Editorial Shaking investors’ confidence

Mineral exploration across Canada is suffering through a gloomy time, but in Ontario explorationists could find it even more difficult to continue their efforts as a result of the recent debacle at the Magnacon and Magino gold mines. The two mines in northern Ontario have been in trouble almost from the moment they graduated from exploration plays to development projects. Now Echo Bay Mines, which had been seen as a savior of sorts when it became involved in the projects, has backed out of a deal that would entrench its ownership of the mines. What’s more, Echo Bay has written off its $42-million investment in the two operations.

The Muscocho group of companies, with an admirable track record in exploration, found it difficult to make the transition from explorer to producer in this instance. Echo Bay, too, couldn’t solve the problems of lower grades and higher costs than had been anticipated.

Those problems have become all too familiar in the past few years as several new mines had to shut down shortly after startup for failing to meet production targets. The partners at Magnacon and Magino are not the first to have suffered such a fate, and they are not likely to be the last.

What’s different here, however, is the high profile of the projects, the high level of credibility the players enjoyed and the amount of money that has been invested. How the partners handled the projects is a question that will be discussed for some time to come. Regardless of opinions on that question, the fact that these companies put so much money into the two projects before acknowledging that their investment would not be recovered cannot add to investors’ confidence.

After all, the partners in these projects were not fly-by-night outfits. Echo Bay is the country’s second largest gold producer, a seasoned operator with experience in harsh environments. The Muscocho companies could boast decades of successful exploration experience and development of a small but profitable gold mine in Quebec. They were working in some prime Ontario geology under the scrutiny of knowledgeable investors and the Ontario Securities Commission (all the companies are listed on The Toronto Stock Exchange).

When things can go this wrong despite such favorable factors, it makes one pause.

In some aspects, this situation is reminiscent of Nova Scotia in late 1987. That’s when Australian mining giant, Western Mining, swooped down on Seabright Resources to get hold of its exploration plays in the Atlantic province. That seemed to add instant credibility to the fledgling exploration plays going on in Nova Scotia at the time. However, when the projects fell far short of expectations, the province’s entire exploration activity suffered as a result.

To a lesser extent, Manitoba has suffered the same fate as a result of failings at the Tartan Lake and MacLellan mines.

Ontario’s exploration industry enjoys a broader base than Nova Scotia or Manitoba and is unlikely to suffer to the same degree. Nevertheless, junior exploration companies trying to adapt to a weak gold price and the recent withdrawal of tax incentives for exploration will all feel the effects of the Magnacon-Magino episode.

How will investors now look on projects in other prospective areas like Mishibishu Lake and the Harker-Holloway region? It’s tough enough trying to raise money for mineral exploration. When individual investors can get government Treasury Bills offering 10-11% interest rates, it’s hard to convince them to seek the potential capital gain mining stocks offer, especially when 50% of that capital gain is going to be taxed back. The failure of the Magnacon and Magino mines makes it even harder to convince investors to put their money in Ontario’s junior mining companies.

If the provincial government really wants to support the industry, it would do well to get behind efforts to convince the federal finance minister that mining needs a capital gains incentive. Ontario should support the appeal for an adjusted cost base for flow- through mining shares, not as a government handout but merely to put junior mining stocks on an equal footing as other investments.