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Pure Gold (PGM.v): If you were AngloGold Ashanti, what would you do?

A classic case of rubbernecking the car wreck, your humble scribe cannot keep his scrawny, beady little eyes away from the fall and fall of Pure Gold’s (PGM.v) share price this week:

(edit 2 hours later: Make that C$107m mkt cap)

It started on the day of its March 28th trainwreck NR, as featured on the blog that day, the filing of its annuals couple of days later did little to help but since then, the dumpage has been relentless. At the time of the NR this humble corner of cyberspace wrote that PGM was deliberately burying the real news at the bottom of the NR but with hindsight, that may be a precipitous and incorrect assumption. Perhaps the real news was here, near the top of the release:

Terry Smith, Chief Operating Officer of PureGold stated, “The wide-ranging optimization initiatives underway at PureGold designed to improve production, boost grade, and reduce costs all share one thing in common, and that is that they are long-term solutions designed to address the fundamental, underlying issues to ensure sustainable long-term success. This asset offers tremendous upside in terms of organic growth and exploration potential, but we need to operate efficiently as a first step in order to unlock that potential. In our first six weeks here, the new operational leadership team have made great progress but we have more work to do and look forward to providing further updates on our progress throughout 2022.”

Bryan Wilson, VP Mine General Manager of PureGold stated, “Throughout my career I have been a part of several underground start-ups and turnarounds and in my experience, success is a product of a strong culture which starts with leadership from the top. We are building a new culture at PureGold centered around open communication, clear goals and strategy, and accountability. In the few weeks I’ve been on the job I can already sense we have an incredible group of people who are up to the challenge, and I look forward to showing them and everyone else what we can achieve.”

Why so? Because it now sounds like the new PGM team was already pleading for its jobs. By then they must have known how annoyed the company sponsors would be and the prospect of default also brings the potential that the major backer take the keys away from them. We’re not talking Sprott though, they don’t care and will get their cash whatever happens (they’re only one step away from borrowing from Waterton, after all). Instead we need to think about the position of AngloGold Ashanti, the long-term strategic partner that decided on PGM and Madsen as their Canada Play, only to see this large dose of egg hit face. AngloGold must be miffed with O’Dea & Co, not least because of the messaging in that March 28th NR of how the undeground team got it all wrong and the overground facilities weren’t up to the standard required to attract and retain the necessary talent (so much for getting Maryse in to slash costs). On that subject, another thing that catches the eye is this, a segment of the February 15th NR announcing the closure of its latest round of financing, including the confirmation that AngloGold Ashanti had upped its equity participation to 19.6% (or 19.9% with the warrants it had hanging around):

In connection with the AngloGold Subscription, PureGold and AngloGold entered into a shareholder rights agreement providing AngloGold with certain rights, including standard anti-dilution and equity participation rights as well as certain rights to PureGold’s technical and scientific data.

This desk read that and mused…

…because one would have thought AngloGold and its years-long involvement as strategic partner and 10%+ owner would already have full access to the dataroom. But apparently not before Feb 15th and then, of course, on Feb 17th we got the latest management change, the entry of the new team and now, that same new team extols the virtues of its “incredible group of people” (i.e. itself). This is why that highlighted segment above has gained importance, what we read was the new PGM people trying to appease AngloGold and convince them the best way forward isn’t to let PGM default, instead they should throw another $50m of its money into the same structure in order to save the company and exit 2022 in fine, free cash flow positive style. Because they’re an incredible team. What could possibly go wrong?

With that we get to the question posed in the title of this post, “What will AngloGold Ashanti do?” because the answer to that one determines whether this is a knife worth catching, or whether PGM is destined for Chapter 11 before Madsen comes out the other side under new owner. We know AngloGold can afford $50m, but by the same token it would be mad to add equity at this point, aside from making a full buyout offer (not gonna happen). The way forward would be a debt deal of some sort and that means dealing with Sprott (who won’t take a haircut) and with 20% of S/O Anglo would drive for an equitable deal (literally), they wouldn’t want to crush the equity price and leave no upside potential. So, any eventual debt deal shouldn’t be too onerous for equity and the stock would likely become a buy at these highly depressed prices, however Anglo has the nuclear option at its disposal and if it refuses to play ball, PGM goes to zero.

The market seems to be pricing the latter but I’m not so sure, what with the way the new team at PGM pleaded for their jobs in the March 28th NR. And that’s the real reason I continue to rubberneck the share price carnage at PGM this week, because at some point the selling will stop and, when it does, there may be a bottom feeder flip in the cards. High risk yes, but with AngloGold as sponsor and with the new PGM team promising results if they get “...just another $50m…c’mon guys…promise it’ll work this time...” the chances are PGM won’t go the same route as HRT.

Disclosure: No position in PGM. Watching it, though.

5 Comments

    A Beaten Down Prospectors Cabin In The Woods The Deep Dark Woods of British Columbia 06/04/22 12:01 pm

    Holy Shalacking’s Batman ……

    https://youtu.be/myU81w93Uu4?t=5

    Reply

    I’m betting a BO, and possibly a bit of a bidding war because of location. Red lake improves at depth so the numbers will only get better, right?

    Reply

    Also just a rubbernecker, fortunately. These kinds of blowup are very interesting because they excellent learning opportunities imo. Still can’t wrap my head around why head grade at mill is about 50% of reserve grade…Madsen mine is prior producer which makes this issue more puzzling for me. Is the grade issue a mining method issue i.e. historically a different mining method used at Madsen and pure gold in changing mine method result in greater dilution?

    Reply

    Great analysis. Real good blog. Keep the great work.

    Reply
    Tim Klerksdorp, South Africa 08/04/22 3:45 pm

    I recall commenting about this asset on another site years ago and caused a bit of a stink. If you look at the dispersion of the reserves as presented in the NI 43 101, I thought “rots of ruck” since they were remnants scattered over about two dozen former mining levels. No doubt these levels were mined for rail haulage equipment and hand held drills (ie. 2.7 m x 2.7 m). In other words, not big enough for mechanized equipment. This was a very predictable train wreck.

    Reply

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