New-wave companies test established leaders’ role

There’s a new breed of mining company emerging on the Canadian mining scene. Characterized by aggressive, acquisition-minded management, they’re challenging established giants of the industry for leadership in an increasingly competitive sector of the economy. Not surprisingly, the engine for most — but not all — of the new- wave companies is the rejuvenated gold price. A 2-year period of stable but unspectacular gold prices in the $300-350(US) range let them consolidate substantial exposures to gold without the pressure of wild price swings. Now, with gold showing strength not seen for three years, they’re cashing in on their faith in gold.

Three examples of the new breed benefitting from today’s gold prices are Teck Corp., Echo Bay Mines and Placer Development.

Echo Bay is a good example of the power of acquisition. Formed in 1980, it is today one of the five top gold producers in North America. It built on the base of its Lupin gold mine, the most northerly gold mine in the Free World, which went into production in 1982. In 1983 Echo Bay produced 118,000 oz of gold, all from the Lupin mine.

In early 1985 Echo Bay purchased a 50% interest in the Round Mountain open pit gold mine in Nevada, the third largest gold mine in the U.S., for $55 million. Then, in late 1985, it acquired the Sunnyside gold and silver mine in Colorado for $20 million(US). Earlier this summer it also bought Tenneco Inc.’s mineral interests including three operating gold mines in Nevada, for $130 million.

Echo Bay expects gold production in 1987 to be at least 480,000 oz., and, having just completed a financing to raise another $73 million, another acquisition could be in the works. Zinc basket

Falconbridge, a revitalized nickel producer, is also one of the pace- setting group of companies, but it has put a lot of its eggs into the zinc basket. In fact, it is selling its gold interests in order to pay for increased zinc exposure.

A year ago, after weathering the storm of the 1981-82 recession, it had a large chunk of cash and a debt-load that was well under control, but it used the cash and increased its debt tremendously to buy Kidd Creek Mines, a fully- integrated, state-of-the-art zinc- copper-silver producer.

Since then it has sold the Kiena gold mine in order to help pay for the Kidd Creek acquisition.

If zinc prices do no worse than hold steady, Falconbridge will come out a winner on that deal, but that’s a big if. Zinc prices defied the pundits in 1985 and fell sharply and have only recovered in the second half of 1986. The outlook for zinc prices is healthy right now, but in today’s volatile commodity markets nothing is assured.

If the zinc price doesn’t perform as many analysts think it should — if it drops again — Falconbridge could be relegated to the “sell” list of brokers, its strong performance since 1983 forgotten. Many analysts are already cautious about Falconbridge’s future.

Third quarter results, a profit of $5.6 million before extraordinary items after two quarterly losses, show that Kidd is pulling its weight. Kidd reported an operating profit of $26.2 million in the third quarter.

And while Teck is known generally as a gold company (even though it’s part of the Toronto Stock Exchange’s metal mines index), its role as leader in a consortium that recently bought a 31% interest in Cominco, the world’s largest zinc producer, increases its exposure to zinc dramatically and propels it to the front-rank of diversified Canadian mining companies. Placer keeps rolling

Meanwhile, Placer keeps rolling along, moving from commodity to commodity as world markets shift but always staying near the forefront — flexible, innovative and ready to change. It’s been like that for 60 years.

At 60 years old, Placer is far from being a young company, but its place among the leaders of the industry is growing as its international expos ure gains in significance.

Placer has a reputation for being well managed. It’s also known as a mine maker. Since 1965 it has developed 10 mines at a historical cost of about $840 million. It shifted out of base metals in the 1970s and managed to mitigate its investment in oil and gas with a successful move into precious metals in the past half decade.

Placer is among the lower cost of the major North American gold producers with an estimated operating cost per oz of $2.05. Its $183 million in working capital and scant $179 million in long-term debt make it a perennial topic for takeover rumors. However, with a very widely held stock position, takeovers seem unlikely. On the contrary, a more likely scenario is one in which Placer makes a takeover bid.

By comparison, several mining companies that have long led the Canadian mining industry can’t seem to get back on track after going through some very rough times stemming from the recession. Hamstrung by heavy debt loads, they have been unable to manoeuvre through the minefield of shifting commodity markets.

Inco has suffered since 1981 as nickel prices fell, then fell some more, but a vigorous and tenacious campaign to cut costs, largely through productivity improvements, has allowed it to survive virtually unchanged. At the moment its balance sheet is probably more healthy than Falconbridge’s. Inco on the sidelines

Still, Inco has by-and-large remained on the sidelines for the past half decade. The only bright spot for it, too, has been gold, its lead role in the Casa Berardi gold camp of northwestern Quebec apparently about to pay some reasonable dividends.

