The Ontario Court (General Division) finally shut down the show at gold producer
The court’s decision puts Royal Oak’s assets under the control of Price Waterhouse Coopers, the same accounting firm that monitored Royal Oak’s affairs during a 4-month period of protection under the Companies’ Creditors Arrangement Act. The receiver will be managing the company’s operations until they can be sold in satisfaction of Royal Oak’s $665-million debt, which is largely owed to a group led by Trilon Financial and to a group of note-holders. Both groups provided interim financing when Royal Oak began to run into debt trouble in 1997 and 1998.
Margaret (Peggy) Witte, who resigned as chairman and president of Royal Oak when the receivership order came down, told a conference call that the company’s problems stemmed from low commodity prices. “This has been a difficult year-and-a-half,” she said, but insisted the collapse of the company was “not due to a misguided corporate strategy,” but to historically low metal prices, regulatory changes and bad luck.
Witte, who will remaining in an advisory capacity for the receiver, receives no severance. She says she had bought large blocks of Royal Oak shares when the price was between $4 and $6, and company records show she had 1.3 million shares at the end of 1997, with 400,000 options. She did not exercise them in 1998.
Royal Oak’s problems surfaced in early 1998, when low gold prices and high operating costs forced it into a series of debt reschedulings. By the end of the year, it had placed itself under court protection.
The receivership order, which for now enforces an orderly continuation of operations at the company’s three mines, at least spells some interim security for the company’s employees. There are 378 employees at Kemess; Pamour has 330, and Giant, 315. Previous receiverships and bankruptcies in the gold mining industry have ensured that payrolls are met.
Similarly, most past arrangements have provided for full payouts to smaller trade creditors and large, though not full, payouts to larger trade creditors. Trilon is first in line to receive assets, followed by the noteholders. Other debt holders will get proportionately less, and shareholders are unlikely to receive anything.
Whether employees at the three operations have long-term job security is a question that will be answered by potential bidders for Royal Oak’s assets — or by their silence. Pamour and Giant have both been cutting costs over the past year, but Giant especially may be close to unprofitability if prices continue to fall.
Kemess, for its part, was supposed to be Royal Oak’s low-cost lifeline, but the mine has not measured up. Although Kemess is probably Royal Oak’s principal asset, its early teething troubles have made it an unattractive buy. Head grades have held in initial mining, but, at 0.61 gram gold per tonne and 0.22% copper, they are already low. The Kemess mill has not performed to specification, with recoveries as low as 56% for gold and 63% for copper.
The mine entered commercial production at the beginning of the fourth quarter of 1998 and, by year-end, had milled 7.5 million tonnes of ore to produce 70,000 oz. gold, plus 9,460 tonnes of copper as a byproduct.
After credits for the copper, the cash operating cost of production at Kemess in its first three months of operation was US$262 per oz. — double what was forecast in the Kemess feasibility study. Depreciation and amortization charges brought total costs to US$429 per oz.
With the receiver now essentially committed to selling the Royal Oak assets, most speculation has centred on the possible bidders for the Kemess operation. Royal Oak had already revealed that
Royal Oak’s 1999 forecast calls for Kemess to produce 235,700 oz. gold at an estimated cash cost of US$185 per oz., after copper credits. Should Kemess perform to plan, it would spin an operating profit of around $35 million, and whether that would attract bids in the neighbourhood of $440 million (its carrying value on Royal Oak’s books) is unclear. Recent takeover bids and purchases of operating gold mines have been done at purchase prices that averaged about 10 times the expected annual operating profit, pointing to a bid near $350 million for Kemess. That is about the same as the carrying value of plant and equipment at the mine.
Doubts about the mine’s ability to operate according to plan would depress that figure, and if costs do not improve, Kemess could show an operating profit of as little as $7 million — in which case bidders might come in somewhere near $70 million for a “going concern,” or perhaps would simply bid on the parts.
The same multiple of operating profit, when applied to Royal Oak’s Ontario division, which operates Pamour, suggests the operation would be worth about $50 million, and the Northwest Territories Division, operating Giant, about $18 million. Pamour is carried on Royal Oak’s books at $45 million and Giant at $25 million.
Royal Oak itself lost $396 million in 1998 on revenues of $108 million. The loss represented $2.72 per share and included a $251-million writedown of mine assets. In 1997, Royal Oak lost $135 million on revenue of $191 million, and the company last turned a profit in 1995, when it made $744,000.
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