The Vancouver-based gold miner, which is backed by industry heavyweights such as Eric Sprott and Robert McEwen, has experienced a slew of issues underground since starting up its Madsen mine in Red Lake, about 550 kilometres northwest of Thunder Bay.
The company poured its first gold in December of last year, but initial production and ore grade at the mine has been dramatically lower than expected. In the first quarter, Pure Gold produced about 4,000 ounces, compared with the 13,700 ounces the company’s feasibility study had predicted. The company has since been forced to build more stopes – discrete areas excavated within a mine – to try to access higher-grade ore, which has driven up its expenditures. Its costs to mine an ounce of gold are running at about US$1,700, more than double what was predicted and not far off the metal’s current trading price near US$1,800.
Pure Gold has also needed to tap the equity markets on a number of occasions for new capital, diluting existing shareholders’ value. On Sept. 8, the company announced that a syndicate of underwriters had agreed to purchase $20-million worth of units at $1.05 in a bought deal. (Each unit comprises one common share in Pure Gold, and half of a common-share warrant. One warrant allows investors to acquire a Pure Gold share at a price of $1.36 for 18 months after the close of the financing). If bought deals go well, they usually sell out within 24 hours. However, the stock has consistently traded below $1.05 since the announcement of the financing, suggesting it hasn’t been a hit with investors. After reaching $2.98 a share late last year, Pure Gold’s shares, which trade on the TSX Venture Exchange, have swooned by 68 per cent.
“From an investor standpoint, it’s been a challenging year absolutely,” Darin Labrenz, chief executive officer 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 trip up in Red Lake, a region that has claimed its fair share of mining casualties over the years. While gold deposits in Red Lake tend to be high grade, they are often erratically dispersed, meaning companies need to do exhaustive drilling to ascertain the exact location of the ore. In the past, insufficient study has resulted in commercial disaster. In 2015, Rubicon Minerals Corp. rushed its Phoenix project in Red Lake into production with only an early-stage engineering study in hand. When Rubicon attempted to mine the deposit, it found no gold. The company quickly collapsed, wiping out about $1-billion in shareholders’ money.
Unlike Rubicon, Pure Gold did a lot more engineering work ahead of the development of Madsen. The company had conducted a full feasibility study on the project, and did extensive drilling. There was also decades of historical data available about the mine, as it has been previously in production for about 40 years, producing 2.5 million ounces, until the 1970s.
Mr. Labrenz and Mark O’Dea, a well-known mining executive and financer, acquired the property in 2014, and subsequent drilling showed Madsen contained another million ounces of gold reserves. Much of the basic infrastructure was already in place from the legacy mine, which meant the capital investment to put it back into production was relatively cheap at around $100-million. Still, Mr. Labrenz acknowledged that more could have been done to stave off the current start-up issues. In particular, more capital should have been put into the underground development infrastructure.
Among Pure Gold’s biggest investors are South African gold miner AngloGold Ashanti Ltd., mining financer Mr. Sprott, and Mr. McEwen, former CEO of Goldcorp. At one point, Mr. McEwen owned as many as 18 million shares, but sold down most of his stake earlier this year. Mr. McEwen, who now owns only 2.6 million shares, says he sold not because he foresaw the problems, but based on a personal investment decision; he thought the government was going to increase the capital gains tax. While Mr. McEwen said he of course would like to see Pure Gold trading at a higher level, he isn’t surprised the company is struggling. “Start-ups can be difficult,” he said. “They don’t always go as planned.”
Adding to Pure Gold’s woes is that the gold sector has fallen out of favour this year, with investors preferring industrial metals, such as copper, which has rallied to record highs partly owing to its increased usage in cleaner-energy applications, such as electric-car batteries.
Mr. Labrenz acknowledged the weakness in the share price of Pure Gold makes it vulnerable to a takeover. In the past, Australia’s Evolution Mining Ltd. has been mentioned by analysts as a possible buyer of Pure Gold. 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 the Red lake gold complex from U.S.-based Newmont Corp., an asset that was previously owned and operated by Canada’s Goldcorp Inc. Earlier this year, Evolution acquired Battle North Gold Corp. for $343-million, further consolidating the Red Lake region.
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