DCF implies that KML is worth significantly more per ton of gold through-put than Valcambi and Rand.
We did another check on the reasonability of that DCF, and that is, on the basis of comparing, the implied returns on Mr. Smajlovic's DCF cash flows to the annual return that Apple, a very successful stock, has yielded over time. His DCF implies extraordinary terms, more than two times those of Apple. And those high returns defy economic logic. Apple is a company with brand loyalty, with competitive advantage, with a
[Page 1298]
business model that is difficult to replicate.
Mr. Smajlovic, DCF, is for a company KML which is not protected by barriers to entry, is subject to competition, and doesn't have a business model that cannot be replicated.
I'm going to conclude with a corrected estimate. We have been instructed to estimate lost profits and alleged expropriation using the DCF and assuming the causal link. It doesn't mean that we agree with those conditions; as we said, the DCF is speculative, and Mr. Smajlovic has not proved causal link. So, all we're really doing is replacing the DCF inputs with what we considered to be more reasonable ones.
And, on this table, I leave you with the corrections, with individual corrections, that we have made to his DCF, eight in total, that the decrease or reduce his alleged expropriation and lost profit damages from 103 and change to approximately 13.7 million, and that is before applying Mr. Smajlovic's deductions to avoid double-counting for the inventory, which is an issue that Mr. Chodorow
[Page 1299]
will discuss next.
Thank you.
THE WITNESS: (Mr. Chodorow) Thank you.
So, now I'm going to turn to the damages related to the seized shipments.
We have been asked to calculate these damages, assuming that each shipment was legally owned as well as the assumption that each shipment was either illegally seized or subject to an attachment. And so, please note that, that caveat to our analysis.
As was discussed earlier, the Shipments 3 and 5 are not part of KML's inventory in its Financial Statements, which raises questions as to their--whether they are legally owned or not.
When it comes to the calculation of these damages, Mr. Smajlovic agrees that Shipments 3 and 5 were never paid for, but are used--and he corrected this morning that KML's--that they were audited, but he argues that the KML financials show that KML would have to pay for those shipments out of any award. And this claim we find to be incorrect, and we find it to be incorrect because when we look as those Financial
[Page 1300]
Statements for 2018, they show no liability to pay for either shipment going forward. Yet Mr. Smajlovic says, he confirmed based on his Financial Statements the obligation to pay.
Beyond this, we will note there are two other issues. The first is that he has taken the pure gold volumes associated with these shipments and values them at the price for gold that has already been refined. But recall that these shipments are unrefined, and it takes time, and it takes money in order to move from unrefined gold to refined gold and so you need to make a price adjustment for the unrefined state associated with those inventories, and that's something that Mr. Smajlovic, even after hearing our argument, has rejected for reasons that we don't fully understand. I think he's confusing our adjustment for the refining related to the difference between the gross and the pure weight, but that's not what this is about. This is that the--the pure weight can only be unlocked by spending money to get these shipments refined, and so, the pure weight volume in those shipments must be worth less than the value of
[Page 1301]
the gold once it's refined.
Additionally, we raised questions in our First Report because we identified that there were two different volumes for each of those shipments in Mr. Smajlovic's report, and in his Second Report he revised it with one further estimate for the volumes for the shipments. And we don't know which, if any, of these is incorrect. We haven't been able to discern that from the documents.
On this slide, we show our calculation of the estimated damages for the seized shipments, and we are making the adjustment for the price for the unrefined status of the gold, and we're also deducting out the cost for the shipments that were never paid for to avoid a windfall, and that estimate ends up at about $12.2 million using the prices as of 30 November 2018.
We will note one other consideration, which is it's our understanding that KML may not have paid in full for the other three shipments; and, if that's the case and there is no clear obligation for KML to make payment of the remaining amounts on those
[Page 1302]
shipments, that could potentially generate another windfall.
With respect to Pre-Award Interest, Mr. Smajlovic uses an estimate of LIBOR + 4%. That's represented by the green bars on this chart. That is intended to reflect the cost at which KML is borrowing funds, but that's different in economic substance from the nature of damages, and those can be thought of kind of as the economic equivalent of a loan from KML to Perú.
And the "commercially reasonable" rate of interest should reflect the risk associated with that loan, and we understand that there are arguments that there can't be risk of non-payment on an award before the Award is issued; and, if that's the legal conclusion, something we don't opine on, then the appropriate Pre-Award Interest Rate is the risk-free U.S. dollar rate.
If, however, damages are subject to the risk of non-payment by Perú looking backward to the date in which the damages are incurred, then it would be appropriate to use Perú's U.S. dollar borrowing rate
[Page 1303]
because that's the rate at which market participants willingly lend money to Perú. And as you can see on the chart, either the Risk-Free Rate or Perú's U.S. dollar borrowing rate are both substantially below LIBOR + 4. And so, we disagree with Mr. Smajlovic's rate because we think from an economic perspective, it's just not measuring the right thing when it's asking the question of what a "commercially reasonable" rate is.
Finally, moving to damages, the combined damages across the three heads of damages, we estimate they were 14.3 million for the lost profits and alleged expropriation in the first column; for the seized shipments, including interest, we estimate it was 13 million; and then, when you combine them, you can't simply add them because, as Mr. Smajlovic notes--and we agree--there is double-counting if you were to do that. And so, we make the same adjustment to avoid double-counting by taking out the costs related to the three shipments that were paid for in order to get our estimate of total damages of 14.4 million. Now, if you were to do that at Perú's
[Page 1304]
borrowing cost, the damages would be 14.6 million.
And, finally, I will just note that there were many claims in Mr. Smajlovic's presentation about the arguments and analysis in our Report, we strongly disagree with those, but we don't have the time to delve into each of those at this point, but we would--we have addressed these issues in our Reports, and we would also welcome any questions to try and clarify the differences and opinion between our views and those of Mr. Smajlovic.
Thank you.
PRESIDENT MCRAE: Now we turn to the Claimants. We will ask them to start with the cross-examination.
MS. HORMAZABAL: Thank you, Mr. President.
BY MS. HORMAZABAL:
Q. My name is Gabriella Hormazabal, and I will be conducting this cross-examination. And for the sake of time, especially since there are two of you, I ask that you reply "yes" or "no" to my questions that require a "yes" or "no" answer. You will have time to
[Page 1305]
expand, if you wish, during Respondent's counsel's time for rebuttal.
Is that agreed?
A. (Mr. Chodorow) We will do our best.
Q. Thank you.
Mr. Chodorow, we understand that you may have worked with a professor of accounting in university, but is it correct that you do not have a degree in accounting?
A. (Mr. Chodorow) That's correct. I taught sections in financial accounting.
Q. Thank you.
A. (Mr. Chodorow) At the Yale School of Management.
Q. You're not a certified public accountant either; is that correct?
A. (Mr. Chodorow) That's correct, but I'm--
(Overlapping speakers.)
A. (Mr. Chodorow) I'm not a CPA, but I'm a regular user of financial statements and I understand key accounting issues.
Q. Again, you were not a CPA, thank you.
[Page 1306]
You are also not a professional, a certified--you're not a professional accountant and have no formal training in financial reporting in GAAP; is that correct?
A. (Mr. Chodorow) Sorry, you said no formal training?
Q. Yes.
A. (Mr. Chodorow) I don't think I would agree with that. I've certainly taken accounting courses.
Q. But you don't have--
A. (Mr. Chodorow) But, like I said, I'm not a CPA. But accounting has been a critical part of both my undergraduate and graduate training.
Q. Thank you.
But you do not have a certification.
A. (Mr. Chodorow) That's correct.
Q. You're also not a Certified Valuation or Business Analyst, or as we call it, a "CVA"; is that correct?
A. (Mr. Chodorow) That's correct.
Q. Mr. Nuñez, you have also never indicated that you have a degree in accounting; is that correct?
[Page 1307]
A. (Mr. Nuñez) That's correct.
Q. You're not a certified public accountant or as we call it, a CPA.
A. (Mr. Nuñez) I am not.
Q. You're not a professional accountant and have no formal training in financial reporting in GAAP; is that correct?
A. (Mr. Nuñez) I disagree. During my graduate training in my Ph.D. in economics you have to take accounting.
Q. And you are also not a certified valuation or business analyst.
A. (Mr. Nuñez) I am not.
Q. Would you agree with me that a CPA trained in accounting and GAAP possesses additional knowledge in how Financial Statements are prepared and which accounting principles are followed? This is a key requisite of performing financial system statement analysis; is that correct?
A. (Mr. Chodorow) I disagree. There are many users of Financial Statements throughout the world that are not CPAs. CPAs may be required to legally
[Page 1308]
prepare Audited Financial Statements, but users that have MBAs or Ph.D.s throughout the world are relying on these Financial Statements, even if they're not CPAs to make these important business decisions.
Q. Thank you. Are you qualified to audit a Financial Statement?
A. (Mr. Chodorow) No, I'm not.
Q. Have either of you ever worked in any of the Big Four audit firms?
A. (Mr. Chodorow) No.
A. (Mr. Nuñez) I have not.
Q. You have both said that you are members of an international arbitration market--practice. Does that practice include arbitration valuation of going-concern businesses not subject to litigation?
A. (Mr. Chodorow) I have done that in the course of my business, yes.
Q. Does that involve a valuation of businesses that are not in litigation, in your present group?
A. (Mr. Chodorow) Well, so, most of my work is in international arbitration, but I do a lot of different--a lot of different things. Sometimes the
[Page 1309]
work that I do is advisory. I've valued a wide variety of different assets for people that are considering transactions or considering making major investments.
Q. Is this in the International Arbitration Group?
A. (Mr. Chodorow) The groups at Brattle, they are loose affiliations. I have clients that for which I do all sorts of valuations. I think actually in my CV I point to all sorts of valuation work that I've done. Some of it is related to litigation, and others are not.
Q. Am I correct to say that an international arbitration involves the practice of advocacy?
A. (Mr. Chodorow) No. We are independent experts.
Q. That's not the question I asked.
A. (Mr. Chodorow) I apologize. I misheard.
Q. Am I correct to say that an international arbitration practice involves the practice of advocacy?
A. (Mr. Chodorow) I think I'm confused. We're
[Page 1310]
independent experts. We're not lawyers, so we're not advocates.
Q. Okay. Well, your Reports certainly seem argumentative to us.
MR. SMYTH: Is that a question or is that just a statement?
MS. HORMAZABAL: I will move on.
BY MS. HORMAZABAL:
Q. Mr. Nuñez, are you currently serving as the Expert on behalf of Perú on another matter?
A. (Mr. Nuñez) Yes.
Q. How many times have you served as an expert for Perú?
A. (Mr. Nuñez) This is the--this is--just those two cases, this one and that one you referred to.
Q. Mr. Chodorow, how many times have you served as an expert for Perú?
A. (Mr. Chodorow) I have never served as an Expert for Perú.
Q. How much were you or the Company you work for, Brattle, paid so far in this Arbitration?
A. (Mr. Chodorow) I would have to go back and
[Page 1311]
look. I don't know the number.
Q. You can give me an estimate or a ballpark, if you don't know the exact number.
A. (Mr. Chodorow) It's probably about $450,000 is where I expect the totals billings will be.
Q. So, you have not been paid all of the fees so far?
A. (Mr. Chodorow) We're paid on an hourly basis.
Q. So, you have not been paid for the Hearing--this Hearing today?
A. (Mr. Chodorow) Correct, although our views are not contingent upon the results of this Hearing.
Q. Mr. Nuñez, how much were you or the Company you work for, Brattle, being paid or will be paid for the other matter you are working on for Perú?
MR. SMYTH: Objection, sir.
A. (Mr. Nuñez) I have no idea.
MR. SMYTH: Has no relevance, and inappropriate.
MS. HORMAZABAL: I will withdraw.
BY MS. HORMAZABAL:
[Page 1312]
Q. Discounted Cash Flow Method or DCF is a specific method that falls under the Income Approach; is that correct?
A. (Mr. Nuñez) Yes.
Q. If you would like to let me know which one of you that wants to answer certain questions, thank you.
Both you and Mr. Smajlovic have presented damages to KML using the DCF Method in this Arbitration; is that correct?
A. (Mr. Nuñez) Yes, with the caveat that we--
Q. Thank you.
A. (Mr. Nuñez) --spent 45 minutes explaining why it's speculative.
Q. Yet you still used it; correct?
A. (Mr. Nuñez) This is speculative and we have done corrections, adjustments that's more reliable but that's not the approach that we--
Q. Did you propose a different main method? I understand that you may have shown us some Market Approach methods, but you still rely on the DCF Method in this case; is that correct?
[Page 1313]
A. (Mr. Nuñez) We make corrections to Mr. Smajlovic's DCF with the assumptions of the caveats that I have--that we have discussed.
Q. Did you propose a different method as more appropriate? That is my question.
A. (Mr. Nuñez) We did not. We were not asked to consider any other method.
Q. Thank you.
Is it fair to say that the DCF Method is well suitable for projects in the precious metal industry due to the fact that the production output are commodities, the markets are well developed, markets are highly liquid, they're global in scope, and with little uncertainty regarding producers' ability to find Buyers? Is that correct?
