Merger trio almost in black

Two of the three mid-tier gold producers planning a friendly merger made money in the third quarter of 2002, but the biggest, Kinross Gold (K-T), is still in the red.

Echo Bay Mines (ECO-T) made US$3.7 million on revenues of US$52 million in the three months ended Sept. 30, as its production declined but gold prices went up. TVX Gold (TVX-T) reported earnings of US$1.9 million out of US$46.5 million in revenue, again thanks to higher realized gold prices. Both companies had taken losses in the third quarter of 2001.

Kinross, on the other hand, lost US$7.1 million in the third quarter, a smaller loss than the US$9.7-million it took in the corresponding period last year, as its revenue declined to US$56.5 million from US$65 million.

At the 9-month mark, Echo Bay is showing the best results of the three, with earnings of US$7.7 million on revenues of US$161.8 million, despite a US$5.5-million loss, taken as an interest expense, on the retirement of capital securities held by Kinross and Franco Nevada Mining. The debt securities were turned into shares now held by Kinross and Newmont Mining (NEM-N).

At the same point in 2001, Echo Bay had taken in US$186.7 million in revenues but had made only US$3.2 million.

TVX, with earnings of US$4.2 million up to the end of the third quarter, has seen revenues jump this year, to US$135.7 million at the end of the first nine months. At last year’s three-quarter pole, it had earnings of only US$79,000 on revenues of US$119.3 million.

At Kinross, the loss now showing at the end of three quarters is US$18 million, down from US$18.8 million at this time last year. Revenue is down to US$184.5 million from US$199.8 million, reflecting lower production in 2002.

The three companies agreed last June to merge and to buy Newmont out of the TVX Normandy Americas joint venture. Echo Bay shares would be tradable for 0.52 of a Kinross share; TVX shares, which have been consolidated at 10-for-1, would be worth 6.5 Kinross shares. Newmont has agreed to sell its 49.9% interest in the Americas operations for US$180 million, and to vote its Echo Bay shares in favour of the merger.

The U.S. Securities and Exchange Commission, which exercises jurisdiction over all three companies by virtue of their New York and American Exchange listings, is still reviewing proxy statements for the meetings where shareholders will vote on the merger plans. The three companies had planned to hold votes before the end of November, but the closing date has been extended to the end of January 2003. They expect to have special meetings of shareholders “in early 2003.”

Kinross requires a simple majority of shares voted in favour of the combination; the other two companies need a two-thirds vote.

Once shareholders have approved the combination, the companies will need an order effecting the merger from the Ontario Superior Court; the agreement now contains a clause automatically extending it by a month if the court has not approved by the end of January.

Cost performance has been poorer at all three companies this year, with Echo Bay’s cash operating costs at US$220 per oz. for the year to date, up US$4 from last year. TVX, which calculates total cash costs, reported them at US$185 per oz., up from US$177 after nine months in 2001, and Kinross saw its total cash costs increase to US$203 per oz. from US$191 the year before.

Costs of organizing the Porcupine Joint Venture with Placer Dome (PDG-T) — which Kinross expects will be one-time expenses — loomed large in the third quarter, with 44,344 oz. produced for Kinross at US$245 per oz. Production from the Hoyle Pond mine, east of Timmins, now consolidated in the joint venture, had kept costs low in the first six months of the year.

The Fort Knox mine in Alaska has also been having an expensive year, with costs now averaging US$241 per oz., up from US$197 the year before. Contract trucking of ore from the satellite True North open pit, and additional equipment maintenance, accounted for a large part of the increase.

The Kubaka mine in far-eastern Russia, which has now made the transition to a wholly underground operation, provided Kinross with the best cost performance; it produced gold at US$135 per oz. in the first nine months of the year, down from US$142 in the comparable period of 2001.

Litigation with Russian shareholders of Kubaka’s operating company, Omolon, is still before the courts, but negotiations between the parties to the suit and the Magadan regional government (which is a creditor of the Russian shareholders) led to a settlement agreement under which Omolon will buy out the Russian shareholders for the equivalent of US$45.4 million and become a wholly owned subsidiary of Kinross. A court order has frozen about US$39 million of Omolon’s assets subject to the settlement of the actions.

Operating results at TVX were marred by ore-moving problems at the Musselwhite mine, operated by Placer Dome. Musselwhite’s production fell to 141,500 oz. in the first three quarters, compared with 174,300 oz. in the corresponding period of 2001, and total cash costs were US$235 per oz., up from US$192. TVX has a 16% share of the production from the mine.

Set against the Musselwhite results, the Brasilia mine in Brazil, operated by Rio Tinto (RTP-N), increased production by 24% over last year, to 172,900 oz., with total cash costs — helped by the depreciation of the Brazilian real — falling to US$162 from US$190 per oz. (TVX’s share is 24.5% of production.)

Echo Bay’s Lupin and Kettle River operations both saw production fall, but the mainstay Round Mountain mine, a joint venture with Barrick Gold (ABX-T), was a steady performer.

Kinross has signed an agreement for a bought-deal financing for 50 million units priced at $3.05, for gross proceeds of $152.5 million. The units consist of a share plus half a warrant, with a whole warrant exercisable for five years to buy a share at $5.