Michelago''s Last Days...This article about MIC was written on March 09, 2005. It would only be 8 months later that Michelago and Golden China Resources would announce there merger plans. Merger talks probably already started that summer.
If memory serves me correctly, and I do stand to be corrected here, MIC spent the next 6 months trying raise bank financing, for working capital for the BioGold Plant, and to increase there 41% interest in SGA to 47.5%. Without further capital to invest into SGA, and with the IPO on the TSX, their stake in SGA dropped from 41%, to the present 24%. They chose bank financing to try to prevent further MIC shareholder dilution on an already highly under valued and under priced stock.
It was however only a few months later when they realized that they had run into a major financial stumbling block. This had more to do with China's Bank Lending Rules than the company's equity and collateral.
It is my understanding, and I again stand to be corrected here, that under China's Bank Lending Rules, you can use land, as collateral, but you cannot use the Chattels that sit on it. In other words, you can mortgage the land your house sits on, but not your house and the things in it.
Since a great deal of Michelago's money was tied up in the BioGold Plant, and their Gold Concentrates Stock Pile, which they could not use as collateral, they found themselves in a bind. They could of course sell their SGA Shares, but besides going against what they wanted to do, SGA was still over a year away from its first and only listing on the TSX. So sell to whom, and for what price?
So when Golden China Resources saw Michelago's Bio Treatment Facility at BioGold, and matched it to their Refractory Gold at Nibao, they saw a marriage made in heaven. When Michelago saw Golden China's two promising gold properties, and especially their fat wallet worth $16M, they to agreed, and thus this resulting merger.
But it is always nice to go back and see what they thought then, before the merger was to take place. AIM (BTW) is the London Stock Exchange, in case you didn't know this.
The article:
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March 09, 2005
Michelago Struggles To Sell Its Story In Australia, So May Come To AIM.
By Our Man In Oz
It takes a big effort to ignore a company with two emerging gold production centres that should, within the next 12-to-24 months, account for more 200,000 ounces of gold a year at less than US$250 an ounce. But, paying no heed to Michelago Ltd has become a fine art in its home country of Australia.
Rather than trade around the A20 cent mark, which its principal cheer-leaders say is a first price target on the road to great and glorious things, Michelago is stuck around A7.5 cents, and having the devil's own job convincing local investors that a series of gold projects in China, and another in the Solomon Islands off the east coast of Australia, are attractive locations for their cash. This, presumably, is the main reason it is said to be considering a listing on AIM.
Said quickly, and without paying too much attention to the location, politics, and the structure of the deals in China and Solomons, it can be argued that Michelago is a terrific little stock. In China, it has strong exposure to a country with a long-established gold culture, with management arguing that it is close to achieving strong cashflows from control of a biological oxidation processing plant, and a number of potential mine developments.
In the Solomons, it is in the process of lifting its stake in the mothballed Gold Ridge mine to 47.5 per cent with the aim being to get the once rich project back in production from next year. If China and the Solomons click, Michelago could indeed enjoy a significant re-rating on the market.
The problem for outsiders is that the company appears to be stretching a number of envelopes at the same time, and is not particularly good at painting a simple picture that simple-minded journalists and potential investors can follow.
China, for example, is said to be the primary focus of Michelago, but activity there has been slow and not everyone shares the comfort level of management when it comes to dealing with the locals and their well-known love of gold.
In any event, profit margins from a processing plant are razor thin which makes it important for Michelago to get into a mine of its own, such as the much-promised (but yet to arrive) Jinya project which has been planned as a 40,000oz a year development, but which has failed to attract a joint venture partner.
A second stretching of the envelope can be seen in the weight of capital now bearing down on Michelago. Less than a year ago, the stock had about 450 million shares on issue. Today it has 700 million shares in the market, plus another 100 million options which can be converted in early 2006. The extra capital results from an issue of 200 million share at A10 cents (raising A$20 million) to pay for the Solomons purchase, with a one-for-two free option at A15 cents attached to the placement.
The third stretch is the Gold Ridge deal itself. Once again, the theory behind the deal is excellent (just as China is a good idea) but the issues which worry the market include fears of renewed instability in the country, and the condition of the mine after five years in tropical mothballs.
For anyone unfamiliar with Gold Ridge, it was discovered in 1992, developed by Ross Mining, became an asset of Delta Gold which was, in turn, swallowed by Placer Dome. For two years the mine performed strongly, until May 2000, when the Solomons effectively became a war zone as a result of a coup similar to that which occurred in Fiji where ethnic troubles bubbled over into open conflict, and Gold Ridge was shut with Placer Dome eventually collecting a A$70 million insurance payout.
Michelago, which takes its name from a small town on the road to the Australia alpine town and ski resort of Cooma, (yes, there is snow in Oz), argues that the past is the past, that law and order have returned to the Solomons thanks to the intervention of the Australian Army, and that now is a good time to re-start a project which, at one stage, represented 30 per cent of the island nation's economy.
In simple numbers, it looks clear cut. Gold Ridge contains a resource of at least 2.3 million ounces and, once re-started, is capable of producing 150,000oz a year at around US$235/oz, with exploration potential the blue sky. The total purchase price, and re-opening cost is put at around US$90 million.
In theory, it is all sunshine and upside, with Michelago potentially poised to shake off its reputation for being a bit slow in completing its deals in China, and on the verge of becoming a two-project business with promising interests in China and the Solomons.
The market, however, is belligerent. Selling commodities to China is fine, but sinking a lot of capital into China is a different bowl of rice. That concern is echoed in the Solomons deal where calm may have been restored but the long-term outlook is uncertain - which all serves to make Michelago an exciting adventure for anyone with a higher than average appetite for risk. Like London? (ed.)
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LINK
https://www.minesite.co.uk/index.php?storySeq=619
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