San Gold shares halted as miner faces cash woes

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The TSX said Tuesday shares of San Gold Corp. will be delisted by the end of February as the company continues to operate its gold mine in Bissett under creditor protection.

Late last week, a Manitoba court granted San Gold an extension to the middle of March to file a formal proposal to creditors and stakeholders.

Company management is optimistic its current production process puts it on a path toward operating profitably by March.

But the company — under protection of the Bankruptcy and Insolvency Act with Gord Neudorf of MNP acting as the proposal monitor — desperately needs to find new financing.

In the next few days, it is expected to retain financial advisers to run a sales and investor solicitation process (SISP) to find new investors, a joint venture partner or sell the company outright.

The company currently has a creditor list amounting to close to $95 million, including close to $30 million in secured debt to a New York financier called Beechwood Re, which is also subsidizing current operations. As well, there is $50 million in unsecured convertible debentures.

It has a plant and equipment with a book value of $64.8 million.

A formal creditor-claim process will take place when the company files its proposal plan. The initial notice of intention to file a proposal was made Dec. 22.

There has been a stay of proceedings on the company since then, and ongoing suppliers are being paid cash on delivery.

San Gold has booked close to $200 million in losses in the last two years. When a proposed merger with Kerr Mines Inc. — another small Canadian mining company — fell apart in mid-December, San Gold was out of cash and needed emergency funding from its secured creditor.

Company CEO Greg Gibson said in an interview Tuesday the whole creditor-protection process is designed to protect all the stakeholders.

“Now that everything is in place, and the loan has been approved by the court… we are now working as a company to save the shareholders and keep them in play… and try to protect unsecured creditors as best we can,” said Gibson.

Gibson came on as CEO last year to try to turn operations around after the company’s failed efforts to become a much larger producer than the operations would allow it to be.

“One of the major problems with San Gold right from the beginning was that (former) management wanted it to be much bigger than what it could (practically support from the mining assets it had),” Gibson said. “They attempted to build this great big mine, but the carrying costs are huge right now.” Since San Gold was formed in 2009, it has raised more than $400 million in equity. But while the company came close to targeted attempts to produce as much as 100,000 ounces of gold per year, it could never make any money doing that.

Under Gibson, the current mine plan is designed to produce about half that much gold, but it could also generate an operating profit at that rate.

“Right now, with the drilling done since last spring, it’s allowed us to define a couple of ore bodies, which makes me comfortable to say that is what the mine will sustain,” said Gibson.

He said under the more modest current production plan that is targeted at higher-grade ore bodies, the mine will become cash-flow positive in March.

“That’s a pretty big statement, because after about a half-billion dollars invested, it has not had a profitable quarter since inception six years ago,” he said.

The company’s workforce of more than 300 people are on the job and wages are being paid. About 40 per cent of its workforce is from the Bissett region, and it has a monthly payroll of about $3.3 million. The workforce is non-unionized.

An industry source said there is some optimism the current plan will yield interest from prospective investors.

“The fact that the current secured creditors are committed to the process should be seen as a good sign,” the industry source said.

Neudorf said the process allows for the court to extend the time to file the proposal in additional 45-day periods for as long as five months after the initial 30-day stay of proceedings.

Gibson said efforts will be made to have San Gold’s shares listed on an alternative exchange while the period of creditor protection unfolds.

martin.cash@freepress.mb.ca