GOLD AND PRECIOUS METALS — Gold companies merge for growth, or survival — Majors, mid-tier producers and juniors take part in merger mania

From the largest South African producers to juniors with small mines, gold companies are joining forces in an attempt to weather a prolonged slump in prices that has already taken its toll on a number of their peers.

The flurry of merger activity appeared in tandem with the bankruptcies of high-cost producers such as Rea Gold and Pegasus Gold (PGU-M). Rea buckled under the weight of heavy debtloads associated with the Bissett gold mine in Manitoba and the San Gregorio gold mine in Uruguay. Both mines failed to live up to expectations, as did Rea’s Mt. Hamilton gold mine in Nevada.

Pegasus, which operated some of the lowest-grade gold mines in the world, came unravelled shortly after completing an expansion at its Mt. Todd mine in Australia.

Since then, several other problem-plagued producers have been placed on a critical list, including Royal Oak Mines (RYO-T), which is struggling to complete construction of its Kemess gold-copper mine in northern British Columbia. Echo Bay Mines (ECO-T) is being closely watched, along with Homestake Mining (HM-N) and Battle Mountain Gold (BMG-N). Former high-flyer Eldorado Gold (ELD-T) also is struggling to stem the flow of red ink from its worldwide operations by cutting costs. Some progress was made in the 1998 first quarter, when cash costs fell to US$255, from US$272 in the 1997 fourth quarter.

A recent research report by First Marathon Securities notes that most North American producers struggled in 1997, as reflected by their collective asset writedowns of US$2.6 billion.

“In 1997, break-even costs for North American gold producers averaged US$346 per oz., versus the average spot gold price of US$331 per oz.,” the report states, listing Barrick Gold (ABX-T), Newmont Gold (NGC-N), Placer Dome (PDG-T), Teck (TEK-T) and Prime Resources Group (PRU-T) as the only companies to have made any money on a breakeven basis.

North American producers are not the only ones struggling to survive.

London-based investment firm T. Hoare & Co. has been keeping a close eye on the South African producers, almost all of which have cash costs above the current spot price for gold. The firm says the current restructuring of the country’s mines “represents the greatest upheaval in the industry since the emergence of the Randlords a century ago.”

One of the two main players in this restructuring is Anglo American, which has aggregated its gold mines around the nucleus of Vaal Reefs to form Anglogold. The other is Gold Fields, the product of the combination of Gencor and Gold Fields of South Africa.

T. Hoare notes that while these “twin pillars of South African mining in the 21st century” are predominantly South African, both have a West African dimension in the form of the Sadiola Hill mine in Mali (Anglogold) and the Tarkwa mine in Ghana (Gold Fields).

The Anglogold restructuring will involve the closure or sale of some assets.

While production is expected to drop accordingly, by just over 1 million oz.

to 5.9 million oz. gold, the company’s average cash costs of production are expected to fall from US$290 to US$255 per oz. gold.

Gold Fields’ annual production of about 3 million oz. gold has cash costs of just under US$300 per oz. T. Hoare’s analysts see potential for short-term cost savings at several mines, though a “sorting out” may be needed for some of the smaller, higher-cost assets.

Meanwhile, in North America, analysts are keeping a close watch on the proposed merger of Amax Gold (AU-N) and Kinross Gold (K-T), expected to close by the end of June. The combined entity will become the fifth-largest gold producer in North America, with production of 1.2 million oz. this year.

The merger was born of necessity, as both companies endured negative investor sentiment in 1997; Kinross for its lack of high-quality, long-life mines and Amax Gold for it weak balance sheet. The two companies reported total losses last year of US$124 million, including various writedowns.

While the merged company will have 12 operating mines, only four are considering “core operations.” It will also have significant debt and several analysts question whether it will be able to sustain its projected production levels if gold prices remain weak.

Analysts are also weighing the pros and cons of the recently proposed merger of Arian Resources (ARA.U-T) and Bema Gold (BGO-T). The deal calls for Arian shareholders to exchange 3.3 of their shares for one Bema share. Arian’s main asset is a 79% interest in a Russian company holding the high-grade Julietta gold-silver deposit in Russia’s Magadan region. The deposit hosts a total resource (in all categories) of 1.1 million tonnes grading 20.05 grams gold and 339.1 grams silver per tonne, for about 1 million oz.

gold-equivalent.

Some Bema shareholders are reported to be concerned about the terms (specifically, dilution) and the uncertainties of working in Far East Russia, where authorities are known to have demanded net smelter return royalties of over 10% at some projects.

On the other hand, some Arian shareholders believe that Julietta is a more robust asset than Bema’s key projects. These are the Refugio gold mine in Chile, which is not yet performing to expectations, and the nearby Cerro Casale gold-copper deposit, which must endure the challenges associated with developing mines in remote, high-altitude locations. Proponents of the merger argue that the surviving entity will be better able to finance development of these and other projects.

Saskatchewan’s largest gold producer, Claude Resources (CRJ-T), expanded its focus to Ontario with the recently completed acquisition of fellow narrow-vein miner Madsen Gold. Madsen’s chief asset is its namesake mine, where reserves stand at 1.1 million tonnes grading 9.26 grams gold, enough for seven years of production at current levels.

The Madsen mine’s yearly output of 50,000 oz. gold (at a cash cost of US$230 per oz.) increases Claude’s total gold production to 110,000 oz. annually.

Claude’s main operation is Seabee in northern Saskatchewan, which produces about 60,000 oz. annually at a cash cost of US$210 per oz. The friendly takeover of Madsen makes Claude a mid-tier gold producer well positioned for growth.

In the junior sector, the proposed merger of Peruvian Gold (PVO-V) and Gabriel Resources (GBU-V) went off the rails after a shareholder requested a vote on the transaction. Securities regulators agreed that Peruvian’s bid for Gabriel (a junior focused on gold projects in Romania and Bulgaria) represented a reverse takeover, which meant shareholder approval would be required. The transaction was terminated because Peruvian was unable to obtain shareholder approval within the time limit set by Gabriel.

In mid-May, Habanero Resources (HAO-V) announced plans to merge with Chilean Gold, a private company that has spent US$5 million acquiring and exploring gold and silver properties in Chile. Habanero has rights to acquire 100% of three properties in the Maricunga district, including one adjacent to Bema’s Aldebaran property (which hosts the Cerro Casale deposit). Chilean Gold also owns 100% of various silver properties in Chile’s Garin district, and is acquiring several other properties in, or near, historic Chilean silver mining camps.

Habanero currently has 3.4 million shares outstanding. Under the terms of the merger, which is subject to various approvals, Habanero shareholders would receive 1 share of the amalgamated company for each 2.5 shares held.

Meanwhile, in Central America, gold producer Triton Mining (TTM-T) is working hard to keep its Limon gold mine afloat in Nicaragua. Toward that end, the junior has agreed to join forces with Black Hawk Mining (BHK-T).

The amalgamation, which would be carried out on a share-for-share basis, is subject to regulatory and shareholder approvals. If approved, Triton would become a wholly owned subsidiary of Black Hawk, which would then have combined minable reserves approaching 737,000 oz. gold, plus an additional 3 million contained ounces in the inferred category.

Triton President Thomas Ogryzlo says the deal would allow Trit
on to further develop the Limon mine and advance several exploration projects. Earlier this year, the company announced a US$15.5-million writedown of the Limon mine assets, “in light of the current and the expected long-term gold price.” Black Hawk’s key asset is the Keystone gold mine in Manitoba, which yielded 67,000 oz. gold last year at an average cash cost of US$190 per oz.