Century Mining to sell $66 million gold-based financing

Century Mining (CMM-V) has joined a growing group of mining companies that are trying to weather the financial storm through alternative financing solutions.

The junior gold producer plans to raise US$66 million in a loan from institutional investors that will be repaid over five years with physical gold produced from its Lamaque underground mine.

The mine is about 500 km northwest of Montreal and 2 km east of the city of Val D’or in Quebec.

The financing will eliminate a “significant portion of short-term liabilities” and improve Century’s financial position, the company declared today. It will also enable the management team to raise money by committing “just a small percentage” of the gold that will be mined at Lamaque between 2009 and 2019.

The gold-based financing also means the company can avoid the significant dilution that is often associated with convertible debt and other conventional financing methods, and allows it to side-step “excessive interest rates” typical of high-yield debt facilities.

Century maintains that the combination of shares and warrants “will result in less than an additional 15% dilution to current shareholders.”

The junior selected Toronto-based Octagon Capital Corp. as the lead agent to place the structured financing with qualified institutions. Management expects the financing to close by the end of February.

Under the financial plan, Century will sell 15,000 units, each priced at $4,400. Each unit will be made up of 600 shares of the company, 1,000 purchase warrants and 5 troy ounces of gold. Each such ounce is deliverable on Nov. 30 in each of 2011, 2012, 2013, 2014 and 2015.

The lion’s share of the money raised (74%) will be used to develop the Lamaque project. About 19% of it will be used as working capital and to pay down short- and long-term liabilities, and the remaining 7% will be spent on the fees and costs associated with closing the transaction.

“The Board of Directors and management consulted financial advisors and reviewed numerous alternatives for the Lamaque project, including mergers, joint ventures, high-yield debt and other facilities with senior lending institutions,” Margaret Kent, Century’s president and chief executive, said in a statement.

“Based on these consultations, management determined that in a robust gold market and with a positive outlook for gold, it is in the best interests of Century’s shareholders to minimize dilution with a gold-based financing alternative.”

Century is working towards restarting the Lamaque mine at Val D’Or, which has been on care and maintenance since July 2008 because the company lacked the capital it needed to properly expand the operations and achieve reasonable commercial returns.

But the mine has an 80-year history and has produced 9.4 million ounces of gold at a head grade of 5.2 grams gold per tonne.

Currently Lamaque has a National Instrument 43-101 proven and probable reserve of 7.74 million tonnes grading 4.56 grams gold per tonne for total contained gold of 1.13 million ounces.

Measured and indicated resources tally 3.69 million tonnes grading 5.27 grams gold per tonne for 624,201 ounces of contained gold. In addition, Lamaque has an inferred resource of 17.84 million tonnes grading 4.83 grams gold per tonne for 2.83 million ounces of contained gold.

Lamaque’s surface infrastructure is in place and fully serviceable including a nearly new, state-of-the-art, 1.25 million tonne per year CIP plant, which was upgraded in 2001.

The mine is permitted at a rate of 1,200 tonnes per day but has been on care and maintenance since July 2008, due to the lack of available capital needed to properly expand operations and achieve reasonable commercial returns.

The Lamaque underground gold mine in the eastern end of the Abitibi Greenstone Belt is host to massive gold bearing quartz veins, dykes and shears along the historically productive Abitibi Gold Belt.

According to a January 2009 due diligence report, the mine will produce over 1 million ounces of gold at a cash cost of USD$421 per ounce and has a net present value (NPV) at a 10% discount rate of USD$88.2 million. The report noted that over a 10-year mine life, Lamaque will generate US$168 million in free cash.

According to the report, funds are needed to dewater the mine, refurbish the Sigma #2 shaft, widen the existing ramp, develop the North Wall and Bedard dyke zones, drill the west extension of
the Bedard dyke and purchase/lease the necessary underground mining equipment.

In addition to the Lamaque mine, Century’s wholly-owned subsidiaries own an 82.6% interest in the San Juan mine, in southern Peru. San Juan produced 70,401 oz. gold in 2006 and 63,124 oz. gold in 2007.

At mid-day in Toronto, Century’s shares remained unchanged at 7.5¢ per share.

The Blaine, Washington-based company has a 52-trading range of 1¢-38¢ per share and has 169.1 million shares outstanding.