Canamax loss hinders Amax earnings

Amax Gold (TSE) hasn’t been actively soliciting offers for its 49.7% stake in Vancouver affiliate Canamax Resources (TSE), but Mark Lettes, treasurer of Colorado- based Amax, says if a good offer comes along, his company would prob ably sell its Canamax shares.

The reason is that Amax would prefer not to continue to carry a paper loss that appears on its balance sheet as a result of Amax’s equity interest in Canamax.

Amax currently holds 10.4 million shares of the Vancouver company whose former president, John Hansuld, once predicted that Canamax would have five mines in production by 1992.

Now operating with three small gold mines and an exploration portfolio that has been limited by the sale of two zinc projects, analysts say there isn’t much incentive for Amax Gold to hang on to its stake in Canamax.

During the first nine months of 1989, Amax Gold reported net earnings of $28.1 million or 47 cents per share after producing 222,000 oz. gold at its two Nevada and one New Zealand gold mines.

Those earnings would have been significantly higher but for an equity loss of $2.49 million which Amax is required to show on its balance sheet to reflect its interest in Canamax.

Under U.S. accounting laws, the equity loss was calculated from depreciation charges on proven and probable reserves at Canamax’s gold mines plus the differential on the market value of Canamax shares and the price ($3-12.18) that Amax paid for them.

“In terms of dollars and cents, that doesn’t look like a good thing for Amax Gold,” said Merrill Lynch of Canada Inc. mining analyst Catherine Gignac. She believes that the future of Amax Gold isn’t going to be made or broken on Canamax’s three mines.

Even though Canamax is expected to be in a break even situation after producing 91,000 oz. this year at a cash cost of $390 per oz., analysts predict that a US$125- per-oz. depletion charge on the company’s reserves will add up to an equity loss of US$3 million on Amax Gold’s bottom line.

In 1988, Canamax reported a loss of $12.7 million or 85 cents per share after taking a $10.6 million writedown on the value of its Ketza River gold mine in the Yukon.

Long-term debt has been reduced to around $20 million from $35 million last year via the sale of the company’s interest in the Midway and Mount Hundere zinc projects and the combining of Canamax’s corporate offices with those of Canada Tungsten Mining (TSE). The latter company is a 57% owned subsidiary of Amax (NYSE) which in turn holds 88% of Amax Gold.

Once the Canadian exploration wing of Amax, Canamax is now regarded as something of a turnaround situation after suffering startup problems at the Ketza mine. After resigning from his position last year, Hansuld was succeeded by Canada Tungsten President Wayne Lenton.

“Canamax is not an encumbrance but at the moment the company is in a standstill position and there is no great prospect of greater revenues coming from its producing mines,” said Mitchell Badler, a spokesman for Amax.

“If someone came along and made an interesting offer, we would certainly consider it,” he said.

According to Yorkton Securities of Toronto mining analyst Paul Esquivel, it would make more sense for a Canadian rather than a U.S. company to purchase Amax Gold’s equity stake in Canamax. In contrast to U.S. law, Canadian companies are only required to base their depreciation costs on estimated reserves rather than proven or probable reserves.

Toronto-based gold producer Corona (TSE) has hired former Bunting Warburg Inc. mining analyst Gordon McCreary to head up its mergers and acquisitions department. While McCreary declined to comment on the issue of Canamax, he once described the Vancouver company as “a definite buy.”