A. (Mr. Nuñez) I would have to disagree with that. I can put you many examples of very risky mining projects on gold or other things that are not predictable, that are not well developed, and they are risky, for example.
Q. What method would you propose that should be used in this industry, then?
[Page 1314]
A. It depends on the Company.
The problem is that the DCF, as I explained, is suitable when there is a long, for example, long track record which--
Q. My question was--
MR. SMYTH: Excuse me, Mr. President, I hate to interrupt the cross-examination, but there have been a number of occasions now where the Expert has been asked a question, is midway through answering it, and then counsel for Claimant will interrupt, and I just think for the sake of the Court Reporter and Interpreters at least, we would ask that the Witness be allowed to answer the question.
MS. HORMAZABAL: The Witness isn't answering my question, but I will let him--
PRESIDENT MCRAE: You have to let them explain the answer, if they gave an answer they have to explain it, unless it's an obvious "yes" or "no" question.
MS. HORMAZABAL: Understood.
BY MS. HORMAZABAL:
Q. So, what is the method that you think is the
[Page 1315]
most appropriate in this industry?
A. (Mr. Nuñez) Of the Valuation Approaches? I can think of, for example, the Cost Method could be something that you could apply here.
Q. You think it's more appropriate?
A. (Mr. Nuñez) It's less speculative than a DCF and because it's hard to find comparables, yes.
Q. So, it's normally used; is that correct?
A. (Mr. Nuñez) Can you repeat the question?
Q. The Cost Method is a method that is commonly used in this industry.
A. (Mr. Nuñez) Again, it depends, there might be--in all industries, in all types of projects, there are situations in which the Cost Method might be appropriate, and in the same industry for other--in other circumstances, the DCF must be--might be more appropriate. It depends.
Q. Is that something that you have provided in your Report?
A. (Dr. Nuñez) We were not asked to do that.
Q. Please confirm that all of the documentation that you have relied upon is listed in your Appendix B
[Page 1316]
of your First Report and Appendix A of your Second Report.
A. (Mr. Nuñez) Yeah, those were documents that were relied upon.
Q. Did you decide not to rely on certain documents in this case, or did you use every single document you received?
A. (Mr. Nuñez) We don't list every single document that we received. As you can imagine, the production is extensive. We have access to all the production, if that's what you're asking.
Q. Approximately how many drafts of each of your Reports did you exchange with Perú's lawyers before producing the final product?
MR. SMYTH: Objection. That's trying to illicit privileged information.
MS. HORMAZABAL: We are trying to establish independence as to assess how much of an influence Perú's counsel--
MR. SMYTH: I think all of us know--
MS. HORMAZABAL: I don't need to know the content.
[Page 1317]
MR. SMYTH: If I could just address that, that comment, I think all of us in this room know that an expert report will go through certain drafts in the process of finalizing the documents, and we submit this line of questioning is both privileged and irrelevant.
MS. HORMAZABAL: Thank you. I just wanted to know how many. Ballpark is fine.
MR. SMYTH: Are you asking me?
MS. HORMAZABAL: You were answering, but I'll go ahead and refer the questions to the Experts.
PRESIDENT MCRAE: Ma'am, I'm not sure when you get to the level of detail of how many, you're getting close to the solicitor-client privilege. When you ask if it was exchanged, as it was admitted, as I think by Mr. Smyth, that's fine, but the detail--
BY MS. HORMAZABAL:
Q. More than one draft?
MR. SMYTH: We would object to the question.
PRESIDENT MCRAE: It's the same question. Clearly they exchanged. That is, as Mr. Smyth said, well-known that this happens when experts submit
[Page 1318]
reports but the number--
MS. HORMAZABAL: Thank you for answering, Mr. Smyth.
BY MS. HORMAZABAL:
Q. Were you asked by Perú's lawyers to modify certain opinions after providing them with drafts of your Report?
A. (Mr. Nuñez) No.
Q. Then why multiple drafts?
I will move on.
A. (Mr. Nuñez) I'm sorry, I don't understand the question. Why multiple drafts?
PRESIDENT MCRAE: There was no question.
MS. HORMAZABAL: Okay.
BY MS. HORMAZABAL:
Q. I will move on to my next line of questions.
Did you conduct any specific analysis, but for or otherwise, in which you were able to demonstrate that the reasons stated in Paragraph 21 of your First Report were the cause of the revenue loss, what analysis did you do?
A. (Mr. Chodorow) We looked at the data and
[Page 1319]
information that was available. We looked at the--we looked at the patterns related to when Suppliers disappeared in I think it was either C-30 or C-43--I can't remember which Exhibit it was--to see if there was anything clear there. We looked at the allegations that were made with respect to the loss of Suppliers and the loss of bank accounts that were in the Claimant's Memorial. And as I noted during the presentation, we found evidence that directly contradicted a number of those claims.
We looked--we would have looked at the Document Production. There was a request seeking all information relating to communications with Suppliers that were terminating their relationships with KML, and I believe that that document request said there were no such documents available.
And so, the information that's available to try and prove this theory is simply not there, which is why we think the causal link is speculative, particularly given that a number of the facts that were stated relating to either Suppliers that purportedly stopped selling after a certain date, but,
[Page 1320]
in fact, continued to sell--or that there were--there was significant Supplier turnover caused by the Measures when, in fact, our analysis of the Supplier retention rates shows no significant change over time as a result of the Measures.
Q. Thank you.
Did you certify that these were actual causes or just merely possible? The ones here in Paragraph 21.
A. (Mr. Chodorow) So, I think we were careful--
Q. This is a "yes" or "no" question.
A. (Mr. Chodorow) I think I need to answer. I think we were careful because there's lack of information to confirm any specific--any specific cause. There's certainly, we found, no evidence whatsoever that it was specifically linked to the alleged Measures.
We don't dispute that it's possible that some effect could have come from that, but we see clear evidence of other explanations that seemed very plausible to us.
Q. How clear?
[Page 1321]
A. (Mr. Chodorow) We think some of it is fairly clear.
Q. Actually clear? Can you explain?
A. (Mr. Chodorow) Sure.
I can provide specific examples, if that's helpful.
Q. Of the causation?
A. (Mr. Chodorow) Yeah, of how we evaluated the causation.
Q. Did you evaluate the causation and actually come to an actual conclusion?
A. (Mr. Chodorow) We did, and the conclusion that we came to was that there was no--no material evidence outside of statements made by the fact witnesses to support the claim that the Suppliers were departing as a result of Perú's Measures, and there were significant other plausible explanations for what was happening. But we cannot receive a firm conclusion because we didn't have access to all the data that it sounds like Mr. Smajlovic may have seen.
Q. I just want a clear answer. Is there a causation of this, or no? Paragraph 21.
[Page 1322]
A. (Mr. Chodorow) As I said, I think there is significant evidence to support these alternative explanations, certainly far more evidence than there is that it was caused by Perú's Measures, but I think we're pretty clear in our opinions that we can't be 100 percent sure and we, you know, it's possible that there was some effect of the Measures. And if there was, we would have tried to disentangle that if we had access to information that would allow us to do that, but that was not available here.
Q. So, you're fairly certain of this but not the other documents Claimant has provided in this Arbitration, other causation. You seem to be very sure about this but not the other causation that we have provided in this Arbitration.
(Overlapping speakers.)
A. (Mr. Chodorow) As I said, we can evaluate the causal link to the extent possible using information that is available to us. And we've tried to do that, the information is necessarily incomplete because there were many documents that--that we would have been interested in seeing from KML that were not
[Page 1323]
present, and so we couldn't--we certainly couldn't conclude that it was caused by the Measures because the documents don't show that because there don't seem to be any documents.
These other explanations are factors that, to us, raised significant doubt as to the alleged causal link and, we think, provide plausible explanations for what may have been happening.
Q. Did you confirm causation was as a result of Paragraph 21, or not?
A. (Mr. Chodorow) We--as I said, we could not confirm causation.
Q. Thank you.
In Paragraphs 21, 65 through 66, and Figure 4 of your First Report, you make the following statements: "KML's volumes were already declining in late 2013, and KML's purchases began declining before the Measures began, referring to the alleged decline in volumes." Please confirm that this statement is based on your assessment of the last two months of 2013. Is that correct?
A. (Mr. Chodorow) That's correct. That was the
[Page 1324]
only data that was available.
Q. Have you done any analysis of the market in which you clearly saw that the market trends of the competitors suggested higher purchases or higher volumes in those last two months?
A. (Mr. Chodorow) Sorry?
Q. Of the year.
A. (Mr. Chodorow) Are you talking--I apologize. Can you ask that question again? I don't think I understood it.
Q. Have you conducted any analysis of the market in which you clearly saw that the market trends of the competitors suggested higher purchases or higher volumes in those last two months of the year?
A. (Mr. Chodorow) No, but it's a--
Q. Thank you.
A. --market where that data is not available for us to evaluate.
Q. Thank you.
In other words--so, you did not analyze what the situation was with competitors during those last few months; correct?
[Page 1325]
A. (Mr. Chodorow) That's correct. We didn't have the data, but looking at this graph, it's very clear that, in order to reach a conclusion on this causal link, one would have to explain what happened between October and November.
Q. That wasn't my question.
If you didn't conduct any analysis, how can you then consider this seasonal decline as permanent?
A. (Mr. Chodorow) I don't think I agree with your premise that this is a seasonal decline. As I mentioned, we looked at the monthly data--
Q. Is it permanent?
A. (Mr. Chodorow) Can I finish my answer?
Q. Sure, please.
A. (Mr. Chodorow) So, we looked at the data, it was up on the screen earlier today--there was monthly data on Peruvian gold volumes. And while it's true that this is the end of the year and theoretically there could be seasonal effects, we looked at other years, and you can see in other years, there doesn't appear to be a seasonal effect. So, there's not a clear trend here.
[Page 1326]
And also, I think Mr. Smajlovic talked about this idea that the holidays started in December. So, if that's the case, that wouldn't explain what was happening in November.
Q. Is there a reason to conclude that this decline would be permanent?
A. (Mr. Chodorow) We don't have the data to evaluate that, which is the problem with the causal link.
Q. Thank you.
Is it not more prudent to analyze the purchases of a year as a whole or determine a trend or to average for such seasonal shifts and looking solely at two individual months?
A. (Mr. Chodorow) So, I think there are a few problems. The first is that, in theory, it could be reasonable to look at seasonal trends, but here we're talking about a history of 15 months, and so, you can't discern any kind of seasonal trends with such limited data.
The second is these volumes are clearly very volatile from month to month, and we know that in that
[Page 1327]
October--sorry, in the August to October period, those volumes were coming to a great extent from the Chamy family Suppliers, which we understand disappeared, and so you can't just assume, okay, they achieved this volume by buying mostly from a small affiliated group of producers--sorry, not producers because my understanding is they weren't producers, but Suppliers, and then assume that after those Suppliers disappear, nonetheless, KML would receive those volumes in future years.
Q. Do you know if the output of Perú, as a whole, for gold declined in 2014.
A. (Mr. Chodorow) I would have to go back and look at the data. I know that the artisanal volume shrunk significantly, but I don't remember the amounts for the total. I would be happy to take you to that place in our Report, if that's helpful.
Q. Thank you.
We're going to pull up [Redacted] Witness Statement, the First.
In your presentation today, you stated that [Redacted] in your presentation today, you stated
[Page 1328]
that Mr. [Redacted] said that he had disrupted the market; correct?
A. (Mr. Nuñez) Yes, that's what we said.
Q. Is this not a mischaracterization of his words? If you could please read them.
A. (Mr. Nuñez) Do you want me to read it out loud?
Q. Yes, please.
A. (Mr. Nuñez) "Prior to KML entering the Peruvian gold market, existing Buyers controlled such market and dictated the price of gold; but I was effectively able to disrupt their strategy."
Q. Did he say "market" or "strategy"?
A. (Mr. Nuñez) It says "strategy," but--
Q. Thank you.
A. (Mr. Nuñez) Would you let me finish--
MR. SMYTH: Excuse me, once again--
MS. HORMAZABAL: They can expand on your--
MR. SMYTH: May I speak?
Once again, the Claimant's counsel has interrupted the Expert while they're making an answer. It's clear that the experts are providing concise
[Page 1329]
answers to questions, so we submit that they should be allowed to make those answers.
MS. HORMAZABAL: This was a simple answer, and he already provided it. He can expand during Respondent's recross--redirect.
PRESIDENT MCRAE: As a general comment, I understand your point, but I think you picked the wrong example because you asked whether he said "market" or "strategy," and he said "strategy," and so there's no need to elaborate at that point.
MS. HORMAZABAL: Thank you.
