Pelangio’s strategy is to acquire and explore camp-sized land packages in world-class gold belts, while using innovative corporate restructuring to maximize shareholder value.
While Pelangio’s management team has the geological, corporate and legal abilities to plan and execute various strategies, depending on the circumstance, the story of Detour Lake provides a good case study of Pelangio’s capabilities.
Detour Lake – A Case Study
A Novel Acquisition
Pelangio Mines (“Mines”, Pelangio Exploration’s predecessor) took steps to acquire the Detour Lake deposit from Placer Dome in 1998. At the time, Placer had decided to close operations at the deposit, as head grades were not sufficient to justify an underground mining operation. Additionally, the price of gold was in the sub-$300 range at the time. Mines already held a significant area around the mine, so the mine property was a good addition to its land position.
There was just one problem with the purchase plan: at the time, Mines were extremely low on funds. Undaunted, Ingrid Hibbard, Mines’ CEO, asked Franco Nevada for a $1.5 million loan, which Mines would repay in royalties and exploration expenditures on the mine property. An offer from Franco would surely require a much higher offer to be successful and an outright mine acquisition didn’t necessarily fit with Franco’s royalty-focused business model, so Franco agreed to this arrangement. Mines approached Placer and purchased the Detour Lake deposit for $1.5 million.
From the late-nineties until 2002 the price of gold stumbled along under $300. Exploration on the Detour Lake property was limited at the time and the market in general was disinterested in gold plays. Mines managed, however, to keep the Detour Lake story alive as the gold bull market slowly took hold.
A Mine Re-Envisioned
From 2003-2006, Mines began the process of re-envisioning the Detour Lake deposit. Eric Kallio, P.Geo, a geological consultant working for Mines at the time was the catalyst. What had been a small-near surface pit with a largely underground operation became an audacious open pit mining plan comprising two significantly larger low-grade open pits, with room for expansion in all directions with further drilling and a steadily increasing gold price. Mines had two choices: (i) raise the significant funds to complete infill drilling of the deposit and move towards development and production, with the significant share dilution, costs and risks those actions entail, or (ii) find a new company, expert team and leader to make the vision a reality. Mines’ skill was in property acquisition and exploration, so the choice was easy.
Enter the Hunter Dickinson Group (“HDI”) and Gerald Panneton. Mr. Panneton had years of experience working on late stage exploration and feasibility projects for Barrick Gold. More importantly, he immediately saw the vast unrealized potential that the Detour Lake deposit still held, well beyond the approximately 1.7 million ounce resource already defined. His determination and vision was to reap tremendous rewards for both Detour Gold and Pelangio Mines shareholders over the ensuing years.
HDI and Mr. Panneton conducted intensive due diligence on the property during 2006, reviewing thousands of metres of historical surface and underground drilling by Placer Dome and Mines. In September 2006, based on HDI and Mr. Panneton’s recalculations, Mines announced a National Instrument 43-101 compliant mineral resource estimate for the Detour Lake property including 20,045,000 tonnes grading 2.14 g/t, containing 1,379,500 ounces of gold, and an inferred mineral resource of 35,435,500 tonnes grading 1.8 g/t, containing 2,035,650 ounces of gold. The Detour Lake mine had a life once more.
Bringing the Vision to Life
In January 2007, Mines sold the Detour Lake deposit to Detour Gold, with Mr. Panneton at the helm, for $5 million and 20 million common shares (valued at $3.50/share), at the time a 50% interest in Detour. Importantly, Detour had a very compact, 40 million common share capital structure – perfect for raising the funds needed to complete exploration and move towards feasibility and development. The Detour Lake deposit, which had been purchased for $1.5 million of borrowed money, was now valued at $75 million – with the upside potential of 20 million shares still to be realized.
Detour Takes the Reins
Detour immediately began an extensive drill program on the Detour Lake property and raised the profile of the deposit immensely. By June 2008, Mines’ 20 million Detour shares had increased from the IPO value of $70 million to over $500 million and Detour had more than doubled the total resources on the deposit, from 3.4 million ounces to 7.8 million ounces. Meanwhile, Mines’ market capitalization soared from $70 million to over $400 million, with the stock price going from $1 to $5.50.
Problematically, for tax and market-related reasons, Mines traded at a significant discount to the market value of its 20 million Detour shares, not to mention the value of the company’s highly prospective properties in Ghana, West Africa. Management took action.
On September 6, 2008, Mines spun-off all of its assets (other than 19 million Detour shares and some working capital) to Pelangio Exploration, a newly formed corporation with the same board and management as Mines. Mines was concurrently renamed PDX Resources. Shareholders of Mines received one share of PDX and one share of Pelangio for each share of Mines they held prior to the spin-off, all on a tax deferred basis due to the specific type of spin-off arrangement that management effected.
The spin-off was designed to reduce the discount on Mines’ market cap relative to its holding of Detour shares, and to gain further exposure and market value for the Obuasi property in Ghana. Unfortunately, the credit crisis of fall 2008 affected equity markets and the mining industry as a whole and required further strategic corporate restructuring by PDX/Pelangio’s board and management.
A Direct Share in Detour
After the nearly unprecedented market crisis of late 2008, PDX’s management reviewed its options in respect of the 19 million shares of Detour that PDX held at the time. Detour’s share price had also been detrimentally affected by the market downturn and PDX’s shares once again traded at a discount to the market value of the Detour shares that it held.
PDX and Detour realized in early 2009 that the most accretive solution for both parties would be to merge the two companies. PDX’s shareholders would no longer suffer the discount on the market value of PDX’s Detour shareholding, and would also receive a pro rata apportionment of Detour shares on a tax deferred basis. Detour would reduce the equity overhang represented by PDX’s control position, which would likely simplify further financing and strategic considerations.
In March 2009, the merger was completed with PDX shareholders receiving 0.2571 shares of Detour for each share of PDX they held prior to the merger (i.e. 19 million Detour shares distributed pro rata to approx. 74 million PDX shares). Most importantly, PDX shareholders received Detour shares directly on a tax deferred basis, which would not have been the case had PDX either sold Detour shares into the market and paid shareholders cash, or distributed the Detour shares to shareholders as a dividend in kind.
2004-2010 – Quite the returns…
By 2010, Pelangio’s early shareholders had realized extraordinary returns. A purchaser of Pelangio Mines Inc. shares in January 2004 might have paid $0.10 per share. By late 2010, with Detour Gold at $30 and Pelangio Exploration at $1.00, those original shares would have been worth $8.70, a remarkable 8600% return on the initial investment. Those returns illustrate Pelangio’s goal of generating wealth for its shareholders via both the drill bit and intelligent corporate restructuring.