Opawica, Minnova will go to court over Lac Shortt mine

A legal dispute over the Lac Shortt gold mine in northwestern Quebec will soon go to trial, according to Opawica Mines (TSE). Opawica will be battling for the proceeds of a 7.5% net profit royalty from the mine, which began operating in 1984. To date, the company has not received any money from Falconbridge Ltd. or Minnova (TSE), the mine owners.

Opawica, former owner of the Lac Shortt gold property, claims the two companies are in breach of fiduciary duties and is seeking settlement in a number of ways including return of the property, an accounting of all revenues, expenses and profits, recovery of profits, and $50 million in damages. Opawica says it has been putting aside cash to fund the legal battle for the past three years and currently has about $400,000 in the treasury.

Word of the trial decision has affected the share value of Opawica and especially of Sumtra Diversified (COATS), a small company with a 26% stake in Opawica. Both issues have been trading heavily over the past two months and Sumtra has almost doubled in value to $1.40 since April. But according to Minnova’s legal representative, Jeff Snow, the trial will not take place for at least a year, mainly as a result of the heavy case load already before the Toronto courts.

The history behind the dispute dates back to 1979 when Opawica optioned the Lac Shortt property to Falconbridge Nickel Mines in return for a royalty interest in the net production profits. Shortly after the deal was made, Falconbridge turned most of its interest in the mine property over to Minnova, which at that time was called Falconbridge Copper. Minnova now controls 94.2% of the mine, while Falconbridge retains a 5.8% interest.

The two companies poured their first gold in early 1985 and have been producing ore from the mine since. Opawica waited quietly to reap its share of the profits until, in February, 1987, the first indications of discontent surfaced at the company’s annual meeting. One year later, Opawica filed a lawsuit against Falconbridge and Minnova in the Supreme Court of Ontario.

Since then, the companies have been unable to resolve their differences through arbitration, said Opawica President Grant Harper.

“Net proceeds” from a mine can be interpreted in many ways, and it is this difference in interpretation which brought about the current dispute, he said.

Minnova says that Opawica is entitled to a royalty, but says Opawica has not received a payment because Lac Shortt has not yet made a profit. Opawica argues, however, that Falconbridge, in its calculation of net profit, is including costs that are not specified in the agreement. Falconbridge denies any accountability with regard to the royalty payments because Minnova agreed to assume Falconbridge’s rights and obligations when it acquired a controlling interest in the mine.

The case bears a striking resemblance to the lawsuit that Zenmac Zinc (ASE) has filed against Minnova for ownership of the Winston Lake zinc mine near Schreiber, Ont. In that dispute, Zenmac is fighting for its claim to a 20% participating interest in the mine. Although Winston Lake has been in production since early 1988, Zenmac has not yet seen any proceeds.

The dispute of Zenmac (and possibly of Opawica) is tied to a takeover of Minnova by Kerr Addison Mines (TSE) in 1986. After the takeover, the new management at Minnova drafted a different joint venture agreement for the Winston Lake mine and produced a schedule of actual and projected preproduction expenditures which “represented a significant and substantial increase over previously provided estimates,” said Zenmac (T.N.M., Dec. 7/87).

According to Minnova’s annual report, the Lac Shortt mine produced 40,083 oz. of gold at operating costs of $380 per oz. last year, down from 52,029 oz. in 1988. Current reserves stand at 975,270 tons grading 0.14 oz. per ton. The Winston Lake orebody contains about 2.85 million tons grading 15% zinc, 1.1% copper and 0.03 oz. gold.