Exclusive Investigative Report by Andrew Topf, Mining Reporter
While the histories of junior miners are often written as rags to riches triumphs, or tragedies cloaked in a heap of unfulfilled promises, the story of Midway Gold is unique. Never before has a company with so much potential, management experience, and financial backing fallen so hard and disappointed so many. But this story was never about inferior assets. And there’s a new player in town with the vision and resources to rewrite the history of Midway Gold.
In 2010, Ken Brunk was reflecting on the success of an impressive feasibility study he put together at the Haile mine in South Carolina, (the study would lead to an $856 million buy-out from OceanaGold) when the former Newmont Mining executive got a call from Roger Newell. Newell was another Newmont man Brunk knew from his days there who in 2009 joined the board of directors at an upstart Nevada gold company known as Midway Gold. Starting off as a senior metallurgist in Connecticut, Brunk moved to Carlin, Nevada in 1983 where he helped build Newmont's first mines and their heap leach pads. Eventually Brunk was running Newmont's worldwide operations including laying the groundwork for the Batu Hijau copper-gold mine in Indonesia, before leaving the company in 1996.
Newell, meanwhile, had an illustrious 40-year career as a geologist, and is internationally credited for recognizing the potential of the Carlin Trend, then initiating Newmont's first exploration programs en route to Newmont becoming the world's largest gold producer with its Nevada operations yielding a million ounces a year.
But when Newell asked Brunk whether he'd consider taking a look at Midway's assets, including the Pan Mine, Midway's flagship project in Nevada, Brunk wasn't impressed.
“Candidly, when I first looked at them, I didn't think a hell of a lot of the grades, particularly at Pan. But anyway, I looked at it and said, Holy cow. This thing actually does work,” he told CEO.ca in a recent interview about the Midway Gold story and the proposed business combination of GRP Minerals, which is headed by Brunk and bought Midway Gold's distressed assets out of bankruptcy in 2016, and Latin American explore-co Fiore Exploration, owned partly by Canadian mining magnate Frank Giustra. Once the merger is completed, the combined company is to be called Fiore Gold.
But first, the backstory. It begins in 2007 when Midway Gold acquired Pan-Nevada Gold, which at the time owned the Pan Project in White Pine County. Midway would go on to pick up the Golden Eagle asset in Washington and five more properties in Nevada: the Gold Rock deposit close to Pan, Tonopah, Thunder Mountain, Pinyon and Spring Valley, located in Pershing County. In 2009 Midway formed a joint venture with Barrick Gold whereby Barrick could acquire 60% of the Spring Valley project by spending $30 million on exploration. The porphyry/diatreme gold system had an NI 43-101 resource of 1.8 million ounces, and would enter prefeasibility under the Midway-Barrick JV.
But it was the Pan Mine that held the most potential for Midway, and the company moved quickly to acquire the necessary permits and complete an environmental impact study in 2013, with first gold predicted for mid-2014. A 2011 feasibility study done by Gustafson Associates showed 864,000 ounces of proven and probable mineral reserves contained within three deposits – North Pan, Central Pan and South Pan. Cutoff grades were between 0.21 and 0.27 grams per tonne. With the mineralization at or near surface, the study called for an open pit mine with heap leach pad. Significantly, the mine plan called for the blasted ore to be crushed and transported to the heap leach via overland conveyor. Gold recoveries from heap leach operations can be problematic especially at new mines, but metallurgical testing showed the South pit had an expected recovery of 85% and the North pit 65%. The project had a net present value of $123 million based on a gold price of $1,200 per ounce (conservative at the time), and a respectable 32% internal rate of return, after tax.
The Pan Mine was characterized as a “low-cost, oxidized, Carlin-style gold deposit” that would be mined through two primary open pits and three satellite pits. Within two years permitting was complete. A photo in the Elko Daily Free Press shows Ken Brunk and the first Midway Gold CEO, Alan Branham, breaking ground on January 17, 2014:
With three core projects in hand, and a pipeline of exploration properties, Midway Gold had no trouble attracting suitors to help finance its flagship Pan Mine. In 2012 Midway convinced New York-based private equity firm Hale Capital Partners to invest $70 million in the company in exchange for becoming the lead shareholder. Under the private placement, the preferred shares were convertible to common shares at $1.85 per share, which at the time was a 37% premium on Midway's share price. Two years later Midway secured another $25 million through a bought-deal financing, and in May 2014 the company cut a deal with the Commonwealth Bank of Australia which provided financing of $55 million under two tranches: a $45 million loan and a cost-overrun facility of $10 million.
By early 2015, Midway had become THE stock to watch, having been touted by gold watchers as the next Nevada gold producer. It was a top pick by renowned stock picker Louis James, promoted by Casey Research and covered by at least half a dozen analysts, the most optimistic of which saw Midway as a $500 million or even a billion-dollar company, having demonstrated a pathway to production. In March, Midway poured its first 100 ounces of gold at Pan and it seemed a short time before the mine would enter commercial production.
