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Pure Gold shareholders face wipeout after junior fails at Red Lake mine
By Niall McGee
Globe and Mail, Toronto
Monday, October 31, 2022
Pure Gold Mining Inc. PGM-X shareholders face losing their entire investment with the junior miner filing for creditor protection after it failed to turn around its gold project in the notoriously hard-to-mine Red Lake district of Northern Ontario.
Last year Vancouver-based Pure Gold ran into trouble when it encountered both grade and production shortfalls at its Madsen mine soon after putting it into production.
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The Red Lake region, which has been mined for nearly 100 years, is known for its high-grade underground gold deposits. While tantalizingly rich in grade, Red Lake is also renowned for gold that is not evenly distributed but instead routinely occurs randomly and erratically, meaning miners need superb technical skills to get it right.
Over the past 18 months Pure Gold had tried to salvage its project by replacing its chief executive twice, redoing a technical study that aimed to find a path to profitable mining, and keeping itself going by raising cash through dilutive equity issues. But last week the junior put shareholders on notice by revealing it failed to raise nearly as much cash as it needed from its latest funding effort. The company also ceased production at Madsen, since it was running dangerously low on funds.
On Monday Pure Gold said it applied for creditor protection under the Companies' Creditors Arrangement Act (CCAA) with the Supreme Court of British Columbia. When companies enter CCAA, typically it is only the debtholders who stand to salvage some of their holdings, while equity holders typically get wiped out.
Pure Gold, which at one point reached a market value of $685 million, closed today's trading session on the TSX Venture Exchange worth almost nothing.
The company's biggest shareholder is South African miner AngloGold Ashanti, with a 16.5% stake. Mark O’Dea, Pure Gold's chief executive, has a 2.2% share. Mining financier Eric Sprott, who has myriad equity investments spread across many junior miners, is the second-biggest holder of Pure Gold with a 6.7% stake.
"I don't think I lost $100 million, but it could very well be," Mr. Sprott said in an interview. "At this point in time, the bigger the better, because it's a tax write-off. Now that it's worth nothing, please tell me I lost $100 million or $200 million. I'll use the tax loss."
Pure Gold holds only around $2 million in cash, compared with more than $200 million in liabilities. Sprott Resource Lending, which is owned by Sprott Inc. SII-T, a firm the billionaire investor founded, is its biggest creditor.
This isn't the first time that the Red Lake district has claimed a junior miner. In 2016 shareholders at Rubicon Minerals Corp., which at one time had a market value of $1 billion, lost everything after the company's mine ran into serious geological problems. A restructured version of the company, Battle North Gold Corp., was acquired by Australia's Evolution Mining Ltd. last year.
In 2008 Goldcorp Inc., bought Red Lake exploration company Gold Eagle Mines Ltd. for $1.5 billion. The acquisition ended in disaster for Goldcorp, which was unable to put the project into production despite spending hundreds of millions in additional development costs.
Pure Gold's Madsen project had previously operated for 40 years, producing 2.5 million ounces of gold, before it was shut down in the 1970s. Pure Gold's founders, Mr. O'Dea and Darin Labrenz, acquired the defunct project in 2014 and their early development work indicated that a new iteration of the mine could produce an additional million ounces of gold. Eventually the pair attracted investment from the likes of Mr. Sprott and Robert McEwen, the founder of Goldcorp. While reviving dormant mine sites can be lucrative because upfront costs tend to be much lower than starting from scratch, they are far from risk-free.
"There probably was excessive optimism initially," Mr. Sprott said. "Maybe things could have been done at a different level early on, when there was more market cap to work with, but c'est la vie."
Despite the recurrent stumbles with Red Lake, it remains a gold district that generates excitement and lofty valuations. Last year Kinross Gold Corp. paid $1.8 billion to acquire Great Bear Resources Ltd., another Red Lake operator whose mining project hasn't been built yet. The purchase price was one of the highest on record for the acquisition of a development company that has no proven reserves.
Evolution Mining had been mentioned by analysts as a possible buyer of Pure Gold before it filed for CCAA. Over the past few years the Sydney-based miner has invested heavily in the Red Lake region. In 2020 Evolution paid US$375 million to acquire Red Lake gold mines owned by U.S.-based Newmont Corp., assets that were previously owned and operated by Goldcorp.
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