‘Smart money’ still in gold, Red Eagle CEO says

VANCOUVER — Red Eagle Mining (TSXV: RD; US-OTC: RDEMF) looks poised to pour its first gold in 2016 following a $19-million private placement that CEO Ian Slater calls one of the “toughest” he’s ever done.

The company is breaking ground on an underground mine at its San Ramon deposit, 70 km north of Medellin, Colombia. Red Eagle is a pioneer of sorts, since it’s one of the only North American companies to advance an asset to development after Colombian President Juan Manuel Santos triggered a flurry of foreign investment in 2011 by declaring mining one of his “four locomotives” for economic growth.

The company received its mine permits for San Ramon in March 2015, but the financial overhang remained an issue, since Red Eagle needed US$15 million to unlock a US$60-million secured credit facility under an agreement with private-equity outfit Orion Mine Finance.

“The conditions are pretty terrible. I mean, the day we closed our financing the TSX Venture hit a low we haven’t seen in something like twenty years. It was the toughest financing we’ve ever done, and some of the bankers in town said they hadn’t seen a company with our level or market capitalization raise this kind of money for a few years now,” Slater commented during a phone interview with The Northern Miner.

The financing will be completed in two tranches with US$13.7 million locked up at press time, and $5.6 million scheduled for completion near the end of August.

One major hurdle for Red Eagle was that it needed to find an investor to jump into the deal. The company has a loyal shareholder in Liberty Metals & Mining, but the subsidiary of Boston-based Liberty Mutual Insurance did not want to exceed a 19.9% equity stake.

The answer to the problem came during Red Eagle’s search for a mining contractor. The company settled on Stratcon GyM, which is part of the Peru-based Grana y Montero Group. During contract discussions it became apparent that Stratcon was also interested in a Red Eagle equity placement.

“The financing was led by Liberty and Ross Beaty, but we needed to find a new investor, and that was really the hard part. We’d been selecting all our mine contractors over the past eighteen months, and we ended up going with Stratcon,” Slater elaborated.

“It’s pretty funny because during my conversations over financings and contracts, it became apparent we were following a similar path to what Alex Black and his team at Rio Alto had done in Peru a number of years ago, and now they’re obviously part of Tahoe Resources (TSX: THO; NYSE: TAHO). The project financing for La Arena was done through Orion and Stratcon built and operated the mine. If you look back, Rio had around the same market cap as us when that deal went through.”

Under the financing Red Eagle will issue 72 million shares priced at 27¢ per share. Liberty would pick up 19 million shares, with Stratcon accounting for another 34 million shares. The company also issued Orion 4.1 million shares pursuant to a previous adjustment under a subscription agreement and 5 million non-transferable bonus warrants. Each warrant is exercisable for one share at 27.5¢, for five years.

The financing gives Red Eagle access to US$80 million in development capital, which will cover the US$74-million capital expenditure estimated under a 2014 feasibility study at San Ramon. The project would be a traditional underground operation with concentrate regrinding and conventional carbon-in-leach on combined float tails and reground concentrate, making gold doré with 96% recoveries.

Red Eagle says San Ramon could crank out 50,000 oz. gold annually over an eight-year mine life at cash costs of US$560 per oz. At US$1,100 per oz. gold the mine would feature a US$52-million post-tax net present value at a 5% discount rate and a 32% internal rate of return. The company anticipates net cash flow of US$70 million and payback on initial capital in 1.7 years.

The mine plan is based on 2.4 million proven and probable tonnes grading 5.2 grams gold per tonne for 405,000 contained oz.

“We’d love to resume property-wide exploration this year, but I don’t think it’s really something the market would like, though that can always change,” Slater continued. “We’re not worried about feeding the mill since our reserves are only on half the shear zone down to 200 metres. Once we have the decline at year-end it will be easier to drill underground, and we have open mineralization at depth.”

San Ramon sits on Red Eagle’s 100 sq. km Santa Rosa property within the Antioquia Batholith near the town of Santa Rosa de Osos. High potassic alteration, anomalous geochemistry and drill results reportedly confirm — and coincide with — historic mine workings at the site that pre-date the 17th century. Outside of San Ramon the company has identified more drill targets across property.

Red Eagle has also turned an eye towards a Colombian acquisition. The company is in the midst of an offer for junior CB Gold (TSXV: CBJ; US-OTC: CBHDF) and its Vetas gold asset.

The project lies 400 km northeast of Bogota, and hosts 1.2 million indicated tonnes grading 3.25 grams gold and 3.2 grams silver for 123,000 contained oz. gold and 121,000 contained oz. silver. Inferred resources total 2.6 million tonnes averaging 3.42 grams gold and 11.49 grams silver for 289,000 contained oz. gold and 969,000 contained oz. silver.

“We spoke with CB Gold around a year ago and proposed a merger, but they didn’t agree on valuation. We really like the asset and think it has real potential to be a mine,” Slater explained. “It obviously wasn’t an ideal time for us since we were in the midst of construction financing, but it would have been gone. They had an offer in place, but we thought it was worth more than that. A lot of our shareholders are also investors in CB, and they were asking us to make an offer — and CB’s largest shareholders also approached us.”

Red Eagle was inclined to take a shot at an acquisition in mid-June when CB proposed a transaction under which it would be acquired by another company for US$2 million in cash and a 3% net smelter return royalty capped at US$15 million. The offer is from OM.L Trading, which is a private company controlled by CB shareholder Michelle Navarro Grau, who holds an 11% equity stake.

Red Eagle rival bid offers CB shareholders 0.162 of a share for each share held. That values CB at 5¢ per share, or US$8.4 million, representing a 46% premium on the junior’s 20-day, volume-weighted average trading price at the time of the offer.

On July 14 CB’s board of directors recommended that shareholders reject Red Eagle’s offer — open until Aug. 5 — after concluding that it “fails to provide adequate value and is an attempt to acquire without offering adequate consideration to shareholders.” CB Gold closed at 3.5¢ per share at press time, with 167.5 million shares outstanding and a $5.9-million market capitalization. 

A third bid for CB Gold emerged on July 27, in the form of a friendly offer from Batero Gold (TSXV: BAT) (see p. 3).

Red Eagle has traded within a 52-week window of 17¢ to 36¢, and closed at 28.5¢ per share at press time. The company has 92.4 million shares outstanding for a $26.3-million market capitalization.

“Our shareholders are all convinced that
the medium- to long-term gold price will be there. If you look at the smart money in Vancouver, and where people like Lukas Lundin and Ross Beaty are investing, it tends to be gold-focused,” Slater commented.

“I really think we will end up being a takeover target. We’re set to be the first modern gold mine in Colombia. Now it’s a question of us putting San Ramon into production. We’ve been approached by mid-tier gold companies looking for value growth in these markets, but we haven’t seen a valuation that makes sense. I think once we build up production we’ll get there.”