“Midway is a junior that is going from explorer to producer and has raised well over $100M in the last 18 months. Its market cap is around $72M, with roughly $28M in bank debt,” The Gold Report enthused in April 2015. “About 50% of Midway shares are owned by institutional investors and the stock had been trading at a market premium. If the stock is under $0.35/share, I think it's a real bargain.”
Brunk, who was brought in as COO in 2010 and became CEO in 2013 to complete the financing and put the mine into production, wistfully recalls the promise of Pan:
“It had minimal infrastructure requirements that you needed to put in compared to most mines because it's only five miles off a main road. You don't need to build a town, you don't need to build a lot of accoutrements, ancillary operations that we do in many, many mines throughout the world. And recoveries were fantastic. The strip ratio was low. 60% of your hauls were downhill. You had a lot of criteria that went together to make a low-cost operation that, at $1,100, $1,200 gold, you had something there that could make some money.”
“So the bottom line, I looked at the assets and said, Yeah, I think you guys have something here that could make a go. I did some estimates, what I thought it would take to put it together, and they said, Okay, would you come in and take this thing to production? So I said, certainly. Let's give it a shot.”
But by the fall of 2014 Brunk, who is now 71, was ready to retire. He left Midway and his replacement in the corner office was Bill Zisch, hired by Hale Capital to finish the project. Zisch was charged with the completing the project and bringing the mine into production under what proved to be difficult circumstances resulting from construction delays and questionable operating practices intended to overcome those delays.
The first problem centred around the heap leach pads. With the first gold pour several months behind schedule, and the potential for cost-overruns becoming more likely, Midway decided to skinny the capital by deferring crushers and instead did a run of mine operation, effectively putting the blasted ore directly onto the leach pad, thereby going against the crushed ore scenario envisioned by the 2011 feasibility study. In an effort to boost production and pay down debt, Midway started construction of the leach pads at the lower end, but torrential rains damaged the pads and added millions in unexpected costs.
Then there was the ore, which contained too much clay. The non-porous clay does not easily allow the cyanide solution to move through it, which results in percolation problems on the leach pad. Brunk said another problem was the operator stacked the ore too high, which slowed the recovery time, meaning that Midway continued to blow through cash while waiting for the gold to be recovered.
There was also a problem with grade control. While Midway had built an assay lab on site, inexplicably, it hadn't been commissioned, so the company was sending all their assays off site for analysis, at huge expense and adding more delays.
But by far the biggest issue, from a perception point of view, was the grade discrepancy. The resource model accounted for a 0.44 grams per tonne gold grade on the leach pad, but Midway was only getting about 0.3 grams per tonne. The company scrambled to find out why, at first examining the blast hole samples, and then realized that the discrepancy came from the resource itself.
Production was halted and a new NI 43-101 resource estimate was ordered. When it came back, the estimate was 15% lower than the 2011 feasibility study; as a result, the measured and indicated resource fell 36% or 284,000 ounces. Some of the M&I was shifted to the inferred category, which consisted of 141,000 ounces at 0.31 g/t gold.
“Their problem was at the time they thought they were doing the positive thing which was accelerating mining to pay the debt back because if we mine more, we leach faster, we get more gold, we get more revenue and we pay back the debt,” an un-named analyst who covered Midway at the time told CEO.ca. “So they're spending all their money on that. They're draining their treasury, sticking it into working capital which is basically the heap leach material in progress which one, they don't know the grade, and two, it's not progressing very well because it's not [supposed to be] run of mine. So, it was a complete and utter cluster.”
At this point Midway had nearly burned through the $55 million loan from the Australian bank, and needed about another $5 million to keep mining. But the bank and lead shareholder Hale Capital were growing impatient, and increasingly concerned that Midway would fail to meet its obligations under the debt facility including meeting the production schedule. By April, Midway had produced 2,300 ounces.
Getting a crusher in to agglomerate the clay ore with crushed rock was estimated to cost up to $25 million – an insurmountable sum for Midway considering the cost over-runs – and the company turned to Hale Capital for help in preventing a default on the Commonwealth Bank debt facility. Hale agreed to advance Midway $10.5 million, but it was too little too late. That is unsurprising given that under Hale's financing deal with Midway, the preferred-share convert was at $1.85, but the stock had fallen to $0.60, and seemingly going to zero. Loaning more money must have seemed like a fool's errand.
Unable to get more financing from its key lenders, Midway declared bankruptcy on June 22, 2015 – evaporating tens of millions worth of shareholder value. CEO.ca contacted Bill Zisch asking for comment on why Midway failed to raise the last-minute capital, but an e-mail was not returned.
In any case, the demise of Midway presented an opportunity for Ken Brunk, who formed a new company, GRP Minerals, seemingly for the sole purpose of purchasing the Pan Mine and other Midway properties out of bankruptcy at a bargain-basement price.
Fresh from Midway's failure, the market showed little interest, and GRP Minerals was the stalking-horse bidder in a bankruptcy sale that netted the company four of Midway's assets: the Pan Mine, Gold Rock, Pinyon and Golden Eagle, all for $5.25 million, along with a $16.1 million assumption of reclamation liabilities at Pan.
