Has Royal Oak hit rock bottom?
FALTERING PROSPECTS
Despite having put the gold producer under bankruptcy protection,
CEO Peggy Witte remains confident about the future. But analysts
say the move is a last-ditch attempt to save a doomed company.
Saturday, February 20, 1999
PETER KENNEDY
British Columbia Bureau
Vancouver -- She's had mines literally blow up in her face and participated in one of her industry's most audacious takeover attempts, so it's no surprise that a little thing like filing for bankruptcy protection has failed to suppress Royal Oak Mines Inc. chief executive officer Margaret Witte.
"It is business as usual with all our mines continuing to operate," she said in a letter sent this week to the gold mining company's 961 employees. "Although this process is expected to take three months to complete, it will not affect day-to-day operations."
Ms. Witte vowed that wages and benefits for all employees would be maintained at levels preceding the bankruptcy protection filing.
After keeping investors guessing for weeks, the Kirkland, Wash.-based company on Monday filed for protection in Ontario under the Companies Creditors Arrangement Act, in a bid to stave off creditors owed about $515-million.
Many analysts don't share the optimism shown in Ms. Witte's letter. They view Royal Oak's filing for protection under the CCAA as a last-ditch attempt to save a doomed gold producer.
"The car crash has already happened. It's just a matter of towing the carcasses away," says John Kilburn, an analyst with Goepel McDermid Inc. in Vancouver. He expects Royal Oak's assets to simply be divided up and sold to other mining companies.
A poisonous combination of low metal prices and massive cost overruns at its $480-million Kemess gold mine in north-central British Columbia pushed Royal Oak into its current predicament. The company has until March 18 to reorganize its financial affairs or face the prospect of being wound up.
Royal Oak sought protection from creditors after suspending interest payments in December on about $120-million (U.S.) owed to Trilon Financial Corp. and its Vancouver affiliate Northgate Exploration Ltd., as well as holders of $175-million worth of senior subordinated debentures.
Among its other debts is the $48-million (Canadian) owed to small suppliers and service companies, who lawyers say will not get paid.
It also owes $19.5-million to Canadian Export Development Corp.
Despite the problems, some observers are counting on Ms. Witte's combative style to pull the company through. A company supplier said he is astounded that the company has been able to keep its flagship Kemess mine going in spite of its financial troubles.
Observers say Royal Oak's survival ultimately depends on whether Kemess is the low-cost company maker that Ms. Witte has always said it is. In the meantime, though, the focus has to be on the financial crisis.
Any restructuring deal may lead to considerable dilution of the company's equity. Royal Oak says its financial adviser, Nesbitt Burns Inc. of Toronto, is working with the senior subordinated noteholders on a possible deal to convert their holdings into equity.
Royal Oak shares closed at 24 cents on the Toronto Stock Exchange yesterday.
Observers with less faith in Royal Oak's scrappy CEO think it's likely that Ms. Witte will be squeezed out by the company's most senior creditors, Trilon and Northgate. Their loan to Royal Oak is secured by a charge on the mine, enabling them to seek a court order to have the project sold, possibly to a friendly bidder.
"It looks like Northgate is setting itself up to take over the mine," said Larry Pezim, a Vancouver stockbroker and nephew of legendary mining promoter Murray Pezim. "They are getting all their little things in place," he said.
Mr. Pezim is referring to Northgate's move to limit its exposure to its $35-million (U.S.) share of the $120-million Trilon loan by using only $14-million of its own cash and borrowing the other $21-million.
Because the loan carries an interest rate of 12 per cent, it was expected to generate an after-tax return of more than 15 per cent.
Neither Trilon nor Northgate would comment on the loans.
Having provided Royal Oak with another $35-million (Canadian) loan to run its operations over the next several weeks, Trilon would have no trouble operating the Kemess mine until it found a buyer for the property, Mr. Pezim said.
"It's a tragic situation for everyone involved," said a Vancouver lawyer with intimate knowledge of Royal Oak's financial situation. "It pits sophisticated lenders against dozens of small suppliers with no voice in the CCAA process."
He said the viability of Kemess will determine whether Royal Oak's assets are liquidated or whether it is possible to cut a deal with the debenture holders so that Royal Oak's debt is manageable.
Royal Oak bought Kemess with great fanfare in 1996, saying it would turn the company into a much larger and more profitable concern. But after experiencing about $50-million in cost overruns, Royal Oak turned to Trilon and Northgate last year for help.
If Ms. Witte is pushed out by Northgate, it would mark the second time in a decade that the Vancouver company has snatched control of a prized gold mining asset from the Royal Oak chief executive officer.
In 1989, when the federal government decided not to provide her former company Neptune Resources Corp. with a $15-million loan guarantee needed to finance construction of a Northwest Territories gold mine known as Colomac, Ms. Witte turned to Northgate for help. She was later squeezed out of the project.
Rather than keep her on board, Northgate elected to develop the operation alone after providing Neptune with a $40-million bridge loan.
