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Shocking fire sale for bankrupt gold miner

Commentaries & Views

Frank Giustra's West Red Lake Gold Mines (WRLG.V) is acquiring the Madsen gold mine in Red Lake, Ontario from Pure Gold Mining & Sprott Resource Lending for ~9% of its prior investment and ~2% of its Dec 2020 peak market cap.

After the transaction, WRLG will emerge as Madsen's debt free owner with a C$59.4M market cap @ $0.35/share w/ $19.9M cash. ~1K words - 5 min read On December 16, 2020, Pure Gold Mining (“PGM”) celebrated delivery of the first ore to its mill. The Madsen mine operated successfully 1938-1972, but PGM was the first to get it back into production. In a news release, its CEO declared a new chapter in the company's evolution as Canada's newest gold miner, and expressed excitement for stakeholders, the Red Lake community, and team. PGM shares reached an all time high of $3.08 that day, for a $1.246 Billion market value ($3.08 x 404,405,033 shares), $1.388 billion including debt. A first gold pour followed on Dec 30. But the top was in.

The mine commissioning struggled with Q1 production 70% below expectations. Costs doubled as the Company built more stopes to access higher grade areas. Grappling with debt covenants, PGM raised cash at increasingly lower share prices: $23M in Sep '21 @ $1.05, then $25M in Mar '22 @ $0.53, then $31M in May '22 @ $0.15. A new CEO appointed Jan ‘22 resigned four months later for health reasons. Liabilities exceeded $231 million at Sep 30, '22 when a leased rock crusher broke down-the final straw. PGM's Madsen mine was put on care and maintenance, and the company entered bankruptcy protection in October. It was an open secret PGM was for sale long-before its bankruptcy process began. But nobody stepped up for it. Too many red flags, not enough conviction. Perhaps buyers wanted to avoid catching a falling knife, or didn't know how cheap it would ultimately get. Enter Frank Giustra, a Vancouver-based mining investor who was watching PGM from the sidelines.

In 2022, Giustra acquired an 18.1% stake in West Red Lake Gold Mines (TSXV:WRLG), a $20M market cap exploration company with a promising gold asset near Madsen called Rowan, with a .8M oz Inferred gold resource. Prospectors descended on Red Lake, Ontario in the 1880s for its high-grade ores. It has been one of Canada's most productive gold mining camps. Red Lake was Goldcorp's base of operations when it merged with Giustra's Wheaton River in 2005. Through acquisition, the combined company grew into the world's largest gold miner by 2011. But Red Lake is a notoriously difficult to mine region with irregular grades. It's seen a number of other failures. Rubicon Minerals went bankrupt in 2015 after spending $700M. In 2021, Evolution Mining acquired it for $343M. Evolution ($6.7B A$ market cap) is the big player in Red Lake now, having acquired Newmont Goldcorp's operations there in 2020 for $375M plus 100M in contingency payments and making substantial investments in the camp. Evolution also owned 6.53% of WRLG before the deal. But Red Lake has had recent successes too.

In 2021, Kinross paid $1.7B for Great Bear Resources, 5 years after the Dixie gold mine discovery, which had little infrastructure compared to PGM. Over $350M has been invested in Madsen according to WRLG's new presentation. There are also $273M in tax write offs, a brand new 800 tpd processing facility, underground ramp access, and 2 million ounces of high-grade gold in the deal. WRLG says PGM underinvested in drilling and underground access. WRLG will explore more and study the project before they contemplate mining again. The deal terms are quite aggressive considering PGM's past investment and valuation heights. WRLG has agreed to pay $6.5M cash, issue 28.46M shares (worth about $10M), grant a 1% NSR, and make up to US $10M in deferred payments for 100% of Madsen. WRLG is raising $20-25M through Canaccord at $0.35 per share. The deal is more than 2X over-subscribed according to friends in the know. In February, WRLG director Ryan Wemark, along with advisor Rob McLeod and VP of Exploration Will Robinson, visited Madsen and led due diligence.

Weymark, a mining engineer in his mid-30s and founder of FUSE Advisors, saw potential for a successful restart through staged studies from PEA to PFS and FS, and underground development to open up higher grade areas. His quiet confidence encouraged Giustra and the Company to make a bid. Career mining executive Tom Meredith, Chair & Interim CEO of WRLG, said the path forward involves maintaining a strong focus on community benefits and investment in people, among other things. The mining industry is a brutal world even on its best days. With the constant fluctuations in commodity prices, excruciating operations, and ever-changing communities, it's not an easy business to thrive in. No credible miner takes pleasure in the failure of their peers, as they know all too well that it could just as easily happen to them. It is a business where success often follows failure.

The industry is open source-built on a foundation of shared knowledge, with each generation building upon the work of its predecessors. However, it's uncommon for a recently failed asset to reemerge in the public market so quickly. WRLG's acquisition of PGM, still fresh in the minds of investors, will be met with scepticism. To restore confidence, the Company must carefully manage expenses, attract top talent, and take the necessary time to rebuild its reputation. But WRLG is acquiring a remarkable land package in a top gold camp with a valuable, high-grade gold deposit at a shockingly low price. The project has already managed to navigate significant obstacles in the form of social licensing and permits, a notable accomplishment in this industry. In fact, the scrap value of the infrastructure alone may be worth more than the price of the acquisition, not to mention the potential value of the deposit.

There's an old mining adage that the best place to find a new mine is in the shadow of a headframe. In WRLG's case the best place to find a new mine may be in the shadow of a brand new mill and $350M of prior investment.

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