Echo Bay earnings hurt by Muscocho write-down

Reduced annual earnings were reported recently by Echo Bay Mines (TSE) reflecting the impact of lower gold prices and a US$20- million writedown on the company’s investment in Muscocho Explorations (TSE), Flanagan McAdam Resources (TSE) and McNellen Resources (TSE). Echo Bay had net earnings for 1989 of US$16 million, or 16cents per share, down sharply from US$54.4 million, or 56cents per share, in 1988. Revenues rose to US$297 million, up from US$267.7 million a year ago.

Although the company’s gold production rose by 23% to 717,000 oz. from 585,000 oz. in 1988, the increase was offset by lower gold prices — US$400 per oz. last year compared with US$440 in 1988. The price decline reduced net earnings by US$21.4 million or 22cents per share.

Consolidated cash production costs also rose by 3.8% to US$220 per equivalent oz., compared with US$212 per oz. in 1988.

The Muscocho writedown caused a fourth-quarter net loss of US$11.2 million, compared with net earnings of US$17.7 million in the fourth quarter of 1988.

Quarterly revenues rose to US$88.3 million from US$80.1 million, despite a drop in the average realized gold price to US$407 per oz. in 1989, from US$429 in 1988. Quarterly production rose by 22% to 218,600 gold-equivalent oz., compared with 178,500 in 1988.

In December, Echo Bay agreed to exchange its one-third ownership of common shares in the three Muscocho companies along with $15 million in cash and loans, for a direct 37.5% ownership of the Magnacon gold mine and 50% ownership of the group’s Magino gold mine.

Both Magnacon and Magino have taken much longer than planned to achieve production. The two properties had originally been expected to produce 75,000 oz. of gold last year, but Magino actually yielded about one-third that amount, while Magnacon is not yet in commercial production.

At one of Echo Bay’s largest properties — the McCoy/Cove mine in Nevada — proven and probable reserves were decreased by 11%, or 603,000 gold-equivalent oz. during the year. In the category of “other mineralization,” an overall decline of 58% was reported, reflecting a decrease of 3.5 million oz. in the “other mineralization” category at McCoy/Cove.

At year-end, Echo Bay said it reduced the proven and probable reserves and “other mineralization” at McCoy/Cove because of unreliable assay data from reverse- circulation drilling below the water table. The company said it had difficulty correlating reverse-circulation drill data with diamond-core holes in the lower zone beneath the Cove pit.

A large drill program was undertaken at Cove in 1989. Results from that work indicated the mineralization in the soft fault zones was being washed out and contaminating the lower portions of some reverse- circulation holes. This gave gold and silver values over a greater length then confirmed by core samples.

Based on its 1989 core-drill program, the company elected to eliminate portions of the previous 137 reverse-circulation drill holes from its calculations. It believed those portions may be contaminated, and therefore unreliable.

Production at McCoy/Cove more than doubled in 1989 to 214,566 oz. of gold and 2.3 million oz. of silver. Production costs rose by 4.5% to US$211 per gold-equivalent oz., from US$202 per oz. in 1988.

At the Lupin mine in the Northwest Territories, production totalled 195,555 oz., while costs increased by 13% to US$231 per oz., up from US$204 per oz. in 1988. The increase was attributed to higher- cost ore being mined in the narrower West zone of the underground orebody, the company said. The mine shaft at Lupin is being deepened to about 4,000 ft. to reach extensions to the Centre and West ore zones. Echo Bay Mines (TSE)* Year ended Dec. 31 1989 1988 Revenue (000s) $297,000 $267,700 Net earnings (000s) $16,000 $54,400 Net earnings

(per share)0.160.56 *US dollars