Eskay Creek spins out cash for Prime

Record production and lower cash costs at the Eskay Creek gold-silver mine in northwestern British Columbia are strengthening the bottom line of cash-rich Prime Resources Group (PRU-T).

Besides Eskay Creek, Prime owns the nearby underground Snip gold mine.

Gold production from both increased by 19% over last year’s quarter, rising to 156,760 oz. gold-equivalent from 132,212 oz. Total cash costs fell by 15%, to US$145 per oz. gold-equivalent, compared with US$171 per oz. in the second quarter of 1997.

For the first half of 1998, Prime produced 321,620 oz. gold-equivalent at a total cash cost of US$141 per oz., versus 255,039 oz. at US$173 per oz. in the first six months of last year.

Prime earned $8.5 million (11 cents per share) on revenue of $53.8 million for the three months ended June 30, 1998, compared with $7.6 million (10 cents per share) on $52.7 million a year ago.

For the first half of 1998, earnings totalled $19.8 million (26 cents per share) on revenue of $110.5 million, compared with $16.6 million (22 cents per share) on $100 million in the first half of last year.

This year’s gains are, in large part, being attributed to the new 165-ton-per-day gravity-flotation mill that started operating at Eskay Creek in January. Contributing to earnings were a lower silver-to-gold equivalency ratio and a decline in the Canada/U.S. dollar exchange rate.

About 38% of sales revenue during the second quarter is being attributed to silver production from Eskay Creek, which produced 69,978 payable ounces of gold and 3.1 million payable ounces of silver, or 129,916 oz.

gold-equivalent, at a cash cost of US$134 per oz. The comparable, year-ago figure was 100,937 oz. gold-equivalent at US$157 per oz.

Production from Snip was down 14% at 26,844 oz., owing to lower ore grades, while cash costs were 6% lower at US$203 per oz. With proven and probable reserves of 232,000 tons grading 0.68 oz. gold (as of Jan. 1), Snip is scheduled to shut down in the second quarter of 1999.

The company realized a gold price of US$297 per oz. in the recent 3-month period, down US$46 from the second quarter of 1997, whereas the realized silver price rose US68 cents, to US$5.48 per oz.

Proven and probable reserves at Eskay Creek stand at 1.5 million tonnes grading 1.69 oz. gold and 78.3 oz. silver per ton, equivalent to 2.5 million contained ounces gold and 117 million contained ounces silver. An additional 371,000 tons of mineralized material, described as potentially economic, averages 0.59 oz. gold and 12 oz. silver.

As part of a budgeted $6.9-million program, exploration drilling below the No. 4 stope of the 21B zone at Eskay Creek uncovered mineralized material that is expected to add more than 100,000 oz. gold and 4 million oz. silver to existing reserves. Further delineation drilling is under way.

Meanwhile, drilling is evaluating lower-grade mineralization that underlies the existing orebody. Studies will determine the potential for mining this material utilizing a bulk method.

Prime spent $1.6 million on exploration during the quarter.

Better-than-expected operating results for the first half of the year induced Prime to increase its 1998 production target to 360,000 oz. gold and 11.5 million oz. silver at a total cash cost of US$150 per oz.

gold-equivalent. The company had previously forecast 345,000 oz. gold and 11.5 million oz. silver at US$174 per oz. gold-equivalent

In May, Homestake Mining (HM-N) made a bid to acquire the minority 49.4% interest of Prime that it does not already own. Under the terms of the offer, Prime shareholders would exchange each of their shares for 0.675 of a Homestake share, or 0.675 of an exchangeable share of Homestake Canada, a wholly owned subsidiary.

To consider the offer, Prime established a special committee of independent directors. The committee has retained RBC Dominion Securities as its financial advisor and McCarthy Tetrault as legal counsel, while hiring Roscoe Postle Associates to review Eskay Creek’s reserves.

The company is expected to make a recommendation sometime in August.

Prime has $200.1 million in working capital, including cash and short-term investments of $185.8 million, and no debt.