Echo Bay swapping shares for mines in Muscocho deal

Equity interests in three associated companies are being traded by Echo Bay Mines (TSE) for partial ownership of two fairly new gold mines in the Wawa area of northern Ontario.

The large North American gold producer has reached an agreement with Muscocho Explorations (TSE), Flanagan McAdam Resources (TSE) and McNellen Resources (TSE) whereby Echo Bay will exchange its approximate one-third ownership in each of the three companies and $10 million in cash, for a 37.5% ownership of the Magnacon mine and a 50% ownership of the Magino mine.

Echo Bay will become the operator of both mines. The deal, subject to regulatory and other approvals, includes Echo Bay gaining the same interests in property surrounding the Magnacon operation and in claims adjacent to the Magino mine. Completion of the agreement is expected by about April 30.

Echo Bay owns 34% of the fully diluted shares of Muscocho, 32.5% of Flanagan and 32.8% of McNellen. Together, the three Muscocho- associated companies own 100% of Magino and 75% of Magnacon. (Windarra Minerals (VSE) of Vancouver owns the other 25% of Magnacon.)

During the first half of 1988, Echo Bay agreed to spend $50 million to earn its stakes in the three companies. Most of that money was spent to develop, first, the Magino mine about 40 miles northeast of Wawa, and then the Magnacon mine about 30 miles west of Wawa, in the Mishibishu Lake area.

Startup problems have plagued both mines; Magino was officially opened in October, 1988, and the Magnacon at the end of June, 1989.

“The Muscocho group has an impressive record of finding gold in eastern Canada. But both Magnacon and Magino have taken much longer than planned to be brought into production. As operators of the properties, we would hope our extensive production experience would prove beneficial to both projects,” Echo Bay President John Zigarlick said.

For 1989, Echo Bay produced about 700,000 oz. gold from its Canadian and American operations.

Magino and Magnacon were originally expected to produce a combined 75,000 oz. in 1989; actual output was about 23,000 oz. Echo Bay reports Magnacon is operating at an annualized rate of about 50,000 oz. and Magino at an annualized rate of about 25,000 oz.

Reserves at Magnacon currently stand at 1.4 million tons grading 0.25 oz. gold per ton. At Magino, reserves of 1.9 million tons grading 0.25 oz. have been outlined by drilling to a depth of 500 ft.

The agreement calls for Echo Bay to loan the three companies a total of $5 million for one year upon closing of the deal. Muscocho will receive $2 million, while Flanagan and McNellen will receive $1.5 million each.

Muscocho reports a working capital deficiency resulting from the capital requirements of the two new mines.

“The company has been placed in a difficult financial position after experiencing delays in commercial production at both Magino and Magnacon,” said J.T. Flanagan, president of Muscocho and McNellen.

“Throughout 1989, lower bullion prices, weak equity markets and startup problems at the mines have precluded the sourcing of additional capital. It’s now imperative we reduce our financial liabilities.”

Flanagan, a veteran of the mining industry along with partner Jack McAdam, president of Flanagan McAdam, says the loan facility will be used to pay suppliers and reduce bank debt.

Muscocho, which plans to close its small Montauban gold mine near Quebec City, Que., in the near future because of depleted gold ore reserves, will retain a 25% interest in Magino and 12.5% in Magnacon.

Flanagan, which will receive $7.5 million from Echo Bay in addition to the loan facility, will retain a 25% interest in Magnacon, which will produce a projected 70,000 oz. in 1990.

McNellen will receive $2.5 million from Echo Bay in addition to the loan facility and will retain a 25% interest in the Magino mine. (Annual output of 40,000 oz. was projected by the Magino owners when the mine opened, based on a production rate of 400 tons of ore per day.)

Echo Bay says it expects to write down its investment in the Muscocho group by about US$20 million for the fourth quarter of 1989.

The writedown, it says, will reduce Echo Bay’s investment from about C$76 million (the cost of the Muscocho group common shares to Echo Bay) to an amount approximating the current realizable value of its holdings in the three companies. The company says the writedown will have no effect on cash flow.