All eyes on Victoria Gold

"The Eagle Gold project promises to become one of the largest gold mines in Yukon history," said Premier Darrell Pasloski on April 8.

“The Eagle Gold project promises to become one of the largest gold mines in Yukon history,” said Premier Darrell Pasloski on April 8.
  Ah, that slippery word “promise.” Does the premier mean “promise” as in a sure thing? Or “promising,” as in the Leafs had a “promising” first period, but leaving open the possibility that the Bruins might score two goals in two minutes and put the game out of reach?

A lot of eyes are on Victoria Gold. It would be the next operating mine in the Yukon. Its shareholders have invested millions and hope for a return. Workers are hoping for jobs and Yukon businesses for lucrative contracts. Our Yukon Party government has staked a big chunk of its credibility on bringing new mines into operation in the Yukon.

However, the mine isn’t a “go” yet. As Monday’s update makes clear, the mine still hasn’t secured project financing, which was slated to occur this quarter according to the timeline in Victoria Gold’s March investor presentation.

Victoria Gold tells us that “non-equity project financing has progressed well.” Potential lenders have visited the site, received technical briefings and begun negotiations. But no deal has been signed yet.

So what is going on? What does all this mean for Yukoners?

First of all, it appears that the traditional approach of selling more shares to finance development won’t happen. Victoria Gold was trading on Monday around 17 cents, close to its 52-week low of 16 cents. This is considerably down from its peak of just under $1.50 in late 2010.

Plenty of other mining companies are also down sharply over the same period, but this doesn’t make it any less painful for Victoria Gold’s current shareholders to issue more shares now. So many shares would have to be sold to raise enough money that the current shareholders’ stake in the company would be diluted. Or, in corporate-speak, “an equity raise to support major on-site construction activity in 2013 is not in the best interest of shareholders.”

Which leaves “non-equity project financing,” or “borrowing the money” to you and me. Victoria Gold estimates it needs $430 million in total funding. Getting a big chunk of this from loans would not dilute shareholders, and if all goes according to plan the company would have enough money to develop the mine and then pay the lenders back out of future profits.

Unfortunately, the debt markets aren’t much friendlier these days than the equity markets. The Wall Street Journal recently reported that there has been only one bond issue by a mining company so far this year in Canada, compared to six in the same period last year.

You can tell all of this is frustrating to Victoria Gold’s management. Their side of the story is that they have a “rare shovel-ready project.” They make the case that their project is “technically sound, with an approved environmental assessment, in a safe mining-friendly jurisdiction, capable of producing 200,000 ounces gold/year with a reasonable projected capital cost for its size as well as attractive expected operating margins.” The company currently has $35 million in working capital and is continuing to work on the project.

They estimate that the investment in the mine will be paid back within just three years, assuming a gold price of US$1,325 per ounce. They also think their cash cost per ounce will be around $615, which leaves a healthy margin even if gold dips a bit below the US$1,400 range where it is now. Importantly, there are a bunch of mines in Canada with higher cash costs, and these would go to the wall before Victoria Gold if gold prices really plunged.

It all sounds good, but for some reason lenders haven’t signed on the dotted line yet. It’s hard for outsiders to know if this is because of general nervousness in the markets about commodity prices and junior mining companies, or more specific concerns about this project.

There is a lot at stake. Premier Pasloski’s press release talked about 400 jobs, although we don’t know how many would be Yukon residents. There are millions in potential contracts for Yukon businesses, and many Yukoners have invested in the stock (although not this Yukoner, just to be clear). And the people who hold the options to buy 23 million Victoria Gold shares must be waiting with bated breath. If the mine goes ahead and the share price jumps, these options could be worth a fortune. However, the average strike price is 44 cents (you’ll recall the shares are currently around 17 cents, and you wouldn’t exercise an option to buy a share at 44 cents so you could sell it 17 cents).

The premier and cabinet are probably even more keen, if that’s possible, than the option holders on the project proceeding. They will remember what happened in February when the Brewery Creek mining project ran into tough sledding, provoking a ripping press release from owner Golden Predator and the Tr’ondek Hwech’in First Nation.

To paraphrase Oscar Wilde, to lose one mining company may be regarded as a misfortune; to lose two looks like carelessness.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels.