Royal Oak tightens belt as Kemess South takes priority

Low gold prices are forcing Royal Oak Mines (RYO-T)

to trim production costs and lay off workers.

The strategy is designed to ensure the company has sufficient cash on hand to complete construction of the $430-million Kemess South copper-gold mine in north-central British Columbia.

The company intends to reduce production costs to below US$300 per oz. at the Pamour mine in northern Ontario and at the Giant operations, north of Yellowknife, N.W.T.

The company has no plans to close either mine, though Graham Eacott, vice-president of investor relations, did say that a drop in the gold price to US$280 per oz. might force the company to consider suspending certain operations.

At presstime, it was not known how many people would be affected by the company-wide layoffs.

Part of Royal Oak’s cost-cutting strategy will be to concentrate on selectively mining high-grade areas at its operations.

In the third quarter, Royal Oak closed its Hope Brook mine in southwestern Newfoundland and the Colomac mine in the Northwest Territories. Both mines were approaching end-of-life reserves and were experiencing costly technical problems.

Earlier this year, Royal Oak sought to conserve cash by delaying the development of several projects, including the Matachewan gold mine, near Kirkland Lake, Ont., and expansion of the Pamour operation.

Construction of Kemess South began in July 1996 and is now 70% complete. The company has so far financed about $295 million of construction and is in the process of arranging the last tranche of financing to replace a revolving line of credit, which expired at the end of September.

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Compensation

As of Oct. 31, Royal Oak had $35 million in cash and securities. The company received $20 million in November from the British Columbia government as partial compensation for the expropriation, in 1993, of the Windy Craggy copper-cobalt deposit.

To date, the government has reimbursed the company to the tune of $130 million, and will continue to pay Royal Oak $1 million annually for 12 years.

The success of Kemess is critical to Royal Oak’s future. The mine is forecast to produce an average of 250,000 oz. gold and 60 million lbs.

copper per year over a mine life that is expected to exceed 16 years. The average cash cost, based on a copper credit of US$1 per lb., is projected to be US$79 per oz., and operating costs are pegged at $6.75 per tonne of ore (including mining, processing, site administration, road maintenance, smelting, refining and freight costs).

Kemess South is expected to generate annual cash flow of $90 million, based on a gold price of US$350 per oz. and a copper price of US$1 per lb. A change in the price of gold by US$25 per oz. would result in a change in the cash flow by $9 million, as would a change in the copper price by US10cents per lb.

Udiluted minable reserves are estimated at 204 million tonnes grading 0.22% copper and 0.62 gram gold per tonne at a stripping ratio of 1.28-to-1 and a net smelter return royalty (NSR) of $11.84. The reserve estimate is equivalent to 4.06 million oz. gold and 990 million lbs. copper, based on an NSR cutoff of $4.75.

Preproduction stripping will include 3.4 million tonnes of overburden and 7.4 million tonnes of waste rock.

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Geology

The deposit is hosted by a quartz monzonite intrusive. The reserves are divided into a leach cap, a supergene enrichment zone and a hypogene zone.

The leach cap contains almost 18 million tonnes of low-grade copper averaging 0.059% copper and higher gold grades of 0.77 gram gold. The combination of the leach cap and supergene totals 45.6 million tonnes grading 0.223% copper and 0.76 gram gold, and represents 22.4% of the ore reserves. The hypogene zone contains the bulk of the reserves.

Mineralization in the supergene zone consists of native copper, chalcocite and bornite. Fine native gold occurs in clots of hematite.

In the hypogene zone, mineralization consists of chalcopyrite in quartz stockwork veins. Native gold occurs as inclusions in, or peripheral, to the grains of chalcopyrite.

The hypogene and supergene will be mined and milled separately. The former is significantly harder than the latter and will require 1.5 times more grinding power. The supergene ore requires more time in flotation, results in a higher degree of slime, and requires finer grind.

Kemess South is expected to start up in April 1998.

Conventional open-pit mining will be employed, and a daily milling rate of 53,000 tonnes has been proposed. Processing facilities will include a gyratory crusher, twin semi-autogenous grinding mills, twin ball mills, a regrind mill and a bulk-flotation circuit.

The final product will be a clean gold-bearing copper concentrate grading about 26.16% copper and 1.97 oz. gold per ton.

The concentrate will be transported by rail to Vancouver and then shipped to a smelter overseas. Royal Oak has just signed a 5-year agreement for sale of the concentrate. Terms and conditions are being kept confidential.

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Third-quarter loss

The company lost $2.4 million (or 2cents per share) in the third quarter on revenue of $54 million, compared with earnings of $10.2 million (7cents per share) on $77.3 million in the corresponding period of 1996. Cash flow fell to $4.2 million from $22.5 million.

For the first nine months of 1997, Royal Oak recorded a loss of $62.6 million (45cents per share) on revenue of $161 million, compared with earnings of $15.3 million on $183 million for the corresponding period last year. Cash flow fell to $5.8 million from $40.2 million.

Gold production in the third quarter amounted to 95,505 oz., 9% less than last year’s 104,012 oz. Cash costs of US$310 per oz. during the quarter were 11% lower than the US$348 per oz. recorded a year ago.

For the first nine months, gold production of 284,430 oz., only slightly more than the 283,655 oz. produced in the corresponding period of 1996 — despite the closure of Hope Brook and Colomac. Cash costs averaged US$344 per oz., up slightly from the year-ago figure of US$337 per oz.

Royal Oak expects to produce a total of 340,000 oz. in 1997 at an average cash cost of US$332 per oz.