In what has been described as a “win-win situation” by both parties,
Dayton shareholders will receive 1.76 shares of Pacific Rim for every single share held. Pacific Rim will be the surviving entity after the merger, with 78.3 million shares outstanding.
Both Pacific Rim and Dayton recognize that there has been a paradigm shift in the gold industry in recent years: the primary driver for share value is now profit margins and no longer the number of ounces produced. Management of Pacific Rim has been motivated by the market valuations of
“Over the last few months, Pacific Rim had been seeking potential new projects that we felt could fit into this new gold industry environment,” says that company’s president, Catherine McLeod-Seltzer. “We quickly identified El Dorado as having the potential to become a high-grade, low-cost underground operation that could command higher-than-average market multiples, and we proceeded to negotiate a friendly takeover of its owner, Dayton Mining.”
Adds Thomas Shrake, the company’s chief executive officer: “The merger of Pacific Rim with Dayton creates a well-financed exploration and development company seeking to fill a market niche.”
Both McLeod-Seltzer and Shrake will continue their current positions in the amalgamated company. The board of directors will consist of three Pacific Rim nominees and two Dayton nominees, with Dayton President William Myckatyn serving as non-executive chairman.
“The near-term immediate cash from Pacific Rim and the technical expertise that comes with their management group will enable Dayton’s El Dorado project to be advanced at a much faster rate than would otherwise be possible,” says Myckatyn. “The rationalization of overheads will also result in a stronger entity going forward.”
McLeod-Seltzer agrees, and adds: “We believe that the strength of the merged company will be greater than the sum of the two companies separately.”
Pacific Rim’s assets consist of US$3.4 million in cash and receivables. The company recently sold its Diablillos silver-gold project in Argentina to
With the shutdown, in late 2000, of Dayton’s Andacollo mine in Chile and the planned phase-out of its 49%-owned Denton-Rawhide mine in Nevada over the next few years, it’s critical that El Dorado be advanced as quickly as possible, says Myckatyn. Pacific Rim will provide the cash infusion to advance El Dorado in the near term. Over the longer haul, the projected cash flow from the Denton-Rawhide mine will finance the growth of the company.
The proposed merger is subject to approval by shareholders of both companies and applicable regulatory bodies. Shareholder meetings are scheduled for April 3, 2002.
For the year ended Dec. 31, 2001, Dayton reported a net loss of US$3.4 million (or 11 per share), compared with a loss of US$8.7 million (32 per share) in 2000, which excluded a US$22.7-million writedown of Andacollo. The company’s share of production from Denton-Rawhide amounted to 49,366 oz. gold and 356,277 oz. silver at a cash production cost of US$247 per oz. Dayton anticipates its share of production from Denton-Rawhide in 2002 will be 48,300 oz. gold and 392,500 oz. silver at a cash production cost of US$218 per oz.
Denton-Rawhide
Denton-Rawhide is an open-pit, heap-leach mine 190 km southeast of Reno. Kennecott Minerals, a division of London-based
Open-pit mining activities at Denton-Rawhide will cease in late 2002. Dayton’s 49% share of metal production between 2002 and final closure in 2006 are forecast to total 109,000 oz. gold and 979,000 oz. silver. Future production will come from leaching of stockpiles and ongoing releach activities. Over the next three years, the Rawhide mine is projected to produce US$8.1 million in cash flow, based on a gold price of US$270 per oz. For every US$10-per-oz. swing in the gold price, cash flow is affected by about US$1 million.
In 2001, cash flow from operations was negative US$2.4 million (8 per share), due primarily to exploration expenditures of US$600,000 on the El Dorado property, administrative expenditures of US$1.1 million and US$800,000 relating to Denton-Rawhide. In 2000, cash flow from operations was a negative US$2.2 million (8 per share).
At the end of 2001, Dayton had US$1.5 million of unrestricted cash and US$3.2 million of restricted cash, which is held in trust for closure obligations at Denton-Rawhide.
Andacollo
The Andacollo gold mine in Chile was permanently closed in December 2000. To facilitate the closure and the orderly disposal of the mine’s assets, Dayton’s subsidiary Compania Minera Dayton (CMD), owner of the Andacollo mine, applied to the courts for protection against its unsecured creditors. This court application resulted in a loss of control over the assets of CMD, and therefore Dayton stopped consolidating the results of CMD effective Dec. 1, 2000.
The court application included a plan of paying off all the unsecured creditors of the mine, including Dayton, from the sale of gold production and assets. This plan was approved by the creditors and the Chilean courts in May 2001 and remains in effect for four years; at the end of four years, unpaid creditors may petition CMD into bankruptcy. At the end of 2001, the total amount owed to all unsecured creditors under this plan was US$5.5 million, including US$1.8 million owed to Dayton. In early 2002, CMD settled, in full, its equipment lease obligations with Caterpillar Leasing, releasing Dayton from its guarantee of this lease.
Dayton acquired a 100% interest in the El Dorado gold-silver project in April 2000 through a merger with Mirage Resource, which was owned 53.8% by Kinross. At the time of the acquisition, Myckatyn regarded the El Dorado project as one of the best-kept secrets. Dayton acquired Mirage and extinguished some $2.7 million owed to Kinross by issuing 2.2 million shares for a total acquisition price of $5 million.
The El Dorado project is 74 km northeast of San Salvador and 10 km southwest of the town of Sensuntepeque in north-central El Salvador. The project comprises two exploration licence areas totalling 75 sq. km and covers a high-grade banded quartz-vein system. In mid 2001, the government of El Salvador made several changes to the country’s mining law. The most significant of these changes included extending the 5-year expiration date to eight years before a property-holder must convert an exploration licence into an exploitation licence. This revision extended, to July 2004, the expiry date of Dayton’s exploration licences covering El Dorado.
