EXPLORATION ’93 — Rea Gold follows growth strategy

When Canadian mining companies fled to the warmer political climes of South America, Rea Gold President James Hogan manoeuvred his Toronto-listed company through North America, snapping up bargain plays which others had overlooked in the stampede south.

Those bargains include two Nevada gold projects, South Comstock and Mt. Hamilton. These holdings, combined with a previously owned Manitoba property (Bissett Gold), could, within a few short years, transform the company from an investor to a sizable gold producer.

“There are tremendous opportunities in Latin America, but they require big bucks,” concedes Hogan, who has been in the Canadian mining industry for two and a half decades. “We had $3 million, and you can’t do much with that in Latin America.”

What he has done is stretch those dollars at home. By early November of this year, Rea still had $1 million in the corporate kitty after a year of hunting hot properties south of the border. If all goes as Hogan has planned, by early 1996, Rea should be producing 100,000 oz. gold a year. The company’s metamorphosis has been not only been external but internal. It has undergone a corporate reorganization and consolidation and set new corporate goals.

Hogan, who had retired from mining to focus on a computer business which matched technology to mining industry needs, was wooed back into the industry to guide Rea though the transition, which began in 1992.

Rea was going though what Hogan calls “challenging times,” being involved with the closure of the Samatosum property, in which it held a 30% minority interest. “We worked very closely with the people at Samatosum during the shutdown to ensure there was a comprehensive de-commissioning on the property so there would be no ongoing liability,” says Hogan.

At the same time, Rea was reducing its overhead and reformulating a mission statement. The leaning down was preparation for a more active role rather than the passive investment-oriented role the company had played in past years.

In essence, 1992 became a year of closing one door and opening a new one. One of Hogan’s first moves was to round up all the available precious metal deposits in North America, and “cull the list to 90” that looked good. He was looking for properties with certain characteristics; proven reserves and quick startup potential.

Nevada soon caught his attention. Only a decade earlier, buyers had flocked to this area, queuing to buy properties and paying 40 times potential mine earnings. Now property-owners were seeking buyers.

The first acquisition was a half interest in the South Comstock joint venture (with TSE-listed BMR Gold) in the Comstock district, 30 miles southeast of Reno.

“In March, 1993, we earned a half interest in South Comstock and in October, we poured gold,” says Hogan, adding, “I defy anyone in South America to find a property where you can do that.”

Rea earned its 50% share by committing US$1.25 million to the first phase of exploration. In return, it receives 100% of the cash flow until recouping its investment. At that point, its share of revenue drops to 50%. The gold property is subject to a 5% net smelter return. Rea will also pay half the feasibility costs of the second phase and US$1.25 million toward construction of a new plant.

Rea’s share of the first-phase production is expected to be 8,000 oz. gold annually while its second phase will be 22,500 oz. The second phase is currently tied up in environmental permitting, though the review is expected to be complete by early 1995.

Rea also optioned the Mt. Hamilton gold project, 44 miles west of Ely, Nev., which has its full environmental review assessment complete and its plan of operation approved by the Forest Service and Bureau of Land Management. According to its letter of intent, Rea acquires the heap-leach property following a feasibility and due diligence study. Hogan expects these to be completed by “the first quarter of 1994, and we will make a production decision at that time.” A positive finding could see Rea pouring gold by the fall of 1994.

The purchase price for Mt. Hamilton Mining, which holds the claim, is US$5.25 million (subject to two underlying net profit interests totaling 5.5%). Four quarterly payments of US$200,000 are to be made during the option year, which can be applied toward the purchase price.

Two other major decisions will be made in 1994. One is a decision on its third gold property, Bissett, 160 miles northwest of Winnipeg, Man., a province Hogan favors.

“Manitoba is by far the friendliest area for mining in the Western World,” he says. “The government there is bending over backwards to help us both with the development of the mine and the programs.”

The Bissett underground gold property was operated previously from 1932 to 1968. Brinco, in 1981, built a mill and completed underground and surface rehabilitation costing $12.5 million from 1981-1983, recovering 102,000 tons grading 0.19 oz. gold per ton.

Hogan says the company is carrying out a pre-feasibility study which will determine the viability of a larger mining operation with a new mill. But the project hinges on “new mine” status being granted by the provincial government. This new status would permit the company to use flow-through provincial tax incentives. Hogan says part of the revitalization plan includes expanding a 500-ton-per-day mill, now on site, to 1,000 tons per day, plus re-designing a portion of the underground shaft.

He sees the main shaft extended vertically down to the depth of the lower level, which would be extended horizontally to meet the shaft at a clean right angle.

This would bypass a series of steps used to follow the sloping orebody and which, in turn, caused difficulties in material-handling. Hogan maintains the orebody could be better-followed by ramping down from the extended lower level.

Rea is awaiting news on the designated new mine status, and a provincial announcement is expected soon. Once a startup decision has been made, production will be staged. “It will be a year before we bring it up to 1,000 tons per day,” admits Hogan.

But as early as four months after the production decision, Rea could re-activate the old mill to operate at the 500-ton-per-day level. This would enable the company to produce some gold in late 1994, with full operating capacity being reached in late 1995.

Beyond 1995, Hogan isn’t looking for more expansions. At this stage of corporate growth, all three properties would be pouring gold and Hogan’s focus would be to ensure that the properties continue to operate smoothly and that resulting revenues replenish the corporate coffers. “That’s not to say that, if something good came along, we wouldn’t look at it,” he hedges. However, mining companies tend to grow not vertically, but rather in a plateau-to-plateau ascent, Hogan explains. Once Rea has successfully scrambled onto this new plateau, Rea will cast its sights on scaling the next step of the upward climb.

— The author is a freelance writer living in Vancouver.