Redcorp enters creditor protection as Tulsequah costs escalate

Vancouver – Redcorp Ventures (RDV-T) has filed for creditor protection, a few weeks after suspending development work at its Tulsequah mine in northern British Columbia in the face of escalating capital costs. Now the company has a month to find new funding in a tough market.

Redcorp is protected from any credit demands until April 4. The key demands stem from an $85-million loan facility with HSBC Bank and outstanding commitments to contractors, suppliers, and vendors, one of which is now the subject of a $6.5-million lawsuit.

“This allows us to go through the restructuring process with possible joint venture partners or possible financiers without any distractions from creditors trying to clean us out,” says Troy Winsor, investor relations representative for Redcorp.

Redcorp started re-developing Tulsequah Chief, a polymetallic underground mine near Atlin B.C. that last operated in 1957, in early 2007. A mid-2008 updated feasibility study projected total capital costs of $322 million, including a $16.9-million contingency fund.

Plans call for the mine, which Redcorp had planned to have in production by the end of 2008, to process 2,000 tonne of ore each day to produce 40,000 tonnes zinc, 9,000 tonnes copper, 3,800 tonnes lead, 1.7 million oz. silver, and 50,000 oz. gold annually. Mine life was projected at eight years; payback would have been achieved in less than 2.5 years.

Redcorp was not the only company confident Tulsequah Chief was going to be not only a functional but profitable mine. HSBC initially provided Redcorp with a $64-million bridge loan; the loan was then boosted to $85 million as part of HSBC’s asset-backed commercial paper (ABCP) re-negotiations.

And Gold Wheaton (GLW-V) promised Redcorp $90 million for the right to buy Tulsequah’s life-of-mine gold production. Gold Wheaton was to hand over $10 million once Redcorp had certain permits in hand and then would make the other $80 million available once Redcorp had paid for Tulsequah’s construction and commissioning. In exchange, Gold Wheaton would pay the lesser of US$400 or the spot price for each ounce of gold produced at Tulsequah.

Everything seemed to be progressing as planned and in October Redcorp hired Global Project Management to head up mine development. The new management company immediately initiated a project execution plan; in the meantime work at Tulsequah was suspended for a planned, three-week holiday. The suspension was then extended through January to give Global Project more time to complete its plan and Redcorp time to focus on a few permitting requirements.

Then, in mid-February, Redcorp announced that Global Partner’s review revealed capital costs had escalated to $500 million from $320 million, raising “serious concerns about the development of the Tulsequah Chief mine by the company without strategic partners.” The company says construction will remain suspended until further notice.

Redcorp has already spent $170.8 million at Tulsequah. The site has a 15-km long network of roads, an airstrip, and temporary camp infrastructure; other monies have been spent securing long-lead-time equipment including a diesel power generating plant, rod, regrind, and ball mills, river tugs, and tow vehicles.

The river tugs and tow vehicles are part of another interesting aspect of the Tulsequah story. The initial plan to get concentrate out of Tulsequah was to build a 160-km long road from Atlin to the mine; construction permits were granted in 1999 and had been renewed since. But in late 2006 the company changed its focus to using the Taku River.

When the mine operated in the 1950 supplies were brought in and concentrate out by tug and barge on the Taku to Juneau, Alaska. Redcorp had initially rejected this option because the water level is too low during half the year to use a tug. More recently, the company identified a year-round river option: the air cushion barge. Air cushion barges use high volumes of low-pressure air to hover on the river but, unlike hovercrafts, are propelled by regular diesel engines. Essentially, an air cushion barge is a slower, quieter, less disruptive hovercraft that can operate in shallow or deep water as well as on land and on ice.

The company applied to amend its B.C. and Canadian Project Approval Certificates. In late February, the B.C. permits came through; the federal permit is expected in the near future. However, the new route takes concentrates into Alaska and thus Redcorp also need approval from the Alaskan government.

The Alaskan permits depend on sea trial proving the vessel meets requirements for noise and wake. Redcorp says the barge, which is being built in Portland Oregon, is 95% complete. But until the barge is completed, moved to Juneau, and sea tested, Redcorp cannot get its Alaskan permit. Without the Alaskan permit, it cannot access the $10-million Gold Wheaton agreement down payment.

And Redcorp is also facing a lawsuit filed by a contractor claiming it has not been paid. Arctic Const. claims Redcorp contracted Arctic in June 2007 to build a mine access road, airstrip, and camp and agreed to make regular payments, subject to a 10% holdback. In early 2008 the parties modified the agreement, with Arctic agreeing to reduce its rates on some equipment in return for contracts for additional work. Arctic says it invoiced Redcorp for the additional work but has not been paid the $6.5 million outstanding.

In early 2007 Redcorp shares traded around 75¢ but their value has fallen steadily since and a share is currently worth just 0.5¢. The company has 398 million shares outstanding.