Lake Shore takes big stake in IDM

VANCOUVER — IDM Mining (TSX: IDM; US-OTC: RVRCF) has taken a step toward production at its Red Mountain gold project — located 15 km northeast of Stewart, B.C. — after cleaning up its balance sheet and closing a private placement that will fund it through the permit process it hopes will end by late 2016.

IDM overcame a financial hurdle when it negotiated the payment of a legacy debt that has haunted its balance sheet for the past two years. The issue dates back to a 2012 option agreement with Lake Shore Gold (TSX: LSG; NYSE-MKT: LSG), when IDM was known as Revolution Resources.

The company optioned Lake Shore’s Mexican exploration portfolio andwas on the hook for a series of balloon payments, despite shifting its focus to Red Mountain.

“This has been in plan since we initially restructured the company last year. The history is that there was a top-of-the-market option deal to acquire the Mexican assets that our current management team didn’t negotiate,” president and CEO Robert McLeod said during an interview.

“The agreement essentially wasn’t tenable due to the balloon payments, which we kept having to book on our financial statements. Firstly, we needed to get rid of that overhang. The second element is a bit of serendipity surrounding Red Mountain. Lake Shore’s CEO, Anthony Makuch, used to work for Lac Minerals back when it had the project, and he’s always been a fan,” he added.

The companies negotiated an amended purchase and sale agreement to settle the remaining $5-million payment obligations, wherein IDM will issue Lake Shore 7.5 million shares and 20 million share purchase warrants priced at 20¢, and valid for five years.

Lake Shore followed up by participating in an IDM private placement, wherein it picked up another 2.5 million shares priced at 10¢ per share. The Ontario-based producer has emerged as an equity holder in the junior with a 19.9% stake.

The arrangement was part of a broader private placement where IDM raised $2 million to see it through permitting at Red Mountain. The company filed its preliminary economic assessment at the project a year ago.

The mine would crank out 55,500 oz. gold annually over a five-year life at average cash costs of $543 per oz. Assuming US$1,250 per oz. gold and US$20 per oz. silver, Red Mountain features an after-tax $58-million net present value at a 5% discount rate, and a 32.8% internal rate of return.

“For a lot of Canadian projects we’re really looking at the foreign exchange rate and how that’s affected our gold-price assumptions. The economics at Red Mountain remain tremendous in Canadian dollars, if you look at our sensitivities,” McLeod pointed out. “The other thing is that we did a bit of drilling last year, and we’re working on a new resource estimate that incorporates a lot of historic areas in zones we didn’t include in our most recent estimate.”

IDM has just submitted its project description report to the British Columbia Environmental Assessment Agency and the Canadian Environmental Assessment Agency, which kick-starts the regulatory process for a 1,000-tonne-per-day underground gold mine that could pour first gold within two years.

The company’s environmental baseline team is finishing seasonal fieldwork, including: surface and groundwater hydrology, archeological assessments, and geohazard, fisheries and wildlife studies. First Nation and community engagement and project engineering studies are underway in conjunction with the environmental assessment process.

“When you look at it historically, the area around Stewart is right up there with Timmins in terms of being one of the most pro-mining places on the planet. Northwestern B.C. is one of the most potentially prolific development areas around, with Seabridge Gold’s (TSX: SEA; NYSE: SA) KSM project and Pretium Resources’ (TSX: PVG; NYSE: PVG) Brucejack project,” executive chairman Michael McPhie said.

“It’s a positive place to permit a mine and it has great geology and infrastructure, and I think a lot of companies would like to be involved. So from our perspective it’s not only that Lake Shore wanted to settle that debt with us, but also to invest into our company,” he continued.

The deal follows hot on the heels of Lake Shore’s $24.5-million offer for junior Temex Resources (TSXV: TME; US-OTC: TMXRF) in late July, though it marks the gold producer’s first step outside its home territory in Ontario. Under the proposal, Temex shareholders would receive 0.105 of a Lake Shore share, which works out to 13¢ per Temex share at the time of the offer.

IDM has traded within a 52-week range of 9¢ to 56¢, and closed at 10¢ per share at press time. The company has 68 million shares outstanding for a $6.8-million market capitalization.

“Given Lake Shore’s expertise in underground mining it’s another source for us, as we move down the path to development. Currently it’s just an investment, but it’s a positive working relationship, and Lake Shore has investor relationships behind it that we might benefit from moving forward,” McLeod said.