It’s not every day that you come across a junior that is on the brink of production and generating cash flow within four to six months, whose largest shareholder is a hedge fund with an 80% ownership stake, whose management team is headed by an executive that has a track record of putting mines into production, and which is trading at 10¢ cents a share.
In January Marlin Gold (TSXV: MLN) will pour the first gold at its Trinidad project in Mexico’s Sinaloa state, a past-producing open pit mine that is being re-built for less than $30 million, including corporate G&A. And chief executive John Brownlie says there’s lots more upside to be had on the company’s 120,000-ha land package, which he claims is the largest held by a mining company in the Mexican state and has several prospects within a short distance of the leach pad.
Perhaps best known for bringing Capital Gold’s El Chanate open pit gold mine in Mexico into production and growing that company from a market capitalization of about $25 million to $400 million before selling it in 2010-11 for $395 million to Gammon Gold, now known as AuRico Gold (TSX: AUQ; NYSE: AUQ), Brownlie says he has put together “a very strong team – a lot of them from my Capital Gold days.” Adds Brownlie: “We have a strong shareholder base because when we sold Capital Gold everybody involved made a lot of money and we had the team set up.”
Mining analysts Tyron Breytenbach and Kyle McPhee of Cormark Securities estimate that Marlin can produce 199,500 oz of gold over an initial mine life of five years at the past-producing Taunus open pit at Trinidad and generate cumulative life-of-mine cash flow of $92 million after corporate costs, at a gold price of US$1,300 per oz.
“This level of free cash flow to shareholders is nearly three times the current fully funded market capitalization of $34 million,” they note in a research report Aug. 1. “We also note that this production and cash flow profile does not take into account the suite of exploration upside opportunities that will likely add to the mine life over time.”
Currently Connecticut-based hedge fund Wexford Capital owns nearly 80% of Marlin, a second firm in New York owns another 9%, a broker out of Scotia in Toronto owns about 4% and management holds another couple of percent.
“In this particular climate and for a company the size of Marlin, we’ve done very well in terms of attracting interest in both New York and Toronto,” Brownlie says, adding that having a large hedge fund like Wexford behind the company “is pretty unique.”
“We’re fairly tightly held, so liquidity is a bit of an issue, and to the Street we’re a little bit of an enigma,” he continues. “Why is John Brownlie taking on such a small mine? Why is Wexford involved in such a small mine, and what is the game plan going forward?”
Akiba Leisman, VP of Wexford Capital, says his group was impressed by Brownlie and his team. “One of the principal reasons for our involvement was because of John’s management capabilities as well as the management capabilities of the people who worked for him,” Leisman says.
Wexford’s initial involvement with Marlin was through a private placement in February 2012 when the private equity-hedge fund took a 17% interest in the company. It then bought a block of stock on the open market in the early part of the second quarter of that year, which brought its shareholding to 20%. In June 2012, Wexford announced an unsolicited tender offer for all of Marlin’s shares, and closed the offer in August, raising its ownership to a little over 52%. At that point Wexford replaced some of the board of directors, added two Wexford employees, and two senior mining executives, Richard Hall and Anthony Hawkshaw. (Previously Hall had been president and chief executive of Metallica Resources and brought the Cerro San Pedro gold-silver mine in Mexico into production before the company became part of a three-way merger to form New Gold. Hawkshaw was a co-founder of Rio Alto Mining.)
In December 2012 Wexford fully backstopped a rights offering (and didn’t charge a backstop fee) that raised $15 million at 8¢ a share that closed in March 2013 and raised its ownership in Marlin to 72%. A second rights offering in May raised another $15 million at 5¢ a share that was completed in August and took Wexford’s interest in the junior to just shy of 80%.
Looking ahead, the game plan is that once in production in January, Marlin will start looking in greater detail at potential depth and strike extensions within the existing pit (“there’s a strong belief on our part that we can go deeper and wider as happened at El Chanate”) and begin to follow-up on mineral showings elsewhere on their sizeable land holdings. (All of the showings are within its contiguous land package and from end to end the property is about 25 km.)
San Carlos, 3 km to the north of the main pit, is drill ready and the highest priority target, Brownlie says, where gold bearing intercepts included 1.74 g/t Au over 40 metres and 1.87 g/t Ag over 18 metres. A satellite target called Bocas, which nearly abuts the main pit, already has a small pit designed by SRK that the company is going to look at closely to see whether it can be joined with the main pit. But the largest showing on their property so far is San Cristobal, 12 km to the south, where reverse circulation drilling has returned intercepts including 0.47 g/t Au and 198.6 g/t Ag over 30 metres and 0.56 g/t Au and 45.5 g/t Ag over 14 metres. “San Cristobal is something that could be significant but work has to be done,” Brownlie offers.
Brownlie says the Marlin-Wexford combination is also looking to grow the business “pretty well anywhere in a good jurisdiction, whether that’s Nevada or California, somewhere that people have done the heavy lifting, particularly in this environment where a lot of money is being spent and certain companies are suffering and we can be opportunistic and aggressive next year post-production to increase our portfolio of near production properties.”
Leisman explains that Wexford is looking at Marlin as a growth vehicle because it feels there are similar assets in similar jurisdictions that offer value in the current state of the market. “We believe the industry has had an issue with capital discipline; it has made very poor decisions with respect to the pricing of deals and has had a poor track record of executing and building projects like this over the past decade,” he says. “Both in terms of opportunities that are out there, and frankly because of mismanagement, we do feel there are attractive acquisitions at the right price that make sense from both a geopolitical and geographical perspective. So the geographies that we’re focused on with Marlin are not just in Mexico."
Marlin is not Wexford's first foray into doing something like this. “It may be our first control investment on the gold side,” Leisman says, “but we’ve done similar transactions in other industries such as oil and gas and coal. So we’re both a private equity and a hedge fund outfit and we do take an active role in a lot of the projects we participate in.”
Over the last year Marlin has traded in a price range of 4.5¢ and 17¢ per share. Cormark has a buy rating and a target price of 15¢.
“With Trinidad construction nearly half complete and positive cash flow within sight for early 2014, we believe Marlin is highly undervalued,” Breytenbach and McPhee of Comark argue. “Of particular interest is the free cash flow yield offered by Marlin, which amounts to 270% cumulatively over the initial five year mine life at spot gold prices (US$1,300 per oz). With no major financing or permitting hurdles, a favourable project jurisdiction, and a capable management team, we see no reason for the valuation discount.”
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