Pegasus crash-lands under debt load

Pegasus Gold (PGU-X) has lost its fight against the dwindling gold price and filed for bankruptcy protection after unsuccessful appeals for clemency to its major creditors.

The company had been in negotiations with the group that provided its revolving credit line, but with the price of the yellow metal at an 18-year low, cash flow from operations has been insufficent to service the debt.

“No progress was being made in those discussions,” concedes President Werner Nennecker.

The company responded to creditors’ demands by closing both its Mt. Todd gold mine in Northern Australia and the Beal Mountain mine in Montana. It also closed out its hedge and foreign exchange contracts, recording a gain of US$74.5 million.

But it was all too little, too late.

The company’s total obligations amount to US$213 million, consisting of US$68 million under a revolving credit agreement, US$14 million in trade debt, US$16 million in foreign currency losses and US$115 million from 6.25% convertible subordinated notes due in 2002.

For the time being, “daily operations will continue, our employees will continue to be paid, and we will continue to produce gold,” Nennecker says.

The company currently has US$16 million in available cash, and most of its assets are unencumbered. Nennecker believes a return to higher gold prices will enable the company to regain its position in the industry.

However, with the closure of Mt. Todd and Beale, Pegasus now has only three operating mines: Montana Tunnels, near Butte, Mont.; Florida Canyon, near Winnemucca, Nev.; and Zortman, near Malta, Mont.

As a bright spot, total cash costs decreased at the Montana Tunnels mine to US$236 per oz. during the first nine months of 1997 owing to the recovery of underground ore from the satellite deposit known as Diamond Hill.

At the Florida Canyon mine, Pegasus recently received a federal permit to lay down a new leach pad. However, total cash costs for the first nine months of 1997 were US$308 per oz., well above the current spot price.

With only a small hedge position remaining, the company becomes more vulnerable to the gold price than it was before.

News of the bankruptcy sent the price of Pegasus falling. Shares were delisted on the American Exchange, while, on the Toronto Stock Exchange, shares fell 44cents to close at 11cents on Jan. 16. The lowest trade was 10cents.

On Monday, shares closed up 22cents, to 33cents. At presstime, the price was 28cents.