Northern Miner, Jul 22, 2014
Bradford Cooke and Endeavour Silver (TSX: EDR; NYSE: EXK) have had noteable successes in revitalizing historic Mexican silver districts, and the team is now looking to take that model into the U.S. via a deal between its Canarc Resources (TSX: CCM; US-OTC: CRCUF) vehicle and beleaguered junior Santa Fe Gold (US-OTC: SFEG).
On July 15 the companies announced a strategic share exchange agreement that will result in Cooke and Canarc CEO Catalin Chiloflischi taking the reins at Santa Fe, with the intention of fast-tracking production at the company’s Summit mine near the town of Lordsburg, New Mexico.
Santa Fe had approximately US$20 million in outstanding debts due to Waterton Global Value and Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND), but those obligations are set to be re-structured as the deal moves forward.
Under terms of the agreement Santa Fe will issue 66 million shares to Canarc, while Canarc will, in turn, issue 33 million shares to Santa Fe. The deal will result in Santa Fe owning roughly 17% of Canarc’s outstanding shares, and Canarc holding around 34% of Santa Fe’s outstanding shares. For Cooke and his team the agreement aligns with Endeavour’s business strategy of picking up distressed near-term assets in historic mining districts and turning operations around to achieve profitability.
“[We] had been looking for opportunities to prosper in this market, and I think it’s very fortunate we found each other. The deal is constructed quite creatively, and offers a way for Santa Fe to find a way forward in dealing with it debts, securing capital, and putting the mine back into production,” Cooke, who will step in as Santa Fe’s chairman, explained during a conference call.
“For Canarc it was an opportunity for us to get into a brand new material opportunity without getting involved in the Santa Fe debts. We see in Summit an opportunity very similar to what we accomplished with Endeavour in Mexico. That’s basically the model we’ll be trying to emulate moving forward,” he added
Summit actually achieved commercial production back in 2012, and Santa Fe had planned to ramp up to a target range of between 28,000 oz. and 30,000 gold equivalent oz. annually over a five year period. The company ended up suspending mining activities in November 2013 following disappointing financial performances. Sales were adversely affected by various equipment issues related to a lack of capital.
Summit’s mine plan was based on probable reserves in Summit’s Footwall zone that total 529,000 tonnes grading 4.13 grams gold per tonne and 290.3 grams silver per tonne for 85,060 oz. contained gold and roughly 6 million oz. contained silver.
The mine is located in a rugged and isolated setting in Grant County, southwestern New Mexico, near the Arizona state line. The property lies within the Steeple Rock mining district, which has recorded historical production of gold, silver, base metals and fluorspar from several dormant mines, including: Carlisle, East Camp and Norman King.
“The type of deposit we see at [Summit] is remarkably similar to the types of deposits we found, re-developed, and expanded at Endeavour. These are classic low-sulfidation, epithermal vein deposits that represent classic high-grade underground gold-silver mines,” Cooke continued. “And they’re typically district plays, so even though Summit is just one property we see the Steeple Rock district has a fabulous history of small-scale production, but not much in the way of modern exploration. I think these additional opportunities should drive ongoing growth for the company.”
Since Summit is close to production, Canarc envisions a fairly quick turnaround time in terms of getting the mine running. Chiloflischi speculated that within six months of locking down project financing the company should have Summit back in action, and estimated that capital costs for the re-start would total between US$12 million and US$13 million. Canarc is looking at a high-grade underground operation that would run at a throughput rate of around 12,000 tonnes per month.
And an additional upside for Santa Fe is that Cooke and his team can bring their financial power to bear at Summit. The company has entered into an agency agreement with Euro Pacific Capital — which has history funding Endeavour and Canarc — in a bid to place convertible gold notes with an aggregate principle amount of between US$20 million and US$25 million.
“What we recognized in Mexico were these famous old silver and gold mining districts that were fully developed, permitted, and staffed, but struggling to operate for various reasons, including: lack of ore, lack of money, low commodity prices, etc. I took the view in the past nine months that 2014 should be a turnaround year for precious metals,” Cooke added. “So I really wanted our Canarc team to have this new material opportunity before precious metals start to take off. I think this is the right one because it’s a brilliant way to accommodate all of our respective needs.”
In terms of the outstanding debt it appears that Sandstorm and Waterton are both behind Cooke’s vision based on the re-structuring proposals.
Santa Fe will reportedly pay Wateron US$3 million in cash, after which the outstanding amount under the credit agreement will be reduced to US$6 million, with that balance paid in US$500,000 installments over the next 45 months.
Meanwhile, Sandstorm has agreed to a US$1 million cash payment out of the proposed financing and a re-jigged streaming agreement under which it will receive a minimum of 350 oz. of gold at a price of US$400 per oz. over 16 quarterly periods.
Shares of Canarc rose around 40% over the two trading days following the announcement en route to a 10.5¢ close at the time of writing. The company has traded within a 52-week window of 4¢ and 13¢, and maintains 152 million shares outstanding for a $16 million press time market capitalization.
Santa Fe jumped around 35% over the same period before closing at US7.5¢ per share at the time of writing. The company has traded within a 52-week range of US2¢ and US20¢, and has 127 million shares outstanding for a US$9.5 million press time market capitalization.