News – 21-JAN-08

As family-owned Cusac Gold Mines (CQC-V, CUSIF-O) ends an era in the Cassiar mining district of north-central British Columbia, up-and-comer Hawthorne Gold (hgc-v, hwthf-o) wants to start another.

Hawthorne and Cusac have agreed to merge in a transaction worth about $20 million, with Cusac contributing the low-grade, 1-million-oz. Taurus deposit, the fully permitted Table Mountain gold mine and 300-ton-per-day mill, and the early stage Taurus II deposit, all located on its 175-sq.-km Cassiar property.

Under the agreement, which must be approved by Cusac shareholders and debentureholders by Apr. 15, Cusac shareholders will receive one Hawthorne share in exchange for 19 Cusac shares, as well as stock options and warrants.

The shares will be converted based on Dec. 17 prices, when Hawthorne closed at $1.70 per share and Cusac at 9. Each Cusac convertible debentureholder will receive one Hawthorne share for each $2 of principal and interest owed. Cusac has about $3 million in debt. On closing, Hawthorne will issue about 6.15 million shares in total.

Hawthorne will take on Cusac’s $6-million agreement with American Bonanza Gold (BZA-T, ABGFF-O) for 70% of the Taurus deposit. The deal was signed last June and is payable by December 2009. Another $3 million must be paid at the start of production or with the completion of a positive feasibility study.

It’s a bittersweet time for Cusac, says David Brett, Cusac’s CEO. The company was started by his father, Guilford, about 40 years ago. Brett’s sister Lea and brother Dan have also been involved with Cusac, which has held the Cassiar property since the 1970s.

They watched the Cassiar community fade to a ghost town when a 40-year-old asbestos mine was shut down in 1992. Cusac remained, making use of deserted apartment blocks as a residence for staff.

“There’s a lot of family pride in the project, that we had carried it forward and kept it alive,” David Brett says.

The Cusac story isn’t completely over: Brett will join Hawthorne in a senior management position and Cusac will continue to exist as a private company. And Brett says he’s happy to see that development will continue at Cassiar.

Historically, about 424,000 oz. gold has been mined from the Cassiar area.

Cusac saw the Table Mountain mine through several bouts of production beginning in the mid-1980s and then again from 1993 to 1997, when it produced about 60,000 oz. gold, and finally, in late 2006/early 2007.

The last breath of life came just before the merger with Hawthorne.

Shortly after production began, the Rory vein — which was being mined — turned out to be more complex than originally thought, leaving the company short on gold and cash.

“We were depending on Rory revenue to fuel development of the next vein,” Brett says.

The company shifted gears to the East vein, despite having less money than desired to speed development along. Then, in September, Cusac ran into a water flow problem in the decline being developed.

“That was the last straw,” Brett says. “We were heading into winter and we decided to shut down development and look at new options.”

The $3 million in convertible debentures maturing at the end of November was also weighing heavily on the company.

“You can see that’s somewhat of a motivator,” Brett says. “In our original mine plan, we expected to mine out both veins and have good cash flow to retire the debt well in advance, but it did not work out that way.”

Enter Hawthorne Gold. Yes, the company only had its initial public offering last April, but after building several successful companies over the last few decades, founders Richard Barclay and Michael Beley knew what they were looking for.

Barclay and Beley recently put together the iron ore company Adriana Resources (ADI-V, ANARF-O), but are better known for founding Bema Gold in the 1970s, and Eldorado Gold (ELD-T, EGO-X) in the 1990s. Bema was bought a year ago by Kinross Gold (K-T, KGC-N) for $3.5 billion.

“Mike Beley and I have been working together for close to forty years,” says Barclay, who serves as Hawthorne’s president and CEO, while Beley sits on the board of directors. “We’ve spent the last twenty-five years building gold mining companies — that’s what we do best.”

They scooped up former bcMetals vice-president of operations Michael Redfearn (bcMetals was taken over by Imperial Metals [III-T, IPMLF-O] early last year) and added Patrick McGrath from Adriana as Hawthorne’s chief financial officer.

And in the short time since Hawthorne’s birth, the company’s portfolio has grown from one property to three.

The most notable is a joint venture with Eureka Resources (EUK-V, ERKAF-O) at the Frasergold property in the Quesnel Trough area of central B.C., 100 km east of Williams Lake. Hawthorne can earn up to 60% on the deposit by spending $3.5 million, making payments totalling $175,000 and completing a feasibility study by April 2010.

The deposit has a historical resource of 363,000 oz. gold. Previous exploration has uncovered a 10-km zone containing anomalous gold values from soil and rock geochemical surveys done in the 1980s. As well, more than 35,000 metres of drilling in 328 holes and 298 metres of underground drifting have been completed. Hawthorne can also earn 70% on the adjoining ground from Dajin Resources (DIJ-V, DJIFF-O) by spending $500,000 by November 2010.

Hawthorne has an option to earn 60% in the early stage Carruthers Pass property in north-central B.C., about 70 km south of Northgate Minerals’ (NGX-T, NXG-X) Kemess gold-copper mine.

Assuming the deal with Cusac goes through, the Cassiar property will receive a lot of the attention it has lacked over the years.

“In the past, Table Mountain has always been hand to mouth,” Barclay says. “It’s a classic undercapitalized gold mine.”

Hawthorne has budgeted $20 million for exploration on all its properties for the next 12 to 18 months. The first step will be a $3-million private placement at $1.60 per unit, with each unit consisting of one share and half a warrant. A Cayman Island-based fund, Praetorian Offshore, will own about 11% of Hawthorne when the financing closes.

Barclay sees Table Mountain having long-term, high-grade potential of five to 10 years. He’s planning on production starting as soon as enough development work is completed, hopefully, within a year.

Nearby Taurus was explored in 1995 and 1996 for large-scale, bulk-tonnage mineralization and more than 350 holes have been drilled on the property. Cusac began its own 25-hole drill program in June 2007 after it received a positive technical report from Wardrop Engineering. Inferred resources were estimated at 32.4 million tonnes grading 1 gram gold per tonne.

Cusac saw promising results. An 80-metre intersection returned 1.15 grams gold per tonne from 3 metres depth, followed by 11 metres grading 2.11 grams gold starting at 100 metres. Another hole returned a 6-metre intersection grading 4.17 grams gold from 4 metres depth.

Barclay says the area has a well-known geological environment, but all the veins have been treated separately. Now it’s time to put the puzzle together, he says.

Cassiar is exactly what Hawthorne was after.

“Now, it’s just a matter of developing resources,” Barclay says. “We look for good projects that are low risk and have had a lot of money spent on them.”

But Barclay and Beley aren’t finished building Hawthorne.

“We are looking for projects that can add to the synergies of Hawthorne and move us towards being a multiple-operation gold producer,” Barclay says.