Echo Bay poised for turnaround

Misinterpretation of reserves at the McCoy/ Cove mine and again at the Magino and Magnacon mines has cost Echo Bay Mines (TSE) millions of dollars. In 1989, Echo Bay’s per-share earnings dropped to 16 cents from 56 cents a year earlier. By the first quarter of 1990, largely as a result of a $42-million writeoff on its Muscocho investment, the gains had turned into losses — 38 cents forfeit on every share. But the mood was optimistic at Echo Bay’s annual meeting. With the costs associated with production startup at Kettle River in Washington and expansion at the Nevada operations behind them, management can now concentrate on improving efficiency at all five of its major gold projects.

“We are going to be as pure as can be and as cheap as can be,” Chairman Robert Calman told shareholders. The company’s first task, he said, will be to resolve the remaining water and ground condition problems at McCoy/Cove. “We still have work to do to get McCoy/Cove working like a Swiss watch.”

Management’s previous errors with respect to Muscocho and McCoy/Cove have influenced investor confidence. Echo Bay is trading around the $15 level these days, down from a 12-month high of $21.25. Still, the May 24 issue of Barclays de Zoete Wedd’s mining report recommends Echo Bay as a buy.

“We do expect confidence to recover,” the report says. It stresses that Echo Bay has an “extremely high” cash flow (some where in the order of $1 per share in 1989), and a low-cost debt. And, according to Echo Bay’s annual report, gold and silver production will increase by 23% this year, while expenditures will be cut by about 65%.

Further in its favor, Echo Bay is scheduled to bring two gold mines into production over the next few years — Kensington and Alaska- Juneau, both in Alaska. The company is currently expanding reserves at 85% owned A-J, hoping to develop more than three million ounces at an average grade of 0.05 oz. per ton. To add to the expansion, Echo Bay will be drilling below the old Treadwell mine, which was flooded in 1917 when too many pillars were extracted from the mine’s upper levels. The ore grade at Treadwell, at 0.13 oz. per ton, is 2.5 times the grade at A-J. Echo Bay has an 85% interest in both deposits.

Just 45 miles north of A-J, Echo Bay is currently studying the feasibility of production at the Kensington deposit. “We are fast approaching the threshold to put in a 4,000- ton-per-day” operation, said President John Zigarlick. The proposed mill would support annual production of 200,000 oz. at a projected production cost of $200 per oz. Echo Bay has a 50% interest in Kensington, while Coeur d’Alene Mines (AMEX) holds the remaining 50%.