Zinc miner Curragh near bankruptcy

A steady decline in zinc prices combined with repercussions from the Westray mine disaster have taken Curragh (TSE) to the brink of bankruptcy.

Shortly after suspending production at its Faro lead-zinc mine in the Yukon on April 3, the debt-ridden miner filed for court protection from its creditors.

“I am disappointed we must take this action, but it was forced on us by our lack of liquidity,” Chairman Clifford Frame, who did not return phone calls, said in a press release. The company has until May 3 to file a financial plan with the court under the Companies’ Creditors Arrangement Act. Curragh says it will use the breathing room to “explore alternative arrangements for additional capital.” To help tide the

company over, the Yukon government has pledged a $5-million term loan. But the few analysts who agreed to be interviewed were skeptical about the zinc miner’s survival.

“Curragh needs more than money from the Yukon or federal government, it needs equity capital,” said Terry Bell of Sprott Securities.

Concerned investors chopped 20 cents off Curragh’s share price in the days after the announcement. At presstime, the stock, which was initially offered at $10 in 1990, was trading at 40 cents in a 52-week range of 36 cents-$4.65. Zinc prices have tumbled from an average of 56 cents per lb. in 1992 to the 45 cents level. Curragh, which owes about $221 million, needs 55 cents zinc just to cover costs and service its debt. Last year, the company lost $54.3 million.

Adding to Curragh’s woes is the fallout from the Westray mine explosion of May, 1992. The coal mine’s untimely closure dashed Curragh’s hopes for diversification against soft metal prices, and repayments on the Westray loan drained $15.6 million from the corporate treasury.

Less tangible, but just as damning, was the effect the fatal explosion had on potential lenders. At the time of the disaster, the federal government was preparing to provide Curragh with a $40 million loan guarantee for development of new ore at Faro.

Now the company appears caught in a vicious cycle whereby lenders are demanding it improve its cash position before they open their own wallets. Yukon government leader John Ostashek, for instance, has said Whitehorse will insist that, among other things, Curragh raise further equity before it provides a $34 million loan guarantee for the development of Faro’s Grum deposit.

Curragh directly and indirectly provides jobs for about 25% of Yukon workers when its Sa Dena Hes and Faro lead-zinc mines are at capacity. A second alternative on Curragh’s wish list is the sale of a half-interest in the Stronsay lead-zinc deposit in British Columbia for US$75 million. But analysts suggest that the key to the comapny’s survival is a proposed $50-million private placement of preferred shares.

Announced in February, the placement was arranged with broker Koloshuk Farrugia on a best-efforts basis. Offered at $1.20 each, the shares would be convertible into subordinate voting shares of the company on a one-for-one basis.

In Whitehorse, negotiations continue over the eight conditions attached to the Yukon government’s offer of a loan guarantee. Marvin Pelley, former president of corporate development and projects, has been appointed to Whitehorse as president of the Yukon division. Colin Benner, former president of operations, will replace Pelley in Toronto and assume direct responsibility of Westray Coal.

Meanwhile, Hillsborough Resources (TSE), Curragh’s partner at Sa Dena Hes, has written off its remaining investment in the mine after losing $7.3 million on the venture in 1992. Curragh holds an 89% interest in Sa Dena Hes, which will remain closed for the next three months in response to high metal inventories and low metal prices.