BY MS. HORMAZABAL:
Q. In your PowerPoint presentation, you also mentioned NTR.
A. (Mr. Nuñez) Yes.
Q. And I see that you cited your own report for that portion of your presentation; is that correct?
A. (Mr. Nuñez) Yes, that's probably where we cited it, yeah.
Q. Did this come from an unverified news or an unverified article?
A. (Mr. Nuñez) I don't know what you mean by
[Page 1330]
"unverified." You will have to show me the--
Q. Have you ever spoken to the writer? Do you know who the writer interviewed?
A. No.
Q. Did it come from any financial documents where you reviewed about NTR?
A. (Mr. Nuñez) Would you mind putting the article in front of me? Otherwise, I cannot comment on any content, if you don't show me the article.
Q. I can provided with your own PowerPoint.
A. (Mr. Nuñez) No, I understand my PowerPoint cites to that, but if you could put in front of me the--
Q. You don't recall your own exhibit?
A. (Mr. Nuñez) I don't recall every single exhibit.
Q. But you do recall where you mention--
(Overlapping speakers.)
A. (Mr. Nuñez) I--
Q. --NTR; correct?
A. (Mr. Nuñez) I absolutely recall NTR, yes.
Q. Please go to Brattle II, Paragraphs 115
[Page 1331]
through 117?
A. (Mr. Nuñez) Let me make a point before you answer the question. This is a causal link that Mr. Chodorow--
Q. You answered first, if you would like to.
A. (Mr. Nuñez) No, we mentioned NTR in our presentation several times in different contexts. If you're asking me about--
Q. Did you ever review NTR's Financial Statements?
A. (Mr. Chodorow) We don't have access to them.
Q. Did you ever review whether NTR's margins were lower than KML's?
A. (Mr. Chodorow) We don't have access to them, so we couldn't.
Q. Where did you receive this information from?
A. (Mr. Chodorow) I said we couldn't because we don't have that information.
Q. Okay. Whether I say "unverified article," is it signed by anyone?
A. It was published by somebody, and it cited to an interview of somebody who was from NTR, I
[Page 1332]
believe.
Q. Did it cite to an interview?
A. (Mr. Chodorow) I believe that it was--it was referring to a statement made by an NTR employee.
Q. You can see here, Paragraph 116, Brattle uses an article, any article, to discuss a competition and how a company may have increased their price in a purchase. But once again, this wasn't a document you reviewed from any Financial Statements from NTR?
A. (Mr. Chodorow) Correct.
But I will note that it's a basic economic theory that, if somebody comes into a market and starts raising the price that they're sourcing for gold, it wouldn't be at all surprising that the Suppliers who had their strategy disrupted, as [Redacted] said, would respond by raising their prices. So, we can't confirm everything about this statement other than that it was discussed as I believe a quote from the Article, but it's certainly consistent with what one would expect from an economic perspective.
Q. So, here in your Report you're saying that
[Page 1333]
it was good to gain Market Share from [Redacted]
Is that what you're alleging here? It says it on your Report. You don't have to...
A. (Mr. Chodorow) I apologize. Are you asking--could you ask the question again? I think I didn't understand.
Q. Do you consider obtaining Market Share from Mr. [Redacted] was good? You read this in an article. I'm just trying to understand.
A. (Mr. Chodorow) There seemed to be a lot of allegations about him. Certainly, NTR viewed it as good. My understanding is that, on the article, that he was deeming back share from--that [Redacted] had taken, so presumably they both thought having volumes from Mr. [Redacted] was good.
Q. That's a mischaracterization. That was never said in this arbitration.
A. (Mr. Chodorow) But I think that's what the article says.
Q. [Redacted] never said he bought from Mr. [Redacted] It's a mischaracterization. Once again, you're repeating an article that's not verified.
[Page 1334]
A. (Mr. Chodorow) We cite to it.
Q. And you're using it as an example.
If you reached out to the writer and you conducted extensive analysis, I would love to see it, if you can provide it.
A. (Mr. Chodorow) We did not.
MR. SMYTH: Is there a question there, just to clarify?
PRESIDENT MCRAE: I think he's answered that he's relied on the article and not anything else. That's all he's relying on is the article.
MS. HORMAZABAL: Okay. Thank you.
BY MS. HORMAZABAL:
Q. In my next line of questioning, please show Paragraphs 27 and 109 of your First Report.
Here, you indicated that the gold-trading business is easy to replicate, there are no material barriers to entry, to protect KML from competition, and KML's existing competitors would act to prevent KML from capturing virtually the entire market, and the only source that you have or actual proof comes from the news article that you--that we've previously
[Page 1335]
discussed; correct?
A. (Mr. Chodorow) Can you point me to where you're referring to? This is a long paragraph.
Q. It says it right there. If you would like, you can go ahead and read it out loud.
A. (Mr. Chodorow) "KML has no material competitive advantage, there are no material barriers to entry to protect KML from competition, and KML's existing competitors would act to prevent KML from capturing virtually the entire market."
That said, this is a summary of information that is discussed and broken down elsewhere in our Report.
Q. Okay. Where is the basis of--or the support for this assertion?
A. (Mr. Chodorow) Could you take me to the Table of Contents?
So, it should be in the section about the economic laws of competition. It should be--it's probably touched upon in the section about Perú's Market Share being unreasonable. And there may be other places where we talk about the detail underlying
[Page 1336]
those opinions.
Q. Do you recall any of the sources you used?
A. (Mr. Chodorow) Not offhand.
Q. Were they similar to the one you used to discuss NTR?
A. (Mr. Chodorow) You can take me to them and we can talk about each of the cites, but as we are sitting here, I don't remember every item that we cited.
Q. Have you reviewed any financial documents of other companies that could allow you to conduct an extensive analysis and come to this conclusion?
A. (Mr. Chodorow) As I mentioned, it's an opaque market, and we don't have access to much in the way of Financial Statements.
Q. Thank you.
Would you agree that having a large and captive demand is a competitive advantage?
A. (Mr. Nuñez) Yeah, I would agree with that.
Q. Thank you.
If I can take you to 136 of your First Report.
[Page 1337]
Here you have accused Mr. Smajlovic's assumption of a 0.1 Profit Margin as demonstrably excessive; is that correct?
A. (Mr. Nuñez) We don't accuse him of anything. We just look at his analysis and make a conclusion, yeah.
Q. Okay. You state that his assumed .1 percent profit on fixing is demonstratively excessive?
A. (Mr. Nuñez) Yes, that's what it says.
Q. So, Mr. Smajlovic has applied a .1 percent Profit Margin, and the .1 percent of the total proceeds is then--this is .1 percent out of 100--right?--is then being used to pay off all operating, financing and administrative charges, tax, et cetera; is that correct?
A. (Mr. Nuñez) No, that's not correct, at least not in Mr. Smajlovic's DCF.
Q. If you could please--
A. (Mr. Nuñez) Of course, I can elaborate.
This is one of the revenue items that he had--that KML purportedly had. There's others.
Q. Which one was the largest?
[Page 1338]
A. (Mr. Nuñez) I don't remember exactly.
Q. Do you remember what the other ones were? Or any other--
A. (Mr. Nuñez) There is revenue in scrap gold, there's some interest charges. Those are two. If I remember--not I don't remember--if I recall correctly that .1, the total margin is something like .3 is the total profitability of what Mr. Smajlovic has in his analysis.
Q. So, his analysis is actually conservative.
A. (Mr. Nuñez) I don't agree with that.
Q. Okay.
A. (Mr. Nuñez) I don't know how the relationship between .1 and .3 that is in his analysis. All I'm saying is that .1 percent is one line item in his income. There's other sources of revenue in his DCF analysis: We were able to analyze this in particular and show that it's excessive.
Q. So, from my review of Paragraph 137, despite using a .1 percent, you are stating that he is being aggressive here?
A. (Mr. Nuñez) Yes, and the reason is because
[Page 1339]
.1 percent or .3 percent are the very small margins or thin margins are applied, and Mr. Smajlovic actually says that today. These are large volumes, and all it takes is to flip it a little bit and you change damages significantly.
And actually, in 137, we explain how that small changes in his margin can reduce or impact damages a significant amount.
Q. You heard Mr. Smajlovic today state that, if it was a .5 percent, the business would not be viable. Do you agree with that statement?
A. (Mr. Nuñez) I don't know. I don't know what information Mr. Smajlovic had to make that--
Q. You have not conduct that analysis; is that correct?
A. (Mr. Nuñez) I haven't--I haven't--we haven't done the analysis that led Mr. Smajlovic to conclude that that particular--I don't know where he sources that opinion.
Q. Does it sound unreasonable?
A. (Mr. Nuñez) I'm not going to speculate.
Q. Well, four-and-a-half years have passed
[Page 1340]
since KML exited the Peruvian market; is that correct?
A. (Mr. Chodorow) Approximately, yes.
Q. Who seized KML's Market Share?
A. (Mr. Chodorow) We don't know.
Q. Do you know who is offering better terms today?
A. (Mr. Chodorow) As I mentioned, it's an opaque market that we can't see, but there are many incumbents.
Q. So, again, you have done none--no independent research in this regard?
A. (Mr. Chodorow) That's correct, but that's the fundamental problem with trying to estimate damages in this case, is that the data that's necessary to perform these kinds of analysis that we would want to do to estimate damages reliably, is not available. It's not available from the documents produced by KML, and it's not available by conducting our own independent research because the data is just not publicly available in most cases.
Q. So, you did not do the analysis; is that correct?
[Page 1341]
A. (Mr. Chodorow) We didn't do the analysis because there's no available data. So, the analysis would be speculative.
Q. Okay. I'm asking because you're the one who presented these assertions. But thank you.
PRESIDENT MCRAE: Ms. Hormazabal, we're close to where we normally take a break, if you are going to start a new topic.
MS. HORMAZABAL: We can take a break.
PRESIDENT MCRAE: Short break? 10 minutes. Okay, a ten-minute break. I have to say to the two experts that you're unable to contact the Respondent's lawyers during this period of time and you are isolated during the break.
THE WITNESS: (Mr. Nuñez) Mr. President, are we allowed to speak to each other?
PRESIDENT MCRAE: Yes.
(Recess.)
PRESIDENT MCRAE: Ms. Hormazabal, whenever you're ready.
MS. HORMAZABAL: Thank you.
BY MS. HORMAZABAL:
[Page 1342]
Q. Are you both ready?
A. (Mr. Nuñez) Yes.
Q. Going back to the 0.1 percent, where you have alleged it to be aggressive or excessive in your Report, are you basing your answer on the actual world or in the but-for scenario?
A. (Mr. Nuñez) It's both. I think I showed a figure today that replicates figures from our Reports, and you see it's before and after the Measures.
Q. So, was it based off of the actual world, the historical values that KML has presented after the Measures?
Did it ever achieve 0.1 percent?
A. (Mr. Nuñez) The point is that they were volatile; that's the point I was trying to make, yes.
Q. Based on the actual world, they were volatile?
A. (Mr. Nuñez) Yes.
Q. Thank you.
We will go on to the next subject. If you could please turn to Paragraph 171 of Brattle's First Report.
[Page 1343]
Were you informed, or did you receive any documentation that stated, that KML never filed a tax return in 2018 because it had not begun operations that year? [Redacted]
A. (Mr. Chodorow) Yes, we did see that document, although we understand--I think there was witness testimony that somebody was working for [Redacted] in, I think, December 2018, if I remember correctly.
Q. I'm asking about actual operations and income.
A. (Mr. Chodorow) I understand there was no tax return filed until 2019.
Q. Since you're aware of what happened in these hearings, are you also aware that [Redacted] did not purchase any gold from Peruvian Suppliers?
A. (Mr. Chodorow) Yes. I believe [Redacted] stated that in his Witness Statement.
Q. Is it your position that [Redacted] should be taken into account for purposes of damages?
A. (Mr. Chodorow) I think it has important implications, so yes.
[Page 1344]
Q. Are you aware that it has been established on the record that [Redacted] did not purchase any gold from inside Perú?
A. (Mr. Chodorow) Yes.
Q. Are you also aware that [Redacted] does not sell to [Redacted] and does not have similar business relationship with [Redacted]?
A. (Mr. Chodorow) I heard that, I believe, when [Redacted] was testifying.
Q. However, it is your position that KML should not receive damages related to countries outside of Perú; is that correct?
A. (Mr. Chodorow) That was a legal instruction. I believe we were clear about that in our Report.
Q. So, is that what you--your proposed calculations--is that what your proposed calculations reflect?
A. (Mr. Chodorow) It reflects both that instruction; and, I think as we were pretty clear in our Report, we considered the volumes that were projected outside of Perú to be entirely speculative.
If you look at the trend, the growth from
[Page 1345]
2012 to 2013, as we present in our Report, outside of Perú, was, I think, about 11 percent. And, in the following year, Mr. Smajlovic forecast that the volume outside of Perú would grow at, I think it was, 60 or 70 percent--I would have to go back and look--and that there was basically no analysis whatsoever of who--what markets it would come from. There was no analysis of the competition in those markets, the available reserves and whether KML could access them.
And so, without any kind of analysis, we think it's speculative to forecast volumes outside of Perú.
There is one single assumption that drives all of the damages outside of Perú; and, as Mr. Smajlovic said earlier today, it was that he assumes that the ratio of 53 to 47 percent for purchases outside Perú and inside Perú would hold through 2048.
