Metals firms do hard time
Pegasus Gold declares bankruptcy, Royal Oak has a near miss
By PETER KENNEDY
Vancouver Bureau The Financial Post
Once a pioneer in low-cost gold mining, Pegasus Gold Inc. filed for voluntary reorganization under U.S. bankruptcy laws in
Reno, Nev., Friday with debts of US$213 million.
Pegasus is the latest in a string of producers brought to their knees by weak bullion prices, which have recently tumbled to 18
1/2-year lows.
While bullion rose US$4.70 to US$290.60 an ounce in New York Friday, industry watchers said there are bound to be more
casualties in the gold mining business.
"There are quite a few companies out there with disturbing balance sheets and no real earnings,'' said Murray Pollitt of
Toronto investment firm Pollitt & Co. Ltd.
Royal Oak Mines Inc. was rescued from the brink of insolvency Friday after its bondholders agreed to let it tap a
US$44-million debt financing. (Both Pegasus and Royal Oak have head offices in
Washington state.)
Among other companies being watched are Echo Bay Mines Ltd., William Resources Inc.
and TVX Gold Inc.
"The [gold] industry is in real difficulty,'' Pollitt said.
Pegasus, which has 120 days to file its restructuring plan, filed for protection after being
pressed by a syndicate of 11 banks to accelerate all amounts payable under a
US$68-million revolving credit facility.
Its other liabilities include US$14 million in trade debt, US$115 million of 6.25%
convertible subordinated notes due 2002, and US$16 million in foreign currency losses.
Trading in the stock was halted Friday. After it resumed, the shares (PGU/TSE) tumbled
75› to close at 11› on volume of 222,100. Its 52-week high is $11.95.
During a conference call Friday, Pegasus chief executive Werner Nennecker said the
company would operate its three U.S. mines while talks with key lenders continue.
"The banks have not issued a demand for repayment,'' said Nennecker, who blamed low gold prices for Pegasus's problems.
After recently shutting its Mount Todd gold mine in Australia and collapsing its gold hedging contracts, Pegasus couldn't
generate sufficient cash flow to service its debt and continue operations, he said.
Analysts weren't surprised see Pegasus file for bankruptcy.
Tony Sutton-Pratt of HSBC James Capel in Toronto said he "nearly choked'' when Pegasus reported a huge loss for the third
quarter ended Sept. 30, 1997 - US$433 million (US$10.47 a share) on revenue of US$78 million.
Those third-quarter results included a US$353.3-million writedown stemming from the closure of Mount Todd.
In the first nine months of 1997, Pegasus produced 353,050 ounces of gold. But costs of US$417 an ounce made its
operations unprofitable.
"Pegasus didn't have the asset base to pay back its debt once Mount Todd had gone,'' said Sutton-Pratt.
Nennecker said an investment bank has been retained to seek potential buyers for Pegasus. But analysts said interested
parties may shy away because of the company's heavy environmental liabilities.
Meanwhile, Pegasus will decide within two weeks whether to shut down its high-cost Florida Canyon mine in Nevada.
If the mine remains open, the company could produce about 250,000 ounces of gold this year, Nennecker said.
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