Royalty sister buys stake in Cripple Creek

Euro-Nevada Mining (EN-T) has offered to buy a majority interest in Golden Cycle Gold (GCC-P), minority owner of the Cripple Creek-Victor joint venture, west of Colorado Springs, Colo.

Euro intends to buy a 54% interest in the junior from a group of shareholders at US$13.50 per share for a premium of 80% over the share price.

The purchase allows Euro a platform to acquire the remaining stake in Golden Cycle through a cash offering to the board of Golden Cycle. The offer would be made at the same price per share, at a later date.

Golden Cycle, which owns a 33% stake in the Cripple Creek-Victor joint venture, trades on the Pacific Stock Exchange at between US$7 and US$7.50 per share.

Euro-Nevada President Pierre Lassonde says the proposed acquisition is consistent with his company’s strategy of acquiring interests in high-profile deposits.

Historically, the Cripple Creek district has produced 22 million oz. gold since it was discovered in 1891. The Cripple Creek-Victor joint venture operates the Cresson mine, which began producing in February 1995 with Independence Mining as operator and 67% owner.

Cripple Creek-Victor recently reported a 55% increase in recoverable ounces at Cresson, bringing the total to 2.7 million oz. gold. Proven and probable reserves also rose, by 50%, to 4.3 million oz. (within 126 million tons grading 0.034 oz. per ton). The mineral inventory at the 10,000-acre property stands at 11.9 million oz. within 400 million tons grading 0.029 oz. per ton. The increase in reserves follows an exploration program. By the end of 1998, the joint venture had completed 4,000 drillholes, totalling more than 2.1 million ft.

Mineralization is hosted in a Tertiary-aged diatreme complex intruded into Precambrian gneisses and granites. Gold is associated with pyrite.

Independence plans to mine from four open pits: Cresson Main, South Cresson, East Cresson-Altman and Wild Horse.

Golden Cycle estimates the Cresson mine will crank out 243,000 oz. in 1999 at a cash cost of US$185 per oz., though Independence refused to speculate on its production forecast.

Lassonde sees another advantage to the acquisition: Independence is coming under new ownership. In December 1998, South Africa’s Anglogold (AU-N) announced it would pay US$550 million for all the gold assets of Luxembourg’s Minorco (MNRCY-Q), which owns Independence.

“Having the world’s largest gold producer as a partner was definitely an incentive in proposing the deal,” Lassonde says.

He adds that Golden Cycle’s shareholders would benefit from greater liquidity under Euro-Nevada. The royalty company can afford to pay a higher premium for the company because of the small number of outstanding shares.

Golden Cycle has only 2.1 million shares, and for an investment of US$27.8 million, Euro would receive a 33% stake in 4 million oz. of reserves.

Euro would also acquire a third of the debt of US$152 million owed by the Cripple Creek joint venture, though Golden Cycle has US$4 million in its treasury. In all, Euro’s cost of the transaction amounts to US$74.5 million.

Regarding debt, Lassonde is confident he can refinance the current loan, which carries an interest rate of 9.75%. “A lower interest rate could really free up a lot of cash flow at the mine,” he says.

At a higher gold price, cash flow would naturally increase. At US$300 per oz., the internal rate-of-return is 9.1%; at US$325, it rises to 12.6%; at US$350, to 15.9%.

Operators at the Cripple Creek-Victor joint venture are evaluating the feasibility of doubling production to 450,000 oz. annually. At this rate, the already low cash cost would drop to US$160 per oz. In 1998, the mine produced 230,366 oz. at a cash cost of US$179 per oz.

“This resource base is comparable to Midas,” Lassonde says. The Midas joint venture, in which Euro and its royalty sister, Franco-Nevada Mining (FN-T), each owns a half-interest, operates the Ken Snyder gold-silver mine in northern Nevada. At Cripple Creek, Euro would hold a one-third interest in 12 million oz., whereas, at Midas, it holds a half-interest in 8 million oz.

Lassonde is also hopeful that gold recovery at Cripple Creek can be improved. Currently, recovery from heap leaching is 67%. “Higher recovery essentially means free ounces, or a lower cash cost,” he says.

The transaction is subject to due diligence by Euro and compliance with regulatory requirements. Euro expects the initial offering for the majority stake to close by July. The board of Golden Cycle will subsequently evaluate the offer for the remaining share in the company.