Homestake wipes slate clean with quarterly writedowns

Depressed gold prices have induced Homestake Mining (HM-N) to reduce to zero the carrying value of its namesake mine in South Dakota. As a result, the San Francisco-based company no longer expects to recover its investment in the mine.

Homestake wrote down US$76.1 million before taxes against its third-quarter earnings, representing the total carrying value of the 120-year-old operation.

The mine writedown accounted for nearly half the company’s total writedown during the third quarter. Homestake also reduced to zero the carrying value of the Mt. Charlotte mine in Western Australia, with a charge of US$26.4 million against quarterly earnings. In all, Homestake took writedowns totalling US$165.9 million (or 78 cents per share) during the 3-month period. In last year’s third quarter, by comparison, the company took charges of US$145.1 million against earnings (or 69 cents per share).

Homestake reported a loss of US$182.2 million (or 86 cents per share) during the recent quarter, compared with a loss of US$155.6 million (74 cents per share) a year ago.

Contributing to the decline was the erosion of the Australian and Canadian dollars in relation to the U.S. greenback. The company reported a loss of US$7.2 million (or 4 cents per share) in its currency protection program.

Despite the disappointment, Homestake has plans to render its namesake operation more efficient. A proposed US$30-million capital investment program would reduce cash costs to US$280 per oz., though this reduction would hinge on a cutback in annual gold production to 150,000 from 180,000 oz. The company expects to make a decision on the capital investment program in the first half of next year.

The mine produced 64,500 oz. gold at a cash cost of US$256 per oz. in the recent third quarter, compared with 97,000 oz. at US$307 per oz. a year ago. Mining at the open pit was completed in September.

Homestake’s overall gold production between the two periods slipped to 630,700 from 642,000 oz., though cash costs were reduced to US$195 from $236 per oz.

The Ruby Hill gold mine in central Nevada exceeded expectations with higher throughput and recovery rates. Third-quarter production totalled 27,800 oz. at a cash cost of US$120 per oz. The open-pit operation entered commercial production in January.

At the Eskay Creek mine, near Stewart, B.C., the number of gold-equivalent ounces produced rose to 121,900, compared with 105,400 oz. in the third quarter of 1997. The increase is attributed to higher throughput, a lower silver-to-gold equivalency ratio, and the commissioning of a gravity-flotation mill. Cash costs fell to US$138 from $163 per oz. between the two third quarters.

Homestake’s share of production at the David Bell mine, ownership of which it shares equally with Teck (TEK-T), increased to 21,700 from 17,700 oz. The improvement at the Hemlo, Ont., operation stemmed from a 22% increase in grade, which, when combined with the decline in the Canadian-U.S. dollar exchange rate, had the effect of reducing cash costs to US$176 from $241 per oz.

Production at Homestake’s Australian operations fell short of year-ago levels. The company’s share of gold produced at the Super Pit operation in the country’s southwest plummeted 10,000 oz., to 92,500 oz. The decrease is blamed on lower throughput at the Fimiston mill, as well as ground movement at the Mt. Charlotte underground mine.

Gold production also decreased at the newly acquired Plutonic mine. A drop in millfeed of 5% resulted in production of 67,100 oz. at a cash cost of US$201, compared with 72,400 oz. at US$220 per oz. in last year’s third quarter.