Granges Seeks To Overturn Share Purchase By Hemlo Gold

In a surprise move, Hemlo Gold Mines (TSE) picked up approximately 9.8% of the outstanding common shares of Granges Exploration (TSE). Owned 51% by Noranda Inc. (TSE), Hemlo Gold paid $9.1 million for the acquisition, based on the purchase of 2,239,000 shares at $4.00 per share.

Battered by prevailing market conditions and production difficulties at its joint-ventured Tartan Lake mine in Manitoba, Granges has traded as low as $3.35 in recent weeks. Hemlo Gold’s purchase is an obvious bargain, at the very least in a relative sense when compared to Granges’ 12-month high of $15.78.

“A lot of juniors are down right now and it does provide opportunities,” said Wil Barbour, vice-president and chief financial officer of Hemlo Gold. Asked if the company would be increasing its stake in Granges, Barbour said it was still an open matter. “It’s an investment at this point, and we may or may not continue.”

Although speculation abounds that the company was primarily interested in Granges’ 50% stake in a large 20,000-acre property in the heart of the Mishibishu Lake gold camp where Hemlo Gold has been particularly active of late, Barbour denied this was the primary motivation.

“Granges is a good, medium- sized exploration company with a very good portfolio of properties, including some in the Mishibishu Lake area, but also including some in the U.S. and elsewhere in Canada. And they also have a very good management group,” he said.

A special meeting of Granges’ board was called last Wednesday to review the situation, and according to Michael Muzylowski, president, the company will be seeking to overturn the share purchase made by Hemlo Gold.

The decision was made based on a review of the Schedule 13D filed by Hemlo Gold, Noranda Inc. and Edper Enterprises with the Securities and Exchange Commission in Washington. Granges said its board was advised that the purchase violated a confidentiality agreement under which Hemlo Gold had agreed that it would not purchase any shares of Granges prior to June 22, 1989 without the written consent of Granges.

“No such consent has been sought or given,” said Muzylowski.

Granges said it has given Hemlo Gold 48 hours to rectify the breach of contract to its satisfaction, failing which it will “initiate appropriate legal proceedings”. The company said it had also received an investment propos al from Hemlo Gold.

Granges explained that in June, 1988, as operator of the Mishi joint venture owned equally by Granges and MacMillan Energy Corp. (VSE), it was requested by MacMillan to furnish data on the property to Hemlo Gold, which was then contemplating an investment in MacMillan.

Granges said this information was provided only after a confidentiality clause was signed which, amongst other things, bound Hemlo Gold not to acquire any shares of Granges for a period of one year without its written consent.

Muzylowski said the holdings of the Mishi joint venture are “well located and cover the favorable greenstone belt over a strike length exceeding 15 miles”. Six separate gold-bearing zones have already been located on the property, he adds, and have been tested by diamond drilling. The Main zone area is estimated by the company to have in-place geologic reserves of 1.1 million tons grading 0.17 oz gold per ton (cut grade).

“Hemlo’s actions,” Muzylowski said, “are a clear attempt to acquire an interest in these significant holdings at a price which does not reflect the long-term value of either this particular property or Granges as a whole.”

Earlier this year Granges said it engaged Nesbitt Thompson Deacon Inc. to approach a number of “carefully selected” senior mining companies which might be interested in acquiring share of the company by way of private placement and which might be interested in “establishing a longer term relationship” with the company. Granges said these companies all signed confidentiality agreements in similar terms to that by which Hemlo is bound.

“The purchase made by Hemlo,” said Muzylowski, “has clearly interfered with Granges’ ability to conclude such an arrangement with any other company.”

A spokesman from Granges told the Northern Miner the company strongly believes the Mishibishu Lake property was the main motivation for the purchase.

“We have one of the biggest land holdings and some of the best ground in the Mishibishu Lake camp,” said John Toporowski of Granges. “But also we have the heap leaching expertise in the U.S. through Hycroft, while Hemlo Gold has a stake in Viceroy which also has a heap leach project in the U.S., so there may be some connection there. We also have some very good exploration projects, but another motivation, of course, was the price.”

Hemlo Gold has been on a bit of a buying spree in recent years. It now has a 12% equity interest in Viceroy Resource Corp (VSE), plus an exploration agreement with them to earn into a 50% interest in ground surrounding their main property in California, a potential heap leach operation now at the permitting stage.

“We’re just an investor in Viceroy which is doing very well on its own,” Barbour said. “There is no connection to Granges’ U.S. interests.”

Hemlo Gold has also steadily increased its position in Central Crude Ltd. (VSE) to 18%, in addition to a 60% interest in that company’s Eagle River claims in the Mishibishu Lake camp.

When asked if Hemlo Gold was considering, or had acquired a position in any other companies in the Mishibishu Lake camp, Barbour said: “None that we have to disclose publicly yet anyway.”