In a move that prevents a Chinese state-owned company from grabbing a foothold along the Northwest Passage in Canada's Arctic, officials in Ottawa have blocked Shandong Gold Mining Co. Ltd.'s bid to acquire TMAC Resources Inc., which owns and operates the Hope Bay gold mine in the Kitikmeot region of northwestern Nunavut.

While stopping Shandong Gold Mining from acquiring the Nunavut operation quashed what many Canadians considered to be a threat to national security, it also blocked funds to pay back TMAC debts and expand the Hope Bay Mine.

"While we are disappointed with the outcome, we are very pleased that TMAC achieved significant operation improvements at Hope Bay," said TMAC Resources President and CEO Jason Neal. "We will continue to build on these improvements while considering options to manage our balance sheet."

National security concerns

Under an agreement reached in May, Shandong Gold Mining was to buy all TMAC's shares for roughly US$149 million (C$208 million), an acquisition that would have given the Chinese company, also known as SD Gold, full ownership of Hope Bay Mine.

The sale of a producing gold mine in Nunavut to a company owned by a Chinese government with Arctic ambitions raised national security concerns among many Canadians.

"This purchase should not go forward," Richard Fadden, who previously served as national security adviser to Canada Prime Minister Justin Trudeau and former Prime Minister Stephen Harper, said earlier this year. "They are clearly adversaries, and I think we have to take that into account every time they seek to buy something."

Federal cabinet members did just that, ordering a national security review of the proposed sale of TMAC and its Hope Bay Mine in October.

While it was originally speculated that the review may extend past February due to extended federal government timelines resulting from COVID-19, the decision to reject the SD Gold bid for the Canadian miner was relatively swift.

Neal said TMAC and its shareholders, which approved the sale with a 97% vote, are disappointed with the decision that would have provided Hope Bay with the financial wherewithal and technical expertise of one of the world's largest gold producers by market capitalization.

Evaluating alternate scenarios

Hope Bay, which got off to a rocky start, could use the injection of capital that a company like SD Gold has to offer.

TMAC began production at Hope Bay in 2017 but the recovery circuit did not operate as expected, creating difficulties for the emerging gold miner.

The company planned to ramp up production in two phases, starting with a 1,000-metric-ton-per-day recovery circuit and then a second identical circuit that would have increased capacity to 2,000 metric tons per day. The initial circuit, however, had difficulties both in through put and recoveries.

While such difficulties are unwelcomed at any new mine, the time and cost to deliver parts and equipment to Hope Bay's remote locale compounded the problem.

TMAC, however, did work through the problems but it took until the first quarter of 2019 for the company to turn its first profit at Hope Bay.

With operations smoothing out, the company completed a pre-feasibility study in March 2020 to expand the Hope Bay Mine to 4,000 metric tons per day starting in 2024. This plan involved building a whole new mill and recovery system at a separate deposit on the property.

"This scenario, which includes a new 4,000 tonne per day plant at Madrid, and developing the mining assets aggressively to be able to feed at this rate, demonstrates a more robust approach to operating at Hope Bay. It replaces the current processing plant by 2024 with a conventional design at a higher capacity," said Neal.

The renewed Hope Bay plan, however, would have required an investment of C$683 million over the next three years, including C$184 million for the new processing plant.

The implementation of this plan, along with loan payments due to Sprott Private Resource Lending and associated lenders, is likely the reasons TMAC reached a deal with SD Gold just five weeks after the pre-feasibility study was completed.

With Ottawa rejecting the bid by SD Gold, TMAC executives will have to rethink how to advance Hope Bay and pay off its debt.

"We continue to believe that the Hope Bay gold belt holds substantial value with long life production potential that presents a significant development opportunity," said Neal. "We have developed and are currently evaluating mining and processing plant alternative scenarios with the objectives of reducing capital expenditures and financing requirements compared with the 2020 PFS, while maximizing value."

While TMAC would prefer just to replace the current recovery system at Hope Bay, the plant is recovering gold and generating cash for the company.

TMAC Resources Inc

TMAC began development of the Madrid North deposit at Hope Bay in 2019. Even without a new processing facility at Madrid, the high-grade gold mineralization could be delivered to the existing mill about 10 kilometers to the north.

"Given our Sept. 30, 2020 unrestricted cash balance of C$71.5 million and current positive cash flow being generated, we expect to have sufficient cash on hand to fund the 2021 sealift, but not to fully repay maturing debt recently extended to June 30, 2021," said Neal.

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Shane Lasley, Publisher

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