Production is right around the corner for Marlin Gold

It’s not every day that you come across a junior that is on the brink of production and generating cash within four to six months, whose largest shareholder is a hedge fund with an 80% ownership stake, whose management team is headed by an executive that has a track record of putting mines into production, and which is trading at 10¢ a share.

In January Marlin Gold Mining (TSXV: MLN; US-OTC: MLNGF) will pour the first gold at its Trinidad project in Mexico’s Sinaloa state, a past-producing open-pit mine that is being rebuilt for less than $30 million, including corporate general and administrative expenses. And CEO John Brownlie says there’s more upside to be had on the company’s 1,200 sq. km land package, which he claims is the largest held by a mining company in the Mexican state, with several prospects near the leach pad. 

Brownlie is perhaps best known for bringing Capital Gold’s El Chanate open-pit gold mine in Mexico into production and growing the company from a $25-million market capitalization to $400 million before selling it in 2011 for $395 million to Gammon Gold, now known as AuRico Gold (TSX: AUQ; NYSE: AUQ).

Today, Brownlie says he has put together “a strong team — a lot of them from my Capital Gold days,” and adds that “we have a strong shareholder base because when we sold Capital Gold, everybody involved made a lot of money, and we had the team set up.”

Mining analysts Tyron Breytenbach and Kyle McPhee of Cormark Securities estimate that Marlin can produce 199,500 oz. gold over an initial five-year mine life at the past-producing Taunus open pit at Trinidad and generate total life-of-mine cash flow of $92 million after corporate costs, at US$1,300 per oz. gold.

“This level of free cash flow to shareholders is nearly three times the current fully funded market capitalization of $34 million,” they note in an Aug. 1 research report. “We also note that this production and cash-flow profile does not take into account the suite of exploration upside opportunities that will likely add to the mine life over time.”

Connecticut-based hedge fund Wexford Capital owns nearly 80% of Marlin; a second firm in New York owns another 9%; a broker out of Scotiabank in Toronto owns 4%; and management holds another couple of percent.

“In this particular climate and for a company the size of Marlin, we’ve done well in terms of attracting interest in both New York and Toronto,” Brownlie says, adding that having a large hedge fund like Wexford behind the company “is pretty unique.”

He says that “we’re fairly tightly held, so liquidity is a bit of an issue, and to the Street we’re a little bit of an enigma: Why is John Brownlie taking on such a small mine? Why is Wexford involved in such a small mine, and what is the game plan going forward?”

Akiba Leisman, vice-president at Wexford Capital, says his group was impressed by Brownlie and his team. “One of the principal reasons for our involvement was because of John’s management capabilities, as well as the management capabilities of the people who worked for him,” Leisman says. 

Wexford’s initial involvement with Marlin was through a private placement in February 2012, when the private equity and hedge fund took a 17% interest in the company. It bought stock on the open market in the early part of the second quarter that year, which brought its shareholding to 20%. In June 2012, Wexford announced an unsolicited tender offer for all of Marlin’s shares, and closed the offer in August, raising its ownership to a little over 52%. At that point Wexford replaced some of the board of directors, adding two Wexford employees and two senior mining executives: Richard Hall and Anthony Hawkshaw. (Hall had been president and CEO of Metallica Resources and brought the Cerro San Pedro gold-silver mine in Mexico into production before the company became part of a three-way merger to form New Gold, and Hawkshaw was a co-founder of Rio Alto Mining.)

In December 2012 Wexford fully backstopped a rights offering (and didn’t charge a backstop fee) that raised $15 million at 8¢ a share that closed in March 2013, and raised its ownership in Marlin to 72%. A second rights offering in May raised another $15 million at 5¢ per share that was completed in August and upped Wexford’s interest in the junior to 80%.

The game plan is that once in production in January, Marlin will look in greater detail at depth and strike extensions within the existing pit — saying that “there’s a strong belief on our part that we can go deeper and wider, as happened at El Chanate” — and follow up on mineral showings elsewhere on their sizable land holdings. (All of the showings occur within its contiguous land package, which is 25 km long.)

San Carlos, 3 km north of the main pit, is ready for drilling and the highest-priority target, Brownlie says, where gold-bearing intercepts included 1.74 grams gold over 40 metres and 1.87 grams silver over 18 metres. A satellite target called “Bocas,” which nearly abuts the main pit, already has a small pit designed by SRK that the company will look at closely to see whether it can be joined with the main pit. But the largest showing on the property so far is San Cristobal, 12 km south, where reverse-circulation drilling has returned intercepts including 0.47 gram gold and 198.6 grams silver over 30 metres, and 0.56 gram gold and 45.5 grams silver over 14 metres. “San Cristobal is something that could be significant, but work has to be done,” Brownlie says.

The Marlin-Wexford combination is also looking to grow the business “Anywhere in a good jurisdiction — whether that’s Nevada or California. Somewhere that people have done the heavy lifting, particularly in this environment where a lot of money is being spent and certain companies are suffering. And we can be opportunistic and aggressive next year post-production to increase our portfolio of near-production properties.”

Leisman says Wexford is looking at Marlin as a growth vehicle, and believes the industry has had “an issue with capital discipline. It has made poor decisions with respect to the pricing of deals and has had a poor track record of executing and building projects like this over the past decade.” He adds that “both in terms of opportunities that are out there, and frankly because of mismanagement, we do feel there are attractive acquisitions at the right price that make sense from a geopolitical and geographical perspective. So the geographies that we’re focused on with Marlin are not just in Mexico.”

Marlin is not Wexford’s first foray into something like this. “It may be our first control investment on the gold side,” Leisman says, “but we’ve done similar transactions in other industries such as oil, gas and coal. We’re a private-equity and hedge-fund outfit, and we take an active role in a lot of the projects we participate in.”

Over the last year Marlin shares have traded between 4.5¢ and 17¢ per share. Cormark has a “buy” rating and a 15¢ target price.

“With Trinidad construction nearly half complete and positive cash flow within sight for early 2014, we believe Marlin is highly undervalued,” Breytenbach and McPhee of Comark say. “Of particular interest is the free cash-flow yield offered by Marlin, which amounts to 270% over the initial five-year mine life at [US$1,300 per oz.] spot gold prices. With no major financing or permitting hu
rdles, a favourable project jurisdiction and a capable management team, we see no reason for the valuation discount.”