Rough ride for North American Metals

The 1989 annual report of North American Metals (TSE) reveals a far different picture of the Golden Bear project in northwestern British Columbia than was likely envisioned by Homestake Mining (NYSE) prior to gaining control of the company almost two years ago. At that time, North American Metals and Chevron Minerals were jointly developing the remote gold project near Dease Lake, B.C. A feasibility study by Wright Engineers estimated a total capital cost of $36 million, operating costs at US$136 per oz., and gold production of about 64,000 oz. per year, making the project appear financially attractive.

Homestake made a tender offer to North American Metal shareholders at $5 per share and by deadline, April 15, 1988, 68% of the company’s outstanding shares had been tendered. Homestake currently holds about 73.3% of the company’s 7.9 million shares.

Subsequent events battered the stock down to a low of 90 cents. It currently trades at the $1.50 level.

The first blow to the project came in early 1989 when the company announced that, due to a change in route, the road access cost had jumped to $19 million from $9 million.

By this time last year, the estimated final cost of the project had almost doubled to the $65- to $70-million range and operating cost estimates had risen to US$210- 240 per oz., putting the viability of the mine in question.

The group did go ahead with final construction and with the first gold recently poured in January, the joint venture is getting closer to calculating the final tally on the project. North American’s annual report notes that the final cost will exceed $80 million and production costs are expected to be in the order of US$270 per ton.

The effect of the higher capital cost can readily be seen on North American Metal’s balance sheet as at Dec. 31. Not including the current portion of its gold loan, the company has a slight working capital deficit. Homestake loaned the company $31 million in return for the future delivery of 84,879 oz. of gold; an effective price of C$365 per oz. The loan is to be repaid in minimum installments of 2,000 oz. per quarter commencing on Sept. 30.

In addition, Homestake lent the company about $6 million at prime- -plus-one-percent as bridge financing to cover further cost over-runs. The result is a net liability of about $37 million. The company estimates that a further $1-2 million will be required before full production is achieved.

Although the project has poured its first gold, commercial production is yet to be realized. The milling operation involves the dry- grinding and roasting as a pre- treatment of refractory ore before recovering the gold through cyanidation and a carbon-in-pulp circuit. Problems with the roaster feed system have resulted in the roaster section being bypassed until the problem can be solved.

This is made possible by milling only the open pit ore which has a low sulphur content, rather than using a blend with the refractory underground ore. The company expects the roaster to be operational soon.

In an effort to improve ore reserves, which are good for about six years, the joint venture plans a $750,000 exploration program in 1990 to test targets near known mineralization in the Bear Zone. In addition, a regional program is planned for the area surrounding the mine at a projected cost to North American Metals of $230,000.

The companies have indicated that they are optimistic at finding more reserves. Homestake certainly has some money riding on this, because according to the gold loan repayment agreement, it will be owed over 30,000 oz. when current reserves are exhausted.