Startup required partners for Muscocho

The long startup periods required to bring the Magino and Magnacon gold mines to the projected levels of operation and the depressed gold price in 1989 resulted in a substantial cash drain on the owners and led to Echo Bay Mines (TSE) becoming a direct participant in both ventures.

This explanation was recently offered to shareholders by J.T. Flanagan, president of Muscocho Explorations (TSE) and McNellen Resources (TSE). News of the agreement became public at the start of the year (T.N.M., Jan. 8/90). Muscocho has a partial ownership in both mines; McNellen is a partner in the Magino project. Both mines are in the Wawa area of northern Ontario.

Regarding the Magino operation, officially brought into production in late 1988 by 50/50 partners Muscocho and McNellen, Flanagan said, in a report to McNellen shareholders, the company, at Sept. 30, had current liabilities of $2.7 million (bank debt and accounts payable) but cash and 09.0accounts receivable of only $835,707.

“With continued improvement in gold output and reductions in costs, it might have been possible to sustain these debts and retire them over time,” he said.

“However, the disappointing results toward the end of 1989 made it apparent action would have to be taken to restore the company’s solvency and make possible the continuance and further development of the Magino mine to its full potential.”

From production startup to the end of 1989, Magino had produced 26,744 oz gold. The average grade milled was 0.17 oz. gold per ton, the mill feed during the first three operating quarters including large quantities of lower-grade material from surface stockpiles.

“Operating costs also showed continuing improvement during the first year of operation, due in part to the adoption of more productive mining methods when it became apparent many of the ore zones were amenable to the long-hole method of mining rather than the more labor-intensive shrinkage stoping originally contemplated,” he said.

Magnacon was officially opened in June, 1989, the project’s development slowed by delays, especially in powerline and mill completion by contractors. After production startup, the mine experienced a series of mechanical problems and equipment breakdowns.

“With improvements in gold output and price in November, it appeared a profitable operation could be achieved in the near future,” Flanagan said in a report to Muscocho shareholders. “However, two major breakdowns in the mill in December resulted in serious production losses, thus further delaying profitability.”

At Sept. 30, Muscocho had bank loans of $3.9 million and accounts payable and accrued liabilities of $7.5 million, Flanagan said. It also had accounts receivable of $2.2 million and bullion settlements of $1.2 million and $6.9 million due from related companies, Flanagan McAdam Resources (TSE) and McNellen.

Muscocho had a 25% interest in Magnacon, Flanagan McAdam a 50% interest, and Windarra Minerals (VSE) the remaining 25% interest. (Windarra is not part of the Muscocho group of companies.)

Under an agreement with Echo Bay, the large North American gold producer wil l exchange its approximate one-third equity interest in each of McNellen, Muscocho and Flanagan McAdam for a 50% interest (25% each from McNellen and Muscocho) in Magino, and a 37.5% interest (half of the combined 75% interest of Muscocho and Flanagan McAdam) in Magnacon.

The deal, which also involves cash payments and loans from Echo Bay, will see Echo Bay become the operator of both mines. In addition, Echo Bay will also gain similar interests in property around both mines owned by the Muscocho- related companies. The deal is subject to regulatory and other approvals.