My thoughts on synergistic opportunities for small Val dÒr area producers

This is what I would do if was was consolidating small gold producers in the Val dÒr area.

This is only what I would do. This is only for blog discussion purposes. Naturally, no one should make investment decisions based on this blog post. The reality of what is happening may look completely different from my ideas. I have absolutely no privileged info as to what is actually being discussed. Also, NONE OF THE COMPANIES DISCUSSED BELOW (INCLUDING CENTURY MINING) MIGHT BE EVEN REMOTELY INTERESTED IN ANY OF MY IDEAS FOR SYNERGISTIC GAINS.

Firstly, I would prefer to see Century`s management stay completely away from any consolidations until Century`s share price hits $1.50 per share. Unlike some of the small producers in the Val dÒr area, I do not believe that Century needs to consolidate with other companies in the near-term of mid-term for Century shareholders to realize a significantly appreciated share prices. I just think it is absolutely essential for Century to deliver and excel with Lamaque (and continue with good results from San Juan). I think it is also mandatory for Century to demonstrate high standards with other areas of the business too (which, among many other things, includes issuing financial statements on time).

The 4 companies I would like to see consolidate are: Century (CMM), Northern Star Mining (NSM), Richmont Mines (RIC) and Alexis Minerals (AMC). Metanor (MTO) is a longer term possibility also, but I personally wouldn`t involve them at this time. Metanor is located too far north and do not offer sufficient synergistic opportunities to justify being included in this first phase of the consolidation process, IMO (even though they have one good property in the Val dÒr area with Inferred 43-101 resources). Wesdome is way too expensive to be considered, IMO.

Along with CMM`s share price needing to go to $1.50, it is my personal view that the share price of RIC, AMC and NSM all need to decrease for me to feel comfortable with a consolidation. With Century at $1.50, I might be able to live with the current share price of AMC at around $.35 (although I would prefer to see them at $.30 due to likely still needing about $30M or so to move their projects forward) and NSM at around $.30 (although I would prefer to see NSM at $.26 to $.28 due to having $42M in debt coming due in Aug/Sep of 2011, and me seeing their share price in serious trouble unless they get significant external help, again only my opinion). I see RIC`s share price as being too high right now – for my consolidation proposal. It needs to come down for my liking, especially when looking at results from their current operating mines.

Having said all of that, I would like to see a consolidation with CMM, NSM, RIC and AMC, but again, ONLY AT THE RIGHT PRICES. I would like Century to take the NO PRICE, NO DEAL approach. Realistically, I think the chances of it (all of these companies consolidating together) happening in the first consolidation phase is SLIM TO NONE. I think it needs to happen, but I think (IMO) there are TOO MANY EGOS involved and there will likely be (IMO) TOO MUCH PROTECTIONISM (especially with senior management level). What I think is most likely to happen is Century merging with only one of the companies, at least in the first phase consolidation.

It`s too bad because I think a CMM, NSM, RIC and AMC merger (at the right prices) would result in shareholders of all 4 companies realizing a triple (and a lot more over time with demonstrated execution) in their respective share price used at consolidation point.

Assuming all 4 companies merge, Century will likely need to arrange for debt/credit line financing to support the AMC ramp up. Depending on how Lamaque comes along with ramping up, Lamaque may be able to fund exploration and development efforts for many of the small properties over the next couple of years. Also, Century might be able to use the $15M from warrants plus CF from the consolidated assets to pay down the NSM $42M debt coming due Aug/Sep of 2011.

The consolidated group will have a flagship asset in Lamaque, to anchor the company. Having a 150,000 ounce per year type pure gold producer is essential for a growth company like this. The market wouldn`t embrace this type of company as much without a flagship asset like Lamaque, with 6 million ounces in the ground. Also, for the market to embrace this, it is critical to show a clear strategy of how the consolidated company will take severally under performing assets and turn them into winners. I think I have identified one major change that will partly address this and a few minor ones also. Here is how I would structure CMM, NSM, RIC and AMC into one company or at least here is what the consolidated company would look like (if I was in charge of such a task):


1) Lamaque Mill (CMM)

Ramped up to 2,000 tpd will likely generate 110,000 oz per year production. Shaft refurbishment in about 4 years will likely take it to 150K oz per yr. However, I`m hoping they will implement the 150,000 mine plan prior to 4 years (without using the shafts), especially if they are able convert significant ounces into P&P (in the upper levels) via the upcoming exploration program.


