Hard Times For Axmin

Axmin (AXM-V, AXMIF-O) has had to survive a bevy of bad news over the last year, the most recent being that yet another suitor has withdrawn an offer for the company.

Axmin — which has its key assets in the Central African Republic (CAR) — can trace its woes to the activity of the CAR government, or more precisely, its lack of activity.

While the Toronto-based company controls the economically attractive Passendro gold project in the country, it had to take a $40.5- million write down on the property, largely due to the government’s refusal to issue a mining permit for the project.

Axmin has been waiting for a mining licence for Passendro for over a year now, and says that revisions to the country’s mining code, made in the middle of last year, have complicated the process.

“The terms of the new mining code give a flavour for what they are expecting,” Mario Caron, Axmin’s president and chief executive, says of negotiations between the company and government over what interest the government would have in the project. “We’re very much in favour of giving them as much as we can but not to point where a project isn’t financeable.”

Revisions to the mining code brought a right for the government to take a 15% free-carry interest in projects and an 18% net smelter return royalty. Axmin’s early mover status in the country, however, means such changes to the code have to be grandfathered in.

Adding to the company’s frustration over the failure to get a mining licence was a government decision to revoke all of the company’s licences for metals that are not gold back in August 2008.

While the ruling doesn’t affect Passendro, it does affect other iron ore projects Axmin has developed in the country. Perhaps just as importantly, it damages the country’s reputation in the eyes of international investors.

“It does create uncertainty in the markets when a government withdraws rights without prior consultations,” Caron says. “The market doesn’t react kindly to such a gesture, and it makes it difficult to raise money and do work in the country.”

That inability to raise money led the company into a strategic review that began last March. Its search for a solution led it to the Guernseybased, privately held gold explorer Toro Gold.

In November of last year, Axmin announced that Toro was offering 14.5¢ per share in an all-cash takeover bid.

While the sum was a long ways off from when its shares were trading in the $1.00 range from mid-2006 until early 2008, given the uncertainty around the mining licence, it was the best shareholders could have hoped for.

But it would appear that hope was all they had. Toro failed to come through with the funds by the required date, and began to re-negotiate with Axmin at a much lower price of just 3¢ per share.

Axmin believed it could get slightly more from another unnamed suitor, but on Jan. 8, it announced that negotiations with that party had broken off as well. Axmin says the second suitor was offering 4.5¢ per share.

While it’s hard to imagine that a company with a solid gold project in a high gold-price environment could be in such dire straights, it shows how seriously investors have to take political risk.

The initial bankable feasibility study on Passendro — done in April 2008 — envisaged a mine that would produce 203,000 oz. gold per year over 5.9 years at cash costs of US$379 per oz.

Axmin put the net present value of the project at US$311 million, with an internal rate of return of 47%.

The project has a measured and indicated resource of 32 million tonnes grading 2 grams gold per tonne for 2 million contained oz. gold. The project also has an inferred resource of 22 million tonnes grading 1.6 grams gold for 1.01 million oz. gold.

And while all those metrics make for a robust project on paper, on paper it will remain unless the government of CAR wakes up to certain economic realities. . . and soon.

At presstime Axmin shares were trading for 8.5¢. The company has 307 million shares outstanding and its share price has moved between 7¢ and 17¢ over the last 52 weeks.