Q. Thank you.
I don't want to cut you off because I have been asked to let you proceed, but that wasn't my question.
[Page 1346]
So, in your calculations, you do not reflect any damages from outside of Perú; is that correct?
A. (Mr. Chodorow) That's correct.
Q. And, as you heard here, [Redacted] did not purchase from inside of Perú; is that correct?
A. (Mr. Chodorow) Correct.
Q. So, following those two premises, wouldn't you consider this position contradictory, to want to take into account [Redacted] for purposes of damages?
A. (Mr. Chodorow) I think you're misunderstanding the purpose of this. We're not saying all of the damages were certainly made up by [Redacted] We're saying perhaps it's a consideration. What we've said is there was a legal instruction that we followed, but we also suggest--we also analyzed the only limited data available, and it didn't support any kind of reasonable forecast for volumes outside these countries.
Q. Okay. That wasn't my question.
Again, why would you diminish or subtract from damages based on [Redacted], if [Redacted]
[Page 1347]
[Redacted] did not have operations and did not purchase from Perú, where your legal instructions are to only include Peruvian-related volumes?
A. (Mr. Chodorow) So, to be clear, if you turn to this slide in our analysis, we--thank you. Mine are very out of order.
We described the eight adjustments that we make, and one of those adjustments--this is on slide--
Q. Could you please provide us the Slide Number.
A. (Mr. Chodorow) Sorry. Slide 31.
Q. Please proceed.
A. (Mr. Chodorow) Okay.
So, you will see, if you walk down the slide, we are making eight corrections to Mr. Smajlovic's analysis. None of those corrections is a deduction related to [Redacted] We are simply highlighting a few different things with respect to [Redacted] that I think are important from a conceptual perspective to consider in valuing--
Q. I'm sorry, but you haven't answered my question. Could you say "yes" or "no," that you have
[Page 1348]
taken [Redacted] an into account regarding your damages calculation?
A. (Mr. Chodorow) It's not specifically adjusted for here, as I said.
Q. Okay. What was your proposition, then?
A. (Mr. Chodorow) So, we have a few different propositions. The first is that [Redacted] provides evidence that the barriers to entry are low, and the reason it does that is because [Redacted] closed KML and then was quickly back in business with [Redacted] It sounds like he didn't have the backing of [Redacted], which we hadn't heard before, but that's--that makes this point even stronger, and he was able to get back in and start a brand-new business in which he was able to start buying gold, and so it's consistent with our discussion that there are no material barriers to entry for the business, along with the other statements that we noted from [Redacted] confirming that.
Q. Should [Redacted] be taken into account for damages? "Yes" or "no."
A. (Mr. Chodorow) I think it should be a
[Page 1349]
consideration, but we don't make a specific adjustment for it.
Q. But, here in your presentation, you say "no," you haven't provided for this. That's what you just represented to me; is that correct?
A. (Mr. Chodorow) That's correct. We did not make a specific adjustment.
Q. Thank you.
Let's go to Paragraph 183 of your First Report. Based on Paragraph 183 of your First Report, you state that Mr. Smajlovic's use of the Market Approach for reasonableness check only was an inherently speculative method; is that correct?
A. (Mr. Nuñez) Yes, that's correct.
Q. And here today, you also represented that you also used the Market Approach to do your own reasonableness check; is that not correct? "Yes" or "no."
A. (Mr. Nuñez) Again, you have to let me answer. A "yes" or "no" question doesn't apply here. Please, can I finish my answer?
Q. Proceed.
[Page 1350]
A. (Mr. Nuñez) Speculative in this context is the application of ALS and the way that he implements the method. We would never say that, as a general matter, the comparable method is speculative.
Q. Are you aware that Mr. Smajlovic has stated that he was unable to identify comparable companies that could be used in determination of damages to KML?
A. (Mr. Nuñez) Yeah, I think I remember he says that.
Q. Do you agree with this assertion?
A. (Mr. Nuñez) I think so, yes, we agree.
Q. Is 2012 the only real but-for world year without Measures?
A. (Mr. Nuñez) Full year, correct, yeah. The alleged Measures, if I remember correctly, is 27 November 2013, so by that measure or criteria--criterion, yeah, 2013 is contaminated by the Measures.
Q. Does Secretariat use Market Approach--"yes" or "no"--to take into consideration for his but-for calculations?
A. (Mr. Nuñez) It doesn't--his damages estimate
[Page 1351]
is not based on the Market Approach. He tests it with the--with ALS.
Q. So, if 2012 was the only real but-for world, why do you say that data after 2013 are comparable for purposes of the damages?
A. (Mr. Nuñez) You will have to elaborate. I don't know. I don't understand the question.
Q. Again, are you using actual world or but-for world, in your analysis?
A. (Mr. Nuñez) In what part?
Q. In your calculation of damages.
A. (Mr. Nuñez) We used actual data because of the way that Mr. Smajlovic presents damages is a but-for minus actual; so, of course, the way that we approach it is in the same way.
Q. Thank you.
Please turn to Claimant's Exhibit C-0143.
The name of this document is "Revolving Line of Credit." Executed by [Redacted] and KML in 2011; is that correct?
Could you please read the names of the executors of this Contract.
[Page 1352]
A. (Mr. Chodorow) [Redacted]
I [Redacted] and Kaloti Metals & Logistics LLC.
Q. Have you seen this document before?
A. (Mr. Chodorow) Yes.
Q. In this Agreement, [Redacted] is referred to as a "lender" and KML as a "borrower"; is that correct?
A. (Mr. Chodorow) That's correct.
Q. Is KML classified as a subsidiary, a branch, or a sister company? Here?
A. (Mr. Chodorow) I would have to read through the whole document. The first sentence does not say it--the first paragraph doesn't say it.
Q. Okay. Let's go to the "INTEREST."
Under Article 2--
MR. SMYTH: Sorry, excuse me, I think the Expert was asking to be shown the whole document before he could confirm the answer to the last question.
MS. HORMAZABAL: I'm sorry. I didn't hear that.
BY MS. HORMAZABAL:
[Page 1353]
Q. Is that what you asked?
A. (Mr. Chodorow) I just mentioned that I couldn't--there was nothing in the first paragraph about confirming a familial relationship. From a legal perspective, I don't know if there's anything else in here.
Q. You're free to scroll up and down, if you want to read it all.
A. (Mr. Chodorow) I don't see anything here.
Q. You've also mentioned here that you've reviewed it.
Under Article 2, the Revolving Line of Credit, please confirm that for the first $3 million [Redacted] would charge 8 percent interest, and then for amounts over 3 million to $5 million, [Redacted] would charge 10 percent interest.
Do you see this?
A. (Mr. Chodorow) I do.
Q. In your experience, don't allegedly-related parties charge--do they usually charge higher or lower interest or no interest at all?
A. (Mr. Chodorow) I apologize, can you ask your
[Page 1354]
question again?
Q. Absolutely.
In your experience, do allegedly-related parties charge higher or lower interest or no interest at all?
A. (Mr. Chodorow) It varies a lot.
Intra-company loans usually have an interest rate associated with them, and the rate depends on the particular circumstances of the lender and the risk.
Q. Would you classify these as fair market rates?
A. (Mr. Chodorow) I don't know what these are. They're just rates that are put in. That's one of the problems is oftentimes in--certainly with related party--and I don't know if these are related party or not--I'm not expressing an opinion--they will set a rate, and I have been involved in many tax disputes relating to whether that Interest Rate reflect Fair Market Value or arm's-length terms or not.
Q. Do they sound reasonable, like reasonable terms? Are they high, reasonable, or low?
A. (Mr. Chodorow) I would have to go back and
[Page 1355]
1 look at what Interest Rates were at the time.
2 Q. But you don't have any basis to assume that
3 they are not reasonable; is that correct?
4 A. (Mr. Chodorow) I don't have a basis to
5 assume they are not or that they are.
6 Q. Thank you.
7 Even after KML's gold inventory was seized
8 in 2013 through 2014, [Redacted] continued to provide a
9 funding source for KML's business; is that correct?
10 A. (Mr. Chodorow) That's my understanding.
11 Q. From your review of the documents, until
12 when? Was it until November 2018?
13 A. (Mr. Chodorow) There was a letter sent in
14 November of 2018. I don't know that they stopped
15 providing any financing at that point. The letter
16 indicated that they were in--were planning to do so,
17 but I don't know if that lending continued or not.
18 Q. Thank you.
19 Is it correct to say that the alleged
20 Measures prevented KML from attaining potentially new
21 Suppliers?
22 A. (Mr. Chodorow) Sorry, is it--can you restate
[Page 1356]
1 the question one more time?
2 Q. Is it correct to say that the Measures
3 prevented KML from attaining potentially new
4 Suppliers?
5 A. (Mr. Chodorow) I would say it's possible
6 that they did, but I have seen no evidence in the
7 documents--
8 Q. Thank you.
9 A. (Mr. Chodorow) --or data supporting it.
10 Q. Is KML considered a refinery?
11 A. (Mr. Chodorow) No.
12 Q. In Paragraph 253 of your Second Report, you
13 state that the valuation of KML implied by Valcambi
14 must be interpreted as an upper bound, however,
15 Valcambi is a refinery; is that not correct?
16 A. (Mr. Nuñez) Yeah, that's exactly the point
17 of our alleged statement that you just read.
18 Q. Do refineries have more risks than what KML
19 does?
20 (Check that quote.)
21 A. (Mr. Nuñez) Not necessarily.
22 Q. If it's--they don't have more costs to
[Page 1357]
1 operate a refinery?
2 A. (Mr. Nuñez) So, the answer is yes, and
3 that's precisely what we did--the analysis, using a
4 per ton of gold to avoid the contamination of
5 different costs and different profitability margins
6 that would be reflected in between KML and the
7 refiners. But given that they have value-added
8 services and they're more profitable, they would be
9 valued more than a non-refinery simply in an area like
10 KML.
11 Q. So, your analysis, you're comparing a
12 refinery to a non-refinery; that is correct?
13 A. (Mr. Nuñez) We're clear that they're not
14 perfectly comparable and we're saying, because these
15 two companies or the Transaction involved in these two
16 companies, are for entities that have refining
17 capacity, that has more value-added services, the
18 value of those should be higher than KML.
19 Q. Thank you.
20 Did you use any ex post inputs for your own
21 calculations, for your own DCF calculations?
22 A. (Mr. Nuñez) We don't think--I don't think we
[Page 1358]
1 did.
2 Q. In 2019, maybe?
3 A. (Mr. Nuñez) Oh, yes, that's correct. It was
4 pointed out today that there was a year--2019 that we
5 should have--that was an ex post, yes. If that would
6 be--it's a fair point by Mr. Smajlovic, and that
7 should be--that should be corrected.
8 Q. Thank you.
9 In Paragraph 34 of your First Report, you
10 state--give me a few minutes.
11 (Pause.)
12 Q. "KML is a limited liability corporation," it
13 says "corporation," but it's company, "that under U.S.
14 tax laws, pays no Corporate Taxes in the U.S. As
15 such, KML would have no tax liability on any
16 compensation received." This came from both of you or
17 one of you; is that correct?
18 A. (Mr. Chodorow) Yes.
19 (Pause.)
20 Q. In Paragraph 34 of your First Report, and
21 again you state: "KML is a limited liability
22 corporation that, under U.S. tax laws, pays no
[Page 1359]
1 Corporate Taxes in the U.S. As such, KML would have
2 no tax liability on any compensation received."
3 That is correct?
4 A. (Mr. Chodorow) That's correct, but it
5 doesn't mean that the income in the U.S. would be
6 untaxed.
7 Q. It would be taxed on the member level; is
8 that correct?
9 A. (Mr. Chodorow) Correct.
10 Q. Thank you.
11 A. (Mr. Chodorow) And that's why any Valuation
12 Expert must consider that liability.
13 Q. So, you have changed your opinion in your
14 Second Report? You went from, we shouldn't consider
15 tax liability on any compensation received--this is
16 what it says here in your own report, in your Second
17 Report, it's a little different; is that correct?
18 A. (Mr. Chodorow) I don't see any inconsistency
19 in there at all, and I'm happy to explain it, if you
20 would like.
21 Q. Yes, please.
22 A. (Mr. Chodorow) So, there are a couple of
[Page 1360]
1 different things here. The first is, if I'm a
2 potential buyer considering purchasing an LLC, that
3 LLC itself will not pay taxes in the U.S. But the
4 Buyers of that LLC will have a tax burden imposed on
5 them, and so when you do the valuation, the--any
6 willing buyer is going to recognize that they're going
7 to get LLC income that is not taxed at the LLC, that
8 it's going to impose a tax burden on the owner, and so
9 they would discount the FMV to account for that tax
10 liability.
11 So, that's important here. I think what you
12 might be suggesting as a contradiction is the
13 implications of taxation on the Award, to the extent
14 that an award is taxed, it would be taxed and it's
15 received by the LLC, then one would expect that the
16 owners would pay that tax liability, but there--my
17 understanding is they're not Claimants here.
