BUSINESS

Fading prospects

Canada’s gold explorers are cutting back

JOHN DALY August 6 1990
BUSINESS

Fading prospects

Canada’s gold explorers are cutting back

JOHN DALY August 6 1990

Fading prospects

BUSINESS

Canada’s gold explorers are cutting back

For the past five months, stock market speculators and some of Canada’s leading mining companies have been caught up in a lively takeover battle for the fabulously rich Eskay Creek gold mine in northern British Columbia. However, the now-resolved Eskay struggle is an exception in the otherwise moribund state of Canada’s gold industry. Battered by low international prices, small gold-mining companies in particular have almost completely halted exploratory drilling in dozens of remote communities, throwing thousands of people out of work.

In Kirkland Lake, Ont., for one, Mayor Joseph Mavrinac says that drilling, which pumped almost $100 million into his town and surrounding region of over 13,000 in 1987, now has almost completely stopped. To help sustain its economy, the town is depending on alternatives, which include a new federal administration centre for the proposed Goods and Services Tax and a new provincial young offenders’ facility. As well, last week Mavrinac signed a $400-million 25-year agreement with Metropolitan Toronto allowing it to dump and recycle solid waste in an abandoned mine pit near the town. Says Mavrinac, 66: “We’re trying to diversify. But even with all those other things, gold is still the backbone of our economy.”

Last year, total exploration _

spending by Canadian mining companies plunged to $775 million from $1.4 billion in 1988. This year, the 4,300member Prospectors and Developers Association, which comprises 140 corporations and 4,160 geologists and prospectors, predicts a further drop to $610 million. The reason: a steady decline in gold prices. Indeed, the price of gold has dropped to last week’s closing of $429.20 from $579.70 per ounce just three years ago. The gradual decline accelerated sharply on March 26, when an unidentified Middle East seller dumped thousands of ounces onto the market, driving the price down by $24.65 in one day to $427.46 an ounce. Gold analysts say that selling by the same investor also caused sharp drops in May and June, when the price hit a 1990 low of $395.56.

As well, executives with hundreds of small so-called

junior Canadian gold-mining companies say that Finance Minister Michael Wilson’s abrupt withdrawal of generous tax incentives for exploration and development in his February budget had a crippling effect. Those incentives allowed mining companies to pass on tax deductions for their exploration costs to investors. For the juniors, most of which have been headed by aggressive prospectors or financiers like colorful Vancouver stock promoter Murray Pezim, the so-called flow-through financing provisions made it easier for them to convince small investors to back high-risk ventures.

In Pezim’s case, the flow-throughs helped him to raise the money that his Prime Resources Group Inc. needed to explore Eskay Creek. Now, says Robert Ginn, president of the Prospectors and Developers Association, “the juniors cannot raise any money by selling shares.” As a result, Ginn predicts that exploration spending by the juniors could decline to $160 million next year, compared with over $1 billion in 1988.

According to Ginn and many analysts, that drop is particularly worrisome because the juniors have been the driving force in Canadian gold exploration. Unlike major gold-mining companies, which are more conservative and do most of their exploration around existing mines, Ginn says that the juniors “just have the

_ conviction to go further.”

The juniors tend to drill dozens of holes in unexplored areas until their money runs out. For small towns like Kirkland Lake, exploratory drilling is one of the most positive aspects of gold mining. Says Mavrinac: “They buy goods and services, rent cars and helicopters—it filters into everybody’s pocket, immediately.”

As well, in a few cases, juniors have earned huge rewards by selling out to major producers. Pezim, 69, was a key supporter of early drilling at the two most spectacular gold finds of the past decade—Eskay Creek and the discovery of the fabulous Hemlo ore body in northwestern Ontario in the early 1980s. Indeed, “the Pez,” as he is nicknamed, likes to boast that he has “discovered more gold than any human being in the world.” Last month, Pezim and two of his associates cashed in on their

investment in Eskay Creek by selling their block of shares in Prime for $65 million to Toronto-based Corona Corp., effectively giving it control of the mine.

