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CANADIAN MINING PERSPECTIVE – Guest editorial: Turnaround at Western Goldfields

The trend in gold mining headquarters these days is to team up a financier and a miner. Mix a boss with an accounti...



The trend in gold mining headquarters these days is to team up a financier and a miner. Mix a boss with an accounting or investment banking background and a number two with an engineering or geology degree and synergy happens. Examples include Ian Telfer and Kevin McArthur at GOLDCORP, and Tye Burt and Tim Baker at KINROSS GOLD. Theres another such duo now in the process of making its mark in gold mining: Randall Oliphant and Ray Threlkeld at WESTERN GOLDFIELDS. They are completing a turnaround at the Toronto-based company that will see it move from a financial problem case, in default on its bank debt, to a revenue-spinning gold producer in just 22 months.

A former CEO of Barrick, Oliphant is chairman of Western Goldfields and a major shareholder. When he took over the reins in February 2006, he brought the financial know-how and banking connections that the company clearly needed. Also a Barrick alumnus, Threlkeld brought hands-on experience developing mines on three continents to the job of president and CEO.

At the time, Western Goldfields represented an entrepreneurial challenge, to say the least. The company was not only in default on its debt, but its share price was languishing even as the gold price gained strength, and its premier mining assetthe Mesquite mine in Californiawas looking like the industrys ugliest duckling. Previous management had picked up Mesquite in 2003 when Newmont interest in it and walked away, leaving behind an approved expansion permit.

The new leadership saw potential, at both Western Goldfields and Mesquite. They arrived along with a new board of directors, fresh vision and fresh cash, starting with a $6.0-million private placement to clean up the balance sheet and end merger talks then underway. Oliphant and Threlkeld viewed Mesquite as exactly the type of asset they were looked for: low on riskits a straightforward truck and shovel, heap-leach operation, located in politically safe North Americawith potential for reserve expansion and high returns.

On the financial side, Oliphant along with CFO Brian Penny (ex of Kinross) moved steadily to fully fund the project. They added a TSX listing to Western Goldfields existing listing on NASDAQ and raised a net $59.0 million in an oversubscribed equity offering early this year. They also arranged a $105.0-million debt facility. Together, that more than covers total startup costs of $108.6 million at Mesquite, with an extra $57.0 million in the treasury at end of the first quarter this year.

On the development side, their high hopes for expanding Mesquites potential have panned out, with a lot of hard work by Threlkeld backed by Paul Semple, VP projects (formerly with Kilborn), and Wes Hanson, VP of mine development (formerly with SNC-Lavalin). While an initial feasibility and mine plan in 2006 confirmed the economics of the project, a subsequent 21,335-metre, reverse-circulation drilling program has borne fruit in expanded reserves and resources and a new mine plan announced last week.

Under the new plan, production will begin in January 2008, a full three months ahead of schedule. Annual production is estimated at 160,000 to 170,000 oz of gold during the following eight years, at a cost of sales of US$350/oz. Gold contained in proven and probable reserves increased to 2.8 million oz, up from 2.4 million oz. In addition, measured and indicated resources contain 1.1 million oz. Total resources, including reserves, rose to 3.9 million oz. The estimated mine life has increased to 12 years from 9.5 years. Further drilling is in the works to add to both oxide and sulphide reserves.

Even at US$550/oz gold, the mine would yield an IRR of 29%, generating an estimated $35.7 million in average annual cash flow until 2015. At US$700/oz gold, the numbers are 38% and $45.5 million, respectively.

Bringing Mesquite into production wont make Western Goldfields a major, but it will be a step toward getting there if Oliphant and Threlkeld have their way. Their strategy is to add more assets like Mesquite, which are low-risk with the potential to generate high returns. The same could be said of this duo themselves.

(James Fleming is a Toronto writer and editor who spent a decade in the mining industry. He is an editor at the C.D. Howe Institute and wrote this article on a freelance basis. He may be contacted at jfleming0324@rogers.com.)


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