Muscocho revises Echo Bay deal

In a revised agreement with the Muscocho Group of companies, Edmonton-based Echo Bay Mines (TSE) will pay a premium to gain a major foothold in the eastern Canadian gold industry.

But a piece of fine tuning which reduces initially the number of Muscocho shares that Echo Bay will own, also allows the Edmonton company to buy a larger share in one of the country’s newest gold producers.

Echo Bay agreed last month to spend $50 million to earn a significant stake in Muscocho Explorations (TSE), Flanagan McAdam Resources (TSE) and McNellen Resources (VSE).

Priced at the 10-day average market closing ended April 11, for each member of the Muscocho group, the investment comprised of $26.5 million in newly-issued common shares and $23.5 million in convertible debt securities.

When the notes were converted Echo Bay was scheduled to become the largest shareholder in Muscocho with 6.85 million shares (21%) and Flanagan McAdam with 3.7 million (23.1%). It would also have held five million McNellen shares representing 23.1% of the company.

But under the new agreement, Echo Bay must pay a premium over the initial price for the common shares to be issued on conversion of the loans. That includes a 12.3% premium for Muscocho ($4 per share), 7.1% for Flanagan McAdam ($4.05) and 6.8% for McNellen ($2.50).

Assuming conversion, Echo Bay will own on a fully diluted basis 20% of Muscocho (6.51 million common shares), 22.4% of Flanagan McAdam (3.57 million shares) and 26.6% of McNellen (4.86 million shares). While the new agreement reduces Echo Bay’s holding in the Muscocho and Flanagan McAdam it also alters a “standstill” agreement limiting the Edmonton company’s interest in Muscocho to 33%.

Pending shareholder approval, Echo Bay can now increase its holdings in the first six years following the first anniversary of the agreement by 1% per year through the open market to a maximum 39% in the seventh year. No restrictions apply after that.

Under the new deal, Echo Bay’s agreements with Flanagan McAdam and McNellen are unchanged, with no increases allowed for a 12-month period. For the six years that follow, Echo Bay may increase its holding in the two companies to 33% on a fully diluted basis.

“The revised agreement doesn’t make a lot of difference as far we (Terry Flanagan and Flanagan McAdam President John McAdam) are concerned because we are still running the company,” Muscocho President Terry Flanagan told The Northern Miner.

“The new deal also enables Echo Bay to account on an equity basis for their share of our gold production,” he said. If drill results from the Muscocho group’s Magnacon and Magino projects near Wawa, Ont., are any indication, Echo Bay could have access to much more than the promised 100,000 oz by 1989.

Scheduled to go into production next year, Magnacon reserves stand at 1.44 million tons averaging 0.24 oz gold per ton, but the gold zone is still open laterally along strike and the operation could be expanded, Flanagan said.

While Magino partners Muscocho and McNellen have experienced some problems with a new 400-ton-per-day mill, which has kept them too busy to receive visitors at the mine, the early teething problems are being overcome.

“We experienced some pipe leaks and the pumps weren’t working properly but the mill is processing development ore from a low grade stock pile and we will know what the recovery rates are within two to three weeks,” said Flanagan.

All reserves at the Magino project (1.9 million tons grading 0.25 oz) are contained above the 500-ft level, but recent drilling shows that the zone is still going strong at 2,000 ft, Flanagan said.