2) Beacon Mill (NSM)

RIC is currently bringing back the Francoeur mine into production for mid 2011. For starters, they are expecting 35,000 ounces of production per year for about 4 years. I believe the grade is plus 6 g/t. There is solid exploration potential to increase mine life. The problem with Francoeur is it is located (25 Km west of Rouyn-Noranda, Quebec) 110 kilometres from RIC`s Camflo Mill (near Val dÒr). They are currently planning to truck the ore 110 kilometres for processing. I believe it will cost RIC about $15M more to bring Francoeur to production stage. They can handle this through their existing cash position.

RIC recently initiated exploration on its Wasamac (advance exploration) property. It is located 10 km from Francoeur and 100 km from RIC`s Camflo Mill. They are currently planning to truck the ore 100 km for processing, once in production. Over 285,000 inferred ounces have been identified (plus 6 g/t grade). Drilling soon to be under way to move those ounces upwards and to add new ounces. There appears to be excellent exploration potential on existing known zones. Of course, a production decision cannot be made on the property without much more work being done first. It`s also a past producer with some mining infrastructure in place.

AMC`s Lac Pelliteir property is located 10 km from Wasamac and 20 km from Francoeur, but 100 km from AMC`s Aurbel Mill. AMC is planning on trucking the Lac Pelliteir ore 100 km for processing.

NSM`s Beacon Mill is located 28 km from NSM`s main mining property. The mill can currently process 900 tpd.

This is the biggest synergistic opportunity for all the companies I believe. I would physically move NSM`s Beacon Mill from its current location (near Val dÒr) and put it on the Wasamac property (near Rouyn-Noranda). Simultaneously, I would upgrade that mill from 900 tpd to 1,800 tpd. I would then have the Francoeur ore, the Wasamac ore (once ready) and the Lac Pellitier ore all feeding into the relocated and expanded Beacon Mill. It would mean Francoeur ore travels only 10 km instead of 110 km, Wasamac ore travels zero km instead of 100 km and Lac Pelliteir ore travels only 10 km instead of 100 km. It likely means that marginal high cash cost mined suddenly become very competitive mines (with not just savings from less travelling but serious economies of scale savings also), with a much greater chance of remaining open if the gold price should happen to fall. It suddenly means an extremely attractive 110,000 oz per year operation with very solid further potential. The market should heavily embrace this approach especially relative to the extremely fragmented and super high cash cost per oz approach in the plans by the various companies today.

Century may need to fund the mill relocation and expansion through debt/credit line if timing of cash flow (of the consolidated company) does not support this initiative.

My thoughts on what to do with the NSM ore is discussed further down the post.


3) Aurbel Mill (AMC)

AMC`s Lac Herbin mining area (40K oz per yr) is fairly close to the Aurbel Mill.

RIC`s Beaufor ore (20K oz per yr) currently travels to the Camflo Mill located on the west side of Val dÒr. With the consolidation, the Beaufor ore can go to the Aurbel Mill which is much closer. This should represent a cost savings (trucking about 8 km instead of going about 30 km). Although, the biggest problem with Beaufor is inconsistent performance, mainly extremely poor performance (IMO) and lack of material exploration success despite significant exploration programs (IMO). It`s a relatively small operation, but I think assistance from new geologists might be able allow for new approaches, especially if it gets worked into the Vulcan approach that Century uses.

