BUSINESS/ECONOMY

Glitter in the desert

D'ARCY JENISH March 21 1988
BUSINESS/ECONOMY

Glitter in the desert

D'ARCY JENISH March 21 1988

Glitter in the desert

For more than a year Torontobased American Barrick Resources Corp. has been drilling for gold on a 6,000-acre piece of land in the hot, dusty, semidesert hill country of northeastern Nevada. Barrick, one of North America’s leading gold mining companies, acquired the property and its proven gold reserves of about 500,000 ounces in late 1986. The company paid $43 million and 2.1 million of its own shares, valued at $38 million, for what is known as the Goldstrike Mine. Since then, Barrick has unearthed one of the richest gold deposits in North America on the property. Last week the company announced that reserves of 8.7 million ounces have been established, including almost two million ounces found since the start of the year. Company president Robert Smith said that the discovery could be worth roughly $5.5 billion at current prices. He added: “It’s a huge deposit and we haven’t found the limits yet. But it’s got to stop somewhere.”

Barrick made its big discovery simply by drilling deeper than the previous owners—Western States Minerals Corp., an American company, and Canadian-controlled PanCana Minerals Ltd. of Calgary. Barrick also upstaged the largest gold mining company in the United States, New York-based

Newmont Gold, which operates an open-pit mine on an adjoining strip of land but which had not conducted deep drilling tests. Barrick’s achievement, according to mine industry analysts, reflects the aggressive attitudes and innovative techniques that have pushed Canadian companies to the forefront of North American gold mining. Said Julian Baldry, mining analyst with Toronto-based broker Nesbitt Thomson Deacon Inc.: “Canada has shaken up the world gold industry over the past 10 years.”

Despite the magnitude of its discovery, Barrick and its shareholders will not reap the benefits for several years. Smith said that production is scheduled to begin in late 1990 or early 1991. But the company is still trying to decide whether to develop an open-pit or an underground mine. Most observers claim that Barrick faces a complex decision. Baldry said that underground mining may be extremely difficult because rock in the deposit has been crushed by natural forces and would not support underground tunnel networks. On the other hand, because the reserves have been found at depths of 1,000 feet to 1,800 feet, the cost of open-pit mining could be prohibitive. Said Paul Esquivel, mining analyst with Toronto-based investment counsellors Davidson Partners Ltd.: “Who

knows what they are going to get out of there, what the costs are going to be, or what the price of gold will be?”

At the same time, Barrick’s lawyers are fighting a prospector’s claim to ownership of Barrick’s prime producing property—the Mercur Mine, located 35 km southwest of Salt Lake City. Barrick bought the mine for $40 million in June, 1985, from Texaco Inc., which had acquired it in its 1984 takeover of Getty Oil Co. Barrick has increased production while cutting operating costs at the mine. But Utah prospector Scott Smith, who staked some of the original claims to the property in the early 1970s, says that he brought in Getty Oil to develop a mine under an arrangement that would

leave him with a 25-per-cent interest. Smith alleges that Getty squeezed him out and that neither Texaco nor Barrick would honor his agreement with Getty.

The dispute took an unusual turn last October when Barrick filed a $64million lawsuit against Smith, as well as the Vancouver-based brokerage firm Canarim Investment Corp. Ltd. and Vancouver stockbroker Reyard Saadien. Canarim and Saadien led a group of investors who put $6.3 million into Smith’s company, Salt Lake City-based Gold Standard Inc., because, they said, they believed that the prospector has a good chance of winning title to the Mercur Mine.

But the legal dispute over the Mercur Mine has been overshadowed by Barrick’s rapid growth and its huge discovery at the Goldstrike Mine. Barrick began to emerge as a gold producer shortly after Peter Munk, 60, and two close associates, David Gilmour, 56, and William Birchall, 45, switched the company’s focus from oil and gas exploration in mid-1983. Munk and Gilmour had been partners since the late 1950s, when they founded the nowdefunct Clairtone Sound Corp., a stereo manufacturer, in Toronto.

Munk says that he turned to gold mining in the early 1980s because he believed that European institutional investors would be forced to move money out of South African companies due to the racial unrest in that country. Immediately after taking control of Barrick, Munk and his partners began searching for producing properties and soon owned mines in Northern Ontario, Quebec, Nevada, Alaska and Utah. By the middle of the year Barrick plans to begin production at the Holt-McDermott Mine near Kirkland Lake, Ont. Said Munk: “We had to have a company in place that could be the recipient of funds moving out of South Africa.”

Munk says that for the next couple of years the company will concentrate on determining the extent of the Goldstrike reserves and on developing them. Shortly after acquiring the property, Barrick began deep drilling to depths of 1,800 feet. By comparison, said Barrick president Smith, the existing known reserves extended to a depth of only 600 feet. Barrick sent core samples from the drill tests to an independent laboratory for analysis and received the results a year ago this month. Said Smith: “We looked at them and we did not believe them. We doublechecked them and sent them to different labs before we convinced ourselves that the results were correct.”

The samples showed that Barrick had hit a 600-foot-thick deposit containing 0.34 ounces of gold per ton of rock. In order to convey the magnitude of the discovery, Smith said that a deposit merely six feet thick containing similar concentrations of gold

could be profitable at current prices. Since the initial drilling took place Barrick has sunk 110 more holes and officials say that they have found up to a million ounces of gold a month.

Smith added that proven reserves of 500,000 ounces are enough to justify development.

Currently, Barrick is negotiating a joint-operation agreement with New-

mont Gold, its next-door neighbor, to develop the first phase of the Goldstrike deposit. Ultimately, Barrick will have to remove as much as 1,000 feet of rock before hitting the gold reserves. According to some mining industry analysts, the Barrick discovery reflects a fundamental difference in attitude and approach between Canadian and American companies. Said Nesbitt Thomson’s Baldry: “If the Americans saw gold on the surface and could make a profit, that is what they would chase. The Canadians have come in with bigger plans.” Besides drilling deeper, Canadian companies have developed innovative new techniques for extracting gold from low-grade deposits. In the process, they have changed the industry’s idea of what constitutes an economically feasible deposit. Baldry added that, 10 years ago, U.S. companies would not consider mining ore containing less than 0.1 ounce of gold per ton. Now, ore with half that much gold can be mined profitably. Said Baldry: “It is the aggressiveness of the Canadian firms that has taken the Americans by storm.” And it was a similar aggressiveness that resulted in American Barrick’s blockbuster discovery in Nevada.

D'ARCY JENISH