Pure Gold Inc., struggling to produce gold with a profit, is the latest junior to face technical problems in Ontario’s notoriously tricky-to-mine Red Lake region.
The Vancouver-based gold miner, backed by industry stalwarts such as Eric Sprot and Robert McEwen, has faced underground issues since launching its Madsen mine at Red Lake, about 550 kilometers northwest of Thunder Bay.
The company mined its first gold in December last year, but initial production and ore grades at the mine have been dramatically lower than expected. In the first quarter, Pure Gold produced about 4,000 ounces, compared to 13,700 ounces predicted by the company’s feasibility study. The company has since been forced to make more stops—discrete areas excavated within a mine—to attempt to access higher grade ore, which has increased its expenditure. The cost of an ounce of gold is trading at around US$1,700, more than double what was predicted, and the metal’s current trading price is nowhere near US$1,800.
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Pure Gold also needs to tap the equity markets on several occasions for fresh capital, which has eroded the value of existing shareholders. On September 8, the company announced that a syndicate of underwriters had agreed to purchase units worth $20 million at $1.05 in a buyout deal. (Each unit comprises one share of pure gold and one-half of a common share warrant. One warrant allows investors to acquire a share of pure gold at a price of $1.36 for 18 months after the end of financing) . If purchased deals go well, they usually sell out within 24 hours. However, the stock has consistently traded below $1.05 since the financing was announced, suggesting it hasn’t been a hit with investors. Shares of Pure Gold, traded on the TSX Venture Exchange, are down 68 per cent since peaking at $2.98 per share late last year.
“From an investor’s perspective, it’s been a challenging year on the whole,” Darin Labrange, CEO of Pure Gold, said in an interview. “I appreciate the patience of our investors who have stuck around.”
Pure Gold is the latest junior to make a trip to Red Lake, an area that has claimed its fair share of mining casualties over the years. While the gold deposits in Red Lake are of a high grade, they are often scattered incorrectly, meaning companies need to conduct exhaustive drilling to find the exact location of the ore. In the past, insufficient study has resulted in occupational disaster. In 2015, Rubicon Minerals Corp. put its Phoenix project in Red Lake into production with only early-stage engineering studies. When Rubicon tried to make a deposit, it didn’t find any gold. The company quickly collapsed, wiping out nearly $1 billion in shareholders’ money.
Unlike the Rubicon, Pure Gold underwent a lot of engineering work prior to the development of Madsen. The company had conducted a complete feasibility study on the project, and carried out extensive drilling. Decades of historical data was also available about the mine, as it had previously been in production for nearly 40 years, producing 2.5 million ounces by the 1970s.
Mr Labrange and Mark O’Dea, a well-known mining executive and financier, acquired the property in 2014, and subsequent drilling revealed that Madsen had another million ounces of gold reserves. Much of the infrastructure was already inherited from the mine, which meant that the capital investment to put it back into production was relatively cheap, at around $100 million. Still, Mr. Labrange acknowledged that more could have been done to address current start-up issues. In particular, more capital should have been invested in underground development infrastructure.
Among the biggest investors in Pure Gold are South African gold miner AngloGold Ashanti Ltd., mining financier Mr. Sprott and former Goldcorp CEO Mr. McEwen. At one point, Mr. McEwen owned 18 million shares, but sold most of his stake earlier this year. Mr. McEwen, who now owns only 2.6 million shares, says he sold not because he foresaw problems, but based on a personal investment decision; They thought the government was going to increase the capital gains tax. While Mr McEwen said he would certainly like to see pure gold trading higher, he is not surprised that the company is struggling. “Start-up can be difficult,” he said. “They don’t always go according to plan.”
Adding to the pure gold crisis is that the gold sector has slumped this year, with investors preferring industrial metals such as copper, partly due to cleaner-energy applications, such as electric-car batteries.
Mr. Labrange acknowledged that the weakness in Pure Gold’s share price made it vulnerable to acquisitions. In the past, Evolution Mining Ltd of Australia has been mentioned by analysts as a potential buyer of pure gold. Over the years, Sydney-based miners have invested heavily in the Red Lake area. In 2020, Evolution paid US$375 million to acquire the Red Lake Gold Complex from US-based Newmont Corp, an asset previously owned and operated by Canada’s Goldcorp Inc. Earlier this year, Evolution acquired Battle North Gold Corp. for $343. -Million, further strengthens the Red Lake area.
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