Lower gold price shrinks Pegasus reserves

A recalculation of proven and probable reserves in light of lower gold prices dramatically reduced the ounces of the yellow metal attributed to Pegasus Gold (PGU-M).

Excluding the contribution from the Mt. Todd gold mine in Australia, the Pullalli project in Chile and the Zortman project in Montana, proven and probable reserves at year-end 1997 stood at 1.2 million oz. gold, assuming a gold price of US$350 per oz. By comparison, reserves totalled 6.5 million oz. at year-end 1996.

The company evaluated the reserves’ sensitivity to further changes in the gold price, and found them to be more sensitive to a downswing than an upswing. At a US$400 gold price, reserves would increase only 7%, to 1.3 million oz., while at US$300 per oz. reserves would fall 23%, to 949,400 oz.

The reserves include ore from the Florida Canyon mine in Nevada, and the Montana Tunnels and Diamond Hill mines in Montana. Mineralization at Mt.

Todd was bumped down to the mineralized material category after the operation was placed under voluntary administration in Australia.

Mineralization at Pullalli was also reclassified in the resource category, as the company anticipates selling the property in the near future.

Pegasus has decided the mineralization at the Zortman Extension project could not support the capital costs required to construct the project. As a result, the company will proceed with reclamation and closure at Zortman, because the mine would not be economic at current prices, and the entire deposit has been relegated to the mineralized material category.

In all, Pegasus had 2.4 million oz. gold in the mineralized material category at year-end, and another 5.1 million oz. classified as additional mineralization.

The company anticipates gold production for 1998 will be off significantly from the year before, in part due to the closure of both the Beal Mountain mine in Montana and the Black Pine mine in Idaho. Estimated production in 1998 will be 300,000 oz. at a total cash cost of US$250 per oz., down from nearly 470,000 oz. at US$308 per oz.

Because of the drop in reserves, Pegasus expects to write down the carrying value of some of its operations, particularly Zortman, in the fourth quarter of 1997. Financial figures for the quarter are expected by the end of April.

At Florida Canyon, Pegasus has made significant changes to the mining plan in an effort to cut costs. It plans to continue stacking ore on the existing leach pad during the coming year and building an extension to the pad. The pit design was also optimized to reduce waste haulage. In all, mining costs are expected to improve due to shorter haulage distances and reduced stripping ratios. The company expects to produce 185,000 oz. gold at a total cash cost of US$285 per oz.

On the exploration front, Pegasus will concentrate its efforts around Florida Canyon, Montana Tunnels and Diamond Hill, spending US$4.3 million in 1998. The company has suspended exploration for at least six months at its Capira Dorada project in Panama, and is in the process of joint-venturing most of its properties in Brazil. Placer Dome (PDG-N) entered into a joint venture on one of them, the Independencia property, where drilling has begun.

Pegasus also reported that a creditors committee has been formed subsequent to the company filing for protection under Chapter 11 provisions earlier this year. The company plans to submit a plan of reorganization some time during the year, though it may not be able to implement the plan for another 9 to 15 months. Nevertheless, Pegasus has voiced a commitment to emerge from Chapter 11 with at least two mines.