Echo Bay to control Muscocho

Edmonton-based Echo Bay Mines (TSE) recently took another step in a growth strategy which has seen gold production increase 56% from 1986 levels by acquiring a major interest in the Muscocho group of companies.

Under an agreement, Echo Bay will invest $50 million in Muscocho Explorations (TSE), Flanagan McAdam Resources (TSE) and McNellen Resources (VSE) in an investment comprising $26.5 million in common shares and $23.5 million in convertible debt securities.

When the notes are converted, Echo Bay becomes the largest single shareholder in Muscocho with 6.85 million shares (21%), and Flanagan McAdam with 3.7 million (23.1%). While Echo Bay will hold 5 million McNellen shares (27.1%), 87-year-old Charles McNellen retains the largest block of shares in the latter company. Considered a “perfect marriage” by Merrill Lynch analyst Catherine Gignac, the agreement combines the mine management skills of Terry Flanagan and John McAdam with Echo Bay’s business savvy.

It also gives the major Canadian gold producer a foothold in the eastern Canada gold industry which it didn’t have before and an interest in around 100,000 additional oz of the yellow metal by 1989.

Most of that output will come from the Magino gold property near Wawa, Ont., and the Magnacon project at Mishibishu Lake where about $40 million is needed to bring the projects into production.

A joint venture involving Flanagan McAdam Resources (50%), Muscocho Explorations (25%) and Windarra Minerals (VSE) (25%), Magnacon is being guided to a first- quarter 1989 startup date. Magnacon reserves

After spending $16.2 million, Magnacon reserves now stand at 1,440,580 tons averaging 0.24 oz gold per ton. That figure includes a 319,040-ton block of proven reserves averaging 0.40 oz.

But construction work on a 600-ton-per-day mill, surface plant and a 30-mile hydroelectric line has yet to be completed before commercial production can begin at Magnacon.

At the Magino joint venture, where a production decision is expected within two months, equal partners McNellen and Muscocho are planning to run a 20,000-ton bulk sample through a 400-ton-per- test mill.

While the mill is still in the tuneup stage, test batches are scheduled to run through within two to three months.

Drill-indicated reserves at Magino stand at 1.9 million tons grading 0.25 oz to a depth of 500 ft. Reserves could increase if tonnage below 500-ft is included.

“Since Echo Bay has been under a lot of pressure to make an acquisition, the Muscocho deal will please a lot of their shareholders,” said Gignac.

While the Edmonton company extracted 500,507 oz gold in 1987 from seven mines, its main operations are based in Nevada and the Northwest Territories. McCoy mine

The McCoy heap leach mine in Lander Cty., Nev., contributed 90,788 oz from open pit operations in 1987 while production at the Lupin mine at Contwoyto Lake, N.W.T., amounted to 193,105 oz.

However, the agreement is not a recipe for the eventual absorption of the Muscocho Group into one of Canada’s biggest mining outfits.

“It contains lots of measures to prevent a takeover,” said Muscocho President Terry Flanagan. The two groups set a Canadian precedent by including a “standstill” agreement prohibiting Echo Bay from increasing its holdings in the three companies to a maximum 33% for an additional six years.

Regardless of how the clause will work, the positions of Flanagan and McAdam remains unchanged. They retain options on 1,028,000 of Muscocho’s 22.9 million outstanding shares and options on 694,000 of Flanagan McAdam’s 10.7 million shares outstanding.

“We feel that Echo Bay can give helpful advice, but Muscocho has the team to do the whole job,” said Echo Bay President John Zigarlick. “We can participate in their growth without diverting our own people from current projects,” he said. “They are buying management as well as an interest in the properties,” said Flanagan who claims he will have money left over to develop other properties in the Muscocho portfolio.

“Now that the deal has been signed, it gives us seven years to show what we can do with the company and we can get on with the business of bringing mines into production and developing new ones,” he said. Under the agreement, if the notes are not converted, they are repayable over a 5-year period with interest at prime rate.