EDITORIAL PAGE — Taking risks

Inco Ltd. has made a lot of right moves over the years but, as has any company that plays such a dominant role within its industry, it has made a few boners, too.

Each story, told and re-told, has come to demonstrate some fundamental truth about the business, something from which others may gain instruction.

The tale of the Lupin gold mine in the Northwest Territories is a case in point. Inco discovered Lupin in 1960 and, after completing 39,000 ft. of diamond drilling, outlined 1.3 million tons grading 0.50 oz. gold per ton. But Inco, the 95% owner, and 5% partner Dome Mines chose to sell in 1980 for $4.8 million and a small royalty. The buyer was U.S. conglomerate IU International, through its subsidiary, Echo Bay Mines.

Echo Bay had been a successful silver producer at Port Radium, 26 miles south of the Arctic Circle, but it was Lupin that thrust the company into the forefront of Canadian gold mining companies and made it one of the world’s major gold producers.

Until 1980, Echo Bay was not publicly traded. In the early 1960s, mining engineer Norman Edgar found evidence of silver near the former Eldorado uranium mine. He created Echo Bay Mines and, with the early backing of IU International, began mining silver in 1964.

But the silver ore was depleted in the mid-1970s, and Echo Bay needed another source of income. The Lupin deposit, 190 miles east of Port Radium, looked promising. With experience running operations in the far north, Echo Bay saw opportunity where others saw risk.

A public issue of Echo Bay shares was needed to fund mine construction — $108 million, with all materials flown in. Even today, access to the site can be gained by air or by an ice road that is passable in the frozen barren lands for only three months in the dead of winter.

But in the 10 years the mine has been operating, it has yielded about $1 billion of gold and has about the same reserves it started out with in 1982. The company has since invested in three other major gold mines and, in 1991, it produced 734,000 oz. gold.

Lupin, however, is still the company’s foundation. Production there is being increased and this year it plans to turn out 200,000 oz. gold — twice as much as it did in its early days.

In 1980, Echo Bay and its American backers were willing to take a chance where two of Canada’s most storied mining companies were reluctant to do so. Inco, one can argue, was in a survival mode at the time losing $1 million a day. It had to concentrate on its core business — nickel — and simply did not have the capital to invest in a gold mine in Canada’s far north. Perhaps Dome should have seen the potential for Lupin, but its 5% was hardly pivotal. There are excuses, but the truth is that for all their vaunted willingness to take on risk, large mining companies are conservative, risk-averse organizations.

They have to protect their shareholders’ interests. But that same conservative attitude is what provides smaller, more flexible companies with opportunities.

The lesson from this parable? There are probably several, but at a time when exploration seems to be fleeing the country, when the climate for investment seems at a low ebb, when the mining industry seems bleak in Canada — that is when there are opportunities to be found.

There will be other stories similar to that of the Lupin mine. The only question is, who will take the risk to bring the next one into production?