Ownership puzzle confounds efforts to develop Holloway

Companies with a stake in the Lightning gold zone east of Timmins, Ont., have gathered around the bargaining table in an effort to create a single mine property.

But considering the deposit represents Eastern Canada’s best hope for a new gold mine, the negotiations are likely to produce some sparks. Any proposal will have to satisfy four mining companies, each with its own agenda. Today, the Lightning zone straddles two separate claim groups: the Holloway property, a 60-40 joint venture between Hemlo Gold Mines (TSE) and Freewest Resources (TSE); and an 18-claim property owned by Teddy Bear Valley Mines (CDN).

Reserves of 5.5 million tons grading 0.25 oz. gold per ton are split almost equally between the two properties. Most of the exploration potential lies at depth on the Teddy Bear ground.

The ownership structure is complicated further by an option deal on Teddy Bear’s claims. Under the agreement, a joint venture consisting of Hemlo (51%), Freewest (34%) and Newmont Mining (NYSE) (15%) can earn a 60% interest in the claims by providing a feasibility study “in accordance with good mining practices.” The group has already earned a 30% interest through exploration expenditures.

Teddy Bear President Andrew Chater says he has yet to determine whether a recent study provided by Hemlo lives up to the murky terms of the option deal. What he terms a “small f, small s” feasibility study concluded that Teddy Bear’s share of the Lightning zone — 2.4 million tons grading 0.23 oz. — could not be mined economically as a separate deposit.

But Hemlo’s biggest challenge is to attach a fair value to the exploration potential of the Teddy Bear claims. While the Lightning zone is almost completely delineated on the 5-claim Holloway property, it remains open at depth on Teddy Bear ground.

Some analysts believe there is the potential to double or even triple the reserves with exploration below 1,000 metres.

“Right now just about all the potential for further ore is on Teddy Bear ground,” said Chater. “By my calculations it’s worth a lot more than they (Hemlo) have offered in the past.”

Last year, as the dimensions of the Lightning zone were just beginning to take shape, Noranda (TSE), Hemlo’s parent company, offered Teddy Bear a 10% interest in the deposit in exchange for the junior’s claim group. At that stage, Noranda believed that the zone plunged on to a separate Noranda-Freewest property to the east. But a deep drilling program to test the eastern extension produced little in the way of ore-grade mineralization. Joe Baylis, Hemlo’s vice-president of corporate development, said Hemlo now believes that the deposit may have a vertical trend. (Noranda’s gold assets, including the Holloway project, were bought by Hemlo earlier this year.) Noranda faced a similar challenge in 1987 when it negotiated a 3-party agreement to develop the Silidor gold deposit at Rouyn-Noranda, Que. In that case, two adjacent properties were united before proceeding with an underground exploration program. Cambior (TSE) and Nova-Cogesco Resources (TSE), which both held a significant stake in one of the properties, ended up with 25% and 20% of the project respectively.

Hemlo says it will put a hold on further work at Holloway, including surface exploration, until the ownership question has been resolved. Development and underground exploration will follow the resolution.