McKee takes on some risk of cost overruns at Refugio

Vancouver-based junior Bema Gold (TSE) has taken advantage of the competition between engineering firms to narrow the risk of building its 50% owned Refugio gold project in Chile, says Chairman Clive Johnson.

Due to the lack of new mining projects and the large number of bidders involved, Bema has persuaded contractor Davy McKee to absorb a portion of any cost overruns that occur when the $130-million heap leach mine is being built, Johnson told analysts during a recent visit to Toronto. Johnson said he had flown to Toronto to talk to the finance departments of local brokerage houses about a recently announced US$75-million syndicated bank loan and to win support from the investment community.

Sharps Pixley, the bullion trading and mine finance arm of the London-based merchant bank Kleinwort Benson, has committed to fund 20% of the syndicated gold loan designed to finance Bema’s share of mine construction costs. With minable reserves of 112 million tons grading 0.030 oz. gold per ton and a 1-to-1 strip ratio, Bema is planning to start construction of a 33,000-ton-per-day operation if financing is in place next March. But due to the inhospitable market climate, Bema has made a big effort to limit the risk involved in such an ambitious venture.

To win the contract, Davy McKee had to agree to guarantee up to US$10 million to cover any cost overruns above an as-yet-to-be-determined target figure for construction, while Bema guarantees up to US$5 million.

Full political risk insurance and a nifty hedging method that involves buying 24-month puts on gold at US$375 per oz. and selling them if the gold price drops are additional precautionary measures.

Johnson said such steps are necessary because with production of 27,000 oz. last year, market capitalization of US$55 million and shares trading at $1.65 (in a range of $4 and $1.70), Bema doesn’t have very deep pockets. Ironically, Bema shares hit a 52-week low, the day before Johnson was scheduled to fly to Toronto.

While Refugio is scheduled to produce over 220,000 oz. by 1994, the asset is not being reflected in any shape or form in the market, said Johnson, who attempted to allay any doubts that analysts may be harboring about Refugio’s location in the Chilean Andes, 14,000 ft. above sea level. “It’s a perfect area for mining,” he said.

In the hospitality suite after his speech, Johnson said he expected the recent firming in the price of gold to push his company’s shares to a level where he could contemplate an equity financing. “We expect a window of opportunity to open up within the next 12 months,” he said.