Patricia management likes Richmont offer

Richmont Mines (RIC-T, RIC-N) has launched a bid for Toronto-based Patricia Mining (PAT-V) to the chagrin of many a Patricia shareholder.

With the timing of the deal coming when gold companies are trading at seldom before seen lows, shareholders are angered that Patricia would decide that now was the best time to sell.

But the reasons for the deal are slightly more nuanced.

“The main reason (for doing the deal now) is we would have had to go to the market to raise capital and that would be highly dilutive and very difficult to accomplish in this market,” says Chris Chadder, Patricia’s president. “We haven’t seen any cash distributions from the project to date, so are back was against the wall.”

While the Island Gold mine the key asset that Rouyn-Noranda, Qubec-based Richmont will acquire should the acquisition go through went into production in 2006, the mine hasn’t generated the cashflows originally estimated.

Instead the mine has lost roughly $1 million since going into commercial production.

Chadder says the chief culprit in the lack of profit has been labour shortages. With less people to chose from the mine’s operators lack the experience to deal with some of the technical difficulties that arise when mining an underground vein system.

Still Chadder is optimistic that Richmont can turn the project around, and with the offer including 0.055 of a Richmont share for every Patricia share, he and all other Patricia shareholders will have a vested interest in Richmont doing so.

“With mine closures all over and labour softening quickly there should be good technical people available,” Chadder says. “The fundamentals of the mine are still good, and the gold price is still above what was budgeted for.”

Chadder says the company used a US$650 per oz. gold price when drawing up economic models.

The higher gold price has helped compensate for head-grades being slightly lower than anticipated.

The deal would leave Patricia Mining shareholders with 9% of the outstanding shares of Richmont, and Chadder says there are no material golden parachutes for Patricia management.

In total the friendly offer would see Patricia shareholders get 15 in cash and 0.055 of one Richmont share for a total cost to Richmont of $17 million.

That sum includes Richmont taking on Patricia’s liabilities of roughly $5.8 million — $3.1 million of which is owed to Richmont.

The transaction values Patricia at 26 per share and offers a 100% premium to its 13 per share closing price on October 24 the last trading day before the deal was announced.

The 30-day trading average of Patricia shares, however, was 15 per share with shares closing at 26 per share price as recently as August 14.

The deal would take Richmont’s interest in the project up to 100% from its current 55% stake. It has been acting as project operator.

At the end of 2007 the project, which sits 50-km northeast of Wawa, Ontario, had proven and probable reserves of 1.05 million tonnes grading 8.39 grams gold for roughly 286,00 oz. of gold, and 590,000 tonnes grading 10.14 grams gold for 192,000 oz. in the measured and indicated category.

Martin Rivard, Richmont’s president and chief executive said the deal would let Richmont boost its operating income and improve mine performance.

“After the transaction, we will have a strong working capital position and more than sufficient cash to support our strategy of expanding our gold assets in North America,” Rivard said in a statement.

If the deal is consummated it is expected to close by mid-December Richmont would still have roughly $20 million in cash and cash equivalents on hand, no long-term debt and just 26.2 million shares outstanding.

Patricia officers, directors and certain major shareholders that represent roughly 29% of the shares outstanding, have entered into lock-up agreements with Richmont.

In Toronto on Oct. 28 Patricia shares climbed towards the offering price and were trading for 20 on 164,000 shares traded while Richmont shares fell 4 to $1.81 on roughly 27,000 shares traded.