St Barbara grabs Gwalia gold (April 04, 2005)

Perth, Australia-based St Barbara Mines has emerged as the winning bidder for the gold division of failed miner Sons of Gwalia.

Under a deal approved by the Committee of Creditors of Sons of Gwalia, St Barbara will pay just A$2.3 million in cash and replace or assume A$35.7 million worth of environmental performance bonds.

St Barbara hopes to reduce the amount of the bonds over the next year by rehabilitating some mining areas, transferring haulage roads to local governments, and selling certain assets and related performance bonds.

St Barbara will fund the deal with the backing of A$40 million worth of credit facilities from its major shareholder, Denver-based Resource Capital Fund II (RCF). RCF holds a 31.4% interest in St Barbara.

Initially, St Barbara will draw down A$7 million on closing to cover the cash portion of the deal, transaction costs, and working capital. The drawdown will have a conversion price of A7 per share, subject to shareholder approval. The deal was slated to close March 28.

In return, RCF has been granted a 1.5% royalty on all future gold production from St Barbara’s Meekatharra complex in the Murchison gold field of Western Australia, beginning in July 2007. A resumption of production from the Bluebird plant there is envisaged by late 2006. RCF also retains a similar royalty on gold produced from the Sons of Gwalia properties, beginning in 2006. Both royalties can be reduced to 1% based on certain commercial arrangements being made.

Included in the sale are Sons’ gold assets in the Leonora, Southern Cross and Laverton regions of Western Australia. St Barbara will also pick up some associated nickel exploration rights, plus a portfolio of royalty interests.

In all, the land package covers 10,000 sq. km. and was reportedly home to reserves totalling 850,000 oz. gold at the end of June 2004 (since then, some 286,000 oz. have been mined, leaving roughly 564,000 oz. in reserves). That compares with reserves of 3.3 million oz. a year earlier. Sons of Gwalia produced 521,000 oz. gold between the two periods, leaving a shortfall of 1.9 million oz. in its reported reserves. That shortfall left the company unable to cover its extensive forward sales contracts and ultimately sent it into administration.

The properties are also home to four processing plants, which produced, on average, 400,000 oz. gold per year over the past eight years. Current resources are pegged at 7.9 million oz.

The Leonora area comprises the Tarmoola open pit and processing facility, the Gwalia Deeps project, and several smaller satellite mines.

The Southern Cross area is centred on a 2.5-million-tonne-per-year plant at Marvel Loch. Feed is sourced from the Marvel Loch and Cornishman open pits and from the Golden Pig and Yilgarn Star underground mines.

The South Laverton Region is home to the 2.5-million-tonne-per-year Carosue Dam plant, which services several nearby satellite deposits, including the Karari and Monty’s Dam open pits and the Safari, Red October and Deep South deposits to the north.

St Barbara expects the Southern Cross and South Laverton operations to produce a total of 150,000 oz. gold at an average cash cost of A$450 per oz. this year. South Laverton is slated for suspension at the end of June; St Barbara plans a review of both operations.

The company also intends to spend A$5 million over the balance of the year exploring for gold at Tarmoola and Gwalia Deeps in the Leonora area. The company will also explore the Red October and Jubilee Well areas in South Laverton, and the Yilgarn Star, Southern Cross Camp and Marvel Loch in the Southern Cross region. Crews will also explore for nickel sulphide targets in both areas.

Sons’ administrators continue to work on the restructuring or sale of the company’s advanced minerals division, which produces mostly tantalum, as well as tin, lithium and mineral sands.

The Greenbushes mine, 300 km south of Perth, is the world’s largest tantalum resource. The company also owns the Wodgina mine, 100 km south of Port Hedland, the world’s second-largest hard-rock tantalum resource. Combined, the two contain 75% of the world’s defined tantalum reserves, and supply more than half of all tantalum demand.

The restructuring of the tantalum division awaits the outcome of arbitration regarding long-term tantalum ore supply agreements between the company and its main customer, U.S.-based Cabot Corp.

Hedge book problems sent Sons of Gwalia into bankruptcy in August of 2004.