VANCOUVER — Marlin Gold Mining (TSXV: MLN; US-OTC: MLNGF) just built a gold mine in Mexico’s Sinaloa state for US$23 million. That is intriguing, but on closer inspection, the intrigue deepens.
Consider these points. Marlin is a publicly traded company but a Connecticut-based fund called Wexford Capital owns 80% of its outstanding shares, of which there are 680 million.
Most of the shares stem from two rights offerings backstopped by Wexford that raised the capital to build the La Trinidad open-pit, heap-leach mine 42 km southeast of the town of Rosario, something the fund had to do after it failed to take Marlin private.
Now, with La Trinidad in operation, Marlin has set up a subsidiary company called Sailfish and given it the right to buy a quarter of the mine’s gold at below the spot price. In contrast with most streaming deals, Sailfish paid nothing for the stream.
In fact, Sailfish will soon get even more from Marlin: another US$15 million to close another deal. That deal will see Sailfish hand US$15 million to Golden Reign Resources (TSXV: GRR) for the right to buy gold from Golden Reign’s planned San Albino mine in Nicaragua for US$700 per oz.
Adding to the interlayering: Marlin is also taking a 20% stake in Golden Reign, and an engineering firm managed in part by two of Marlin’s directors will manage the San Albino build.
This complicated arrangement is driven by Wexford’s vision to develop companies that support each other in financing, engineering and building mines. For investors, the benefits should be reduced risk and enhanced premiums.
The story starts in 2012, when Wexford bought a 17% stake in Oro Mining. The fund managers at Wexford liked Oro’s La Trinidad property so much that they launched a hostile takeover bid for the company.
Many Oro investors tendered to the bid — but not all. When the dust settled Wexford owned 53% of the company, which was soon renamed to Marlin Gold Mining.
“Marlin is a public entity by happenstance right now,” said Akiba Leisman, chairman of Marlin and Golden Reign and a vice-president at Wexford. “If we had collected more than two-thirds of the shares Marlin would be private, but to their credit some of Marlin’s investors said the price per share that we were offering — 11¢ — was too low. So because we were dealt that hand we had to operate in the public space.”
The goal at Marlin was to build La Trinidad into a mine, which is expected to cost US$27 million. Wexford had the money, but since Marlin remained a public entity, the capital had to move through appropriate avenues. The solution was two rights offerings. The first, in early 2013, raised $15 million from existing shareholders at 8¢ a share. The second, eight months later, raised another $15 million from existing investors at 5¢.
The moves gave Marlin its cash, but also left the company with 680 million outstanding shares. And since Wexford subscribed for all the shares, other shareholders declined to purchase in the rights offerings. By the end of 2013 Wexford owned 79.9% of Marlin.
Two months later La Trinidad poured its first gold. The heap-leach operation in Sinaloa state is expected to produce 40,500 oz. gold this year, rising to 60,000 oz. annually thereafter. The small resource supports a five-year mine life, but Marlin is confident it will find more mineralization.
Marlin is also confident La Trinidad is more valuable than Marlin’s 15¢ share price suggests — and has a plan to change that.
“There’s been a fairly consistent valuation difference between gold royalty and streaming companies and gold-producing companies, and for the longest time I didn’t understand why nobody attempted to exploit that difference,” Leisman said. “The reality is that people have, just not in gold mining. In different industries different financial structures lead to different valuations, and prudent money managers look to exploit that.”
Leisman pointed to Canada’s royalty trust model and to the master limited partnerships in the U.S. as examples of royalty-like structures in other sectors. But he and his partners did not know of anyone exploiting the arbitrage between streaming and producing in the gold sector.
That’s where Sailfish, Marlin’s subsidiary company, comes into play. Sailfish is a streaming and royalty company. It was set up as a Marlin subsidiary but in short order will be spun out at an independent public entity, its shares going to Marlin shareholders.
That means anyone investing in Marlin today gets both a nascent gold producer and a new streaming company within each share, a bridge that should take advantage of the producer-versus-streamer valuation arbitrage.
Once the streaming deal with Golden Reign closes, Marlin will spin Sailfish out. That will end the arbitrage advantage, but Leisman thinks synergies between Marlin, Sailfish, Golden Reign and any future companies or mines added to the set will create advantages.
“There are other things we think we can do a bit better than our competition out there in the royalty space,” Leisman said. For one, joining the Wexford–Marlin–Sailfish–Golden Reign group requires full participation. In the Golden Reign deal, for example, the engineering firm connected to two of Marlin’s directors will manage the engineering and construction at San Albino; Leisman is taking over the chairman’s seat; and two Wexford representatives are joining Golden Reign’s board of directors.
“As an investor in this industry that has seen a lot of screw-ups, we tend not to tolerate that here at Wexford,” Leisman said. “That means it’s important to have financial and operating oversight in the assets we invest in.”
Next, Leisman points out Sailfish will operate differently from other streaming and royalty companies because it will distribute 90% of its operating cash flow to its investors.
“For the life of us we don’t understand why our competitors hold a war chest of capital on their balance sheets, because if you announce an accretive acquisition — and for royalty and streaming companies every transaction is accretive — there will always be a financial market available to finance accretive acquisitions,” Leisman said.
By distributing its capital to shareholders, Sailfish will become unique: an income investment with a high coupon that is inflation protected, because of the relationship between gold and inflation.
“In this yield-starved environment we want to have an investment product that pays a substantial yield on an annualized basis, but that also offers something a fixed-income product wouldn’t,” Leisman said. “Say there is inflation and prices go through the roof. Guess what? Gold will go through the roof too, and so our distributions will increase.”
As Sailfish and the other members of the new Wexford group of companies become better established, Leisman sees synergies increasing.
“Sailfish can also, for example, operate in a synergistic way to Marlin’s acquisition strategy,” he said. “You can envision a situation where Marlin makes an acquisition and uses Sailfish as a source of financing to develop it — it would be relatively inexpensive to Marlin but still accretive to Sailfish.”
As for what projects or companies might be on Sailfish or Marlin’s radar, Leisman pointed to the recent deal with Golden Reign, whose San Albino project in Nicaragua offers a near-surface oxide gold resource that the company plans to develop within the next two years.
“We are attracted to projects that have the grade to support them-selves in almost any environment,” Leisman said. San Albino indeed offers good grades — the open-pit resource there stands at 247,000 indicated tonnes grading 9 grams gold and 10.8 grams silver, plus 682,000 inferred tonnes averaging 8.25 grams gold and 10.7 grams silver.
“We also like things that have containable capital requirements,” Leisman continued. “And Nicaragua has demonstrated itself as a reasonable jurisdiction. Finally, we think San Albino is something that can grow into our sweet spot.”
Engineering expertise, arbitrage opportunities, strength in numbers — Wexford’s concept involves a lot of moving parts, but if they all fit together as intended the result could be an efficient and effective machine.
To date the market has reacted little to the scenario. Marlin’s share price inched its way from 11¢ to 15¢ in the week after its Sailfish streaming subsidiary news, which was followed by news of the first gold pour at La Trinidad. Meanwhile, Golden Reign’s share price gained 1.5¢ on news of the $15-million streaming deal to close at 19¢, still near the low end of its 52-week, 11.5¢ to 44¢ trading range.
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