Noranda has been hurt by chronically weak copper prices among other things, but its acquisition binge in the late 70s and early 80s left it with a mountain of debt and heavy exposure to some commodities other than metals that proved ill-timed. Its investment in giant forest-product company MacMillan Bloedel was made when it thought the worst recession since the 1930s was coming to an end. The market for forest products didn’t pick up as anticipated, however, and Noranda suffered as a result.

It tried to hold on until markets improved, but about 18 months ago realized it would have to sell some good but non-core assets in order to whittle down its debt. It has been fairly successful in that program, reducing its debt by more than a billion dollars in the past year, but Noranda is still not fully recovered.

With Noranda, too, gold has been the saving grace. Never far from the centre of the Canadian mining stage, Noranda managed to take a large stake in Hemlo, the jewel of the Canadian gold mining crown in the second half of the 20th century.

Third quarter results are encouraging news for Noranda. For the 3-month period it reported net earnings of $4.7 million, the third consecutive quarter in which it was inthe black. That brought 9-month earnings to $52.9 million. The Roman Empire

Another pillar of the Canadian mining community, Denison Mines, is struggling to keep its head above water. The empire, built by Stephen Roman since 1957 on the foundation of Denison’s uranium mines at Elliot Lake, Ont., is being undermined by a move into oil and gas and potash.

Prices for oil and gas are about half what they were a year ago, while potash prices have been weak for two years. There’s an oversupply of all three and little hope that prices will rebound to previous levels. As a result, Denison skipped two quarterly dividend payments on its common s tock in 1986 — the first it has missed — and just recently sold off Lake Ontario Cement, one of its better performing subsidiaries, ending a 25-year relationship. The proceeds of the sale, $83.4 million, will go toward reducing debt.

Meanwhile, some senior gold issues — those which one might think would be best positioned to benefit from gold’s performance — have been held back due to a variety of special circumstances.

Dome Mines, for instance, and its subsidiary Campbell Red Lake Mines, have been hampered by their connection to Dome Petroleum. While the gold miner has a 20.5% interest in the troubled oil and gas producer, more critical is its $225-million loan guarantee. Dome P
etroleum has been teetering near the brink of defaulting on its debt payments, a situation that would trigger the loan guarantee. That is perceived to be a real drag on Dome Mine’s ability to manoeuvre.

Another major gold producer, Lac Minerals, has been in limbo since its market value was almost cut by half last March after an Ontario Supreme Court decision awarded the largest of the Hemlo, Ont., gold mines to International Corona Resources. If not for the court decision, the Page-Williams mine would belong to it. Hemlo appeal

That court decision is under appeal and, until the final outcome is known, Lac has been fairly quiet.

Corona, on the other hand, is on the threshold of entering the big- time gold miners’ clubhouse. If the March decision is upheld by the Ontario Court of Appeal, there’s no doubt that Corona will be invited in — indeed it may well become leader of the club. But even if the Page-Williams mine at Hemlo is not included in Corona’s portfolio, Corona will be a substantial gold producer by 1988, its current 50% share of the Teck-Corona mine at Hemlo augmented by Mascot Gold Mines’ Nickel Plate mine scheduled to start production in 1987 and be Canada’s lowest-cost gold producer in terms of cost per oz of gold produced.

Another gold producer that appears to have come from nowhere to arrive at the front of the pack is American Barrick Resources. Built on the foundation of now defunct Camflo Mines, American Barrick has managed to become one of North America’s major gold producers almost entirely by acquisition. It will turn out 200,000 oz of gold in 1986 and should improve on that substantially when its McDermott mine near Kirkland Lake, Ont., goes into production in 1987.

Its single most important purchase, and one that appears to be proving a success from just about every angle, is the Mercur mine in Utah. American Barrick bought the mine in mid-1985 from Texaco Inc. Described then by The Northern Miner as a Cadillac of a mine, American Barrick has been able to make a go of the facility that never seemed to grab Texaco’s fancy.

The Mercur mine will produce about 110,000 oz of gold for American Barrick this year at a cash cost of about $188(US) per oz. No collapse imminent

The big Canadian mining companies are far from the point of collapsing. In fact, recent results show that they’re slowly getting firmly back into the black. But the over-all picture of the industry is changing as the new wave of companies takes on increasing significance — and added responsibility — of a continued growth mode.

A few years ago an investor might look to Inco, Noranda or Dome Mines for a play on Canada’s mineral resources. Those companies are still among the the leaders and therefore among the most visible of Canadian mining compani es, but they’re being joined by the Tecks, Echo Bays and Placer Developments.

It’s a changing industry, but it’s also an industry gaining depth through greater diversity.