Calculating Sp(r)ott Price @ Barkerville Gold Mines

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Thursday November 14, 2013

Mines are made, not found.

That is Barkerville Gold Mines' tagline for investor brochures.

James Francis Gerard Callaghan spent upwards of $120 million making Barkerville mines and properties along central British Columbia's Cariboo trend in Canada.

Do you know the restaurant Max's in northern California? "This is a good place for a diet. This is a bad place for a diet."

Barkerville Gold Mines (BGM in Canada and BGMZF in Canada) "is a good place for a new investor."

NEWBIES GET: 127,000 hectares of land, 174 mineral claims, 311 placer claims, 101 creeks, 7 mines, a mill, 6,800 completed assays and another 23,000 in process, plus hundreds of exploration drill-holes across what looks like more than 75,000 meters.

One newbie is Eric Sprott, a 69-year-old Canadian who covets precious metals.

"Barkerville is (was) a bad place for an old investor."

LONGTIMERS GOT: the right to say the prospector they invested in spent $120 million and landed in hot water because of an overreaching gold estimate by an engineer named Peter George. The 43-101 Canada filing infuriated the TSX Venture Exchange and British Columbia Securities Commission, specifically a geologist-regulator named Robert Holland.

Someone told me this morning that if you had staked $2 Canadian to Barkerville (formerly International Wayside) stock as the British Columbia, Canada, prospector was purchasing Cariboo Gold Belt properties in the mid-1990s, you'd have less than 2 cents worth of stock now. (The SEDAR FILINGS travel back to JULY 1997.)

That 2-cent figure probably is a generous appraisal.

An offshore investor tells me, "Did you know COF (companies owned by Frank) received $8 million in fees from Barkerville combined in fiscal 2012 and 2013?"

Mr. Callaghan says that figure, in cash and stock, is overstated.

"In the annual report it is recorded I receive $20k per month for the past 3 years. For the first 10 years, the salary was $5k per month. The $8 million I don't know what that is," the 59-year-old Vancouverite says. "But LG (Lionsgate Energy) and GCC (Golden Cariboo Resources) sold their assets for cash and stock (and) it was NO-where near that number. They each still have their shares."

LG and GCC (tickers in Canada) are related parties, and they each are public Canadian companies.

Our Barkerville narrative will be with us for at least for the 3 1/2-year length of investor Eric Sprott's $15 million loan facility.

This is what RELATED PARTY TRANSACTIONS look like in a SEDAR FILING (2004):

b) Balances payable:

The amounts payable to related parties, which are non-interest bearing, unsecured and due on demand, are comprised of the following:

Due to a company controlled by a director (Note 9.c) $2,427,960
Due to Island Mountain Gold Mines Ltd. $515,720
Due to directors and officers $442,697

The balance due to Island Mountain Gold Mines Ltd. at November 30, 2004, related primarily to advances for property payments on the Cariboo Gold Project and includes interest payable of $7,500.

c) Related party transactions:

A summary of the amounts charged to the Company by directors, and by companies controlled by directors, is as follows:

Exploration and development expenditures:
Bulk sample project $1,104,492
Exploration expenditures $3,211,630
Project administration fees $47,898

Administration expenses:

Consulting fees $45,000
Management fees $45,000

That all is part of a spending legacy the old investors have hanging from their belt buckles.

Did you see our recent coverage of Mr. Callaghan, not long after Barkerville shares began trading in October following 13 months of British Columbia regulatory review and the rewriting of Cow Mountain resource estimates?

That coverage was mostly about Frank Callaghan, gregarious and likeable promoter, playboy, prospector and skier.

This article is more about Barkerville and the loan.

Most of the geoscientists I know, and the mining promoters, and a flock of investors, and a baker's-dozen of gold writers canvassed this week at New Orleans Investment Conference, said they see Barkerville (choose one): maybe | maybe not | never providing a break-even or better return to longtime (old) stakeholders.

If you chose never, you are correct.

Please continue reading, as there is still the case to be made for new stakeholders.

You see, at the Cariboo Gold Fields, going back to the late 1800s or early 1900s, residents recorded about 4 million ounces of gold pulled from the ground, some 4 hours' drive above Vancouver, Canada.