Since taking over Pan, GRP Minerals has spent about $19 million through a 15,000-metre, 127-hole drill program in order to update the old Midway resource numbers. According to a soon-to-be released technical report done by SRK Consulting, Pan now hosts 434,000 ounces of measured and indicated resources, at 0.44 grams per tonne. Brunk also hired a completely new and experienced operations focused management team. Working with select consultants they were successful in making an operational turnaround at Pan.
Problems with the heap leach pad have been obviated through “capping and fluffing,” whereby rocky ore from the North pit was placed on top of the existing heap, then blended with an excavator and dozer to a depth of 15 to 20 feet. Capping and fluffing was completed in May 2017, for a total of 34,522 ounces recovered since inception (including Midway stacked ore) at a recovery rate of 57.5%, according to the report. The head grade on the pad is now 0.44 g/t, the same grade called for in Midway's mine plan.
In addition to the in-house team, the operational turn-around was confirmed by various consultants including Tim Scott, a heap leach specialist with Kappes, Cassiday & Associates of Reno, and advisors to Fiore including Paul Matsyek, executive chairman at Lithium X (CVE:LIX), and David Keough – the former COO of Goldrock Mines and its Lindero heap leach deposit bought by Fortuna Silver.
Under the terms of the proposed business combination of GRP and Fiore Exploration, which is expected to receive regulatory approval by the end of summer, Fiore Exploration shareholders will own about a third of the combined company - to be called Fiore Gold - and GRP shareholders will own two-thirds. Pro forma calculations estimate an enterprise value of approximately CAD$112 million based on an estimated share price of $1.15
The transaction is conditional on Fiore Exploration raising $17 million which will be used for expanding the leach pads at the Pan Mine, as well as drilling there and at Gold Rock, another Midway property that lies 10 kilometres away. Fiore Gold will also acquire the Golden Eagle project in Washington State and retain four exploration projects in Chile owned by Fiore Exploration: Pampas El Peñon, Cerro Tostada, Lomas de Puqios, and Rio Loa.
According to Tim Warman, who will be at the helm of Fiore Gold as CEO, the new management felt the best way to build up shareholder value was not to simply be an explore-co, but to become a small to mid-range producer that would have the potential for an $800 million to a billion-dollar market value. He figures the Pan Mine could get up to 50,000 ounces a year, with potentially another 50,000 oz at Gold Rock, which is arguably a better deposit, with better grades and recoveries than Pan, according to Warman. Plans are for growth by acquisition as well as organically.
The 2012 resource at Gold Rock, about 340,000 ounces measured and indicated, covers a two to three-kilometre strike along a 10-kilometre gold trend, in a folded sedimentary rock structure known as Joanna Limestone. Warman notes it's the same type of structure found at Bald Mountain, about 80 km to the north. Kinross acquired Bald Mountain and half of Round Mountain from Barrick in 2015.
“We think that existing resource could probably support a 50,000-to-75,000-ounce production profile without too much work and very similar to the Pan Mine, an open pit, heap leach, run of mine-type operation. In between Pan and Gold Rock, we can fairly quickly be up over 100,000-ounce production profile.”
He added that the goal is to use the financing to expand production at Pan through a second leach pad, expand the resource through more drilling, and start drilling Gold Rock in order to convert the historical resource into a current NI 43-101. Despite their close proximity, a mine at Gold Rock is likely to be separate from Pan, through there may be synergies in refining and administration.
As far as Golden Eagle in Washington State, Fiore isn't placing a large amount of value on it in the deal, although it has a 2009 resource of roughly 1.7 million ounces at 1.7 grams per tonne. While the mine is open-pittable, it's constrained by land owned by Hecla Mining. Another factor against the project is the ore is refractory, meaning a higher cost to process it. On the other hand, Kinross' nearby Buckhorn mill is running out of ore, making a three-way deal for Golden Eagle a possibility, says Warman.
“At the end of the day, you know, we see three companies, ourselves, Kinross, and Hecla with assets that are getting very low value right now. Maybe if we put our heads together and think of a away to combine those assets, we can extract some value out of them for all three companies and have a win, win, win situation.”
CEO.ca asked Brunk whether he thought savvy investors will be able to tell the difference between a failed Midway Gold and a new and improved Fiore Gold that is essentially developing the same assets. Brunk had two points to make. One is technical, where he said he feels a lot more confidence in the team he's assembled.
“I spent a lot more time making sure that practices, procedures, rigour and so on get installed on that site. Secondly, I've changed the management of that site out 100%. I put in good mining people, people that I know.”
The second is financial. While Brunk was careful not to throw any stones regarding the failed financing arrangements at Midway, reading between the lines, he is shying away from complex deals with people who don't necessarily understand mining or get how starting up a mine does not always go as planned.
“If you look at the history of the people in Fiore, that's what they do. You don't see these exotic financings. And I would argue that was part of Midway's issue was the preferred [shares]. But not just the source of the preferred but the structure of the preferred, the limitations that you had put on you with those kinds of financial facilities. And I think it's pretty much definite in our plans and thinking going forward, that's not where we're going. We're not into that sort of thing. Let's keep it simple.”
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