Troubled Pure Gold mine in Red Lake finds a buyer

West Red Lake Gold Mines (TSXV: WRLG; US-OTC: WRLGF) has inked an agreement with Sprott Resource Lending Corp. and Pure Gold Mining and to acquire all of the issued and outstanding shares of the struggling precious metals miner.

The deal hands West Red Lake (WRLG) the Madsen gold mine (which Pure Gold renamed after the company) and associated land package, located in northwestern Ontario’s Red Lake district.

WRLG would pay $6.5-million in cash, 28.5 million shares. The agreement grants Pure Gold a 1% secured net smelter royalty (NSR), as well as up to US$10 million in deferred consideration payments.

“The acquisition of the Madsen mine is a major step, and positions us as a leader in Red Lake gold exploration and development,” WRLG chief executive officer Tom Meredith said. “With a wealth of targets near the Madsen mine, alongside regional prospects and those within our existing Rowan project, we are confident that the brightest days for our consolidated portfolio are just ahead,” he said.

Pure Gold Mining bought the historic Madsen gold mine in 2014. Madsen produced 2.5 million ounces of gold at an average grade of 9.7 grams gold per tonne between 1938 and 1999.

The company poured first gold at the operation by the end of 2020 and announced the start of commercial production in August 2021.

The asset had had a peak market capitalization of nearly $1.2 billion in 2021. Its last resource estimate tallied mineral resources at 1.7 million indicated gold oz. at 7.4 grams gold per tonne and 0.4 million inferred oz. at 6.3 grams gold. The estimate is currently being treated as historical by the company.

Existing infrastructure on site includes an 800-tonne-per-day mill, double ramp access, significant underground mine development, a 1,275-metre shaft, tailings management infrastructure, and a water treatment facility. The operation has all the required permits to restart production.

Cash constraints

The mine was placed in care and maintenance in October last year, as Pure Gold failed to secure additional funds to keep the mine operational. The company filed for creditor protection.

In connection with the acquisition, WRLG has signed an engagement letter with Canaccord Genuity for a “bought-deal” private placement of subscription receipts for a total gross proceeds of $20 million, with an underwriter’s option of $5 million at 35¢ per subscription receipt. Mining investor Frank Giustra is expected to provide a lead order for the financing.

The transaction is subject to certain conditions and the approval of the British Columbia Supreme Court in Pure Gold Mining’s ongoing proceedings pursuant to the Companies Creditors Arrangement Act proceedings.

Sprott is expected to receive the shares and NSR payment because a fund managed by Sprott is the company’s senior secured lender. The firm may nominate and appoint a director to WRLG’s board of directors if Sprott or an associate owns 15% or more of WRLG’s issued and outstanding shares.

Following the completion of the acquisition and concurrent financing, Sprott is expected to own roughly 24% of the company’s outstanding shares.