Midway runs into trouble at Pan mine

Midway Gold (TSX: MDW; NYSE-MKT: MDW) has hit a rough patch, less than two months after it initiated production at its Pan gold heap-leach mine in Nevada.

On May 11, the company reported results on modelling at Pan, including an updated resource estimate that reclassified a large part of the measured and indicated resource as inferred.

The revision shows measured and indicated ounces dropped 36%, or 284,500 oz., partly due to a 15% drop in grade. In that category the project has 503,800 oz. (35.9 million tonnes at 0.44 gram gold), versus 788,300 oz. (47.3 million tonnes at 0.52 gram) in the 2011 feasibility study. The comparison excludes the 4,300 oz. gold produced to date and the 36,000 oz. under leach.

It appears Midway has moved 131,000 oz. into the inferred category, which stands at 141,000 oz. (13.9 million tonnes at 0.31 gram), up from 10,200 oz. (633,000 tonnes at 0.50 gram). Both estimates used a 0.14-gram-per-tonne cut-off.

Despite the boost in inferred resources, there are 150,000 oz. gold in measured and indicated that have vanished.

Midway says the updated resource includes drilling this year as part of its internal review into the lower grades and lower output versus the feasibility study. In early March, it reported that early sampling of ore grade came in below modelled grades, and hired an independent engineering firm, Gustavson Associates, to examine modelling, sampling and assaying practices. Gustavson also signed off on the 2011 resource estimate and feasibility study.

The revised estimate contains another 13,400 metres (44,000 feet) of reverse-circulation (RC) drilling and five diamond-drilled core holes. “RC drilling, closely spaced blast hole assays and in-pit geologic mapping indicated that the mineralization was less continuous along the trend than previously interpreted from resource drilling,” Midway says, adding recent operating experience has helped it better understand the mineralization controls. It also updated the property’s mineralized boundaries.

Midway intends to use the updated resource when it revises the mine plan and reserve estimate before late June. Any reduced reserves will lower the mine’s output and prospects, as well as put it at risk of an impairment charge. Based on previous reserves of 864,000 oz. (48.3 million tonnes at 0.56 gram), the feasibility study estimated Pan’s annual production at 81,000 oz. over an eight-year life.

Meanwhile, the company faces a high risk of defaulting on its US$53-million, three-year senior debt with the Commonwealth Bank of Australia (CBA). Due to start-up delays and lower-than-expected gold output, the firm does not have enough funds to finish building the Pan mine and meet its requirements under the senior loan.

 While CBA agreed to waive certain conditions until April 20, the firm failed to meet them, and had until May 20 “before the non-compliance becomes an event of default.”

In a corporate update on May 21, Midway noted it was in “technical default” of its loan agreements, and that it was consulting with its senior lender about conditional waivers.

As a result, Midway will not have access to the undrawn US$5.5 million under its senior debt, and has US$3.8 million left under its US$10.5-million subordinated debt facility. The proceeds will help build the Pan mine, but are not enough to “cure noncompliance of the senior debt,” the company said in early May.

The junior did not return a request for comments before press time.

At the end of March, the estimated cost to build Pan was US$86.2 million, excluding crusher, agglomeration and leach pad expansion costs, of which Midway had spent US$78.6 million.

At the time, it had a US$29.9-million working capital deficit and US$2.7 million in cash and equivalents.

The Pan gold mine, which began production on March 26, sits at the northern end of the Pancake mountain range in western White Pine County, 29 km southeast of Eureka, Nev.

On the reserve update news, Midway shares plummeted 70% to 11¢, before rebounding slightly to close May 22 at 13.5¢. After the revision, analysts at both Haywood Securities and Canaccord Genuity downgraded the stock to a “sell” from a “hold.”