Queenstake third quarter report
Queenstake Resources Ltd QRL
Shares issued 30,000,000 Dec 22 close $0.145
Thu 23 Dec 99 Company Review
Mr. Chris Davie reviews the company
The most significant event of the third quarter of the year has been the
increase in the price of gold. As a result of its apparent stabilization
above $285 (U.S.) per ounce, Queenstake's Magistral gold project in
Sinaloa, Mexico, becomes a potentially viable open pit heap leach project.
The project is expected to demonstrate robust economics at gold prices
exceeding $285 (U.S.) per ounce. The company has accelerated work on the
feasibility study and expects to have a bankable document completed by
early 2000. This document will allow consideration by banks of project
financing, and Queenstake believes will lead to project construction and
gold production by late 2000 or early 2001.
The feasibility study is being performed by Kappes Cassiday and Associates
of Reno, Nev., and Pincock Allen and Holt (PAH) of Denver, Colo. Work at
this time is focussing on completion of geotechnical drilling and
engineering, process design and cost estimation, reserve finalization and
detailed mine planning, and updating of environmental, archaeological, and
hydrological baseline studies. All other elements of the study have been
completed.
The mineralization at Magistral has been thoroughly drilled by over 740
drillholes. Epithermal, low-sulphidation style gold mineralization occurs
in four mineralized zones comprising silicified stockwork and breccia zones
within volcanic rocks. The resource as determined by PAH using a 0.4 grams
per tonne cutoff comprises 348,200 ounces in the measured category, 102,500
ounces in the indicated category and 5,500 ounces in the inferred category.
Preliminary analysis of the effect of project economics using floating-cone
techniques indicates that of the order of 6.3 million tonnes at grade of
1.6 g/t may be expected to be economically minable. Owing to the coarse
size at which the material may be leached, capital and direct operating
costs are expected to be unusually low, while infrastructure costs will be
minimized by the readily accessible location of the project. Annual
production is expected to be of the order of 45,000 ounces per year, with a
projected mine life of seven years. Potential extensions to the mineralized
zones remain untested and there remain untested targets in the district,
which is controlled by Queenstake. Additional exploration on Queenstake's
ground is expected to add significantly to the resource.
The company continues to evaluate other opportunities for near-term
production and cash flow. The objective is to acquire at least one
additional such project within the next few months. Queenstake is currently
involved in negotiation of a number of such opportunities, which could be
acquired at little or no cash cost.
The acceleration of the Magistral feasibility study, together with the
search for additional production opportunities, represent a change in the
company's focus from early stage exploration to production. The company's
board of directors believes that this change in focus is mandated by
current and foreseeable market conditions, which with few exceptions place
little or no value on exploration properties. This has led to a situation
whereby exploration expenditures do not add value to the company. In the
medium- to long-term, Queenstake will be an integrated mining company with
projects spanning the spectrum from grass roots exploration to production.
In the short-term, however, the company's efforts and expenditures must
focus on the generation of production and hence cash flow. The company is
implementing stringent cost controls so as to conserve cash to the greatest
extent possible until production is achieved.
Exploration programs, financed by Barrick in Peru and by a unit of the
Anglo American Corp. in Africa, are continuing. Queenstake expects to
negotiate agreements on several of the company's attractive properties in
Peru, such that further exploration on these properties will be financed by
joint venture partners. For the time being, the company is curtailing
expenditures on early-stage exploration programs with a view to restarting
these programs at the appropriate time.
The board of directors is, of course, disappointed in the company's share
price. The company's cash balance at Sept. 30, 1999, of $4.9-million places
it in a strong position to complete its feasibility study prior to seeking
development financing. A positive feasibility study should revalue the
company to reflect the value of this asset. As the feasibility study
continues, management will be making a concerted effort to disseminate to
shareholders, institutions, and potential new shareholders the results of
that study. On a different subject, Queenstake is pleased to announce that
on Nov. 16, 1999, the company and Robert Miller reached an agreement to
settle all claims and controversies existing between them for a lump sum
settlement of $316,000 (U.S.). A trial had been schedule for February,
2000.
The company has moved swiftly to take advantage of the recent modest but
significant improvement in gold price; it also remains well-positioned to
take advantage of any additional improvement in metal markets.
