Hemlo Gold on buying spree?

Mining companies often complain that acquisition costs for mature gold properties are simply too high. But not all companies have the financial clout of acquisition-hungry Hemlo Gold Mines which has agreed to pay more than $15 million for a 7% equity interest in Vancouver-based Viceroy Resource Corp.

What has Viceroy got that would interest a company which already has about 300,000 oz of annual gold production? The long and the short answer is more gold — about 108,000 oz per annum from Viceroy’s Castle Mountain property in California which could be in production sometime in 1988.

Viceroy President D. Ross Fitzpatrick confirmed the proceeds will be used to finance the Castle Mountain project to production. The company had already decided to develop the property as an open pit heap leach operation with a production rate of up to 8,000 tons of ore per day; so the participation of Hemlo Gold has taken many people by surprise because Viceroy could have easily funded the $10- million project on its own. But Hemlo Gold has an abun dance of cash flow plus a wealth of expertise in both exploration and mine development through its affiliation with Noranda. Hemlo Gold would also be a tough competitor in the event someone else made a takeover attempt for Viceroy. Mr Fitzpatrick unsuccessfully defended a hostile takeover bid for his Westmount Resources a few years back which no doubt has left its mark.

There is plenty of additional reserve potential in Viceroy’s exclusive 9-section area of interest and also on the 33 sections to the north and south which are to be explored by Hemlo Gold. Under its agreement with Viceroy, Hemlo can earn a 50% interest in the 33 sections by spending $5 million over the next five years, $1 million of which must be spent in the first year. A conventional milling operation might be viable on the main claim group in conjunction with a heap leach operation.

Hemlo President John Ivany explained to The Northern Miner that the company’s relatively small equity position in Viceroy will give it “a foot in the door,” suggesting Hemlo may eventually increase that shareholding. The initial subscription is for 300,000 shares at $16.75 each, representing a total expenditure of approximately $5 million.

Hemlo has also agreed to advance Viceroy $10 million which is convertible into shares at a price of $16.75 per share. “If it doesn’t go, I feel we will at least get our $10 million back,” he said. (The shares are being offered at a discount to the present market price which at presstime had reached the $23 level.) So Hemlo has its upside fairly well protected. Expand through acquisitions

Mr Ivany said that Hemlo’s policy was to expand through acquisitions and he confirmed the company was also looking at other opportunities. He also conceded he was very impressed with Viceroy’s large land position in California and the fact the operation could be brought into production quickly and cheaply, considering its production capacity. He forecast operating costs of $175(US) per oz at Castle Mountain compared to $110 for the company’s Golden Giant mine at Hemlo, Ont.

Last year’s drilling program at Castle Mountain was highlighted by the discovery of the Lesley Ann deposit which contains some 6.8 million tons grading 0.091 oz. Two exceptionally high grade intercepts were reported from the program including 65 ft of 1.1 oz gold and 50 ft averaging 1.14 oz. Only 24 holes have been drilled into the deposit which is open in all directions and to depth. Total reserves in the Oro Belle, Jumbo South, and Lesley Ann deposits are 24 million tons grading 0.06 oz gold which is quite high by heap leach standards.

Viceroy has a strong Noranda connection through Bernard O. Brynelsen, a company director who is also chairman of Brenda Mines, a Noranda subsidiary. Noranda is the controlling shareholder in Hemlo Gold Mines. Also on the Viceroy board is former liberal cabinet minister Jean Chretien, with whom Mr Fitzpatrick worked previously.