Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Royal Oak-RYO -- Ignore unavailable to you. Want to Upgrade?

To: Mike G who wrote (1618)	2/16/1999 8:21:00 AM
From: Daniel Chisholm	Read Replies (1) \| Respond to of 1706

Hi Mike G, The real outcome of this could depend on the short term price of Gold. If the POG pops up dramatically then RYO could survive, but if not then it looks grim if you are long. What sort of move do you have in mind when you talk of "If the POG pops up dramatically"? At this point one might argue that Royal Oak common is a low priced "call option" on the price of gold, with a "strike price" far above the current ~$300 POG. However due to their low cost of production and high fixed costs, this might not be the best way to assess the value of the stock (see below). If you wish to speculate on the possibility that the price of gold might experience a very large spike in the next ~six months, is RYO a sound way to place such a bet? I say "in the next ~six month" because if such a spike doesn't happen in that timeframe, then the opportunity for RYO common to participate will have passed. Thomas Talbot, Michael Bidder, Al Cern and myself discussed the current valuation of RYO with POG = $300 and the "what-if" scenarios of rises in the POG around posts 1520-1541. In my post: exchange2000.com I put forward the suggestion that if the POG were to go to $375, then under my most optimistic view (remember, as a short I must take an optimistic view of Royal Oak's business prospects when assessing my downside) they would perhaps be able to just tread water. An interesting thing is that their low cost of production at Kemess means that a spike in the POG won't make as big a difference to them as it would to a high cost mine. I closed that post out by writing (in reference to the value of RYO common) My point was, the value of a mine sold today or in the near future (e.g., under bankruptcy) will be determined by today's market conditions. If a you have $100 million or $500 million that you would like to use to lay a bet on gold rising in price, there are simpler more efficient ways of doing that than buying a low cost gold mine. Although not explicitly written, one of these more efficient ways would be to buy a high cost-of-production gold mine. Royal Oak's chief problem is that it cost too much to develop Kemess, and that under its current financial structure it is unable to pay for the cost of its capital. A rising price of gold will not be their saviour. Simply put, they paid too much for the mine, and at some point this misallocation of capital, this loss, must be recognized and paid for. Everyone with a stake in Royal Oak will probably be hurt, but the pain will not be spread evenly. By law the financial interests of creditors, suppliers, employees and bankruptcy financings come before the interests of the common shareholders. None of us on this discussion group have been able to figure out how the shareholders are going to wind up with anything. If Kemess is a viable low cost producer (I assume that it is), then it will survive and probably prosper even if the price of gold is mired at $275 forever. Royal Oak common stock however will likely be worthless in about a year. - Daniel

To: Mike G who wrote (1618)	2/16/1999 10:55:00 PM
From: roger fontaine	Respond to of 1706

Royal Oak on brink of bankruptcy Court grants troubled gold miner protection from creditors; Trilon's emergency loan will give firm time to try to work out a financial restructuring Tuesday, February 16, 1999 ALLAN ROBINSON Mining Reporter Toronto -- Royal Oak Mines Inc. is teetering on the brink of bankruptcy and yesterday sought protection from creditors in a last ditch effort to avoid collapse. The company won court approval to give it enough money to keep its mines operating for the next few weeks and give it time to work out a financial restructuring package with creditors owed $515-million. Pummelled by historically low gold and copper prices, Royal Oak has been in restructuring talks with its creditors since late last year. It had hoped to complete refinancing by yesterday -- a self-imposed deadline -- but failed to reach a deal with its senior creditors. Instead, it appeared before Mr. Justice Robert Blair of the Ontario Court's General Division who granted Royal Oak bankruptcy protection under the Companies' Creditors Arrangement Act. And shortly afterward, Royal Oak's principal secured creditor Trilon Financial Corp. agreed to go ahead with an emergency loan package of $34.7-million. The potential stumbling block in the deal, which raised the objections of several creditors, is that $18.5-million of that emergency loan is slated to be repaid to Trilon, its partner, and other associates to meet interest and royalty arrears along with certain fees. "This company, to put it in the vernacular, is broke," said Peter Griffin, Trilon's lawyer, referring to Royal Oak. Judge Blair also gave the directors of Royal Oak some protection if they decide to stay on the job. Royal Oak's directors sought and won protection covering them on $17-million in potential environmental liabilities they face on its mines and properties. The largest potential liability, $12.5-million, is the estimated cost to clean up both the arsenic underground and the surface reclamation at the Giant mine in the Northwest Territories. Margaret Witte, Royal Oak's president and chief executive officer, said in an affidavit filed with the court that it lacks working capital and has insufficient equipment to raise the mine tailings dam at the Kemess mine in British Columbia, as ordered by the province. The Kemess mine, which produces 330,000 ounces of gold a year, can only continue to operate if the tailings dam can be heightened in order to safely handle the runoff from the snow melting in the spring. The British Columbia government has threatened to close the mine if it can not be operated in an environmentally safe manner. Meanwhile, Royal Oak's creditors are moving in on the company. The court was told the major secured lenders including Trilon and its partners, which are owed $120-million (U.S.), and three banks, owed $33.3-million, appear likely to be repaid as do holders of construction liens totalling $18-million (Canadian). The unsecured creditors, which include noteholders, are owed $175-million. "You can see who is in the most interesting position," said Ronald Robertson, a lawyer for the noteholders. Under any financial restructuring, the noteholders are expected to end up with a major equity position in Royal Oak. "The shareholders' interest in this company have effectively disappeared," Mr. Robertson said. Other creditors include construction liens of $18-million (Canadian) and the Export Development Corp. of Ottawa, owed $19.5-million. "What is clear is that the restructuring will be complex, lengthy and very expensive," said Hilary Clark, a lawyer representing Bank of Nova Scotia. The immediate impact of the emergency loan deal is a cash injection of $8.4-million to Royal Oak. Royal Oak said $11-million will be used to supplement working capital to sustain the company's mining operations, $1-million will be used for administrative and other related expenses, and $18.5-million will be used to pay interest arrears, future interest and royalties to Trilon. The court order stays all legal proceedings against Royal Oak until March 18 and authorizes the company to prepare a plan of compromise or arrangement for its outstanding liabilities. Royal Oak said it plans to prepare a restructuring plan for submission to the court within three months, with court-sanctioned votes to follow.