Financial review
In the nine months ended Sept. 30, 1999, Queenstake's interest income was
$247,401, compared with $337,581 in the same period last year, reflecting
the corresponding reduction in cash balances from $8,687,389 at Sept. 30,
1998, to $4,871,920 at Sept. 30, 1999. Management fees of $9,397 included
in other income are charged by the company, based on a percentage of
expenditures incurred for the Peru and Mexican companies owned jointly with
Alamos Minerals Inc. The 1998 comparative figure of $53,161 included
$50,325 of management fees charged to Sept. 30, 1998, for 1998 and 1997
expenditures that were included in 1998's income. General and
administration expenses decreased to $839,667 from $956,057 at this time
last year, a result of staff reductions and other cost cutting measures
implemented last year. It is expected that the initial post-merger general
and administration expenses may increase slightly at first as the costs of
closing surplus offices are incurred, but should result in expenditures
that will only marginally exceed the company's current levels. Corporate
development expenses of $83,365 for the current period are expenses
assigned to investigating project or corporate acquisition opportunities.
The company's near-term strategy is focused on completing the feasibility
study at Magistral and to seek opportunities to acquire cash flow or
near-term potential cash-flow producing assets.
Current exploration expenses of $648,518 relate to the costs of property
evaluations that did not result in the acquisition of mineral properties
with continuing exploration or development potential, and the costs of
current period programs on the company's mineral properties that no longer
meet that criteria. This figure compares with $13,369 of the general
exploration costs for the first nine months of 1998.
Mineral property costs written off to Sept. 30, 1999, totalled $3,101,218
of the costs of prior period programs on the company's mineral properties
that no longer meet the continued exploration criteria. There were no
similar costs written off in the prior period.
Exploration expenditures of $941,945 were capitalized in the period --
about $568,000 for Peru projects, $298,000 for Mexico projects, $60,000 for
Chile projects, $16,000 for Malawi projects -- compared with $3,234,675
capitalized in the same period of 1998.
The principal activity in the third quarter was the completion of the
acquisition and subsequent merger of Santa Cruz Gold Inc. for 10,500,107
shares at a deemed value of $2,815,000. The legal, accounting and
regulatory costs of the merger were approximately $417,149. In addition,
the company absorbed a working capital deficiency of $2,012,214 upon the
merger and $586,120 of term debt. This portion of term debt may, at the
option of the debt holders, be converted to 414,000 shares of the company
at any time prior to Dec. 31, 2000.
At Sept. 30, 1999, there are 30,012,164 shares issued and outstanding.
After the merger on July 19, 1999, there were 29,999,914 shares issued and
outstanding. On July 28, 1999, the company issued 51,750 shares, pursuant
to a severance agreement with a former Santa Cruz officer, for deemed
proceeds of $50,000. In August, 1999, pursuant to a Toronto Stock Exchange
approved normal course issuer bid, the company purchased 39,500 shares from
the market for cancellation, at a total cost of $7,858. The company may
acquire up to 1.5 million common shares over the course of a 12-month
period ending on Aug. 15, 2000, to a maximum of $250,000. These shares will
be cancelled upon purchase. The company has not acquired any shares since
August and has no immediate plans to do so. Prior to the merger, the
company had 39,054,491 shares issued and outstanding.
The company's working capital at Sept. 30, 1999, is $3.4-million, with
$586,120 of term debt ($400,000 (U.S.)). The company has commissioned a
feasibility study for its 100-per-cent-owned Magistral project in Sinaloa,
Mexico, that is expected to be completed in the first quarter of 2000. The
company intends to seek a combination of debt and equity financing assuming
an economic feasibility study to develop the Magistral project through to
production.
CONSOLIDATED STATEMENT OF LOSS
Nine months ended Sept. 30
1999 1998
Revenue
Interest
income $ 247,501 $ 337,581
Other income 12,568 53,161
--------- ---------
259,969 390,742
--------- ---------
Costs and
expenses
General and
administrative 839,667 956,057
General
exploration 648,518 13,369
Corporate
development 83,365 -
Direct operating 1,725 1,438
Depreciation 58,190 39,889
--------- ---------
1,631,465 1,010,753
--------- ---------
(Loss) before
the undernoted (1,371,496) (620,011)
Other income
(expense)
Mineral property
costs written
off (3,101,218) -
(Loss) gain
on foreign
exchange (87,318) 228,252
(Loss) on sale
of equipment - (2,869)
--------- ---------
Loss before
minority
interest (4,560,032) (394,628)
Minority
interest 4,369 4,271
--------- ---------
Net (loss) $(4,555,663) $ (390,357)
========= =========
Net (loss)
per share (15 cents) (1 cent)
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