Leader Mining plans merger with Ariel —

Ariel’s previous merger attempt derailed after due diligence

Calgary-based junior Leader Mining International (LMN-A) is attempting to leap from explorer to producer by acquiring Ariel Resources (AU-T).

The two companies recently signed a letter-of-intent to convert all of Ariel’s 16.96 million shares into Leader shares at a ratio of 12.42 to 1.

Leader currently has 14 million shares outstanding.

The deal, which is still subject to regulatory and shareholder approvals, would add Ariel’s three small underground gold mines in Costa Rica — Tres Hermanos, San Martin and El Recio — to Leader’s Canadian exploration portfolio. Leader’s key asset is the Knife Lake project in northeastern Saskatchewan, where a prefeasibility study is assessing the amenability of a 79-million-tonne, low-grade copper deposit to open-pit mining and conventional sulphide extraction (T.N.M., May 4-10/98).

Leader plans to immediately inject US$2.5 million into Ariel’s mine projects in hopes of increasing aggregate annual production to 50,000 oz. gold from about 13,000 oz. A portion of the funds will also go towards exploring for additional resources.

The deal with Leader follows Ariel’s 1996 attempt to merge with Dakota Mining (a company recently delisted from the Toronto Stock Exchange for unrelated matters). Initially, that deal was to have involved the conversion of two Ariel shares into one Dakota share, but it was amended in early December so that the exchange ratio could be based on Strathcona Mineral Services’ independent audit of Ariel’s Costa Rican properties. Two weeks later, after completing its own due diligence, Dakota terminated all merger discussions with Ariel.

Ariel continued production at the mines, cranking out an aggregate 13,411 oz. gold in its 1997 fiscal year ended Sept. 30. In fiscal 1998, the company expects aggregate production to top 13,000 oz. gold, a level which, by the end of the second quarter, Ariel was roughly on pace to achieve.

Though cash costs for 1998 are not specified, a 1997 report states that the average “direct out-of-pocket cost (before administration and interest)” for producing an ounce of gold during the three months ended June 30, 1997, was US$264.

Ariel processes ore from the Tres Hermanos and San Martin mines at a nearby modified carbon-in-pulp mill. The mill also treats concentrates produced by local artisanal miners, which the company says is done primarily “to save the local rivers from mercury contamination.” Asked if this gold is included in Ariel’s production figures, a company spokesman said, “I think it is, but it’s not a material amount.”

At San Martin, Ariel had attempted to operate a continuous vat-leaching plant associated with an open-pit resource that it began mining in April of last year. The open-pit project has since been laid to rest in order to mine “the more economical underground reserves.”

At the end of 1997, Ariel pegged measured and indicated resources at its Costa Rican properties at 2.25 million tonnes grading 4.52 grams gold per tonne. A further 1.7 million tonnes grading 4.1 grams gold are classified as inferred, and 4.2 million tonnes grading 4.83 grams gold are deemed “anticipated.”

The resources were calculated by Tim Coates & Associates (TCA) and follow guidelines initially recommended by the Canadian Institute of Mines’ (CIM) Ad Hoc Committee. The committee has since removed anticipated resources from its classification system.

Ariel reported a net loss from operations of US$944,671 for its fiscal year ended Sept. 30, 1997 — excluding a US$2.6-million writedown of various mineral properties, claims and mining rights — compared with a loss of US$194,559 a year earlier. Revenue between the two periods rose to US$5.1 million from US$4.9 million. A loss of US$346,945 was reported for the quarter ended Mar. 31.

In a recent filing, Ariel noted that it does not currently comply with a number of guidelines of the Toronto Stock Exchange related to corporate governance, including one that suggests the audit committee be composed only of outside directors. The company also states that while it complies with the requirements of the British Columbia Company Act, in that the majority of its audit committee is comprised of outside directors, “the board feels it is appropriate to have William Bennett, the president of the company, sit on the audit committee, given that he is most familiar with the operations of the company.”

Furthermore, the company does not have a committee of outside (non-management) directors with the responsibility for assessing directors on an ongoing basis. “Given the relatively small size of the board of the company, it is felt [to be] unnecessary to carry out ongoing assessments of the directors,” the filing states.

Ariel’s board consists of Bennett, financial consultant John Hislop and business consultant Barbara Kelly. Ernst & Young resigned as Ariel’s auditor early this year and a new firm has since been retained.