Deal with Amoco Canada said good for Placer Dome

From a Placer Dome investor or potential investor point of view, at least two good things could happen as the result of a deal struck between the newly-formed mining giant and Amoco Canada Petroleum, which is still on the verge of a takeover of debt-ridden Dome Petroleum.

One of the benefits to Placer Dome would be achievement of 100% ownership of the Detour Lake gold mine in northeastern Ontario, where close to 87,000 oz of gold are expected to be produced this year. Placer Dome and Amoco currently hold a 50-50 interest in the mine, a holding that Placer Dome acquired as a result of the recent merger between Placer Development, Dome Mines and Campbell Red Lake Mines.

A second benefit to Placer Dome from the Amoco deal would be the elimination of the $225-million loan guarantee to Dome Petroleum that came with Dome Mines into the amalgamated company, and which had been hanging over Dome Mines, as one analyst expressed it, like the “sword of Damocles.”

Here’s the background to the new Placer Dome/Amoco deal:

Placer Dome owns 66,533,900 shares or about 19.5% of the outstanding shares of Dome Petroleum.

In 1982, Dome Mines guaranteed a portion, in the amount of the aforementioned $225 million, of a bank loan made by the Bank of Montreal, Canadian Imperial Bank of Commerce, the Royal Bank of Canada and the Toronto-Dominion Bank to Dome Energy, a wholly-owned subsidiary of Dome Petroleum. The guarantee became an obligation of Placer Dome upon the amalgamation.

Now, as John Hick, Placer Dome senior vice-president corporate, tells The Northern Miner, under the terms of the agreement with Amoco Canada, Placer Dome will be unconditionally released from the guarantee, and Amoco Canada will transfer to Placer Dome for an undisclosed price Amoco’s 50% interest in the Detour Lake mine.

In turn Mr. Hick says, Placer Dome will deliver, as Amoco Canada directs, the consideration Placer Dome receives for its Dome Petroleum shares under the arrangement agreement between Amoco Canada and Dome Petroleum, and will assign to Amoco Canada its claims for unpaid guarantee fees and its security for the guarantee.

One analyst has estimated the worth of Amoco’s shares in the Detour Lake mine at from $200 million to $250 million, and while Mr Hick said he would not particularly quarrel with that estimate he suggested it would constitute a “very good deal” for Placer Dome.

Opened almost four years ago under a joint venture between Amoco Canada and Campbell Red Lake, the Detour began life as an open pit, had some serious teething troubles, and is now being transformed into an underground operation.

The mine produced a total of about 87,000 oz gold last year, Mr Hick said, and is expected to produce only slightly less than that this year. The underground operation should be on-stream in the first quarter of 1988, at a rate of 2,000 tons per day.

Commenting on the elimination for Placer Dome of the Dome Petroleum guarantee, Mr Hick said that in any case it had become a less serious obligation for the much larger amalgamated company than it had been for Dome Mines. Actually, he noted, Placer Dome had enough cash in the treasury (about $239 million at the end of March) that it could have “paid off the guarantee t omorrow.”

He emphasized that the settlement of the obligations under the guarantee and the purchase and sale of the interest in Detour Lake, are totally conditional on the final, completed acquisition of Dome Petroleum by Amoco Canada.

“It’s a package deal for us, and that’s the key to the whole thing,” he said. “If for instance company `X’ were to offer more tomorrow for Dome Petroleum, and Amoco were to walk away, we would be free to do a new deal. We have that flexibility.”

The Placer Dome executive said he believed that Amoco does have a “reasonable shot” at concluding the Dome Petroleum takeover. Meantime, the timing of that conclusion is not really critical to Placer Dome’s future, he said.