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Wednesday March 18, 11:58 am Eastern Time
Moody's cuts Royal Oak Mines notes
(Press release provided by Moody's Investors Service)
NEW YORK, March 18 - Moody's Investors Service downgraded to Caa2 from B3 the debt rating of Royal Oak Mines Inc [AMEX:RYO - news].'s US$175 million of 11% senior subordinated debt, due 2006.
The outlook for the rating is negative.
The rating reflects Royal Oak's deteriorating operating and financial performance from its high cash operating costs and increased expenses relating to mine closures, as well as the write-downs of properties that have become uneconomic to operate in the current low gold price environment.
The rating also considers the increase in debt by approximately US$44 million in senior secured notes, incurred through a private placement in early January 1998 to help fund the final stages of its development of the Kemess Mine and for general corporate purposes; the very recently announced cost overruns of approximately US$30 at the Kemess Mine, due to a number of unforeseen construction-related problems, for which financing has not yet been identified; the lack of financial flexibility, due to the absence of a bank credit facility; the risk that the April 1998 start-up date of production at the Kemess Mine could be delayed through further unforeseen circumstances; and the potential that after production start-up at the Kemess Mine, a continued lower price for copper would reduce copper mining credits and increase the estimated life-of-mine cash operating cost at Kemess Mine above US$128 per ounce for gold, net of copper credits of $0.80 per pound.
The negative outlook reflects the possibility that if the currently low gold and copper prices continue, the benefits anticipated from lower cost production at the Kemess Mine would be less realizable, resulting in Royal Oak's coverages and cash flow remaining negative or thin.
However, the rating also acknowledges the relatively near-term completion and likely start-up of the Kemess Mine; its modern facilities, which promise a relatively improved operating efficiency, including lower cash operating cost than at the company's other mines; and the chances of its operational success, given the significant development experience of management.
During the first nine months ended September 30, 1997, the company's total gold production of 284,430 ounces marginally surpassed the 283,655 ounces of gold production for the same period in 1996.
Additionally, the average spot price for gold for the period was US$339 per ounce, 14% lower than the US$392 per ounce for the same period in 1996, and Royal Oak's realized gold price was US$410 per ounce, 13% lower than the US$472 per ounce in 1996, due to lower hedging gains.
As a result, revenues at the nine months ended September 30, 1997 declined 12% to US$161 million from US$183 million in the same period of 1996.
The combination of high cash costs (US$344 per ounce of gold through the first nine months of 1997, compared with US$337 per ounce in 1996) and other operating expenses, resulted in an operating loss of approximately US$17 million for the nine months ending September 30, 1997, compared with an operating profit of US$17 million over the same period in the prior year.
The high cash cost for the nine months ended September 30, 1997 reflects the continued decline in head grades and mill recovery rates at the company's Hope Brook and Colomac Mines, which were subsequently closed in the third and fourth quarters of 1997, respectively.
The closures resulted in a write-down of US$29 million for the company, thereby increasing Royal Oak's net loss for the first nine months ended September 30, 1997 to US$46 million.
The company's present gold mining operations are restricted to only those areas of its Timmins (Ontario) and Giant (Northwest Territories) mines that the company believes are economical at a gold price below US$300 per ounce. In the fourth quarter of 1997, Royal Oak implemented measures to reduce cash costs at its Timmins and Giant Operations, which included a reduction in manpower and selectively mining areas of higher grade ore where possible.
In the fourth quarter, the average cash cost for these two mines was US$285 per ounce of gold. Cash costs of US$330 per ounce in 1997 were 4% lower than the US$343 per ounce reported in 1996.
The rating also considers the likely near-term start-up of the Kemess Mine, a US$340 million (including the US$30 million cost overrun) gold and copper mine in north-central British Columbia, from where more than 40% of the company's total gold production should occur during its 9 months of operations in 1998. Royal Oak expects that, in 1998, its focus on Kemess will result in total production of approximately 382,000 ounces at a company-wide cash cost of US$202 per ounce, net of copper credits of $0.80 per pound.
Moody's also notes that, with the Kemess project, Royal Oak is moving to operate as a more traditional mining company by developing a large scale property beyond the scope of its existing operations. Royal Oak's senior managers' significant development experience with other major organizations, however, mitigates the risk involved in the management of such a large mining operation.
Royal Oak Mines Inc. is a Canadian gold mining company whose current producing mines are in the Northwest Territories and Ontario.
The company's headquarters are in Kirkland, WA.
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