The McKenzie Break property (NSM) is a somewhat advanced exploration and development property, located about 25 km away from the Aurbel Mill. I would send the McKenzie Break ore to the Aurbel Mill (represents about 10 km savings as part of the consolidated group – NSM currently has plans for the ore to eventually be processed at the Beacon Mill (at the current Beacon Mill location). Although there are some significant infrastructure in place at McKenzie Break, there is still a lot of work remaining (especially on the exploration front) before a production decision can be made (I think). It is also not clear how much it can contribute to yearly production. I have plugged in 15K oz per year (once up and fully running), simply to max out the Aurbel Mill capacity. I have assumed the Aurbel Mill can contribute around 75,000 ounces per year to production.

The Aurbel Mill will likely be the highest cost per ounce operation within the consolidated portfolio.


4) Camflo Mill (RIC)

This mill is located about 3 or 4 km away from NSM`s Midway property (NSM`s primary property). The Midway property is a very advanced stage property. It may be ready to produce ounces on a consistent basis in the near-term, but it`s not clear if it needs an injection of cash to get it ramped up properly. It has a decent size resource base (about 550K 43-101 and about 300K non-43101) but appears to have really good potential for further ounces through exploration. I have the Midway property eventually maxing out the Camflo Mill capacity at say around 65,000 ounces per yr (although NSM doesn`t appear to provide production guidance on its properties). The consolidated approach provides a savings of about 24 km of trucking distance (sending ore next door to Camflo rather than sending it to the current Beacon Mill location).

Also, there is no guidance by NSM for cash cost per oz, but logic would suggest it should be decent.

Midway generates a bit of silver. I don`t know if Camflo can handle silver. I know base metal by-products need additional processing. I don`t believe additional processing is required for by-product silver also, although I really don`t know. I think the term dore bars are used to refer to pours that include both gold and silver combined. Either way, I`m sure an add on can be done if necessary.


5) Snow Lake Mill (AMC)

This is the old New Britannia mine (in Manitoba) that was successfully operated by Kinross and High River Gold (for 10 years I think). A good size resource base has been identified. There also remains good exploration potential. Most of the cash needed by AMC will go towards work on this operation. I believe the mill is fully operational and can handle around 80,000 oz per yr (once they ramp to such levels over the next couple of years).

Cash cost per oz should be solid, if execution goes well.


6) San Juan Mill (CMM)

Will be ramped up to 30,000 ounces per yr.


7) Island Gold Mill (RIC)

The mine is located in Ontario. The operation has been relatively poor thus far, in my opinion of course. However, I like the potential for performance becoming better. I also really like the exploration upsides. There are a number of good targets elsewhere on the property.

The operation can probably deliver steady state production of around 45,000 ounces per year. It has a 650 tpd mill.


Transition:

I`m not concerned with too many projects coming together all at once. I say that for many reasons. Firstly, the flagship asset (Lamaque) would be up and running. Secondly, all of the assets discussed are currently being worked on with solid plans in place to bring them to production (none of these represent building a mining operation from scratch, which would be a totally different game).

I would keep all of the operating teams in place. The teams can continue to progress with their respective projects as if nothing happened. Where the redundancy can be found is at top level management (duplicate CEOs, duplicate Vps, etc.). I would remove all of that redundancy and use some of those savings to create a transition/co-ordination team. I would have all of the projects report into this team. The team will ensure the master plan is being followed and will be in charge of driving efficiencies.


Value:

After successful execution, and if we continue to realize a strong gold price, I see this type of company with a $2.0(+++) billion market cap – easily realizing significant gains for all of the shareholders participating in the consolidated company. On the flipside, I see it as a lost opportunity for shareholders of small producers in the Val dÒr area if the management of those companies don`t get their act together and finally start creating shareholder value. IMO, it has been a pathetic last 5 years for shareholders of these companies (yet the gold price has more than doubled, almost tripled, in that timeframe).


Status of certain management teams:

RIC – a 20% shareholder of RIC is now Chairman. He recently appointed 4 additional directors (people he is comfortable with). He is looking for a partner (or partners) to transform the company to mid-tier producer status.

NSM – they recently appointed a new CEO with a primary mandate of growing their company.