Rye Patch scoops up Florida Canyon gold mine in Nevada

VANCOUVER —Rye Patch Gold (TSXV: RPM; US-OTC: RPMGF) is buying the venerable Florida Canyon heap-leach gold mine in Pershing County, Nev., out of receivership after its previous owner, Jipangu of Japan, ran into debt problems.

Rye Patch will pay US$15 million in cash and 20 million shares to the creditors at closing. Florida Canyon is a fully permitted operation that has been in continuous production since 1986, but now only produces residual gold from material on existing pads.

The company plans to redevelop the site — including building a heap-leach pad and waste-storage facility — to commercially mine a planned expansion of the Florida Canyon orebody by early 2017.

Looking northeast at the Florida Canyon gold mine in Nevada’s Pershing County. Credit: Rye Patch Gold.

Looking southwest at the Florida Canyon site in Nevada. Credit: Rye Patch Gold.

“We’ve visited the operation several times, and it’s similar geologically to the projects we have been working on in Nevada. We had the opportunity sort of fall in our lap due to the receivership,” Rye Patch president and CEO William Howald said during an interview.

“The operation has been in production for quite some time, and the previous operators had moved ahead and permitted the next heap-leach pad. We’re moving forward with building the infrastructure, and it’s basically an extension of the current pit. We’ll be mining the same rock and working with the recovery processes that have been effective for the past 30 years,” he added.

Rye Patch hired Mine Development Associates to complete a preliminary economic assessment of Florida Canyon as part of its due diligence on the acquisition, and the study models a mine that would crank out 75,000 oz. gold annually over an eight-year mine life. The study indicates pre-production capital of US$29 million and operating costs of US$759 per oz. gold.

The capital figure includes US$5.8 million for mining equipment and deferred maintenance; US$2.7 million for a crusher upgrades; US$7.2 million for the new leach pad, pond and piping construction; and US$3.8 million in contingency.

Florida Canyon hosts measured and indicated resources of 76 million tonnes grading 0.37 gram gold per tonne for 1.13 million contained oz. gold. The project also has an early-stage sulphide resource of 6.4 million tonnes at 1.56 grams gold for 391,000 contained oz. gold.

“There are definitely orphan holes that hint at potential oxide upside north and south of the main deposit,” Howald said. “The other thing I find exciting is the sulphide blanket beneath the oxides. There aren’t a lot of drill holes down there, but it has potential, and similar orebodies in Nevada have proven amenable to a flotation circuit.”

Rye Patch figures it could get Florida Canyon back to significant production levels within six months, with a mine that would feature a US$49-million, after-tax net present value at a 7.5% discount rate, and a 34.4% internal rate of return. The company’s base case assumes a US$1,000 per oz. gold price in the first two years, and a US$1,150 per oz. gold price over the remaining six years of operation.

To fund the pre-production capital, Rye Patch signed a commitment letter for a US$27-million credit facility with Macquarie Bank at an annual interest rate of LIBOR, plus 8%. The company must also close an equity financing of at least US$30 million by late July to complete the acquisition.

On June 2, Rye Patch announced a private placement, wherein it could raise up to $50 million. The best-efforts financing involves 182 million subscription receipts priced at 22¢ apiece for gross proceeds of $40 million. The company granted its agents an option, however, to sell another 45.5 million receipts for $10 million.

Each receipt would entitle the holder to receive one Rye Patch share when all conditions of the Florida Canyon deal are met.

“Our main goal is really to get the mine up and running, and generate sustainable cash flow,” Howald said. “We’re hitting the market just perfectly because we know our business is cyclical, and I believe we’ve passed the bottom here. Once we have production early next year we can look at the sulphide potential and the oxide targets along trend.”

Rye Patch views the deal as a regional consolidation, since it already holds 110 sq. km along the prolific Oreana gold trend.

Florida Canyon sits halfway between Lovelock and Winnemucca, Nev.; and 30 km north of the company’s Wilco, Lincoln Hill and Gold Ridge projects.

The Oreana gold trend in Nevada. Credit: Rye Patch Gold.

Lincoln Hill has been the most advanced-stage project in the portfolio. It hosts a high-grade, gold-silver-quartz-pyrite-tourmaline-sericite stockwork vein system overprinting a “large low-to-moderate grade disseminated replacement precious metal mineralizing system.”

Rye Patch also holds a 3.4% net smelter return royalty (NSR) over all gold and silver ounces at Coeur Mining’s (NYSE: CDE) nearby Rochester mine. The royalty is capped at 39.4 million equivalent oz. silver, which the company says should sustain the royalty payments through 2018.

“Our royalty position allowed us to be players in the game during the downturn, and this is really a transformative event for our company,” Howald said. “We’ve been advancing Lincoln Hill towards production in early 2019, and so Florida Canyon fits nicely into that corporate strategy. Now we’ll generate cash flow quickly, and that will really allow us to drive our regional project portfolio. It’s also a game changer due to the potential infrastructure synergies of the on-site assay lab and experienced mining team.”

Rye Patch shares have traded in a 52-week range of 11¢ to 28¢, and closed at 27¢ per share at press time. The company has 144 million shares outstanding for a $139-million market capitalization, and reported US$6.1 million in income from its Rochester NSR in 2015.