Amador County mine sale banks on lure of high gold prices

The owners of a historic gold mine in the Amador County town of Sutter Creek are putting their company up for sale.

Sutter Gold Mining Inc., based in Vancouver, British Columbia, has hired the Toronto investment banking company IBK Capital Corp. to find a potential buyer, merger candidate or joint venture partner. The mining company (TSX Venture Exchange: SGM) hopes gold prices, which hit a 27-year high on Wednesday, will attract a suitor.

Sutter Gold Mining chief executive officer Hal Herron said about 25 companies are interested.

"Most likely it will be a stock-for-stock exchange so it will be tax-free for shareholders," he said.

The Sutter mine contains a 3.2-mile segment of the historic Mother Lode gold belt.

Sutter Gold Mining has invested about $24 million to drill exploratory holes, obtain operating permits and design a mill, which has not been built. Last year, the company received a key permit from the Central Valley Regional Water Quality Control Board which allows it to pull water out of the flooded mine and store the mine tailings.

The Amador County mine is Sutter Gold Mining's most valuable property, Herron said. In March 2006, the company issued a report estimating the mine could contain 695,000 ounces of gold.

Gold prices soared Wednesday after the Federal Reserve lowered its benchmark federal funds rate from 4.75 to 4.5 percent. The Associated Press reported that the price of one ounce of gold settled at $795.30 on the New York Mercantile Exchange Wednesday, and then reached above $800 in electronic trading for the first time since 1980.

At $800 per ounce, Sutter Gold's reserves could be worth $556 million.

"I think the market can continue to rally over the next two to three weeks, and maybe go to $850," said Tom Pawlicki, a precious metals analyst in the Chicago office of MF Global Ltd. The weakness of the dollar and a large number of call options are driving the price up over the next couple of weeks, he said. By the beginning of next year, he expects it will drop back to $720.

Sutter Gold Mining also has properties in Mexico purchased in a joint venture with Premier Gold Mines Ltd. (Toronto Stock Exchange: PG) of Thunder Bay, Ontario. The Mexico property is in the historic El Alamo Gold District of Baja California Norte, site of a gold rush in 1888.

Sutter Gold has mostly financed its operations through stock sales. With 76.8 million shares outstanding and the stock price down to 26 cents per share, the company needs an alternative means of financing the mine's development.

"I don't want to dilute the existing shareholders by floating another issue of stock," Herron said.

Sutter Gold's major stockholder, Riverton, Wyo.-based U.S. Energy Corp. (Nasdaq: USEG), has cooled its enthusiasm for gold exploration. U.S. Energy controls 54 percent of Sutter Gold. It also owns a share of a molybdenum mine in Colorado and has started construction on an apartment complex and a coal-fired power plant in Wyoming.

"Our strategic objectives, which previously focused on undervalued asset 'plays,' are somewhat different now, as we seek to identify investments that can generate recurring cash flows, revenues and earnings for our company," U.S. Energy president Mark Larsen said in a news release. "Oil and gas, along with inter-mountain west real estate opportunities, will continue to be a primary focus for new investment, unless an extraordinary mineral prospect is presented to us."

Sutter Gold had a market capitalization of almost $20 million on Wednesday. It had assets of $3 million on June 30, the date of its most recent financial statement. Its annual loss rose to $1.86 million in the year ended Dec. 31, 2006, from $1.5 million in the prior year. The loss was equal to 3 cents per share both years. Annual revenue rose to $47,500, from $39,700.

In the six months ended June 30, it lost $1.1 million, a 199 percent increase from the first half of 2006. Operating costs were higher due to an exploratory drill program completed in the second quarter. First-half revenue decreased to $14,900, from $18,700 for the same period in 2006.

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