COVER

ALMIGHTY GOLD

D'ARCY JENISH May 16 1988
COVER

ALMIGHTY GOLD

D'ARCY JENISH May 16 1988

ALMIGHTY GOLD

COVER

Mining gold, says Vancouver promoter Robert Friedland, is like playing three-dimensional chess. First someone has to explore for it, then find someone rich enough to finance the venture —and, finally, battle some of the harshest conditions on earth to extract it. But across Canada, from Newfoundland to the fabled Klondike goldfields in the Yukon, prospectors, developers and promoters are winning their three-way struggle: more gold is being mined than ever before, and the Canadian industry’s Midas touch is in demand worldwide —from the jungles of Thailand to China’s ancient frong tiers. Friedland, chair2 man of Galactic Reo sources Ltd., says that s the rationale fuelling the I golden resurgence is as historic as it is simple.

“Gold is the ultimate ‘real value,’ ” he said. “You can take it to any country in the world and trade it for the local currency of the realm.”

The Canadian mining industry is in the middle of the biggest boom to hit the gold sector since the end of the Second World War (page 38). Over the past five years exploration has reached unprecedented levels across Canada, more than 30 new mines have opened and gold production has risen annually. The rejuvenation of the Canadian industry has sprung from a combination of rising gold prices—to $600 last year from $440 in 1985—the 1981 discovery of the mother lode in the huge Hemlo ore body in northwestern Ontario, the development of new technology for mining low-grade reserves, and a federal tax-incentive system called flow-through financing, in which companies passed on their exploration tax deductions to investors. The federal government created an uproar

within the mining community when it announced that it planned to cancel the incentive as part of the tax-reform package outlined last year.

Irresistible: Meanwhile, Canada’s gold scouts are pursuing a glittering ore that contains an ancient and irresistible lure. The warm yellow glow of the gold seduces the eye and imparts a sense of comfort and beauty. It is ductile and more malleable than any other metal, lending itself to fine craftsmanship in jewelry, gold leaf and even electronic circuitry and medicine. It is also associated with wealth and power. Said Friedland: “Gold has a mystique around the world and in most cultures. It has historically been—and remains—money, and there is something primeval about mining money. It is inherently exciting.”

The search for gold has taken Canadians around the world and made many of them rich. Indeed, Canadian companies control more than 40 per cent of the

gold mined annually in Nevada, the largest American gold-producing state. Canadian firms also own or control three large open-pit gold mines in the United States and the largest gold mine in Australia. As well, Canadian entrepreneurs are now attempting to establish gold-mining industries in Thailand, China and the South American nation of Guyana. Said Friedland, who recently concluded an agreement with the Chinese: “They wanted a Canadian company to teach them how to mine gold. Canada has the best mining expertise in the world outside South Africa.”

Bonanza: The gold rush has also created a potential bonanza for major domestic and foreign companies that are cash-rich and determined to increase their reserves through acquisitions. With all the exploration that has occurred, dozens of small companies now own potentially lucrative gold properties. But the stock market crash last

Oct. 19 drastically cut the share prices of dozens of mining companies, making them much cheaper to take over. The crash has also made it nearly impossible for them to raise exploration money through new share issues.

In the past month alone, three major acquisitions have been announced or concluded. Officials of Edmonton-based Echo Bay Mines Ltd., North America’s fourth-largest gold-mining company, announced that it will acquire up to 21 per cent of rapidly expanding, Torontobased Muscocho Explorations Ltd. and similar percentages of two related companies. Australia’s largest mineral producer, Western Mining Corp. Holdings Ltd., announced that it had acquired control of four junior Canadian companies for a total of $480 million. And a subsidiary of San Francisco-based Homestake Mining Corp., the secondlargest gold producer in the United States, paid $5 a share for control of

Vancouver-based North American Metals Corp., which owns 50 per cent of a new mine in northwestern British Columbia. Said North American president Robert Hunter: “A couple of years down the line, when it’s producing and expanding, $5 a share will seem like a giveaway.”