Application
The application to convert an exploration licence to a 30-year (or longer) exploitation licence must include a feasibility study, a development work program and an environmental impact study.
Under the old mining laws, the maximum size for an exploitation permit was 10 sq. km. This arbitrary size restriction has now been removed. Another important change is that the government royalty levied on mineral production has been reduced to 2% from 4% of net smelter return (NSRs).
The El Dorado district was initially exploited by the Spaniards d
uring colonial times. Limited operations ceased in 1894, and the area remained dormant until 1942 when a subsidiary of New York and Honduras Rosario Mining Co. acquired the property. Between 1948 and 1953, the mine produced 72,487 oz. gold and 355,123 oz. silver from 270,000 tonnes of processed ore. Development work included four levels of underground workings serviced by two shafts.
Mirage optioned the property in 1993 from Zinc Metal of Toronto and entered into a joint-venture arrangement with Dejour Mines and Bethlehem Resources, subject to a back-in right held by Kinross. Zinc Metal retains a 3% NSR, which can be purchased outright for US$4 million.
Mirage bought out Dejour’s and Bethlehem’s interests in May 1995. Following the completion of a prefeasibility study by James Askew & Associates in the fall of 1995, Kinross waived its back-in right as a result of restrictive time constraints relating to the completion of a bankable feasibility study.
Thirty-five individual quartz veins, each exceeding 1 metre in thickness, have been identified in a 50-sq.-km area of the El Dorado project. The steeply dipping veins are up to 2 km long and vary from 1 to 15 metres wide in surface exposures. The veins are dominated by chalcedonic quartz and calcite, and generally contain 1-2% sulphides, consisting mainly of pyrite. Many of the veins form ridges.
The gold mineralization is fine-grained and partially encapsulated within the banded vein chalcedony. Metallurgical testwork indicates that a conventional cyanidation plant utilizing carbon-in-pulp technology could achieve recoveries of 93% for gold and 83% for silver.
Most of the past exploration work focused on targets below the El Dorado underground mine area, where three main vein systems — Zancudo, Minita and Minita 3 – were drill-tested between 285 and 100 metres above sea level. The surface of the property is, on average, 400 metres above sea level. Drilling also defined resource tonnages on the La Coyotera Norte vein and the near-surface Nueva Esperanza vein.
Geometry confirmed
In 1997, Kinross, on behalf of Mirage, incorporated the results from more than 42,000 metres of drilling in 189 core and reverse-circulation holes to estimate a geological resource of 4.2 million tonnes grading 6.64 grams gold and 48.4 grams silver, equivalent to 892,000 oz. gold and 6.5 million oz. silver. A higher-grade portion beneath the El Dorado mine area was calculated at 1.3 million tonnes grading 11 grams gold and 74.6 grams silver, or 457,000 oz. gold and 3.1 million oz. silver.
In the summer of 2000, Dayton completed a 13-hole core infill drilling program totalling 3,727 metres in the El Dorado mine area to confirm the geometry and continuity of the Minita, Minita 3 and Zancudo veins.
Surrey, B.C.-based Lacroix & Associates calculated a revised estimate for the El Dorado mine area, based on the additional drilling. Indicated resources are estimated at 799,200 tonnes grading 13.7 grams gold and 98 grams silver, equivalent to 353,000 oz. gold and 2.5 million oz. silver. Inferred resources contain 110,600 tonnes grading 10.8 grams gold and 77 grams silver, for an additional 38,000 oz. gold and 273,000 oz. silver.
While Dayton’s 2000 drilling program was considered a technical success, it did not materially change the previous resource estimates. The bulk of the resource is contained in the Minita vein, which averages a true thickness of greater than 3 metres.
The total indicated resource of the El Dorado project is estimated by Lacroix at 3 million tonnes grading 7.6 grams gold and 56.9 grams silver per tonne, equivalent to 742,100 oz. gold and 5.5 million oz. silver. A further 779,000 tonnes grading 4.7 grams gold and 34.5 grams silver, or 117,800 oz. gold and 864,000 oz. silver, are categorized as inferred.
‘Productive horizon’
In evaluating the El Dorado project, Pacific Rim has determined that high-grade mineralization in the Minita vein and Coyotera vein systems occur in a “productive horizon” between 250 and 100 metres of elevation, or 150 and 300 metres below surface. “This characteristic is typical of epithermal systems of this type and is critical to the understanding of the potential of El Dorado,” says Shrake.
Of the 200 or so holes drilled on the property, McLeod-Seltzer says only about 50 holes reached the depth of the productive horizon and that most of those were drilled on the Minita vein, which contains the bulk of the resource. Only one other vein system has been systematically drill-tested to the productive interval, and that was the Coyotera vein. Some of the other veins on the property contain significant drill intercepts that are open to depth, including:
– Nueva Esperanza (3 metres of 13.65 grams gold and 63.4 grams silver, including 0.75 metre of 26 grams gold);
– Veta Grande (3.8 metres of 8.6 grams gold and 65 grams silver, including 1 metre of 26.6 grams gold);
– San Matias (2.8 metres of 10.66 grams gold); and
– Los Jobos (1.3 metres of 11.66 grams gold).
“There is no shortage of drill targets at El Dorado,” says Shrake. “The immediate mission is to prioritize these targets. The plan at El Dorado will be to compile the geochemistry, conduct additional surface sampling as needed and further define the structural geology with mapping.”
This information will be used to design a drill plan targeting the productive horizon. Drilling is scheduled to begin in the second quarter of this year after all necessary data have been compiled.
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