Hemlo to boost stake in Holloway venture

With the Holloway project being readied for production by Hemlo Gold Mines (TSE), junior partner Freewest Resources (TSE) was poised to make the transition from an exploration company to a gold producer.

It now appears a different course of action will be taken. Hemlo Gold recently announced that it intends to amalgamate with Freewest, thereby increasing its direct interest in the Holloway project to 84.65% from 50.79%. The property is about 40 miles north of Kirkland Lake, Ont. The agreement-in-principle calls for each Freewest shareholder to receive one Hemlo Gold share for every 4.1 Freewest shares, as well as shares on a 1-for-1 basis in a newly incorporated company. The new entity will have $3 million in cash and hold all Freewest’s existing properties other than the Holloway joint venture and related properties in Harker and Holloway twps. Freewest President Mackenzie Watson had been busy in recent months lining up financing for his company’s expected share (33.86%) of capital costs. The change in plan, he says, was simply a matter of a bird in the hand being worth two in the bush. He also hinted that his new company, which will likely retain the name “Freewest” in some form, may take on some new exploration projects.

“We think the Hemlo deal is good for shareholders,” Watson tells The Northern Miner. “They won’t have to wait as long for a return on their investment.” Ronald Coll, mining analyst with McLean McCarthy, views the transaction as good for all parties, particularly as it provides a premium on Freewest’s pre-bid share price. “Hemlo has a greater stake in the project, and Freewest is free to do what it does best — exploration,” he says.

If all goes as planned, Teddy Bear Valley Mines (CDN) will be the remaining junior participant, with a 15.35% interest.

The transaction is still subject to a due diligence review and regulatory approvals. Freewest will also seek opinions on the value and fairness of the transaction before a shareholders’ meeting is called to vote on it. Hemlo holds about 19% of outstanding Freewest shares, and has an approximate 8% equity interest in Teddy Bear.

In the meantime, surface construction and mine development are under way at Holloway, with initial production scheduled for the first quarter of 1996. At last report, the capital cost of a custom milling operation was estimated to be $55 million.

Minable reserves are 6.4 million tons grading 0.2 oz. gold per ton, sufficient for 13 years of production. The 1,380-ton-per-day mine is targeted to produce 100,000 oz. gold per year.

The Lightning deposit remains open at depth, and a portion (about 8%) extends on to ground in which Teddy Bear has a 40% interest. As a result of this (and also owing to a favorable royalty structure), Teddy Bear expects to receive more than 17% of the net revenues from the new mine.

Teddy Bear, which has itself undergone a recent restructuring, is considering several options to raise its share (currently about $9 million) of capital costs.