MINING MARKETS & INVESTMENT NEWS — Dayton continues to rebuild

A proposal to reorganize its capital structure marks a final step in a re-building process that Dayton Mining (DAY-T) started more than eight months ago.

The beleaguered gold producer intends to convert all of the US$69-million principal amount of its outstanding unsecured subordinated debentures into common shares, and to consolidate its shares in a 10-for-1 exchange.

Dayton is offering to convert its debt at the rate of 4,500 pre-consolidation shares for each US$1,000 principal amount of debentures, equating to a conversion price of US22.22 cents per pre-consolidation share. Once the conversion of the debentures is approved, Dayton proposes to consolidate its shares, by exchanging one new share for every 10 pre-consolidation shares held. That consolidation would happen prior to the issue of the shares under the conversion.

The conversion and consolidation would leave Dayton with about 35 million shares outstanding, a bank debt of US$5 million and some US$5 million in cash.

If approved, the transaction will be treated under Canadian accounting regulations as a financial reorganization resulting in the comprehensive revaluation of the assets and liabilities of Dayton. Under these “fresh start” accounting rules, the liability related to the convertible debentures will be eliminated, the company’s deficit will be wiped clean, and all assets and liabilities will be revalued to their estimated fair values.

Investment firm Nesbitt Burns, which Dayton engaged as a financial advisor, delivered an opinion that the conversion will be fair to the holders of debentures, as well as to shareholders. Nesbitt Burns was the lead underwriter of the original financing, followed by Scotia McLeod and CIBC Wood Gundy Securities.

The 5-year debentures mature March 1, 2002, and bear interest at 7% per annum, payable semi-annually. The debentures are convertible at the holder’s option into common stock at a conversion price equivalent to US$6.36 per share, equal to 157.23 shares per US$1,000 principal amount debenture. Dayton has the option of repaying the debentures in shares at maturity.

When the US$69-million convertible debenture financing closed in February 1997, Dayton was trading at US$5.31 per share on the American Stock Exchange and $7.20 on the Toronto Stock Exchange. Today, Dayton is trading at the bottom end of a 52-week range of 15 cents-$2.39.

The proposed conversion must be approved by debenture-holders owning not less than 75% of the principal amount of the debentures. Dayton will also seek approval of shareholders for the issuance of the shares upon the conversion, as well as the consolidation. The company expects to hold a meeting for holders of debentures and shares on March 31.

Dayton owns the Andacollo gold mine, a 20,000-tonne-per-day, open-pit, heap-leach operation near the coastal city of La Serena in central Chile. Development and construction began in July 1994 and was completed in September 1995. Commercial operations began Jan 1, 1996. In its first year of operation, Andacollo produced 87,650 oz. at a cash cost of US$205 per oz.

In 1998, the mine produced 92,548 oz. at a cash operating cost of US$241 per oz., compared with 91,347 oz. at US$251 per oz. in 1997.

In the early part of 1998, Minorca Resources acquired a 12.2% interest in Dayton by purchasing 5 million shares for $16 million, or $3.20 per share, from outgoing President Wayne McClay. Then Minorca President Roland Horst resigned his post to become Dayton’s chairman, but at the annual shareholders’ meeting in June, Horst and the entire board of directors were ousted in favour of an alternative slate of nominees proposed by minority shareholder Manchester Securities of New York, N.Y. William Myckatyn was subsequently elected chairman, president and chief executive officer of the company. Minorca has since merged with McWatters Mining (MCW-T).

“The first order of priority was obviously to get the Andacollo gold mine functioning better than it has in the past, and as well as it can in the future,” states Myckatyn. “As a result of the efforts of our new management team at Andacollo, the mine is now finally meeting targets and, for the first time ever, generating cash flow for the company. The terms of our project loan have been stabilized and we do not expect that to be an issue going forward.”

Reserve and resource estimates at Andacollo were recently updated using a gold price of US$325 per oz. Minable ore reserves at the end of 1998 were estimated at 31 million tonnes grading 0.87 gram gold per tonne, with a stripping ratio of 1.84-to-1. This is equivalent to 862,100 contained ounces of gold.

If a gold price of US$300 per oz. is used, the number of contained ounces falls to 812,300.

Total resources stand at 134.6 million tonnes grading 0.64 gram, based on a cutoff of 0.3 gram. All reserve estimates were audited by Denver-based Mine Reserve Associates. At the end of 1997, reserves stood at 1.3 million contained ounces based on a gold price of US$350 per oz. The subsequent decrease is due to additional drilling data, the use of a lower gold price, the mining of 176,500 oz. gold in 1998, revised pit slopes, ore losses in the Socorro deposit and a re-interpretation of the Churrumata pit.

Dayton has budgeted US$400,000 for further exploration at Andacollo in 1999. The revised production model for 1999 is 138,000 oz. at a cash operating cost of US$200 per oz.