Plummeted: Before the current round of development, the country’s gold-mining industry endured more than three decades in which mines closed, production sagged and employ-

ment plummeted. The long slide occurred primarily because the United States, with the support of other Western governments, fixed the price of the commodity at $35 (U.S.) per ounce in 1934, which at that time was the equiva-

lent of $35.35 in Canadian funds. The price remained fixed at that level until 1968. As a result, increasing costs made gold mining a money-losing venture.

While rising prices and the giant Hemlo discovery generated new interest in gold, the advent of flow-through financing in 1983 gave the industry the money necessary to launch an exploration boom. Mining companies had been allowed to deduct $1.33 from their taxable income for every $1 spent on exploration or development of mineral reserves. The flow-through financing provisions simply allowed mining companies to pass that tax benefit on to investors who bought newly issued company shares. According to federal department of energy, mines and resources officials, an estimated $2 billion in flow-through shares had sold between 1983 and the end of 1987.

Although an estimated 70 per cent of the money raised through flowthrough shares has been spent in Ontario and Quebec, exploration activity has soared across the country. A March, 1988, study by the Prospectors and Developers Association of Canada showed that between 1983 and the end of 1987 investors spent $136 mil| lion in flow-through 5 money in Atlantic Canali da and a similar amount in the Prairie provinces. The PDAC study also showed that $289 million was spent in British Columbia and $270 million in the Yukon and the Northwest Territories. Despite that outburst of exploration activity, Ontario and Quebec still produced 80 per cent of the 2.3 million ounces of gold mined in Canada last year.

Revived: The new exploration has revived gold mining in almost every area of the country. In Nova Scotia, where gold was first discovered in 1862, the industry had been dormant since 1946 when the last mine closed. But now, 35 companies are exploring for gold, and last year they spent $72 million, up from $8 million in 1985. And they have attracted the attention of gold-hungry foreign investors. In March, Hecla Mining Co. of Canada Ltd., a subsidiary of the largest silver producer in the United States, signed an agreement that will allow it to acquire an interest of up to 60 per cent in a Nova Scotia gold-mining

project owned by Toronto-based Acadia Mineral Ventures Ltd. Said Acadia president Donald Smith: “When you see companies like Hecla come in to Nova Scotia, it augurs well for the province’s gold-mining industry.”

An equally dramatic revival of the gold industry has occurred in Saskatchewan. In early 1987 the Star Lake Mine near La Ronge, 360 km north of Saskatoon, became the first gold mine to operate in the province since 1942, and a second one is scheduled to begin operating by the end of 1988.

Driven: From the start, the Canadian gold boom has been driven by entrepreneurial promoters and developers rather than the large, established mining companies.

The first new drilling on the Hemlo claims was financed by Vancouver promoter Murray Pezim after Timmins, Ont.based prospectors John Lärche and Donald McKinnon failed to attract any interest on Toronto’s Bay Street (page 41). Now, at 67, Pezim has 20 exploration projects and operates almost 50 listed companies from the 15th floor of the Stock Exchange Tower in downtown Vancouver. Two other Van-

couver promoter-developers, who discovered the richest section of the Hemlo reserves, Richard Hughes and Frank Lang, have solved one of the great mysteries of Canadian gold mining by discovering the underground sources of gold that triggered the famous Klondike gold rush of 1897 (page 40). They also

say that they have found underground deposits that feed gold into the streams of the Atlin area of northwestern British Columbia, about 160 km south of Whitehorse.

Hughes and Lang have also become

partners in a Bangkok-based venture called Thai-Am-Can Mining Ltd. Last month the government of Thailand, which is attempting to re-establish its gold-mining industry, awarded the company exploration and development rights to three parcels of land totalling about 40,000 acres. Thai-Am-Can was founded by William Wright, a 49-year-old American who worked for a placer, or riverbed, mining operation in the Klondike during the past six summers. He spent his winters roaming around Southeast Asia looking for opportunities to develop gold-mining ventures. Wright said that he settled on Thailand after seeing a fiveton golden Buddha, now displayed in a downtown Bangkok temple. It was produced from Thai gold several centuries ago. Said Wright: “If you ask a Thai citizen, they say there’s no gold here. There’s so much gold here, it would scare them

if they knew.”

