Patricia Mining backs Richmont bid

Richmont Mines (RIC-T, RIC-n) has launched a bid for Torontobased Patricia Mining (PAT-V, PTMHF-o) much to the chagrin of many Patricia shareholders.

With the timing of the deal coming when gold companies are trading at seldom-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 and CEO. “We haven’t seen any cash distributions from the project to date, so our back was against the wall.”

Patricia and Richmont are partners at the Island gold mine, 50 km north of Wawa, Ont., and the deal would take Richmont’s interest in the project up to 100% from 55%. The Rouyn-Noranda, Que.-based company has been acting as project operator.

While Island went into production in 2006, the mine hasn’t generated the cash flows originally estimated.

Instead, the mine has lost roughly $1 million since achieving commercial production.

Chadder says the chief culprit in the lack of profit has been labour shortages. With fewer 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 gold price of US$650 per oz. when drawing up economic models.

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

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 roughly $5.8 million in Patricia’s liabilities that Richmont would take on — $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 the last trading day before the deal was announced in late October.

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

At the end of 2007, the project hosted proven and probable reserves of 1.05 million tonnes grading 8.39 grams gold for roughly 286,000 oz. gold, and measured and indicated resources of 590,000 tonnes grading 10.14 grams gold for 192,000 oz.

Martin Rivard, Richmont’s president and chief executive, said in a statement that the deal would allow Richmont to 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.

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

In Toronto the day after the news, Patricia shares climbed 8 towards the offering price to about 20, while Richmont shares fell 4 to $1.81.