Much of the metal in and around the town of Wells, B.C., was placer gold from all the creeks. About a third of that came from underground mines: the Cariboo Gold Quartz Mine, the Island Mountain Mine and the Mosquito Creek Mine.

Hundreds of newspaper reports, television spots and Internet blasts that have emanated from Barkerville these past 14 or 15 months stem from an open-pit resource that Mr. George, the independent engineer hired by Barkerville, estimated at north of 10 million ounces for BGM's Cow Mountain.

The stock rose about 70 percent and a few folks made good money. Most did not. Trading ground to a halt almost immediately afterwards: summer 2012.

Just this autumn of 2013, that Toronto investor and asset manager, Mr. Sprott, spearheaded a $15 million loan facility linked with warrants and actual gold production, or its equivalent in cash.

"The board and Eric worked on it for a long time," Mr. Callaghan says.

Mr. Callaghan had a gold pour up there in February 2013, and he says another one is coming by March 2014 -- this one from Bonanza Ledge and tailings in and around the ledge.

Comments from various executives, geologists, writers, analysts and investors, all of whom I could name, but shall not, for their sake and the sake of their e-mail boxes, cut to the bone. Most reference Mr. Sprott, whose loan involves delivery of gold or that cash equivalent at various stages.

Says one: "What no one seems to get is that Barkerville is going to be spending Sprott’s money to produce gold to give to Sprott, at best a zero-sum game, leaving them still with the same pile of debt, and at worst, they won’t be able to meet production quotas and Sprott gets the property. If Sprott seriously wanted this to succeed, they would have put someone on the board and insisted on a few management changes."

Or:

"Sprott expects him to crater and they take over. Peter George wasn’t working in a vacuum. Callaghan hired him because he was an (redacted) who would produce whatever results you want. (Peter) George ... worked for (redacted) until they listened to him long enough to realize he wasn’t dealing with a full deck."

Or:

"Frank Callaghan and (redacted) of (redacted)... manage one public company that contracts with their private company. As long as they can generate results good enough to raise money, they keep raising money and paying it to themselves in their private company. ...If Callaghan deserves any credit, it’s that he ran the very first company in this cycle to have to do a 1-for-10 (share) rollback."

I asked Mr. Callaghan what happens if he cannot raise the loan facility's three payments of 4,166.67 ounces of gold during a 30-month span.

"If I can't raise $5 million with a phone call, then I did not raise $120 million for this company," he told me on the telephone.

I asked Frank what the all-in cost is for pouring an ounce of gold at Bonanza Ledge. "It's $900, and it's in the 43-101 (report.)"

I asked him about Mr. Sprott's intentions. "Eric Sprott won't own this company. He wants equity, and right now, I don't want to give equity."

I asked Mr. Callaghan what the primary risk is for investors: that gold declines to $1,000 an ounce, or $900? "No. The one risk is that I die and someone else has to run this company."

The current market worth of BGM is about $65 million. The stock is about 57 cents Canadian. Eric Sprott has the right via 30-month warrants to purchase 9 million BGM shares at 89 cents each. He can be forced to exercise those warrants on an accelerated time schedule, thus sending the company more money, if the stock climbs another 50 percent from that level.

Takeaway: The upper limit of the loan facility for gold repayment -- what I call Sprott-price -- is $1,600 an ounce. When gold rises above that level during the next 30 months, Barkerville shares will outpace gains in most other prospectors linked to loan arrangements.

Until the next gold rally, then.

Your friendly,

Thom Calandra

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NEVER MISS AN EDITION OF THE CALANDRA REPORT - SUBSCRIBE BY PAYPAL... Thom Calandra is the editor of The Calandra Report, an investment newsletter. He previously co-founded and was founding editor of CBS Marketwatch, one of the world's largest financial Web sites. He also co-founded Ticker Trax for Stockhouse. Thom has a wife and two children, and is based in Tiburon, California. TCR, the newsletter, is a paid report: The Calandra Report for Paypal information. More →

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Thom Calandra

Twitter: @http://twitter.com/thomcalandra

thom.calandra@gmail.com

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