JOHANNESBURG – Witwatersrand Consolidated Gold Resources (Wits Gold) on Friday said that it had offered to buy embattled Great Basin Gold’s (GBG’s) suspended Burnstone gold operation, in Mpumalanga.
The TSX- and JSE-listed group aimed to deliver dividends to its shareholders and generate cash flow in the near term, as Wits Gold brought Burnstone into production.
“Moving to producer status will serve as a solid platform with which to start generating free cash flow for shareholders,” Wits Gold CEO Philip Kotze said, adding that the bid was in line with the company’s strategy of owning and developing shallow mines in South Africa.
Wits Gold would pay $7.25-million in cash towards GBG South African subsidiary Southgold Exploration’s debt, which was restructured and cut by 55% to $177.35-million.
Southgold would, from generated actual cash flow, repay the remaining $170.1-million liability.
Wits Gold would also advance a $100-million shareholder loan with an interest rate of 4%, which was also to be paid back on a preferential basis from Southgold’s operating cash flow.
The offer to buy the mine would be put to vote on July 11, but Wits Gold had signed irrevocable undertakings from the major creditors that its bid would be voted for to eliminate deal uncertainty.
Burnstone was put on care and maintenance in September, after several production setbacks and an inability to afford the mine’s required working capital to reach cash-flow breakeven forced the mine into business rescue.
Kotze noted that a new underground mining plan, which would allow for flexibility in the production approach, had been developed, after due diligence found the previous mine plan “far too ambitious”.
GBG’s mine plan had created market expectations, which had resulted in the team rapidly trying to deliver into high production, at 250 000 oz/y, without the required structures in place, he explained.
Burnstone, which started producing in 2010, encountered a geological fault that GBG did not find during exploration drilling, leading to the company having to revise its 2011 production guidance to 30 000 oz – which it missed by 6 000 oz – from the previous levels between 85 000 oz and 110 000 oz.
The mine’s production target – before suspension – for 2012 was 90 000 oz to 100 000 oz.
Wits Gold lowered production by 50%, with plans in place to potentially ramp up production in a gradual phased approach to a maximum 130 000 oz/y for a $100-million investment. First production is expected 12 months after the initial takeover.
“We have a number of options that require less capital for lower production or more for higher production [than the middle ground of 50 000 oz/y],” he said, noting the current Wits Gold plan for the mine required $50-million in capital expenditure and would enable production ramp-up to about 70 000 oz/y.
Wits Gold expected to take control of the operation – which has more than six-million ounces of gold in proven and probable reserves and a forecast life-of-mine upwards of 25 years – during the second half of 2014, after which the final mine plan would be decided on according to the market at the time.
Wits Gold aimed to initially focus on establishing the appropriate infrastructure for the relevant plan, and develop until enough ore reserve had been opened up for sustainable production.
The company would complete the footwall development in advance, and create a drilling platform to predetermine the geological structure and paychannels.
Wits Gold also planned a three-dimensional seismic survey, which would constrain the highly faulted underground structure and enable mine design optimisation.