Westmin’s oil/gas division a major profitable source

The oil and gas division at Westmin Resources has been its most profitable in recent years, eclipsing all other sources of income by a wi de margin. But even though crude oil production was at record levels last year, sharply lower prices had a marked effect on operating profits, shareholders were told at the annual meeting.

The mining division also faced lower prices which contributed to a drop in consolidated cash flow from $80 million in 1985 to $52.1 million last year, Paul M. Marshall, president and chief executive officer, pointed out. Commenting on the impact of exchange rates, he noted that a 1 cents increase in the Canadian dollar results in an after-tax charge to Westmin of $1.5 million.

Net earnings for 1986 were $8.7 million compared to $30.5 million in 1985 and revenues were a record $189.6 million, an increase of 12% from the previous year.

Mr Marshall said there was a growing consensus that the OPEC accord would hold and precipitate a modest increase in oil prices during the next few years. He was also optimistic about natural gas, suggesting the turnaround “would be sooner than later” and the present U.S. surplus would disappear in 2-3 years. Predicting the gas market there would be bad this summer, he concluded it would steady by fall and any increase in consumption would have to come from Mexico or Canada.

He doubted that 1987 earnings would be better than last year’s but said he expected an improvement in 1988. Referring to Westmin’s good working capital ($153.9 million at year-end) and strong balance sheet, he said the company has increased its internal exposure to precious metals since selling off its interest in Lacana Mining.

Responding to a question about whether additional working capital was needed for exploration, Mr Marshall said the company hasn’t restricted exploration because of a lack of money. Rather it has set more stringent requirements for exploration ventures. Conceding there were no bargain basement prices out there, he said the company was interested in new acquisitions “with a satisfactory return.”

Westmin plans to increase mill capacity at its H-W mine on Vancouver Island at a cost of $24 million. The 33% expansion will boost mill throughput to 4,400 tons per day and the payback period will be less than a year, the company estimates. Reserves will last “well into the next century,” he said, adding that Westmin preferred a poly metal mine to a primary gold producer. Proven and probable reserves now stand at 12.7 million tons grading 0.07 oz gold, 1.15 oz silver, 2.52% copper, 0.37% lead and 5.37% zinc.

Discussing exploration activities in the minerals division, Dr Arthur Soregaroli, vice-president exploration, noted that five gold discoveries had been made in the past year excluding the Stewart camp. He also said the feasibility study for the Silbak and Big Missouri properties at Stewart would be completed in June. “We are expecting good things from this study,” he added.

Based on a price of $390(US) for gold and $5.40 for silver, Westmin estimates the $62-million capital cost of the project will be paid back within two years. Cash operating costs for gold would be $134 per oz and $3.06 for silver. Higher grade material will be mined in the first three years with annual gold output averaging 80,000 oz and silver 560,000 oz during that period.