JOHANNESBURG (miningweekly.com) – South African gold explorer turning producer – Wits Gold – is acquiring the out-of-pocket Burnstone gold mine on excellent terms.

Wits Gold CEO Philip Kotze told the media on Monday that the proposed acquisition was providing the company with an ultra-low-priced shortcut into gold production.

He said the JSE- and TSX-listed gold junior had managed to secure, with no advance payment at all, an option on an asset that had been on the receiving end of more than $800-million worth of investment.

An amount of $7.25-million would have to be paid over, but only once the deal was fully consummated.

The company had thus managed to secure an option on a mine that was 90% complete, without having to outlay anything in advance, which meant that, “for 10c in the dollar, we get the full benefit of all the capital that has been spent on this asset to date,” says seasoned campaigner Kotze, who has 32 years of mining experience under his belt.

Once the $7.25-million was paid, the point of transaction certainty would have been reached and the mine would then belong to Wits Gold.

Only at that point would the company be required to begin raising an amount of up to $100-million over time. However, this would not be for paying off the asset; instead, the money raised would be used to grow production.

“Depending on what the market conditions are at that point in time, we will raise an amount lower than the $100-million and get the mine up and running, and then, over time, continue to invest in it, to build it up to maximum production, which in our current plan is 120 000 oz a year,” Kotze said in response to Mining Weekly Online (also watch attached video).

The company had more than one option of getting cash into the business: "The one is by raising equity capital and, because we have cut back such a significant portion of debt, the opportunity has also been created to put more debt back into the operation,” added Kotze, who will have been at the helm of Wits Gold for two years on August 1.

Should the market fall severely, there was an opportunity to extract more than a ton of gold from pillars, at very low capital cost.

The $7.25-million would be paid in cash towards Southgold’s debt, which has been cut by 55% to $177.35-million as part of a business rescue plan.

Southgold would repay the remaining $170.1-million liability from cash flow and advance the $100-million shareholder loan at the Johannesburg Interbank Agreed Rate plus 4%, which had to be paid back on a preferential basis.

There is an effective three-year ‘holiday’ on the repayment of both the interest and the capital on the $170.1-million loan to Credit Suisse and Standard Chartered Bank.

Once repayment began, the shareholders’ loan of up to $100-million would be repaid first.

This would render Wits Gold up to $100-million better off, with the proceeds available to pay dividends and as working capital on other projects.

Thereafter, only 10% of free cash flow had to go towards repayment of the $170.1-million to Credit Suisse and Standard Chartered Bank.

“Which means whatever we put into Burnstone is not significant risk capital. We’ve got control of it, and we get paid back first,” Kotze told Mining Weekly Online.

Meanwhile, Wits Gold’s 25.5% black economically empowered partner is financially unencumbered, leaving it free to follow its rights in the event of an equity capital raising exercise.

The project, already on the reef horizon, is within a hair’s breadth of total completion.

The orebody, which is narrow on its north-eastern side, thickens significantly as it moves to its south-western side, facilitating bord-and-pillar mechanised mining.

All development will be mechanised. At full production, some 1 500 people are expected to be employed at Burnstone.
Kotze, who began his career with Anglovaal Mining in 1981, has held positions at companies including AngloGold Ashanti, Kalahari Goldridge Mining, Harmony and Deloitte & Touche.

Wits Gold’s four assets – De Bron-Merriespruit (DBM), Bloemhoek, Robijn and Beisa – are in the heart of the Free State goldfields, and the company’s most advanced exploration project, DBM, is expected to be developed as a shallow underground mine.

Great Basin Gold’s embattled Southgold filed for bankruptcy protection under the South African business rescue procedures in September last year.

BUSINESS RESCUE
Southgold creditors voted overwhelmingly in favour of the Burnstone business rescue plan, which is the largest business rescue in South Africa to date, Webber Wentzel partner Lara Kahn tells Mining Weekly Online.

The rescue plan, which provides for the resolution of all outstanding claims against Southgold and for the ultimate opening of the mine itself, has been published by Southgold's business rescue practitioner, Peter van den Steen of V-Squared.

The proposed plan provides for the transfer to Wits Gold of all the shares issued by Southgold.

Business rescue is still very new. Even though the Companies Act was amended in 2008 to provide for it, the business rescue provisions only became operative some 18 months ago. 
 
The implementation of business rescue is appropriate when, looking forward six months, the company in distress is likely to be illiquid or insolvent and is capable of being rescued. 

“Unless there is a white knight prepared to inject post commencement finance to fund the company's restructure, there is no point in going into business rescue at all and a liquidation would be more appropriate,” Kahn comments to Mining Weekly Online.

In addition to funding, there must also be a viable rescue plan that is implementable.

“It goes without saying that not all failing businesses are capable of rescue,” she adds.

Burnstone was a candidate for business rescue because it is a viable gold mine and has the funding necessary to get back on its feet.

It went into rescue largely because of encountering a perfect storm in which the mining operations hit a geological fault and at the same time the company ran into funding difficulties.

The Graben fault meant that the company required more funding which, on top of its existing financial difficulties, meant that it required urgent restructuring and the rescheduling of its debt.

Van den Steen was able to use the business-rescue period to sell the Burnstone mine and reschedule the company's debt through the transaction with Wits Gold, said to be worth about R3-billion in value-addition terms.
 
None of the creditors is to be paid in full and all are accepting a significant discount on their debt.

The lenders will have to wait many years for their loans to be repaid, which will happen if the mine is, ultimately, a success.

The business-rescue practitioner is engaging with the Department of Mineral Resources to transfer ownership under Section 11 of the Minerals and Petroleum Resources Development Act.
 
Kahn and Webber Wentzel partner Etienne Swanepoel advised throughout the rescue on regulatory issues, tax, mining, commercial and litigation, going to court for a declarator some months ago on proper regulatory framework compliance.

The legal firm helped to balance creditors’ competing interests within the Companies Act’s tight regulatory framework. Together with other advisers, it assisted with the mine sale and continues to assist with the transaction itself.