18 Q. That was going to be my subsequent question.
19 A. (Mr. Chodorow) Okay.
20 And so, you know, if that's the case, then I
21 don't--then it would seem inappropriate to gross up
22 for taxes that they may or may not pay on the Award.
[Page 1361]
1 Q. But you do want to discount taxes.
2 A. (Mr. Chodorow) Yes, because any potential
3 Buyer would. The issue here, as I've described as my
4 understanding that the owners themselves are not
5 Claimants here. And so, to the extent that there is a
6 tax burden associated with an award, I think we
7 explicitly had this as an instruction, that that was
8 not to be considered in assessing damages. But I
9 think there is a distinction between that and the idea
10 that somebody would value a company that has income
11 that is taxable without accounting for that tax, which
12 is what happens in Mr. Smajlovic's Second Report.
13 If there is a good legal argument for a
14 gross-up, then that's something that could be
15 considered. It's just my understanding that the
16 people that would be affected on any taxation of the
17 Award are not Claimants. And so, if you do a
18 gross-up, you're making--you're providing compensation
19 to people that are not Claimants.
20 Q. This was taken as an instruction from Legal
21 Counsel?
22 A. (Mr. Chodorow) The fact that the owners of
[Page 1362]
1 KML were not Claimants? I believe it was.
2 Q. And what else?
3 A. (Mr. Chodorow) I was also--I think we also
4 received an instruction that gross-up was not
5 appropriate, but this argument, as just a general
6 matter--what I'm talking about with respect to the
7 impact of the taxation burden on the Fair Market
8 Value, that is irrelevant with respect to whether
9 there is a gross-up or not. If I have an asset that's
10 going to pay me a hundred dollars, and that asset is
11 not taxed at the asset level, but me as the owner,
12 "No, I'm going to have to pay $30 in taxes from owning
13 that asset; I'm only going to be willing to pay $70."
14 And so that's why, even if the taxation
15 burden is not at the corporate level, anybody valuing
16 it is still going to discount--
17 Q. Thank you.
18 A. (Mr. Chodorow) --because it creates a tax
19 burden.
20 Q. My question is if it was an instruction or
21 not. "Yes" or "no." And it sounds like you answered
22 my question, the gross-up was an instruction, and
[Page 1363]
1 other relevant taxation matters were instructions from
2 counsel; is that correct?
3 A. (Mr. Chodorow) I don't think that's correct
4 at all.
5 When I'm talking about the implication of
6 taxes for a pass-through entity, that is an economic
7 opinion. That is not a tax opinion. I believe there
8 were two instructions related to taxes. One, that tax
9 gross-ups were not appropriate in this case, and--but,
10 nonetheless, even if I didn't have that instruction, I
11 would still conclude that it's appropriate to account
12 for the taxes.
13 And then, the other was that the Claimants
14 themselves, they're not eligible to receive
15 compensation.
16 Q. Thank you. So, you did receive an
17 instruction?
18 A. (Mr. Chodorow) On those points, yes.
19 Q. Can you confirm to this Tribunal today
20 whether KML should have paid but did not pay taxes in
21 Perú? Income Taxes in Perú, by KML?
22 A. (Mr. Chodorow) I'm not a Peruvian tax
[Page 1364]
1 expert. I saw Mr. Smajlovic's reference to the PwC
2 Country Tax Guide, which seems--and I would suggest
3 taxes should be paid there, and that seems quite
4 plausible to me.
5 Q. But your answer is you don't know.
6 A. (Mr. Chodorow) But I'm not an expert.
7 Correct.
8 Q. Thank you.
9 Let me ask you a question, and I know one of
10 you has worked with the IRS. I don't remember who?
11 A. (Mr. Chodorow) That's me.
12 Q. Okay. When a company has more expenses than
13 revenues in the country in which they work in, do they
14 pay taxes, Income Taxes once again?
15 A. (Mr. Chodorow) Once again, as a high level
16 matter, no, but tax laws are complicated.
17 Q. Thank you. That's all.
18 A. (Mr. Chodorow) I would note, that if we're
19 talking about the actual world, there may be no
20 profits to tax in Perú. But in the but-for world
21 where KML is very successful, I find it very hard to
22 believe--
[Page 1365]
1 Q. Thank you.
2 A. (Mr. Chodorow) --that under transfer pricing
3 rules there wouldn't be an obligation to pay Peruvian
4 taxes.
5 Q. Thank you.
6 In your First Report, Paragraph 236, you
7 indicated your views that November 30, 2018, the
8 Valuation Date is arbitrary, unsupported, and
9 inconsistent with the evidence; is that correct?
10 A. (Mr. Chodorow) That is correct.
11 Q. Claimant's Expert, Mr. Smajlovic, considers
12 KML to be a going-concern business up to 2018. So, do
13 you agree with his position regarding KML's treatment?
14 "Yes" or "no."
15 A. (Mr. Chodorow) I didn't agree with his
16 statement because it was--I believe it was premised on
17 the assumption that the gold inventories were written
18 off. And when we looked at the Balance Sheet, that
19 did not appear to be the case.
20 Q. So, you have no position on this?
21 A. (Mr. Chodorow) Well, we do have a position,
22 and the position is set forth in this section of our
[Page 1366]
1 Report.
2 Q. What, in your opinion, is the correct
3 Valuation Date?
4 A. (Mr. Chodorow) I think it's very hard to
5 determine in this case.
6 Q. So, you have no position in this?
7 A. (Mr. Chodorow) Our position is that
8 selecting any specific date feels quite arbitrary.
9 Q. You know what you allege is not, but you do
10 not know what it is? Is that what you're telling me?
11 A. (Mr. Chodorow) I'm saying that the premise
12 upon which Mr. Smajlovic reached the conclusion in his
13 First Report that this was the appropriate Valuation
14 Date, didn't seem to be supported by the Financial
15 Statements.
16 Q. Did you see any evidence in those financials
17 to support a different date? You just mentioned that
18 it's due to the financials, then--
19 A. (Mr. Chodorow) As we explained, there was
20 Mr. Smajlovic cites to the decision about when
21 inventories were written off as the basis for when KML
22 became insolvent. And, in this Report, we're not
[Page 1367]
1 expressing an opinion on when that should have been
2 done. We are simply noting that the Financial
3 Statements do not show any such write-off, and that,
4 in theory, at any point in time from, I don't remember
5 the start, but sometime around 2014 and beyond, one
6 could reasonably conclude that the Company was
7 insolvent. And the factors that go into that are just
8 depending upon if and when the inventories should have
9 been written off, and that's something we didn't reach
10 an explicit opinion on. We only know that the Balance
11 Sheet does not show them having been written off.
12 Q. Once again, you have no position on what the
13 correct Valuation Date is?
14 A. (Mr. Chodorow) That's correct.
15 Q. Thank you.
16 In your view, the inventory could have been
17 written off at any time prior to November 30, 2018,
18 and after the seizure of the inventory in 2014; is
19 that correct?
20 A. (Mr. Chodorow) So, we don't reach an opinion
21 about when the inventory could have been written off.
22 I think that's specific to the facts and
[Page 1368]
1 circumstances. We're just saying, if it had been at
2 any point in time from 2014 forward, the Company would
3 have been insolvent.
4 Q. Did you in any of your Reports provide an
5 assessment of the likelihood of KML recovering the
6 inventory?
7 A. (Mr. Chodorow) We did not.
8 Q. Mr. Chodorow, you indicated that you did not
9 review documents confirming the insolvency of KML
10 between 2014 and November 30, 2018; is that correct?
11 A. (Mr. Chodorow) Sorry, where are you
12 referring to?
13 Q. You indicated that you did not review
14 documents confirming the insolvency of KML between
15 2014 and November 30, 2018; is that correct?
16 A. (Mr. Chodorow) So, I think that we have seen
17 no documents confirming insolvency. And even the
18 Balance Sheet as of December 2018 didn't seem to show
19 any write-off of the inventories.
20 Q. But you allege that it should have been
21 written off in 2014 or what is your position?
22 A. (Mr. Chodorow) No, I don't think we ever
[Page 1369]
1 said that. I think we said--I think we simply said
2 that this issue of the insolvency being caused by the
3 write-offs was arbitrary because we didn't see any
4 basis to conclude that the inventories were ever
5 actually written off. But if they had been written
6 off at any earlier date, there would have been an
7 insolvency as of that date.
8 Q. Am I correct in saying that you take a lot
9 of positions of what is incorrect but you don't
10 suggest what is correct?
11 A. (Mr. Chodorow) We express our opinion as to
12 things that are wrong, that's true, and we explain
13 that, based off of the information we have seen, we
14 can't reach a specific opinion, and this applies
15 equally here to other things where there is just
16 simply no data to conduct the analysis, and so there
17 seems to be a speculative nature to some of this.
18 Q. Will you agree with me that the solvency of
19 a company means that it is unable to fulfill its
20 financial obligations?
21 A. (Mr. Chodorow) There are multiple
22 definitions. That can be one of them.
[Page 1370]
1 Q. Yeah, sure. Please.
2 A. (Mr. Chodorow) Sorry?
3 Q. Would you like to read one of them? Is that
4 what I heard?
5 A. (Mr. Chodorow) No, no. I said that what you
6 gave as an example can be--can be an instance of
7 insolvency, that there are multiple definitions.
8 Q. Thank you.
9 So, one of the definitions, would it be
10 insolvency is the ability of a company to meet its
11 long-term debts and financial obligations?
12 A. (Mr. Chodorow) That seems like a reasonable
13 one.
14 Q. Thank you.
15 Would you agree with me that a business
16 could fulfill its long-term obligations by generating
17 profits? Is that correct?
18 A. (Mr. Chodorow) Yes.
19 Q. Obtaining additional financing through
20 equity; is that correct?
21 A. (Mr. Chodorow) Yes.
22 Q. Obtaining additional financing of debt or
[Page 1371]
1 refinancing its existing debt; is that correct?
2 A. (Mr. Chodorow) I would say so, yes.
3 Q. Did you provide an opinion on KML's ability
4 to raise equity financing from its members to continue
5 operating?
6 A. (Mr. Chodorow) We didn't. We noted that
7 there was a commitment that was shown on the Balance
8 Sheet to provide financing by some of the members, but
9 that was never fulfilled.
10 Q. Did you provide an assessment of KML's to
11 raise debt either through its banking relationships or
12 through [Redacted] in order to continue operating?
13 A. (Mr. Chodorow) We--we didn't evaluate that,
14 but it's certain--it seems pretty clear that, that at
15 least until sometime in 2018 that [Redacted] was floating
16 them. With respect to the banks, I think
17 Mr. Smajlovic said that there was never any
18 expectation that they would be providing any kind of
19 actual funding but just, rather, the payment services.
20 Q. So, we can conclude that [Redacted] actually funded
21 KML until 2018; is that correct?
22 A. (Mr. Chodorow) They did provide funding
[Page 1372]
1 until--until then, yes.
2 Q. Thank you.
3 Will you agree with me that, in the case of
4 KML, a part of their assessment of solvency may have
5 included the potential recovery of the seized
6 inventory between 2014 and 2018?
7 A. (Mr. Chodorow) That would be an appropriate
8 thing to consider.
9 Q. Why is that?
10 A. (Mr. Chodorow) Because that's one of the
11 factors that would go into the decision as to whether
12 to do a write-off.
13 Q. And again, you're not an accountant or a
14 CPA.
15 A. (Mr. Chodorow) No, but I know that from
16 using Financial Statements.
17 Q. If they had received the inventory in 2018,
18 would the Company have survived?
19 A. (Mr. Chodorow) I don't know.
20 Q. You looked at their numbers, you looked at
21 their financials. I'm sure you have done this
22 exercise at one point or another.
[Page 1373]
1 A. (Mr. Chodorow) So, if you're asking if
2 they'd received the inventory, would they have been
3 insolvent on--
4 Q. Would they have survived. That's what I'm
5 asking.
6 A. (Mr. Chodorow) I don't know the answer to
7 that question because there are a lot of factors aside
8 from just the receipt of the cash flow for the
9 inventory that would affect their survival.
10 Q. Would 17 million have made them solvent in
11 2018?
12 A. Can you move up for a moment?
13 So, would that have made them solvent?
14 Maybe.
15 Q. "Yes" or "no."
16 A. (Mr. Chodorow) And the reason I say that is
17 because, if, indeed, they received the 17 million and
18 if, indeed, they were obligated to pay off Shipments 3
19 and 5, they would be left with less than that, so I
20 can't quite tell that from here.
21 Q. We're looking at the same chart, are we not?
22 A. (Mr. Chodorow) Yes.
[Page 1374]
1 Q. And what does your chart say in 2018?
2 A. (Mr. Chodorow) Right here it says about
3 negative 12.5 million.
4 Q. So, you can conclude had they received the
5 17 million, they would--or even 13 million, they would
6 have been solvent?
7 A. (Mr. Chodorow) Yeah, if 13 million is
8 greater than that figure, and I think it is, then it
9 would have avoided this insolvency.
10 Q. Thank you.
11 A. (Mr. Chodorow) That's a different question
12 from the survival of the Company, which is what you
13 asked about.
14 Q. That was my question. Thank you.
15 Can we show AS-0105. And again, you have
16 seen this letter from November 14, 2018? You had
17 previously mentioned it before?
18 A. (Mr. Chodorow) That's correct.
19 Q. Here, [Redacted] is seizing any further advances of
20 funds and is requesting an immediate settlement of its
21 outstanding credit balance; is that correct?
22 A. (Mr. Chodorow) That's what the letter says,
[Page 1375]
1 yes.
2 Q. Thank you.
3 Are you aware that KML ceased its operations
4 in 2018?
5 A. (Mr. Chodorow) Yes.
6 Q. Specifically November 2018?
7 A. (Mr. Chodorow) I don't know the exact date.
8 I know that purchasers in Perú stopped earlier in the
9 year, but I think we haven't seen monthly data to show
10 when their last purchases were.
11 Q. This was after April 30th; is that correct?
12 A. (Mr. Chodorow) Yes, the purchases in Perú
13 continued until after then.
14 Q. Thank you.
15 Is it correct to say that KML operated in
16 2014, 2015, 2016, 2017, and 2018?
17 A. (Mr. Chodorow) Yes.
18 Q. Do you agree that KML even generated profits
19 in three of these years?
20 A. (Mr. Chodorow) I would have to go back and
21 look at the Financial Statements for that.
22 Q. But do you remember?
[Page 1376]
1 A. (Mr. Chodorow) I know in some years they
2 did, and some they didn't, but I just don't remember
3 the number and which years those were.
4 Q. Is it your position that even a relatively
5 small chance that the inventories would not be
6 returned was more than sufficient to make KML
7 effectively insolvent?
8 A. (Mr. Chodorow) I think in general, yes.
9 Q. If you could please show AS--or, actually,
10 Brattle Report Paragraph 121. I'm sorry, Second
11 Report.
12 In your Report, you dispute the level of
13 capital investment required to run the business of
14 KML; is that correct?
15 A. (Mr. Nuñez) 121?
16 Q. Yes.
17 Towards the bottom, you provide an example.
18 Do you not remember this part of your Report?
19 A. (Mr. Nuñez) I'm reading the Report.
20 REALTIME STENOGRAPHER: I'm sorry, say it
21 again?
22 THE WITNESS: (Mr. Nuñez) I'm reading the
[Page 1377]
1 paragraph.
2 BY MS. HORMAZABAL:
3 Q. So, this information also came from another
4 Article; is that correct?
5 A. (Mr. Nuñez) Are you talking about the
6 footnote? And what information?
7 Q. The information where it's discussing that a
8 company could have started with only $4,800 in
9 capital.
10 A. (Mr. Nuñez) Yes, I'm assuming you're looking
11 at 152. Could you show me the footnote, please. Let
12 me see.
13 Yep. That's--
14 Q. The same article.
15 A. (Mr. Nuñez) That's that Article, yes.
16 Q. How much debt did the Company you're
17 referring to start off with?
18 A. (Mr. Nuñez) Which company?
19 Q. In Paragraph 121, I'm sorry, you state, "for
20 example, a Company called Minerales Rivero was formed
21 with a capital of only 4,800," and you're using this
22 to state that it's easy to enter this market; is that
[Page 1378]
1 not correct?
2 A. (Mr. Nuñez) That's the purpose, to
3 illustrate that there's very little capital needed as
4 an example, barriers to Entry that you don't need a
5 lot of capital to enter this market.
6 Q. Again, how much debt did that company have?
7 Do you know?
8 A. (Mr. Nuñez) No, I don't have the financial.
9 This is a very opaque market, and I don't know. The
10 4800 could be a combination of equity and debt, could
11 be equity, could be only debt. I cannot tell you what
12 it is, but the 4,800 is the amount of funding that it
13 was required to set up this business. It's not a lot.
14 Q. Again, you don't know how much debt this
15 company had? You don't have any information on this
16 company to--
17 (Overlapping speakers.)
18 Q. I hadn't finished my question.
19 A. (Mr. Nuñez) No, all I know is that according
20 to the Article, you need less than $5,000.
21 Q. From your review of the Financial Statements
22 that KML had a revolving line of credit since 2011; is
[Page 1379]
1 that correct?
2 A. (Mr. Chodorow) I would have to go back and
3 look at when the--I think the line of credit that we
4 saw before was during 2011. I don't remember if they
5 drew on it in that year or not.
6 Q. In any of your two Reports, do you state
7 that those Financial Statements are unreliable? I'm
8 asking "yes" or "no."
9 A. (Mr. Chodorow) I don't remember.
10 Q. But you prepared to come to this Hearing
11 today; is that correct?
12 A. (Mr. Chodorow) I did.
13 Q. Thank you.
14 So, again, in any of your two Reports, do
15 you state that those Financial Statements are
16 unreliable?
17 A. (Mr. Chodorow) I--I don't recall.
18 Q. Do you believe they are?
19 A. (Mr. Chodorow) I think they don't reflect
20 what [Redacted] suggested they reflected with, for
21 example, the write-off. But I don't know if that's a
22 problem with the Financial Statements or it's
[Page 1380]
1 something that--a problem with the stated fact that
2 the inventories were written off.
3 Q. My question is: Have you stated that in
4 your Reports at all?
5 A. (Mr. Chodorow) I don't remember.
6 MR. SMYTH: With respect, I think the Expert
7 has answered the question. It's been asked several
8 times now.
9 MS. HORMAZABAL: We're just asking a
10 question about their Reports. They should know their
11 Reports they prepared to come here today.
12 MR. SMYTH: If you repeatedly ask the same
13 question and get the same answer, with respect, I'm
14 not sure where that gets us.
15 PRESIDENT MCRAE: I think the last question
16 was slightly different. It was asked, have you stated
17 it in your Report.
18 THE WITNESS: (Mr. Chodorow) I don't recall.
19 MS. HORMAZABAL: Thank you.
20 BY MS. HORMAZABAL:
21 Q. Will you agree with me that a company that
22 purchases $1.33 billion's worth of gold in a year
[Page 1381]
1 requires a lot of financing or capital?
2 A. (Mr. Chodorow) It's--there is not a lot of
3 detail on the amount of capital in the Balance Sheets.
4 We understand that they were doing some borrowing.
5 They were funding them either through short-term
6 payables or through short-term debt with [Redacted].
7 Q. So, you do agree with me?
8 A. (Mr. Chodorow) That financing is needed?
9 Yes.
10 Q. That a lot of finance is needed in order
11 to--so, there is a larger barrier to Entry than what
12 you're saying?
13 A. (Mr. Chodorow) Well, so, certainly a company
14 needs financing, but [Redacted] was able to obtain
15 financing--sorry, KML was able to obtain financing.
16 Q. Thank you.
17 Mr. Nuñez, you presented on the topic of
18 taxation of LLC income here today; is that correct?
19 A. (Mr. Nuñez) Yes.
20 Q. You went into detail about a potential
21 windfall to Shareholders of KML by not deducting the
22 taxes?
[Page 1382]
1 A. (Mr. Nuñez) That's correct, yes.
2 Are you referring to the slide I presented
3 today?
4 Q. Yes.
5 A. (Mr. Nuñez) Yes.
6 Q. You also noted that these Shareholders are
7 not Claimants. I just want to make that clear for the
8 record.
9 A. (Mr. Nuñez) I see that my colleague said
10 that--answered that question, yes. They're not
11 Claimants.
12 Q. Thank you.
13 Do you agree, then, Mr. Smajlovic is not
14 calculating damages to Shareholders but to KML LLC, in
15 the lost Enterprise Value--
16 A. (Mr. Nuñez) Mr. Smajlovic is calculating
17 damages on the basis of Fair Market Value. He says
18 that.
19 Q. Okay. So, going back to that same question
20 about the 4,800 in capital, you do note in your
21 footnote that it states that the firm traded
22 250 million allegedly using only 4,800 in capital. Do
[Page 1383]
1 you think that's virtually possible without that?
2 A. (Mr. Nuñez) Can you point me to the figure
3 of the 250 that you're referring to?
4 Q. It's in this footnote right there, 152.
5 A. (Mr. Nuñez) You said 250.
6 Q. On the bottom of the Footnote 152. Do you
7 see the calculations you did there?
8 A. (Mr. Nuñez) Yes, 5 tons of gold valued at 45
9 is worth 225, yes.
10 Q. That is virtually impossible; is that not
11 correct? Does the math make sense?
12 A. (Mr. Nuñez) Can you please show me exactly
13 what I'm trying to illustrate or show here?
14 Q. So, let's go back to the paragraph where you
15 discuss the 4,800 in capital.
16 A. (Mr. Nuñez) Yeah, okay.
17 Q. And then we can scroll down and show your
18 footnote. And does it make sense that with only 4,800
19 a company could purchase 5 tons of gold?
20 A. (Mr. Nuñez) 5 tons of gold. Well, that's
21 what--
22 Q. It sounds like very simple math.
[Page 1384]
1 A. (Mr. Nuñez) Yeah, the math is and that's
2 what I'm saying, 225 million.
3 Q. With 4,800 they were able to purchase
4 225 million's worth of gold?
5 A. (Mr. Nuñez) That's what it says, yeah.
6 Yeah, that's what this would suggest.
7 Q. Have you confirmed this? That doesn't sound
8 correct, does it not?
9 A. (Mr. Nuñez) No.
10 Q. Okay.
11 A. (Mr. Nuñez) We're basing it on the argument
12 in the Article.
13 Q. Thank you.
14 In Paragraph 199 of your Second Report, from
15 my understanding is you attempt to criticize
16 Mr. Smajlovic's comparison of the 5.19 Discount Rate
17 to the 3.8 percent of the WACC actually used by
18 Barrick Gold in a project.
19 Why wouldn't a real company--a company's
20 real WACC not be comparable?
21 A. (Mr. Nuñez) Our criticism or our observation
22 of Mr. Smajlovic was that he says 5.19 percent is
[Page 1385]
1 reasonable because Barrick Gold has a 3.8, and we
2 noted that that's not an apples-to-apples comparison
3 because the 5.19 is a nominal rate, the 3.8 is a real
4 rate, that is net of inflation.
5 Q. What is the Discount Rate you propose?
6 A. (Mr. Nuñez) We, in our corrections, we used
7 the second benchmark than Mr. Smajlovic proposed which
8 is based on the data from Damodaran, which he claims
9 to yield or to be 4.4 percent, we say that the data
10 that Professor Damodaran provides, actually applies
11 8.4 percent.
12 Q. Is your 8.4 percent based off of the mineral
13 industry or the gold mineral? Is that--
14 A. (Mr. Nuñez) In the industry, I think it's
15 precious metals. But what we do is Mr. Smajlovic
16 proposes that as a benchmark. He says I'm going to
17 take the information from Professor Damodaran for the
18 mining, for the precious metal industry. He takes
19 some inputs from there and makes calculations that you
20 cannot do. You either take all the inputs or you
21 don't. You cannot change some of those like
22 Mr. Smajlovic did.
[Page 1386]
1 So, we're saying, if this is to have some
2 meaning, you have to take Professor Damodaran's
3 calculation, and that implies 8.4.
4 Q. And you were able to look at all the risks
5 implied in that particular WACC for a minerals
6 industry? Do the same risks apply to KML's business?
7 A. (Mr. Nuñez) Again, Mr. Smajlovic proposes
8 that as a check on his--on his Discount Rate. If
9 you're going--if you're going to look at the risks
10 that are built in that calculation, you have to take
11 all of that. You cannot just say well, the risks are
12 lower here, but I'm going to take some of that, some
13 of those inputs and change others. That doesn't--it's
14 just not--it just violates financial principles.
15 Q. Okay. We will disagree. I will move on.
16 REALTIME STENOGRAPHER: This is the Court
17 Reporter. Can we take a two-minute break?
18 PRESIDENT MCRAE: That's an imperative, and
19 we take the two-minute break.
20 (Brief recess.)
21 PRESIDENT MCRAE: Perhaps after that break,
22 we could take stock of where we are in terms of
[Page 1387]
1 timing.
2 MS. HORMAZABAL: I believe I have around
3 three lines of questioning, maybe 20 minutes.
4 PRESIDENT MCRAE: Thank you. Then proceed.
5 MS. HORMAZABAL: Thank you.
6 BY MS. HORMAZABAL:
7 Q. Could you please read Paragraph 27 of your
8 First Report, the last sentence of Bullet Point No. 3.
9 I can read it out loud for you.
10 "Competition would be expected to drive
11 rates of return down towards the Cost of Capital under
12 such circumstances." I have learned that Cost of
13 Capital is equal to the Discount Rate and the proposed
14 Discount Rate that you have just provided was
15 8.2 percent; is that correct?
16 A. (Mr. Nuñez) Yes, it's 8.4, but, yes,
17 that's--in our corrections that's the Cost of Capital
18 that we use.
19 Q. Thank you for correcting me. I don't know
20 why I always say 8.2. 8.4.
