BUSINESS/ECONOMY

Defence of a gold mine

D'ARCY JENISH August 17 1987
BUSINESS/ECONOMY

Defence of a gold mine

D'ARCY JENISH August 17 1987

Defence of a gold mine

BUSINESS/ECONOMY

For the past five years Toronto-based Dome Mines Ltd., one of Canada’s oldest and most venerable gold producers, has suffered mightily from its connections to Dome Petroleum Ltd., the debt-ridden Calgary oil and gas company. While the share prices of other Canadian gold producers have soared, Dome Mines shares have floundered, in part because the company guaranteed a $225-million Dome Petroleum loan. Last week the corporate connection caused more turmoil for the gold producer. Australian-based Giant Resources Ltd., through its Canadian subsidiaries, attempted to purchase a 21.5-percent block of the mining company’s shares owned by Dome Petroleum. Giant was trying to prevent the planned merger of Dome Mines and two other companies—Vancouver-based Placer Development Ltd. and Torontobased Campbell Red Lake Mines Ltd.—which would create the largest gold producer in North America. But Dome Petroleum, under presssure from Dome Mines, rejected Giant’s offer, clearing the way for a shareholder vote on the three-way merger on Aug. 12.

According to an information circular sent to shareholders, amalgamation would benefit all three companies. Combined gold output would exceed one million ounces annually, production costs should drop and profits per share could be expected to rise. But aside from such operating advantages, mining industry analysts contend that Dome Mines and Placer, the two principal players, want to merge for defensive reasons. Both want protection from potentially hostile takeover bids. And Dome Mines desperately wants to dilute its connection to Dome Petroleum. Giant’s motives for intervening remained something of a mystery.

Although the participants in the planned amalgamation are stressing their compatibility, they have sharply different approaches to the gold mining business. Dome Mines, which has operated in Northern Ontario since

1910, and Campbell Red Lake, which is controlled by Dome, are conservative companies, said Julian Baldry, senior mining analyst with Toronto-based investment firm Nesbitt Thomson Deacon Inc. Both have been slow to increase their output or buy into new mines as gold prices rose and production costs declined over the past few years, added Baldry.

But Placer, formed in 1926, is a dynamic company. Its gold production rose to 331,000 ounces last year from 45,000 ounces in 1982 as new mines came onstream. Placer posted a profit of $70 million in 1986, nearly double its 1985 earnings, and last March was flush with cash reserves exceeding $250 million.

For Dome Mines, the merger would erode its connections to Dome Petroleum, which it launched in the late 1940s to take

advantage of the Alberta oil boom. As a legacy of that relationship, Dome Mines still owns 19 per cent of Dome Petroleum’s outstanding shares, the largest single ownership block. On the other hand, Dome Petroleum owns 21 million, or 21.5 per cent, of Dome Mines’ shares, which are worth almost $450 million. Under the planned merger, Dome Petroleum would end up with eight per cent of the new company.

The oil and gas company has pledged the shares as collateral on an $800-million loan from four major Canadian chartered banks.

The fate of the shares took on a new urgency for Dome Mines in April when the proposed sale of Dome Petroleum to Amoco Canada Petroleum Co. Ltd. for $5.1 billion was announced. A spokesman for a group of 25 unsecured foreign creditors of Dome Petroleum said that the sale agreement called for the disposal of the Dome Mines shares.

“Up till then, Dome had been saying they didn’t want to sell them,” said the creditors’ spokesman. And Amoco spokesman Richard Brown told Maclean's that if his company does indeed take over Dome Petroleum, it will certainly unload the Dome Mines shares.

The Dome Petroleum connection has been a burden on the mining company for a second reason: the $225-million loan guarantee. A Toronto-based mining analyst who asked not to be named said that Dome Mines would have to sell assets or borrow money if the banks asked it to cover the guarantee. What is more, the guarantee has made investors wary of Dome Mines stock and kept the price down for several years, said the analyst.

But the attempt by Giant Resources to block the amalgamation left many industry observers baffled. “It seems bizarre to say the least,” said a mining industry analyst. Dome Petroleum would have required approval of the four Canadian banks and Amoco to sell the Dome Mines shares, but the Giant offer was good for only one week. Furthermore, three members of the Dome Mines board of directors, including chairman Fraser Fell, sit on the Dome Petroleum board and would have had to give their blessing. “Fraser Fell is within 10 days of becoming chairman of one of the biggest companies in the world,” said the analyst. “Why would he sell to these guys?”

Although there may yet be some surprising twists to the saga of Canada’s two Domes, by week’s end it appeared inevitable that the companies would soon cease to operate as independent entities. For Dome Mines, the future looks bright. Analyst Baldry predicted that the company created by the amalgamation would develop an international following among big institutional investors.

Meanwhile, Dome Petroleum’s future was becoming ever more tenuous. On Aug. 6 the company announced that it had failed to win unanimous creditor approval for the extension of a 15-month-old interim debt repayment plan. Without such approval, the company is officially in default on substantially all its loan agreements. Yet there remained a glimmer of hope that the Dome-Amoco deal would win creditor approval. A spokesman for the group of unsecured foreign creditors told Maclean's that the group has hired an independent financial adviser to evaluate the sale and should have a report by the end of the month. “The individual banks have their own ideas on it,” said the spokesman. “We are not jumping one way or the other yet.”

D'ARCY JENISH

ANN SHORTELL