A British Columbia judge will have a lot to consider today in mulling over the application for the sale of a mothballed Red Lake gold mine to new ownership.
A group of disgruntled shareholders and mining contractors of insolvent Pure Gold Mining are not going to allow the transaction to proceed without a fight.
Vancouver’s Pure Gold Mining, which has been under CCAA (Companies’ Creditors Arrangement Act) protection for more than seven months, was scheduled to appear in a B.C. courtroom May 29 for final approval of the sale of the mine to West Red Lake Gold Mines.
In mid-April, West Red Lake announced it had signed a binding agreement with Pure Gold and Sprott Resources Lending Corp, Pure Gold’s primary lender, to acquire all of the shares of Pure Gold.
According to a report from KSV, the court-appointed monitor, the cash-and-share deal is valued between $49.4 million and $54.4 million.
The assets being sold to West Red Lake Gold involve the underground mine, a processing plant and a 4,600-hectare property. The targeted date to finalize the sale is June 23.
The sale of the mine is structured around an insolvency measure called a reverse vesting order (RVO), a solution that’s increasingly being granted by courts in insolvency cases in order to give a clean slate to the buyer.
RVOs are attractive to buyers of distressed companies because it allows the shares of the insolvent company to be sold along with all the good assets, including things like existing environmental permits, mine closure plan bonding and all the tax attributes, which are all preserved.
All the bad assets, like liabilities, assets and creditor claims, are relegated to the limbo world of a specially created residual company.
The court approved a RVO in the sale of Harte Gold to Silver Lake Resources last year.
Pure Gold Mining is asking the court for a reverse vesting order, but Linda Larouche has something to say about that.
The B.C. resident and Pure Gold investor, is the representative plaintiff in a class action lawsuit launched April 2022 on behalf of an unknown number of investors seeking an unspecified amount in compensation for damages and losses incurred from their investments in Pure Gold.
The class action alleges Pure Gold failed to disclose the true state of the financial and operational problems at mine, pointing to “misrepresentations” in publicly disclosed documents.
In petitioning the court not to approve the RVO, Larouche argues not only would West Red Lake acquire all of the shares of Pure Gold but the RVO would release the company’s former directors and officers from liability.
The defendants named in the class action include former president-CEO Darin Labrenz, former CFO Sean Tetzlaff, Mark O’Dea, a Pure Gold director, and Graeme Currie, director and board chair. Labrenz and Tetzlaff exited early in January 2022 as part of a corporate housecleaning.
Also named are Sprott Capital Partners and a raft of underwriters involved in raising a total of $54.3 million for the company on three separate occasion, between May 2021 and February 2022 through share offering and brokered private placements.
The Pure Gold Mine, which went into production in August 2021, was a revitalization project of the former Madsen Mine.
But investors found out within the months that there had been numerous issues in the mine planning, there were underground development delays, the amount of high-grade gold ore running through the processing plant was not what was anticipated, along with a myriad of other “strategic misalignments” that resulted in out-of-control spending that put the company in a severe cash crisis.
Sprott Resource Lending, the larger secured creditor, loaned Pure Gold millions to stay solvent and to keep the mine operating, and later supported the company financially during CCAA.
Management at Pure Gold later admitted in a webcall with analysts and shareholders last August that they didn’t have a handle on the local geology and started mining at the low-grade end of the deposit.
But Mark O’Dea, then-company president, said they had learned their lesson, steps were taken to get costs under control – including layoffs – and that they “were rounding the corner” on their way to better performance and higher grades by year’s end.
That was before Pure Gold halted production on Oct. 24 and entered creditor protection last Halloween. The mine was put on the selling block days later.
Today, only a skeleton crew of 38 out of an operating workforce of 271 remains on the job to maintain the site.
Larouche and the plaintiffs also want to see a scoping study of the mine that was completed last February, was made available to potential buyers, but was not publicly disclosed.
After entering CCAA, Pure Gold’s original plan was to prepare a prefeasibility study with a new life-of-mine plan to show to potential bidders. However, the company decided to carry out a more generalized scoping study, also known as a preliminary economic assessment, which would address the economics of the mine and included a new life of mine plan.
“It ought be produced,” Larouche and the plaintiff said in an affidavit, saying it would show the value of the mine.
At the same time, KSV Restructuring, the court-appointed monitor, said there are “several” construction claims by claimants that were registered in an Ontario Superior Court of Justice against Pure Gold soon after the company entered CCAA.
Nuna Logistics is out more than $3.8 million and SCR Mining and Tunnelling of Sudbury is owed more than $577,000.
The companies are among a number of people, including dozens of mining contractors and service and supply companies, are owed $149.3 million but are categorized as unsecured creditors.
They take issue that a good chunk of the sale proceeds – about $4.7 million in cash – plus common shares of the purchasing company and a convertible promising note of US$6.7 million would flow directly to Sprott rather than to Pure Gold or the monitor and placed in a trust account for a later determination.
Sprott is categorized as a secured creditor collectively owed $133 million
The two companies noticed KSV, in its monitor’s report to the court, provided no comment or advice regarding their liens and assert that they rank ahead of Sprott as a secured creditor.