Collapse of Echo Bay deal has Flanagan group scrambling

A cloud has been cast over the Toronto-based Flanagan McAdam group of gold mining companies following the recent collapse of a property-share swap agreement with Echo Bay Mines (TSE). The surprise decision by Echo Bay to cancel a major refinancing agreement with Muscocho Explorations (TSE), Flanagan McAdam Resources (TSE) and McNellen Resources (TSE) has left the trio scrambling to locate new financial backing.

J.T. Flanagan, president of McNellen Resources, said the companies are working in co-operation with their major secured creditor to find “an alternative financial arrangement.”

He said several outside organizations have indicated an interest in the companies’ two underground gold mines and surrounding properties in the Wawa area of northern Ontario.

Officials of the companies are currently meeting with prospective new partners, he said, but in the meantime, operations at the Magino and Magnacon gold mines are continuing on a reduced basis.

Share prices of all three juniors plunged to record lows after Echo Bay said it would not proceed with the refinancing deal which would have seen its one-third share interest in Muscocho, McNellen and Flanagan McAdam exchanged for direct operating interests in the Magino and Magnacon mines. Now, Echo Bay will retain its one-third share interests in the three juniors.

McNellen and Muscocho each holds a 50% interest in the Magino mine where reserves are estimated at 1.6 million tons grading 0.15 oz. gold per ton. The Magnacon mine is owned 50% by Flanagan McAdam with Muscocho and Windarra Minerals (TSE) each holding 25% interest. Magnacon hosts reserves estimated at 1.47 million tons grading 0.18 oz.

Shares of Muscocho have traded recently at a low of 8 cents while shares of McNellen have sunk to lows of 8 cents within a 52-week range of 8 cents- $1.70. Meanwhile, shares of Flanagan McAdam have fallen to a low of 5 cents within a 52-week range of 2 cents-$3.10.

Echo Bay decided to walk away from its $76-million investment in the three juniors after a reassessment of ore reserves and gold grades at the high-cost underground mines.

Echo Bay recently reported a first- quarter net loss of US$37.9 million or 38 cents per share after making a US$42.4 million writeoff of its investment in the Muscocho group. A US$20 million writeoff was made in the previous quarter. Shares of Echo Bay have reached lows of $13.50 recently after trading in a 52-week range of $12.28-24.88.

Windarra, which retains a 25% interest in the Magnacon mine, said it is confident that with proper financing and management the gold mine could be operated on a profitable basis. Windarra is 26.4% owned by Hemlo Gold (TSE).

Meanwhile, shares of Toronto- based McAdam Resources (TSE) have also plunged to a low of 7 cents after the company reported lower than expected results from bulk samples taken at its Spud Valley gold property on Vancouver Island, B.C.

McAdam also reported it is “seriously undercapitalized and may not be able to carry on its business affairs.” That announcement followed demands by Muscocho Explorations for an immediate repayment of a $1.9-million loan owed to it by McAdam, which is 12.5%-owned by Muscocho. However, McAdam said it doesn’t have the funds available to make the payment to Muscocho. The Spud Valley property and mill were pledged as security for the loan and Muscocho has the right to appoint a receiver.

Due to a conflict of interest, three members of McAdam’s board who are also Muscocho directors have tendered their resignations. McAdam also has about $1 million of unsecured trade creditors which it is unable to pay.

Results from the test milling program at Spud Valley are as follows: Tons sent to mill 1,662 Tons rejected prior to milling 675 Tons milled 947 Recovered oz. (gravity con.) 86 Recovered oz. (flotation con.) 43 Total recovered oz. 129 Oz. in tailings 12 Calculated mill head grade (oz/t) 0.149 Assayed mill head grade (oz/t) 0.120 Overall recovery (%) 91.3%

McAdam said the overall recovery grade was less than expected due to low gold grades in the material that was processed from the Linton north vein on the 7th level. The company does not have the funds to continue bulk sampling.

On May 7, The Toronto Stock Exchange suspended the common shares of McAdam from trading on the basis of the company’s financial position.