U.S.Rrport Crown options properties from Nevada Goldfields

In a bid to increase its gold production and exploration prospects, Crown Resources (VSE) has taken a 30-day option to purchase a number of assets from Nevada Goldfields (TSE). The assets, all in Nevada, include the Kingston mine and mill, the Manhattan mine, and two exploration properties.

If exercised, Crown would pay US$1.5 million cash plus 100,000 of its common shares to Nevada Goldfields’ secured lenders and assume a US$1.5-million note carrying a rate of prime plus 1%.

In addition, the secured lenders would retain a 50% net profits interest in the Keystone pit mining operation (Manhattan mine) to Dec. 31, or to a maximum payout of US$1 million, whichever comes first. In return for the payments to lenders, about US$7 million in bank debt will be cancelled from Nevada Goldfields’ balance sheet.

Crown would also invest US$1 million in Nevada Goldfields through a private placement of 1,153,500 shares plus 500,000 warrants to purchase stock at US$1 per share.

Nevada Goldfields closed the Kingston underground mine in August, 1989, in an effort to conserve cash flow when the company encountered lower than forecast grades and increased waste mining. The Kingston complex includes a 700-ton-per-day carbon- in-leach mill and all associated underground mining equipment. Nevada Goldfields estimates proven-probable reserves at 110,000 tons grading 0.16 oz. gold per ton, plus an undiluted resource of 500,000 tons grading 0.18 oz.

The proximity of Crown’s Klondike property to the Kingston is certainly a factor influencing the deal. The Klondike property lies immediately adjacent to the Kingston mine along the same geologic structure. Crown estimates a mineral resource of about 400,000 tons grading 0.25 oz. gold.

The Manhattan property is currently being developed as a small open pit operation with the mining contracted out. Preliminary estimate of undiluted reserves is at 86,000 tons grading 0.21 oz. gold, most of which is included in the planned open pit. If an agreement is finalized, Nevada Goldfields would continue to manage the property for a fee.

The option agreement also includes two early-stage exploration properties, the 100-acre Birch Creek property and the 600-acre Smoky Valley prospect. Both of the properties have anomalous to ore-grade surface rock samples and lie within 15 road-miles of the Kingston mill.

Crown plans to conduct, along with independent consultants, a detailed due diligence review of the transaction over the next 30 days. Crown spokesman Allan Marter noted that the company’s primary interest is in the Kingston mill and its proximity to a number of excellent exploration targets.

If the deal goes through, Nevada Goldfields’ balance sheet will take a turn for the better. With US$7 million in bank debt eliminated and the infusion of US$1 million from the private placement, the company will go from having a large working capital deficit to a plus US$1.5- million position, according to President Alan Bell.

The company’s long-term debt remains relatively large. However, with deferred revenue of over US$4 million and US$9.9 million in 10% convertible debentures.

Nevada Goldfields will be left with its Aurora mine, near Hawthorne, Nev., which is expected to produce an average of 1,300 oz. of gold per month at an average cash cost of about US$200 per oz.

Bell said he did not see a problem with meeting the company’s debt obligations and noted that a 30% expansion in production was possible by increasing the mine’s crushing capacity at a cost of about US$300,000. Current reserves are good for about four years, but more would have to be found before a production increase would be implemented.

Bell would like to spend up to US$700,000 on exploration on the property this season to locate more reserves. He is confident one or more of 12 targets on the property will yield further reserves.

In addition, the company will retain its interest in the Empire project, 40 miles west of Denver, Colo., which is being explored by Noranda Exploration.