The board of directors of Australian-based
Watching from the sidelines,
Last month, WMC said it was in discussions with several parties, including Alcoa, regarding a possible takeover offer or a restructuring of the company. Earlier this week, WMC announced its directors were reviewing options for the future of the company and seeking financial and legal advice to ensure the best outcome for shareholders.
WMC holds a 40% minority interest in the world’s largest alumina producer, Alcoa World Alumina & Chemicals (AWAC), which supplies 27% of world demand. Alcoa is the operator and owns the remaining 60%. Alumina is the main ingredient in the manufacture of aluminum metal.
AWAC contributed A$572 million in pretax operating profits to WMC in calendar 2000, up 107% over the previous year, mainly as a result of increased production and higher average prices. WMC’s share of alumina production rose 5% to 5.2 million tonnes, whereas aluminum production was higher at 129,000 tonnes.
For the first six months of 2001, AWAC generated a pretax operating profit of A$352 million before taking into account A$74.1 million in after-tax writedowns. WMC’s share of alumina production was off 6% at 2.5 million tonnes. The high-cost St. Croix refinery was permanently closed and production curtailed at Point Comfort in response to aluminum capacity cutbacks in the U.S. and Brazil.
Alumina production for the third quarter was down 14%, year over year, at 1.1 million tonnes, with prices softening as a direct result of a slowdown in the world economy. There is speculation on the street that should Alcoa tender a successful takeover bid for WMC, it would unload the Aussie’s copper, nickel, uranium and fertilizer divisions.
In response to apparent merger discussions with Alcoa, WMC has set up data rooms, and several companies have reportedly entered into confidentiality agreements.
Last year, WMC delivered record earnings of A$765 million (67.9 per share) on the back of A$3.1 billion in sales revenue. Declining prices in all main commodities took their toll on WMC in the first half of 2001. Earnings were down at A$274 million (24.9 per share) for the 6-month period, against a profit of A$403 million (35.1 per share) in the first half of 2000. However, half-year sales rose to A$1.56 billion from A$1.52 billion.
About a year ago, WMC began exploring opportunities to unlock the value of its gold division. In 2000, the company’s share of production from its operations, including St. Ives, Agnew and Norseman, totalled 727,400 oz. These operations generated a profit of A$35.4 million for the year.
In September, WMC announced it had reached an agreement to sell the St. Ives and Agnew mines to
WMC holds a 56% stake in Meliadine West and is the operator, with Cumberland and Comaplex each holding a 22% carried interest. Situated 20 km north of Rankin Inlet, Meliadine West covers the western half of a 70-km-long gold trend. Since 1995, WMC has incurred about $55 million in expenditures at Meliadine West and outlined five deposits containing a total resource of 32.8 million tonnes grading 4.7 grams gold per tonne, equivalent to just under 5 million oz.
WMC was in the midst of prefeasibility studies when the decision was made to include the project in the package of gold assets for sale. The studies were examining the potential for developing an open-pit or combined open-pit/underground operation, while reassessing the satellite deposits and modelling higher-grade zones in the main deposit.
Right of first refusal
Cumberland and Comaplex hold a right of first refusal pertaining to the sale of WMC’s stake in Meliadine West. In addition, to maintain its interest in the project, WMC must make annual cash payments to its Canadian partners of $1 million at the start of each new year until commercial production has been achieved. The payments escalate each year to $3 million after four years. Should WMC terminate the option agreement, its interest reverts back to Cumberland and Comaplex.
“They are certainly not focused on [Meliadine] right now,” says Kerry Curtis, Cumberland’s senior vice-president.
In the meantime, Cumberland has revised the resource estimate for the Vault deposit, based on results from drilling carried out last spring at the wholly owned Meadowbank project, 70 km north of Baker Lake. Vault is the fifth gold deposit to be outlined at Meadowbank. It was discovered last year, 5 km northeast of the other four near-surface deposits. An independent resource estimate prepared by MRDI, a division of AMEC E&C Services, shows that the Vault deposit hosts an inferred resource of 7.5 million tonnes grading 3.9 grams, equal to 936,700 oz. gold.
The addition of the Vault deposit brings the total resource base of the Meadowbank project to 3 million contained ounces. The measured and indicated portion now stands at 7.8 million tonnes grading 5.79 grams, or 1.4 million oz., whereas a further 10.9 million tonnes grading 4.44 grams, containing 1.6 million oz., has been categorized as inferred.
The economic impact of the Vault deposit and its relation to the Meadowbank project are being addressed in a scoping level study. Cumberland is incorporating the results of a prefeasibility study which MRDI completed in March 2000, prior to the discovery of the Vault deposit.
That study envisions a base-case scenario of 2,500 tonnes per day, from which would be produced an average of 160,000 oz. annually over eight years. Proven and probable open-pit reserves were estimated at 5.5 million tonnes grading 5.44 grams, or 963,000 oz. The estimates are based on a long-term gold price of US$300-325 per oz., a projected stripping ratio of 7.5-to-1 and a mill recovery rate of 92.4%. Open-pit reserves were deemed sufficient for six of the projected eight years of production.
Total cash costs were forecast to be as low as US$145 per oz. in the first year of operation; they would average US$196 per oz. over the life of the project. Capital costs were pegged at US$93 million, and the study called for a minimum mine life of 10 years.
Size unknown
Curtis describes Vault as an open-pit and underground prospect that has been drilled to a depth of 350 metres. “The key is how much is which,” he says. “We know we’re going to get an open pit in there; we just don’t know how big it’s going to be.”
He says that with the addition of the Vault deposit, the scoping study will look at increasing the production rate dramatically. “Instead of lengthening the mine life, we are going to try to upsize it,” Curtis states, adding: “We’ll have the guts of the study done in three to four weeks.”
Cumberland recently closed a $1.1-million flow-through financing, with Canaccord Capital acting as the agent. The funds will be used to explore Meadowbank further, beginning in the second quarter of 2002.
Results from a 1,450-line-km airborne geophysical survey, completed in September, will be used to plan the spring drilling. The survey covered the 5-km distance between the original four deposits and the new Vault deposit.
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