After selling her Neptune stock for $2-million in 1991, Ms. Witte launched Royal Oak by merging five companies with high-cost gold mines in Timmins, Ont., Yellowknife, NWT and Hope Brook, Nfld. Ironically, she was able to reacquire the Colomac property in 1993 for about 5 cents on the dollar.
Since then, she has been involved in two of the decade's major mining news events: the 1992 bombing during a strike at her company's Giant gold mine in Yellowknife that left nine miners dead; and an audacious $2.2-billion bid for Lac Minerals Ltd., a Toronto-based gold producer. When the bid was launched in 1994, Lac was four times larger than Royal Oak.
After Royal Oak lost the battle when Lac shareholders accepted a higher offer from Toronto resource giant Barrick Gold Corp., Ms. Witte set her sights on developing the Windy Craggy copper mine in northwestern British Columbia.
She turned that decision to her advantage in 1996 by winning a $166-million compensation package from the B.C. government after it expropriated the Windy Craggy site to create a provincial park.
Proceeds of the grant were used to fund development at Kemess. At the company's annual meeting in Toronto four years ago, Ms. Witte promised that Kemess would eventually make Royal Oak a profitable gold miner capable of producing more than one million ounces of gold annually by 2000.
But it hasn't worked out that way. Colomac and the Hope Brook gold mine in Newfoundland were shut down two years ago, both victims of high costs and the company's inability to achieve gold recovery targets. The Giant mine in Yellowknife and the Pamour mine near Timmins, Ont., aren't making profits in the current gold price environment. Royal Oak has been hanging on in the hope of getting Kemess up and running at planned production rates.
Analysts say that if Kemess had lived up to its original billing, Royal Oak wouldn't be in such dire financial straits.
In recent financial statements, Northgate said information provided to it by Royal Oak indicates that Kemess can produce an average of 250,000 ounces of gold and 60 million pounds of copper annually during an expected mine life of 16 years. Northgate also said it believed the gold and copper would be produced for an average cost of $140 (U.S.) an ounce and 80 cents a pound respectively.
Assuming gold and copper traded at $300 an ounce and 80 cents a pound respectively, the mine was expected to be highly profitable, generating annual cash flow of about $50-million.
But a combination of cost overruns and skirmishes with major suppliers like Tercon Contractors Ltd., which has filed a lien against the Kemess site, have prevented Royal Oak from demonstrating that Kemess can live up to the company's rosy predictions.
In its court filings, Royal Oak says the Tercon claim could seriously disrupt its operations if it is successful. Royal Oak also says the mine produced 39,789 ounces of gold and 9.7 million pounds of copper between Oct. 7 and Dec. 31, 1998.
But the company is clearly having problems, because production costs of $258 an ounce are much higher than its original targets.
Analysts say it isn't clear whether Royal Oak's financial problems are the reason Kemess is not performing as planned. The company has also said it needs about $5-million (Canadian) just to maintain the operation and comply with provincial standards relating to a tailings dam set up to contain liquid effluent and other hazardous waste material from the Kemess mine.
That includes about $1-million for modifications to the processing mill and to buy spare parts for heavy equipment.
Meanwhile, provincial mines inspectors are keeping the company on a short leash after being warned by the Federal Department of Fisheries and Oceans that the province could be held liable for any environmental damage caused by breaches in the Kemess tailings pond.
Royal Oak faced near disaster earlier this month when the B.C. government came within a hair of closing Kemess because the company failed to keep the tailings dam up to provincial standards.
"We understand that the construction of the tailings dam has not kept pace with the input of tailings and expected spring runoff flow, and there is insufficient freeboard to contain these flows this spring," Ted Perry, director at the DFO's Habitat and Enhancement Branch, said in a letter to B.C. mines inspector Fred Hermann. "We believe that a discharge from the tailings impoundment could have significant impacts on the environment, and be a serious violation to the Federal Fisheries Act."
A spokesman for the B.C. government has said Royal Oak's ability to retain an operating permit for Kemess is dependent on daily inspections of the tailings pond. Provincial officials appear anxious to avoid another confrontation with the nearby Tsay Keh Dene First Nation, which last year set up blockades near the site to protest the construction of hydro lines across the band's territory.
"One of the band's biggest concerns is contamination of the water supply," said Stephen Johnson, a consultant with Victoria-based environment group LGL Ltd. "We are also afraid that Royal Oak is in such serious financial shape that it may be forced to cut corners," he said.
Royal Oak has disclosed that it is seeking financial assistance and other concessions under the province's Job Protection Program. But industry officials doubt the company will get it. They say the provincial mining officials are in no mood to assist Ms. Witte after she thumbed her nose at them three years ago by moving the company's head office across the border from Vancouver to Kirkland, a suburb of Seattle.
However, in her letter to employees, Ms. Witte didn't seem too concerned about what may prove to be insurmountable problems. "I am confident that our asset base and committed employees will allow us to emerge from this process a stronger company," Ms. Witte said. "However, we continue to require the best efforts from all employees across the organization at this challenging time."
|
