Non-cash offer — Royal Oak bids for Hope Brook

The Hope Brook gold mine in Newfoundland could be re-opened next summer if Royal Oak Mines (TSE) is successful with its plans to acquire the mine and related facilities from Hope Brook Gold, a subsidiary of BP Canada (TSE).

Hope Brook began life in 1987 as an open pit, heap leach operation, but by early 1989 was processing underground reserves in a 3,000-ton-per-day mill. The operation produced 110,460 oz. gold in 1990, but it was not economic because of high costs and operating problems compounded by delays and setbacks. A shutdown began in May of this year which was attributed to environmental control problems, and BP Canada is now selling all its mining assets.

Royal Oak believes that cost savings resulting from changes to the mining and milling methods at Hope Brook will make the operation economic at current gold prices with minimal capital expenditures. The company has already developed an operating plan to reopen the mine which, if successful, would boost its annual gold production by 60% to about 320,000 oz. gold per year and minable reserves by 85% to about 2.6 million oz.

Royal Oak currently produces about 200,000 oz. gold annually from mines at Yellowknife, N.W.T., and Timmins, Ont. The company acquired the Yellowknife and Pamour operations late in 1990 for about $35 million from the creditors of Giant Resources of Australia. After implementing a multi-front turnaround plan, Royal Oak is now reporting profits from the mines, a strategy which the company hopes to duplicate with the Hope Brook acquisition.

In exchange for the Hope Brook assets — which include the mine, milling facilities, supply boat, site inventory and all mineral rights — Royal Oak will issue the BP subsidiary five million common shares, together with a 5-year operating royalty payable only when the Hope Brook mine is operating and at gold prices above US$380 per oz. The company will assume other liabilities only repayable at gold prices in excess of US$500 per oz. Completion of the acquisition is subject to regulatory approval, a definitive agreement and due diligence review, and receipt of environmental permits and satisfaction of other labor and government-related issues.

Graham Eacott, spokesman for Royal Oak, said it could take one or two months to complete the acquisition. If successful, he said the company would be looking to reduce administrative and corporate costs, and introduce cost-cutting measures similar to those implemented at the Giant and Pamour mines.

On the technical front, the company will aim to improve the availability and utilization of mining equipment and make changes to the mill circuit to remove bottlenecks in crushing (caused by the hard mafic material) as well as to improve recoveries, increase throughput and reduce chemical consumption. Before the shutdown, Hope Brook management made great strides to solve the various operating and environmental problems, and after modifications had increased mill throughput to as high as 3,850 tons per day. The operation did not have grade problems, as it was originally viewed as a low-grade deposit that would require high volume mining and processing.

At the end of 1990, Hope Brook had proven and probable minable reserves of 10.7 million tons averaging 0.11 oz. gold per ton, with potential to expand reserves at depth. About 50 miles from Port-aux-Basques, the mine is serviced by power but does not have road access.