Royal Oak finds savior

Royal Oak Mines (RYO-T) has obtained US$120 million to help finance the completion of the Kemess gold-copper mine in north-central British Columbia.

Toronto-based Trilon Financial came to the rescue, arranging a US$120-million debt issue in the form of senior secured notes. According to the agreement, the notes cover a 2-year term and carry Libor (the London interbank offered rate) plus 6%. Right now Libor is approximately 11 to 12%.

Financing remains subject to approval by the subordinated bond holders.

The deal is expected to close by mid-April.

“We welcome Trilon’s financial assistance, which will enable us to complete the development of the Kemess mine,” said Royal Oak President Margaret Witte. “We are pleased to be working with a financial group with substantial experience in the Canadian mining industry.”

Northgate Exploration (ngx-t) purchased a US$35 million junior tranche of the secured notes. The company intends to finance the investment from its current cash resources, as well as through a term financing arrangement worth US$30 million. Northgate’s stated goal is to increase its investments in the mining industry, specifically in the gold sector.

Royal Oak’s financial woes began when it announced that the Kemess project was $40 million over budget. The cost overrun was attributed to additional expenses related to the construction of the tailings dam and pipeline system.

Finding itself short of cash and in technical default with respect to senior secured debentures to the tune of $27 to $29 million, Royal Oak was forced to scramble to raise sufficient funds to ease its “short-term liquidity problems.”

The company will use the net proceeds of the financing to complete development at Kemess and repay the company’s existing US$44 million senior secured notes. The remaining money will be used to supply sufficient working capital through project start-up.

Construction at Kemess is said to be 92% complete. The mine hosts a minable resource of approximately 204 million tonnes grading 0.22% copper and 0.62 gram gold per tonne, equivalent to 4.06 million contained ounces of gold and 990 million lbs. of copper. The mine’s estimated average cash cost is pegged at US$128 per oz. (net of copper credits valued at 80cents per lb.). Kemess is expected to operate for 16 years with an average life-of-mine production rate of 250,000 oz. gold per year.

The mine is slated for full start-up in May, and is expected to produce 363,000 oz. gold this calendar year at an estimated cash cost of US$208 gold per oz., net of copper credits. A value of US$300 per oz. gold was used in the calculation.

In related news, the Tsay Keh Dene band stated in a recent press release that it wasn’t adequately consulted about the impact of the mining project on its traditional territory. The band also states that a “secret back-room deal” between the province and Royal Oak for the development of Kemess placed government officials in a conflict of interest. The band’s lawyers argue that this alleged conflict of interest biased the issuance of the Project Approval Certificate for Kemess.

Royal Oak countered by stating that the band’s claims were without merit and were a frivolous attempt to interfere with the company’s financing plans.

Royal Oak believes that the Tsay Keh Dene band is reacting to an earlier decision handed down by the Supreme Court of British Columbia that held up an injunction obtained by the company last summer. That injunction prevented the band from blockading access to the Kemess site. The band tried to overturn the injunction on the basis that there had not been full disclosure to the court and that the province did not have authority over the access road since it was built in a different area than had been originally planed.

In other news, Royal Oak released its fourth quarter and year-end operating results. The company recorded a net loss of $72.6 million, (or 52cents per share), for the three months ended Dec. 31, 1997, compared with a loss of $21.3 million (15cents per share) over the corresponding period in 1996.

The company posted a net loss of $135.2 million (97cents per share) for the fiscal year, compared with $6 million, (4cents per share) in 1996.

The loss is attributed to a reduction of currency and commodity contracts totalling $46.3 million. An additional $34.1 million was lost on investments in gold mining companies and the company reported a $39.7-million writedown on its Colomac mine assets.

In fourth quarter of 1997, revenue was pegged at $30.4 million, compared with $72 million during the fourth quarter of 1996. The losses are attributed to the combined impacts of lower production and lower average realized gold prices.

For the year, Royal Oak’s revenue totalled $191.2 million, including hedging gains of $33.7 million, compared with revenue of $255.2 million in 1996, when hedging gains totalled $51.3 million.

Royal Oak produced 66,919 oz. gold in the fourth quarter at an average cash cost of US$274 per oz. This is compared with 105,548 oz. gold at US$357 per oz. during the corresponding period of the previous year. The average realized gold price in the fourth quarter dropped to US$327 per oz., from US$505 per oz. in the fourth quarter of 1996.

For the year, the company produced 351,349 oz. gold at an average cash cost of US$330 per oz, compared with 389,203 oz. at US$343 per oz. the year before. Royal Oak’s average realized gold price for 1997 was US$393 per oz.

compared with last year’s value of US$481 per oz.

The company blamed lower gold production on its recent mine shutdowns. It cited economic reasons as well as dwindling ore reserves for the closures of the Hope Brook mine in Newfoundland and the Colomac mine in the Northwest Territories, both of which have been put on care and maintenance.

As of December 1997, minable ore reserves were estimated at 7 million oz.

gold, down from the previous year’s estimate of 9.9 million oz. as a result of a reduction, to US$350 per oz. from US$390, in the assumed gold price.