Innovative: Although Vancouver is known for its high-risk speculative mining firms, the current rush of development has produced some innovative companies and projects in Eastern Can-

ada. One of the most unusual was assembled by Stephen Wilkinson, a 36-year-old geologist and general manager of Toronto-based Ateba Mines Inc. Wilkinson says that he became convinced in 1982 that gold could be extracted profitably from heaps of waste ore. In early 1987 Wilkinson leased three ore heaps from the owners of defunct mines near Beardmore, Ont., about 150 km northeast of Thunder Bay. His theory was correct, and Ateba finally poured its first gold bar last December.

Another company attempting to bring an old mine back to life is Toronto-based Duration Mines Ltd. In January, 1987, Duration president David Rogers acquired the rights to the Theresa gold property near Long Lac, Ont.

The mine’s original developer in 1948 was Alphonse Caouette, a railway worker and amateur prospector from Quebec. He convinced friends and family members to help him build a community and a mine in the remote bush of Northern Ontario. Despite a blessing from a Montreal bishop, the project closed in 1953 after just five years in operation.

But now Rogers says that he is convinced he can turn the property into a major gold producer.

Although Canadian mining companies are known primarily for their underground expertise, they have also proven both innovative and aggressive in their use of new techniques. In 1979 Vancouver-based Pegasus Gold Corp. became the first company to successfully put a gold mine into operation using heap leaching. That method involves spraying massive stockpiles of ore with a solution of water and sodium cyanide, which dissolves the gold. The solution is collected and the gold is extracted.

Leaching: When Pegasus began trying to develop its heap-leaching technique at its Zortman and Landusky mines in Montana, investors, geologists and mining engineers doubted that the project would work, said Rayard Saadien, a vice-president of Vancouverbased Canarim Investment Corp. Ltd. who raised the money for the company. Saadien said that Pegasus was attempting to mine ore containing as little as 0.03 ounces of gold per ton. At that grade, the gold is not even visible to the human eye. And Canadian mines yield an average of 0.2 ounces per ton. Said Saadien: “When we started heap leaching, we were the laughingstock of Vancouver.”

The advent of heap leaching coincided with another trend that allowed Canadi-

an companies to achieve their present status as major achievers in U.S. and world gold mining. According to John Tumazos, a senior vice-president and gold analyst with New York-based Oppenheimer & Co., large U.S. oil companies purchased mining assets when world petroleum prices increased sharply in the 1970s. The oil companies then

began selling their gold-mining subsidiaries after world oil prices collapsed in 1982. To date, Echo Bay has been the biggest beneficiary of the oil industry’s exodus from gold mining. In late 1986 Houston-based Tenneco Inc. sold Echo Bay three producing mines in Nevada.

Crossroads: But after five years of unprecedented growth, Canada’s gold industry has reached a crossroads, according to many observers. The disappearance of flow-through financing will mean that a huge source of exploration money will dry up. And the other crucial factor affecting the industry is the price of gold. For the past 18 months the price of gold has hovered around $550 per ounce. But several gold watchers now seem uncertain where the price will go. Tumazos predicts that gold will fall to $520 per ounce this year and will tumble again to the $460 range next year.

But Toronto-based publisher and mine financier Ian McAvity, whose investment newsletter Deliberations is mailed to sub| scribers in 42 countries, predicts I that gold prices will skyrocket in 1 the next year as economic conditions deteriorate. McAvity noted that the government of Taiwan has indicated that it will spend about $6 billion this year, buying 25 per cent of the free world’s gold production in order to reduce its enormous holdings of U.S. dollars. As other international investors lose confidence in the dollar and the American economy, they might also begin moving some of their assets into gold.

Survive: But despite changing economic conditions, the inevitable fluctuations in paper currencies or shortages of exploration money, analysts say that gold mining will survive. Indeed, the Canadian industry is full of relatively old prospectors, developers and promoters who persevered through the dreary years when mines were closing, jobs were disappearing and exploration money was scarce. And a new wave of companies, including Echo Bay, Royex and American Barrick, along with a new generation of entrepreneurs like Ateba’s Wilkinson and Galactic’s Friedland have revitalized the industry (page 40). The newcomers, like the previous generation of miners, have quickly discovered the lure of gold. And once smitten, they find it hard to walk away empty-handed.

D'ARCY JENISH

ANN WALMSLEY