The Pez’s latest windfall has been soured, however, by a B.C. Securities Commission investigation into some of his Eskay Creekrelated stock market dealings last summer. Provincial regulators allege that Pezim, Prime president John Ivany and senior vice-president Lawrence Page benefited from inside information by increasing their stake in the mine before they publicly released a set of very positive drilling results last August. All three have denied the allegations. Last week, the Pez complained to Maclean’s that the value of shares he and other investors own in the hundreds of Vancouver Stock Exchange-listed companies he is affiliated with have declined by over $200 million since the hearings began. He also expressed sympathy for other small exploration companies who are finding it impossible to attract investors. Said Pezim: “They are struggling. They can’t get the money.”

But while he and other juniors are hurting badly, so far no large producing Canadian mines have been forced to close because of low gold prices, although they have curtailed exploration. To date, only a handful of smaller and older mines with higher production costs have shut down. The latest closures occurred last month, when Vancouver-based Canamax Resources Ltd. suspended production at two small mines, one near Wawa, Ont., and the other in the northeastern Yukon, idling a total of 200 miners. Canamax said that the price of gold would have to rise to more than $464 an ounce before it would reopen the mines. For large gold mines, however, the average production cost in Canada is $288.80 an ounce, leaving comfortable margins.

Moreover, because they can still afford to finance new drilling out of their own earnings, the majors have not cut back significantly on their exploration budgets. Says Robert Smith, president of Toronto-based American Barrick Resources Inc., which operates six mines in Canada and the United States: “As far as the majors are concerned, there will be little or no reduction.” Indeed, Smith says that Barrick, which has grown mainly through acquisitions, may in fact benefit from the juniors’ problems. Says Smith:

“Short-term financial troubles in the juniors could make them acquisition targets.

We’re keeping an eye open.”

But analysts say that any further decline could be painful. Egizio Bianchini, a senior mining analyst with the brokerage firm of Nesbitt Thomson Deacon Inc. in Toronto, says that prices have declined to near the production costs of many older mines. “If we have a $406 price for 12 months,” he adds, “a lot of older mines would shut.”

Among those at risk, accord-

ing to Bianchini, are Placer Dome Inc.’s Dome Mine in Timmins, Ont., as well as its venerable Campbell Red Lake Mine in Red Lake, Ont.

Because of price fluctuations in recent months, however, most analysts and gold executives are reluctant to make any firm predictions. Still, Stewart Murray, chief executive of

the authoritative research company Gold Fields Mineral Services Ltd., cites several factors that could push prices back up again. Among them: declining interest rates in the United States and other countries, which have lowered the returns on alternative investments to gold. As well, fears of instability in the Middle East invariably add to investor demand. Last week, the price went up $8.32 in a single day following Iraqi saber rattling in its dispute with Kuwait.

Murray also says that rumors of a massive gold sell-off by the Soviet Union earlier this year, which allegedly helped to drive down prices, were exaggerated. Still, he added that while “sentiment has turned recently, I don’t think the price is going to motor up to $464.”

Even if prices remain at current levels, Canadian gold producers enjoy significant advantages over the Western world’s largest producer, South Africa, which accounts for about 40 per cent of the world market. According to Gold Fields’ statistics, the average cash production cost of $288.80 for large Canadian mines last year is close to the world average, and well below the $320 average for South African mines. Already, several large South African mines have cut back their production because of the current price slump, idling thousands of mine workers. As well, Murray says that South Africa’s costs will continue to rise because most of its mines are old, and black workers, who have traditionally earned far less than their white counterparts, are now winning larger wage settlements.

Executives with the companies in charge of the 50 drilling projects proposed for Eskay Creek, however, are unconcerned by international gold price fluctuations because the mine is so rich. Working near the Alaska panhandle in rugged mountains northeast of Stewart, B.C., those companies plan to spend about $100 million in the area this year. But in dozens of other gold-mining towns across Canada, the prospect of that kind of activity is a distant one. Still, Kirkland Lake’s Mavrinac, whose family has owned and operated hotels in the town since the 1930s, says that “if the price returns to $450 to $500, all hell will break loose.” Until 2 then, however, the town where gold was first

8 discovered in 1912 and which officially bills S itself as being “on the mile of gold” will have to g rely on an unpopular sales tax, juvenile offend| ers and garbage to tide it over.

g JOHN DALY with HAL QUINN in Vancouver

9 and MICHAEL HARRISON in Toronto

HAL QUINN

MICHAEL HARRISON