21 Do you know the--do you know your IRR or
22 your return rate of investment percentage for your DCF
[Page 1388]
1 calculations?
2 A. (Mr. Nuñez) When you mean our DCF, you mean
3 our corrections or Mr. Smajlovic's?
4 Q. Your proposed damages calculations. Do you
5 know what the IRR or the return rate of investment
6 percentage is?
7 A. (Mr. Nuñez) I don't think that we have
8 calculated the IRR on the 8.4.
9 Q. But you do comment here that it should be or
10 should equate to the Discount Rate the Cost of
11 Capital. If I'm not misinterpreting your Paragraph 27
12 that's highlighted there.
13 A. (Mr. Nuñez) What we're saying is that, you
14 know, this is a general point, but it applies here,
15 that if the market is competitive or under
16 competition, the rates of the return that you would
17 have observed would approach the Cost of Capital.
18 That is correct.
19 Q. Can we do a small exercise here with one of
20 the Excel sheets from Brattle?
21 PRESIDENT MCRAE: Do you have any problem
22 with this?
[Page 1389]
1 MS. HORMAZABAL: Any objections?
2 MR. SMYTH: Absolutely not.
3 PRESIDENT MCRAE: Go ahead.
4 MS. HORMAZABAL: Thank you.
5 BY MS. HORMAZABAL:
6 Q. As you see here, we have already switched
7 over the toggles all to Brattle, to reflect Brattle.
8 A. (Mr. Nuñez) Okay.
9 Q. And this took me a while, so bear with me.
10 A. (Mr. Nuñez) And just to be clear, this is
11 our updated--this is from our Second Report, the
12 exhibit that we submitted with our Second Report, that
13 should be 108. Yes, that's correct. I can see that.
14 Thank you.
15 Q. Thank you for confirming.
16 So, if we go to Tab T1, 2, 9, 10, to confirm
17 that by switching all of the toggles, total damages
18 decreased to the 13,731,284 Pre-Award Interest or
19 14,000,328 after including Pre-Award Interest, which
20 are Brattle's total damages; is that correct?
21 A. (Mr. Nuñez) I'm going to take your word for
22 it, but it looks--I'm not going to dispute that.
[Page 1390]
1 That's the number that we have in our Report.
2 Q. I just want to show you so you can see that
3 we've done everything accordingly.
4 A. (Mr. Nuñez) Yes.
5 Q. And then in Tab T6, Cell J25. Are we
6 already in T6? Cell J25, you can also confirm that
7 the numbers correspond, or you can even look at your
8 own report to confirm?
9 A. (Mr. Nuñez) That's fine.
10 Q. If we go to Tab C3, where you, Brattle, have
11 presented various IRR calculations?
12 A. (Mr. Nuñez) Yes.
13 Q. After switching all the toggles in the first
14 step, you can see that in Cell I10 that, in accordance
15 with your inputs, your total Return on Investment is
16 71 percent; is that correct?
17 A. (Mr. Nuñez) That's what it says there, yes.
18 Q. Do you want to correct your initial
19 statement that the IRR should be closer to the
20 8.4 percent that you had initially discussed?
21 MR. SMYTH: Before the Witness answers the
22 question, can we just be clear what you've adjusted in
[Page 1391]
1 the Excel? I think you mentioned you changed some of
2 the toggles. What exactly have you done? Just to
3 help us clarify.
4 MS. HORMAZABAL: I thought I was very clear.
5 Do you want me to go through it?
6 BY MS. HORMAZABAL:
7 Q. Did you understand what I did?
8 A. (Mr. Nuñez) I think I did. I'm going
9 to--the numbers look very similar to what we have in
10 our presentation, that are numbers that I remember, so
11 I'm okay answering the question.
12 Q. We're not trying to--
13 (Overlapping speakers.)
14 MR. SMYTH: If the Expert is happy to answer
15 the question, then go ahead.
16 MS. HORMAZABAL: Thank you.
17 BY MS. HORMAZABAL:
18 Q. So, do you see that 71 percent; is that
19 correct?
20 A. (Mr. Nuñez) Yes.
21 The only observation that I could say here
22 is that the labeling the 71 percent would be the
[Page 1392]
1 annual return implied, in this case would be Smajlovic
2 model adjusted for Brattle inputs, if you will.
3 Q. Okay.
4 A. (Mr. Nuñez) Just to be clear, this is not
5 Mr. Smajlovic's model anymore.
6 Q. Okay. Thank you.
7 A. (Mr. Nuñez) But let me answer it now.
8 71 percent again, this is--71 percent is still higher
9 than the 20 percent that Apple returns.
10 Q. That wasn't the question. The question was
11 you created your own, you made your adjustments, you
12 created your own DCF. What you have stated in your
13 Report doesn't correlate with what you have
14 calculated?
15 A. (Mr. Nuñez) No, that's not--that's not
16 correct.
17 What we said is that we started with the
18 Smajlovic model, and we make reasonable corrections to
19 the extent that we can, and this is the best we can
20 do.
21 Looking at this, what it's clear is that the
22 returns are still higher than the Rate of Return, 8.4
[Page 1393]
1 or 5.19.
2 Q. Mr. Nuñez, what is your Rate of Return based
3 off of your own corrections?
4 A. (Mr. Nuñez) What is your Rate of Return?
5 It's implied, if I take everything that you said, it
6 says that it's 71 percent.
7 Q. Thank you.
8 If we can go to Paragraph 33 of your First
9 Report, and you stated this quite a few times in
10 Paragraphs 210, in Paragraph 234, where you state--the
11 first one: "We were instructed by counsel that the
12 appropriate Pre-Award Interest Rate should reflect no
13 risk of default." Is that correct?
14 A. (Mr. Nuñez) Yeah, that's what it says.
15 Q. And you took the instruction; is that
16 correct?
17 A. (Mr. Nuñez) But then we're saying that even
18 in the rest should reflect potential for default by
19 the Respondent, we do both. We did--we offered that
20 we were instructed that the Pre-Award Interest should
21 reflect no risk of default, but then we provided the
22 two versions as we discussed this afternoon.
[Page 1394]
1 Q. Okay. This is just of the first one. I
2 will show you in another circumstance where you also
3 say you took the instruction.
4 A. (Mr. Nuñez) Yeah, that's our understanding
5 that it should reflect no risk of default.
6 Q. So, you did take the instruction; is that
7 correct? "Yes" or "no."
8 A. (Mr. Nuñez) If that's--yes, that's the
9 instruction.
10 Q. Thank you.
11 Would you say this instruction is
12 over-reaching?
13 A. (Mr. Nuñez) I don't know what you mean by
14 "over-reaching."
15 Q. Again, this is an instruction from counsel,
16 your counsel is instructing you regarding financial
17 matters; is that not correct?
18 A. (Mr. Nuñez) No, I'm not--these are not
19 financial matters. That's an instruction in terms of
20 whether I need to consider there should be a risk of
21 no default. However, we are very clear that we can
22 see there are the two alternatives. Whether there's
[Page 1395]
1 risk of default or not, is a legal matter.
2 Q. So, interest is not a financial matter? Is
3 that what you're telling me?
4 A. (Mr. Nuñez) No, that's not what I'm saying.
5 Is that the instruction here does not reflect
6 financial matters. Whether in the context of the
7 dispute here, as Mr. Chodorow discussed this morning,
8 if the Tribunal decides that there was a risk of no
9 payment of default or not, is a legal matter.
10 Now, depending on what you tell me I should
11 assume, then I can tell you what's the appropriate
12 rate to use.
13 Q. So, the taking of risk to you is not a
14 financial matter, it's a legal matter; is that what
15 you're telling me? I'm trying to understand what
16 you're saying.
17 A. (Mr. Nuñez) In the context of the
18 arbitration, whether--if the Tribunal finds that there
19 is an award, there is a payment to be awarded to KML
20 and whether--that becomes a loan, as we discussed,
21 from Perú to the Claimant, when the liability, when
22 the loan happened determines whether there is a risk
[Page 1396]
1 of non-payment or not. That is a legal matter.
2 So, depending on that, we calculate the rate
3 that is commercially reasonable under that legal
4 instruction.
5 Q. So, you base this--you base this on Legal
6 Counsel's instruction. Do you know of any businesses
7 that pay a Risk-Free Rate?
8 A. (Mr. Nuñez) Any businesses that pay
9 Risk-Free Rate? I don't know. The U.S. Treasury
10 obviously pays a Risk-Free Rate, the U.S. Treasury,
11 and there's some companies that are very low risk AAA
12 companies play very, very close.
13 Q. Is that a business?
14 A. (Mr. Nuñez) No, that's what I'm saying. The
15 Risk-Free Rate is a rate of--the Interest Rate that
16 the U.S. Treasury, basically the U.S. Government, and
17 there are companies, some, very few, that are--that
18 pay very close to the Risk-Free Rate.
19 Q. Is it a reasonable commercial rate what a
20 reasonable business would pay?
21 A. (Mr. Nuñez) But you have to distinguish here
22 that the commercial reasonable rate in this context is
[Page 1397]
1 not about a business. It's that effectively Perú
2 became a--or KML would become a lender to Perú, so you
3 need to think about what is the risk that involves
4 that relationship, whether businesses pay or not,
5 Risk-Free Rate, it's frankly irrelevant to this
6 particular question of whether what's the
7 "commercially reasonable" rate in the circumstance
8 that there is an award, when that liability arised,
9 and understanding that Perú becomes a creditor--sorry,
10 that KML becomes a creditor to KML.
11 Q. So, is it your position that the sovereign
12 debt of Perú is risk-free? I know you talked about
13 the United States.
14 A. (Mr. Nuñez) No, that's not my assumptions.
15 As a matter of fact, we showed this morning that the
16 risk--that the cost of borrowing of Perú slightly
17 higher than the Risk-Free Rate. You can put that in
18 front of me one as of our slides. As a matter of
19 fact, it's slide--Slide 38 of our presentation.
20 Yes.
21 Q. My question is: So, having Perú as a
22 borrower, as a debtor, is risk-free? That's what
[Page 1398]
1 you're telling me?
2 A. (Mr. Nuñez) That's not what I'm saying. The
3 second--
4 Q. If you can clarify that for me, please.
5 A. (Mr. Nuñez) The second bullet here says "if
6 damages were subject to risk of non-payment, then the
7 appropriate commercial rate would be Perú's U.S.
8 dollar borrowing rate which is shown in the blue bars
9 which is clearly higher than the Risk-Free Rate in
10 red," so certainly is not.
11 Q. So, what is appropriate in this case without
12 taking into consideration your legal instructions?
13 A. (Mr. Nuñez) It's not for us. It's a legal
14 matter whether Perú--
15 Q. This is a financial matter, is it not? We
16 just discussed this with you.
17 A. (Mr. Nuñez) The risk--in the market, Perú
18 pays the rate that is in blue in the market. That's
19 the commercial reasonable--I'm sorry, that's the
20 Market Rate that Perú pays to unsecure borrowers in
21 the market. That's the risk--includes--the rate
22 incorporates the risk of default of Perú. That's
[Page 1399]
1 unquestionable.
2 Q. So, having Perú as a debtor is not risk-free
3 as you're showing me here; is that correct?
4 A. (Mr. Nuñez) Yes, that's--unequivocally.
5 Q. Thank you.
6 How about Post-Award Interest? Do you
7 recall what your position was?
8 A. (Mr. Nuñez) I don't think that we commented
9 on Post-Award Interest.
10 Q. In your Opening Statement, you stated that a
11 certain Interest Rate would not give KML an incentive
12 to collect; is that correct?
13 A. (Mr. Nuñez) Sorry, can you--can you show me
14 on the screen?
15 Q. Did you say that in your Opening or not?
16 A. (Mr. Nuñez) On the Opening today?
17 Q. I will repeat the question.
18 In your Opening, you stated that a certain
19 Interest Rate would not give KML an incentive to
20 collect--is that correct?--collect the Award.
21 A. (Mr. Chodorow) That's correct. We did make
22 that statement, and that was the statement that, if
[Page 1400]
1 the Pre-Award Interest--
2 Q. Thank you.
3 A. (Mr. Chodorow) --Rate exceeds the Cost of
4 Capital, then there is an incentive to delay payment.
5 Q. Thank you.
6 Is it correct that Perú can voluntarily pay
7 an award at any time?
8 A. (Mr. Chodorow) That's a legal matter that I
9 can't opine on.
10 Q. I mean, you've told me that you have been in
11 this international arbitration realm for a while--both
12 of you, actually--can any debtor pay voluntarily at
13 any time?
14 MR. SMYTH: The Expert has already testified
15 that this is a legal matter on which he can't opine
16 on, so we don't see the sense in further questioning
17 on this point.
18 MS. HORMAZABAL: This is a financial matter.
19 MR. SMYTH: I believe he just testified it's
20 a legal matter.
21 MS. HORMAZABAL: I would beg to differ.
22 PRESIDENT MCRAE: What's a legal matter, I
[Page 1401]
1 don't think it can depend on the assessment of the
2 Expert as to what is a legal matter, but it seems to
3 me you're asking a question about their entitlement to
4 pay, which sounded to me rather like a legal matter.
