Santa Fe’s U.S. landholdings makes public offering inviting

Santa Fe Pacific Minerals, a unit of Santa Fe Pacific (NYSE), only became a precious metals producer in 1988, but it’s safe money to bet the company will emerge as one of the more significant players in the western U.S. mining scene over the next decade. That’s because outside of existing operations, the company has an enviable and highly prospective land base of more than eight million acres of mineral rights plus substantial additional mineral rights held under lease and mining claims. Through its sizable Nevada holdings, for example, the company has exposure to the state’s five main gold trends including the Carlin trend.

Some of the land (about 4.5 million acres remaining) was originally granted to predecessor rail companies more than a century ago by the U.S. Congress as an incentive to open the west. Other land grants were purchased, or were acquired through subsequent mergers with the business units of other rail companies. A sizable portion of this land was granted in a “checkerboard” pattern, particularly in Nevada, California, and to a lesser extent in New Mexico and Arizona.

Having been born with the equivalent of a gold spoon in its mouth, Santa Fe Pacific Minerals appears to be quietly stepping up the pace of exploration on its own lands. It has also entered into a number of joint ventures.

George Byers, director of public affairs for the Albuquerque- based company, says parent company Santa Fe Pacific is currently considering a public offering for the minerals unit.

If a public offering comes to fruition, considerable investor attention will be focused on the mineral potential of the company’s extensive land holdings. A cash infusion could breathe new life into the company’s motto of being “dedicated to developing hidden assets.”

The parent company is a diversified conglomerate that is undergoing a restructuring to improve profitability and reduce debt. It is active in transportation (rail and pipelines) and natural resources, and it has extensive real estate assets predominately in the “Sun Belt” states.

“It’s no secret that a public offering for the minerals unit is being looked at,” Byers said. “We’re taking a hard look at it, but no decision has been made yet.”

The company may want to wait until its new 100% owned Rabbit Creek gold mine near Winnemucca is up and running later this year. This new Nevada gold mine — the first to be operated by Santa Fe — is expected to produce about 100,000 oz. gold annually when up to capacity.

The company recently announced a significant increase in reserves for Rabbit Creek which will be an open pit, combined milling and heap leach operation. Proven and probable oxide mill reserves now stand at about 12 million tons averaging more than 0.13 oz. gold per ton, while oxide heap leach reserves total 38 million tons averaging 0.028 oz. gold. The property also hosts substantial refractory sulphide reserves.

In addition to Rabbit Creek, the company owns and operates the Lee Ranch open pit coal mine in New Mexico plus numerous industrial minerals quarries in the western states. It has a 50% interest in the Trinity silver mine in Nevada.

The company also has a 30% stake in the Marigold open pit mine near Valmy, Nev., a combined mill- heap leach operation that was officially opened last summer by project operator Rayrock Yellowknife Resources (TSE). Marigold, which represented Santa Fe’s first exposure to gold mining, is expected to produce 60,000 oz. of gold annually.

“We are like other companies in that at any given time we have about 50 active projects,” Byers said, adding that the current exploration focus is gold.

Byers also noted that one of the more significant projects currently being explored is the company’s 100% owned Lone Tree Hill property adjoining the Marigold mine. Significant gold mineralization was discovered on this property late last year, with one of the better holes intersecting oxide mineralization grading 0.12 oz. gold per ton over 55 ft.

“We have seven rigs on this property right now,” Byers said.

An important exploration priority is an approximate 35-mile-long checkerboard land assemblage in Nevada between the company’s Rabbit Creek mine and the joint venture Marigold mine and adjacent Lone Tree Hill projects.

Most of the company’s other exploration projects are still in the early stages, as are most of the joint ventures. The company hasn’t released much information on these less advanced projects. That has helped to enforce a widespread perception that Santa Fe is slow off the block to develop its properties or to enter into joint ventures with other companies — a perception Byers said is erroneous.

“We are very open and we welcome inquiries regarding joint ventures on our properties,” he said. “When a joint venture is going to expedite any potential for increasing value, we’re going to do it.”

David Crombie, president of Rayrock Yellowknife Resources, has been involved with Santa Fe since 1986, several years after his company became involved in a syndicate to explore the Marigold property. This Nevada property was on BLM (Bureau of Land Management) land, but expansion was restricted by Santa Fe’s checkerboard holdings.

“We wanted to pool all the acreage to have a solid block for exploration and development so we went to Santa Fe and negotiated a pooling arrangement with them,” Crombie said, adding that the exploration syndicate was able to negotiate a 70% interest fairly quickly.

“We had the advantage of having a discovery on our acreage which makes quite a difference,” he explained. “It’s not at all like someone going to them and wanting to do an exploration agreement on their lands.”

Having a discovery on adjacent lands was also the route taken by a small Vancouver-based junior, Noramex Minerals (VSE), which recently secured an agreement to unitize its 2,400-acre Bunce property in Nevada with 1,018 acres of adjacent Santa Fe land.

“We had a small gold deposit shaping up on our property adjacent to their land,” said Brian Fairbank, president of Noramex, adding that his company has since come up with a second discovery on the Santa Fe ground. The company is hoping to prove up an open pit, heap leach mine.

Under the agreement, Noramex is to spend $1 million over five years to earn 100% interest in Santa Fe’s land, with Santa Fe retaining a 5% net smelter royalty. But Santa Fe also has an option to earn 50% of the unitized property by spending $2.6 million over the succeeding five years.

Fairbanks said it took his company several years to hammer out a workable deal with Santa Fe.

“They have their requirements and are tough negotiators,” he said. “But once we got the deal we found they are good to work with.”

Over the course of the next decade it’s possible Santa Fe will enter into some high profile joint ventures. But it also is likely the company will do it alone wherever possible, given that it has spent considerable effort to quietly build up another “hidden asset” — its own technical team on the exploration and operations side.