Starcore Boosts San Martin Reserves Despite Financial Woes

VANCOUVER — Starcore International Mines (SAM-T, SHVLF-O) has boosted reserves at its San Martin mine in Queretaro state, Mexico.

The high-grade underground operation can now claim proven and probable reserves totalling 763,000 tonnes grading 3 grams gold per tonne and 29 grams silver. Inferred resources add 1.57 million tonnes grading 3.65 grams gold and 40 grams silver.

Starcore acquired San Martin in early 2007, buying it from Goldcorp (G-T, GG-N) subsidiary Luismin for US$24 million and 4.7 million shares. The mine, which sits roughly 50 km east of the city of Queretaro, covers 130 sq. km and includes seven underground mining units as well as three under exploration. Luismin had been operating the mine since 1993, mining some 267,000 tonnes of ore each year.

In 2008, Starcore produced 19,000 oz. gold and 33,000 oz. silver at San Martin from 266,200 tonnes of ore carrying average grades of 2.5 grams gold and 33 grams silver. The average cash cost to produce an ounce of gold was US$433. The company also added 4,800 metres of tunnel to the underground infrastructure.

In addition to the ore it mines, Starcore also uses the San Martin facility to process concentrate ore from two nearby mines. One of those mines temporarily halted production earlier this year, which negatively impacted Starcore’s cash flow.

The company’s cash flow is also hindered by gold sales contracts fixed at US$731 per oz. that cover roughly 1,147 oz. each month until January 2013. The sales contract is part of its agreement with Investec Bank, which provided Starcore with a two-tranche convertible loan facility totalling US$13 million backed by a gold hedging facility in late 2006.

Starcore has made all debt, interest, and forward sales contract payments according to the Investec loan but early this year the company failed to meet a debt covenant requiring that the ratio of assets to liabilities not fall beneath 110%. The company received a default waiver in April but only on the condition that it obtain additional financing by the middle of the year.

Now the company is caught between a rock and a hard place. It secured a commitment for a US$10-million loan from a Mexican financial institution, which it wants to use to pay down the US$7.4 million it still owes to Investec. But to draw the Mexican loan, Starcore must be able to back it with the San Martin mine, or specifically the shares of its subsidiary that holds the mine. The problem is that Investec currently holds a pledge to those shares.

And solving the problem is not as simple as getting Investec and the Mexican bank to switch funds for the shares pledge because Investec would also require Starcore to wind up its forward sales commitments. That is, Starcore would have to pay Investec the difference between its hedged price, US$731, and the actual price of gold for each ounce due to Investec until 2013. As stated in its quarterly financials: “At gold prices in effect on the date of this report, the company does not have sufficient funds to both wind up the forward sales agreements and repay the Investec loan facility.”

Starcore says it is working with Investec on alternatives.

Starcore shares trade near 10¢. The company has a 52-week trading range of 5-18¢ and 61 million shares outstanding.