5 MS. HORMAZABAL: If any person has a right
6 to pay at any time. Be it a person, a country--
7 PRESIDENT MCRAE: If you were to ask--
8 MS. HORMAZABAL: They mentioned that there
9 was an incentive for KML to collect--to not collect.
10 So I'm just asking a legal--I mean, the financial
11 expert, if it is correct that Perú can voluntarily pay
12 an award at any time.
13 It goes to whether what appropriate interest
14 would be applicable?
15 PRESIDENT MCRAE: But, I mean, the question
16 of whether or not you're entitled to pay at any time
17 strikes me as being a legal question. The question of
18 whether you would have an incentive to pay or not,
19 that strikes me as a financial question.
20 BY MS. HORMAZABAL:
21 Q. What is more important? Is it the incentive
22 for Perú to pay or for KML not to collect?
[Page 1402]
1 A. (Mr. Chodorow) I--I don't know the answer to
2 that question. We don't get involved in enforcement
3 proceedings, and so I don't know what the rules are
4 with respect to enforcement. If you're saying which
5 is stronger, they can both have incentives in theory,
6 depending upon how the Pre-Award Interest Rate is set.
7 That's one of the reasons that we say it's appropriate
8 to make sure that the risk scenario that is legally
9 determined, whether it's that the damages are deemed
10 to have been incurred in the past and there was a
11 liability arising from the moment that happened, or if
12 the liability only attaches once an award is issued.
13 That's the distinction between the Risk-Free
14 Rate--right?--it's a scenario where the Tribunal says
15 Perú doesn't owe anything at all--
16 Q. We are asking about Post-Award. I don't
17 know if--
18 A. (Mr. Chodorow) So, we didn't opine on that.
19 I think that the appropriate Post-Award Rate would be
20 consistent with the Perú-U.S. dollar borrowing rate.
21 Q. Does a higher Interest Rate provide an
22 incentive for Perú to pay or not?
[Page 1403]
1 A. (Mr. Chodorow) It would provide an incentive
2 to pay as well as penalize Perú.
3 Q. Thank you.
4 MS. HORMAZABAL: We have nothing further.
5 PRESIDENT MCREA: Thank you very much. Do
6 you have any redirect?
7 MR. SMYTH: We do have a couple of very
8 short questions. And I promise we'll be brief, I
9 don't want to test the Tribunal's or Mr. Kasdan's
10 patience.
12 BY MR. SMYTH:
13 Q. So, you were asked about the revenues and
14 volumes generated from outside of Perú; and, in that
15 regards, if I could just take you to Paragraph 119 of
16 your First Report. If that could be projected on the
17 screen, that would be helpful.
18 In the meantime, I can just read you the
19 sentence that I was drawing your attention to.
20 So, here it says: "However, the basis for
21 claiming losses outside of Perú as a result of the
22 Measures is even more speculative than the alleged
[Page 1404]
1 losses within Perú."
2 Would you care to expand on that?
3 PRESIDENT MCRAE: You're rather difficult to
4 hear.
5 MR. SMYTH: I'm not close enough to the
6 microphone.
7 BY MR. SMYTH:
8 Q. We're looking at the second sentence of
9 Paragraph 119, and it says: "However, the basis for
10 claiming losses outside of Perú as a result of the
11 Measures is even more speculative than the alleged
12 losses within Perú."
13 Would you care to expand on that statement?
14 MS. HORMAZABAL: We did not ask that
15 question. The redirect needs to be limited to our
16 cross-examination.
17 MR. SMYTH: With respect, questions were
18 asked about the volumes that were sourced outside of
19 Perú and the Expert's opinions were challenged on
20 that, so we consider that this question falls within
21 the scope of the cross and, therefore, redirect.
22 PRESIDENT MCRAE: When you're asking to
[Page 1405]
1 expand on something, presumably there will be
2 something that was said in the course of the
3 cross-examination. And I'm actually am not quite sure
4 when you say ask to expand on this, what the context
5 was because you're asking him to expand on something
6 in the written pleadings, as I understand.
7 MR. SMYTH: So, the questions were around
8 the instructions that the experts received with
9 respect to volumes outside of Perú, and I believe the
10 suggestion was that the conclusions in relation to
11 those volumes were purely based on an instruction.
12 However, I do not think that accurately reflects
13 Brattle's testimony, so I was asking them to expand on
14 that point.
15 PRESIDENT MCRAE: Okay. Well, you put it
16 slightly differently now, and that's a slightly
17 different question, so go ahead.
18 THE WITNESS: (Mr. Chodorow) Yeah, yes, so
19 we deem that to be very speculative, and I think I
20 mentioned this before, but there is only one single
21 number or--that goes into this analysis, and that's
22 the split of--the assumed split of 53 percent outside
[Page 1406]
1 of Perú, 47 percent inside. There is no analysis as
2 to the growth potential, the competition, there is no
3 identification of which countries this would come
4 from, and it's very inconsistent with the fact that
5 between 2012 and 2013, I believe, there was fairly
6 limited growth that Mr. Smajlovic's model assumes
7 would all of a sudden become very rapid in 2014 and
8 beyond. And so we deem that to be very speculative.
9 BY MR. SMYTH:
10 Q. Thank you.
11 And you were also asked some questions about
12 a revolving facility between [Redacted] and KML, and there
13 was also some discussion about long-term debts. Would
14 you consider a revolving facility to be long-term debt
15 or not?
16 A. (Mr. Chodorow) It could be. It would depend
17 on the terms. This one, I note that the debt
18 associated with--that was taken out from [Redacted] appears
19 as a current liability on KML's Balance Sheet, and a
20 current liability is liability that is due within less
21 than one year under accounting definitions, and that's
22 something that Mr. Smajlovic highlighted as well in
[Page 1407]
1 his Report about the timing of one year separating
2 long term and current liabilities.
3 Q. Thank you.
4 MR. SMYTH: No further questions,
5 Mr. President.
6 PRESIDENT MCRAE: Thank you.
7 Do you have any recross?
8 MS. HORMAZABAL: No. Thank you.
9 PRESIDENT MCRAE: Thank you.
11 ARBITRATOR FERNÁNDEZ: I have a very general
12 question because, at the outset, at the beginning of
13 your intervention and the intervention and the answers
14 that you provided during the cross-examination,
15 questions were asked about the methodology, and we are
16 experts in the legal field. I do not have any
17 background in accounting. This is personally
18 speaking, and I would like for you to explain to me
19 since a legal practitioners have a methodology that is
20 well-accepted, and we know how far to go and there are
21 no surprises, but here we heard about the cost-based
22 method--he's not understanding?--
[Page 1408]
1 THE INTERPRETER: Can you hear me? This is
2 interpretation into English. One, two, one-two
3 testing. Yes, can you hear me, sir?
4 THE WITNESS: (Mr. Chodorow) Yes, I can.
5 ARBITRATOR FERNÁNDEZ: So, let me repeat my
6 question.
7 At the beginning of your answers during the
8 cross-examination, something was said about the
9 methodology used in the reports that we heard today of
10 the accounting methodology, which, as we heard, it is
11 the cost-based method. We're also heard about the
12 cash-flow method, so the question is something that
13 has already come up in other arbitrations, and there
14 is a significant ICSID case, in particular Tecmed,
15 that discussed it because whether using one method or
16 the other, what is the outcome, and also given the
17 methodology used in mining, what would be the proper
18 method or whether it is whimsical to choose the method
19 because the method yields a result.
20 So, I would like for you to focus or to tell
21 me, someone that is a layperson here in the area of
22 accounting, what are the options--what are the
[Page 1409]
1 consequences of those options?
2 THE WITNESS: (Mr. Chodorow) Thank you.
3 So, briefly. So, there are the three
4 methodologies that are recognized in valuation.
5 There's the Market Method, which I think both Brattle
6 and Mr. Smajlovic agree is not--is not useful here
7 because there aren't good comparables, so that leaves
8 us with the Cost Method, and the DCF, and they both
9 have weaknesses in this case. One is that the Cost
10 Method that looks at historical or sunk investment
11 generally, as it's applied in arbitration, is it
12 doesn't necessarily reflect Fair Market Value because
13 the value of an asset can change after you've made the
14 investment.
15 And in mining cases--and I wouldn't
16 characterize this as necessarily a mining case because
17 it's more about the output, but in mining cases, when
18 you have early-on projects where it's difficult
19 to--it's difficult to figure out, say, for example,
20 you don't have reserves or resources, generally the
21 methods like CIMVal suggest the use of the Cost
22 Method. And that is an accepted method, but it has
[Page 1410]
1 the short-fall that it doesn't necessarily reflect
2 Fair Market Value.
3 Now, in this case, we didn't apply the Cost
4 Method. Again, in general, we have concerns about its
5 reflection of Fair Market Value, but we do have the
6 data to do it, and those are the inputs that go into
7 the Internal Rate of Return calculation, and I don't
8 have those in front of me, but I think we see from the
9 Balance Sheet that the debt and equity investments in
10 the Company--and this includes all debt and equity
11 investments and debt that would be reflected, and it's
12 accounting for debt that would be reflected in
13 Mr. Smajlovic's forecast, that ends up being about
14 $3 million. So, we think the Cost Method would come
15 in lower than the DCF for that reason. But I would
16 have to go back and check the numbers, but I think
17 those are about right.
18 And the Discounted Cash Flow Method, again,
19 we tend to prefer it in most circumstances. But here
20 it has the speculative nature that we discussed
21 because we don't have business plans, this was a
22 market that there's been debate about whether a
[Page 1411]
1 disrupted strategy means a disrupted market. We think
2 it would because Suppliers are changing their actions
3 and it changes the reliability or profitability in the
4 market. There is no--there's no good means to
5 forecast the ending Market Share that KML would
6 receive, and so all these things lead us to believe
7 that even the DCF is speculative, but it's hard to
8 weigh one against the other because neither--one is
9 not a measure--sorry--of Fair Market Value, and the
10 other is attempting to measure Fair Market Value, the
11 other being the DCF, but it's something that is very
12 imprecise and unreliable in the facts and
13 circumstances here.
14 So, unfortunately, I think there's not a
15 good answer. I think the DCF is a more--generally
16 would provide higher damages, given the amount of
17 investment that we've seen in this business.
18 I hope that is helpful.
19 ARBITRATOR FERNÁNDEZ: Yes, but the question
20 is whether, at the end of the day, by applying one
21 method or the other, the variation in the outcome is
22 significant or not.
[Page 1412]
1 THE WITNESS: (Mr. Chodorow) I think it
2 would--it would probably range from, you know, roughly
3 3 million of historical investment brought forward to
4 the date versus the roughly 13 million, and so I think
5 that the--I think that they end up being within a
6 relatively narrow range. I can't do the calculation
7 off the top of my head, but probably about 5 million,
8 maybe a little more for the sunk cost approach, and 13
9 or 14 million for the DCF-based approach.
10 ARBITRATOR FERNÁNDEZ: Thank you very much.
11 PRESIDENT MCRAE: Well, thank you very much
12 to both of you for coming and giving your testimony
13 today. So, thank you, you are now relieved from your
14 obligations, and we now have to start whatever we have
15 left for the day and planning for tomorrow.
16 (Witnesses step down.)
17 PRESIDENT MCRAE: It's certainly clear that
18 we are starting at 1:00 tomorrow. So, I'll get that
19 out of the way.
20 MR. DÍAZ-CANDIA: Yes, sir.
21 PRESIDENT MCRAE: That's clear for both
22 sides? Okay. So, that's set aside for tomorrow.
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13 PRESIDENT MCRAE: Yeah, yeah, yeah.
14 Okay. Is there anything else we should
15 consider? Mr. Díaz-Candia?
16 MR. DÍAZ-CANDIA: Yes. I would like to
17 point out that today at lunch I was fed a dish called
18 "Peruvian chicken," and I think that's a
19 micro-aggression from the Centre.
20 PRESIDENT MCRAE: We were not served
21 Peruvian chicken at lunch. I don't know whether
22 that's unfair or whether it's a balance that we
[Page 1415]
1 weren't given it.
2 MR. DÍAZ-CANDIA: For the record, that's
3 obviously a joke. I risk reading the Transcript out
4 of context.
5 PRESIDENT MCRAE: Okay. Well, thank you
6 very much. We will then suspend today and start again
7 at 1:00 tomorrow.
8 (Whereupon, at 5:58 p.m., the Hearing was
9 adjourned until 1:00 p.m. the following day.)
[Page 1416]
I, David A. Kasdan, RDR-CRR, Court Reporter,
do hereby attest that the foregoing English-
speaking proceedings, after agreed-upon
revisions submitted to me by the Parties, were
revised and re-submitted to the Parties per
their instructions.
I further certify that I am neither counsel
for, related to, nor employed by any of the
Parties to this action in this proceeding, nor
financially or otherwise interested in the
outcome of this litigation.
Signature
DAVID A. KASDAN