Western Areas secures recovery fund (July 05, 2006)

Western Areas (WARSF-O) says full-scale production at the South Deep gold, 45 km southwest of Johannesburg, should resume earlier than expected after the South African-based gold miner lined up short-term credit facilities totalling 450 million rand.

In early May, a loaded skip broke free of its winder drum during regular maintenance, and plunged some 1.6 km down one of the mine’s twin shafts. The skip was followed by 6.7 km worth of cable that detached from 8 clamping devices on the winder drum while the skip was around mid-shaft. There were no injuries and all workers were safely removed to the surface.

The company initially estimated that the Main shaft, which suffered serious damage at several points, would be out of commission for 9-12 months, halving production during that time. It now expects to recommission the shaft early next year following an estimated 80 million rand worth of repairs.

Investigations into the cause of the accident continue, as does work towards settlement of a potential insurance claim. The mine’s equipment and production have insurance coverage of US$65 million though the company must cough up the first US$10 million.

Western Areas will split the repairs costs with the mine’s other half-owner Barrick Gold (ABX-T, ABX-N), which inherited its stake via its takeover of former 50%-owner and operator Placer Dome.

Western Areas says the bank facilities will also allow it to continue to fund its share of mine development costs, and cover gold hedging commitments. The company had previously said it would sell shares equivalent to 10% of its current issued share capital to raise cash to keep it afloat.

At the end of March, the hedging commitments amounted to a derivative liability of 3.6 billion rand (US$566 million), when marked to market. That hedge book saw Western Areas realize an average of US$403 for each of the 55,460 oz. of gold sold during the first three months of 2006, compared with an average spot price of US$561 per oz.

In 2005, South Deep produced a total of 461,119 oz. gold at a cash cost of US$387 per oz., up from the 428,585 oz. poured at US$383 apiece a year earlier.

At last count, South Deep was home to proven and probable reserves of 147 million tonnes running 6.2 grams gold per tonne, for 29.3 million contained ounces. Measured and indicated resource amount to 109.9 million tonnes averaging 7.3 grams gold per tonne, for 25.9 million contained ounces. The estimates are based on a gold price of US$400 per oz.

Soon after the skip fall, Gold Fields (GFI-N, GOF-L) picked up some 18.27 million Western Areas shares on the relative cheap to boost its stake to 15.47%. In March, archrival Harmony Gold Mining (HMY-N) picked up a 29.2% stake in Western Areas, and Harmony CEO Bernard Swanepoel took a non-executive seat on the company’s board.