Firstgold Caught Between Two Superpowers

After spending $16 million over the last two years developing a processing facility at its Relief Canyon mine in Nevada and finding a state-owned Chinese company with which to partner and provide much-needed cash, Firstgold (FGD-T) says objections from the Committee on Foreign Investment in the United States has scared off its strategic investor.

China’s Northwest NonFerrous International Investment is not proceeding with its planned investment in Firstgold because the Committee on Foreign Investment objected to it on the grounds that it posed national security risks. Firstgold’s Relief Canyon mine, near Lovelock, is about 80.5 km from the Fallon Naval Air Station and related infrastructure, which the Navy uses for tactical aviation training.

In July, Northwest Non Ferrous International Investment had agreed to purchase 51% of Firstgold for US$9.5 million and loan it US$5.5 million for working capital for the mine. The company also agreed to buy the secured lender’s position for US$11.5 million.

But those plans derailed in December, when the Committee on Foreign Investment said it would recommend to U.S. President Barack Obama that he reject the proposed investment.

“The Chinese can come in and buy real estate near Lovelock so I don’t see what’s so special about the mine. . . it’s just baffling,” Firstgold’s chief executive, Terry Lynch, said in a telephone interview before he learned that Northwest was withdrawing from the deal.

Lynch also pointed out that Relief Canyon was a very small mine that in a good year would produce just 80,000 oz. gold, adding that the mine property is surrounded by other mines.

Lynch noted that as far as he knows, there are no laws that restrict foreign companies wishing to invest in properties near mili- tary establishments and if there were, he would not have proceeded with the transaction.

“It’s about having a clear set of rules,” he argued. “There probably have been a tonne of transactions involving foreign companies buying assets in Nevada so is this just a Chinese rule? Is there some sort of xenophobia about this?”

He added: “I wouldn’t have gone through all this grief if I had known this would have been such a traumatic ordeal.”

Now Firstgold is reviewing other options to bring Relief Canyon into production and to obtain value for its assets. In addition to their proposed equity investment in Firstgold, Northwest had a separate agreement to purchase the senior secured debt in Firstgold. At presstime, Firstgold was not sure whether Northwest’s withdrawal would affect that agreement.

“The good news is that at the time we struck the deal with Northwest, gold was at US$900 per oz., today it’s US$1,100 per oz. so that’s positive and we’ve had some inquiries,” Lynch said.

Relief Canyon is one of four properties Firstgold owns in Nevada. The mine is about 177 km northeast of Reno and consists of 965 acres (3.9 sq. km).

Historically, 141,000 oz. of gold were extracted from the Relief Canyon property between 1986 and 1989. The operations were then suspended due to the declining price of gold.

The junior explorer poured its first gold dor bar in March 2009, after receiving its final reclamation permits from the Nevada Department of Environmental Protection in April 2008. The permit was the final step of a permitting process that took nearly three years to complete.

Firstgold had anticipated mining to begin in the existing pits in early 2010.

Throughout 2007 and 2008, the company developed a new crusher system and completely overhauled its process plant. The plant is capable of handling 2 billion gallons of fluid per year and processing 7 million tons of ore.

Over the last 52 weeks, Firstgold has traded in a range of 2-31¢ per share; the company has 182.5 million shares outstanding.