Cassiar purchase of Similkameen increases sales and profitability

Depending on whom you talk to, it was either the deal of the year or the steal of the year, although the facts would seem to support the latter. In any event, the purchase by Cassiar Mining Corp. (TSE) of Newmont Mining’s Similkameen copper operation near here has more than doubled Cassiar’s annual sales and provided a much needed diversification out of asbestos.

“We are doubling our sales and we are more than doubling our profits,” Jim O’Rourke, president, told The Northern Miner during a recent visit to the Similkameen mine. (A number of analysts are predicting that Cassiar’s net profit for 1988 could reach $20 million or more, about 60% of it from the Princeton operation). The Vancouver-based mining firm’s open- pit asbestos mining operation at Cassiar, B.C., is profitable and demand often exceeds production capacity. But the acquisition of Similkameen will boost profits to pre-recession highs and create an even stronger base for new acquisitio ns in the future.

It’s also a coup for O’Rourke, who is no stranger to the copper industry; he learned the business from the ground up at the Gibraltar mine near Williams Lake, B.C., (where he was manager) and at Marcopper in the Philippines, both of which are operated by Placer Dome (TSE).

How good a deal was Similkameen? Well, it was so good that even O’Rourke admitted his board could hardly believe what they were hearing when he brought the acquisition proposal to them. Indeed, just a few weeks ago, two highly placed executives at Highland Valley Copper lamented the fact they had missed it.

A number of major investment houses have taken notice of Cassiar since the acquisition. Oliver Lennox-King, an analyst at Walwyn Stodgell in Toronto, describes Cassiar as one of the best junior, base-metal companies in Canada today. He says it’s “the most highly- leveraged play on copper in Canada,” with 2.3 times more leverage than Gibraltar Mines, the company’s closest rival.

Lennox-King and several other analysts were impressed with the purchase. The $10-million price for the mine, which was set Jan 1, was contingent upon Cassiar securing concessions from unionized workers, B.C. Hydro, and the provincial government, all of which it eventually did. Cassiar actually entered into negotiations with Newmont’s union and, after settling a number of other outstanding matters, closed the purchase May 31.

However, during that interim period (Jan 1-May 31) mine income totalling $5 million was deducted from the purchase price, leaving Cassiar to pay the balance out of 50% of income. On our visit, O’Rourke estimated the balance would be paid off sometime in October.

Cassiar also borrowed $4 million in concentrates from Newmont (interest free) which is repayable in June, 1990; and it managed to free up capital for the acquisition by deferring until 1989 a $5.4-million loan made to Newmont by B.C. Hydro under the provincial government’s Critical Industries Program.

As an added twist, Similco Mines (previously a Newmont subsidiary now owned by Cassiar) had an $80- million tax loss that Cassiar can utilize. So the mine will not pay any tax until it has earned that amount.

Similkameen was brought into production by Newmont in 1972 at a cost of $75 million. A similar project today would probably involve an expenditure of about $200 million. So why did Newmont sell at such a bargain basement price? Actually, there were several reasons.

For one thing, Newmont was exceedingly bearish on copper, having lived with depression-era prices for several years. In the 1970s, the company had a difficult experience at its money-losing Granduc mine near Stewart, B.C., where losses continued even after it was sold to Esso Minerals.

Equally as important, Newmont made a strategic blunder by selling all its production forward to February, 1988 at 70 , missing the recovery in copper prices. (That sale price was below its cost of production so it wasn’t making a dime).

Fending off a takeover attempt by T Boone Pickens’ Mesa Limited Partnership added an extra $2.2 billion(US) to Newmont’s debt load, so the company had to sell off assets. This year, Newmont has sold what it describes as non-core assets in Canada, the United States and South Africa, whittling down that debt by about $1.2 billion.

Newmont had planned to close Similkameen in two years which understandably caused serious morale problems at the operation. But Cassiar came in with a 7-year mine plan and a no-closure clause which swayed mine workers in their favor. (During our recent visit, The Northern Miner was told they are also look ing at a 15-year mine plan). Proven reserves (56 million tons grading 0.44% copper) are sufficient for seven years of operation and possible reserves (106 million tons of 0.4% copper) exist for another eight years of production, subject to confirmatory drilling. Precious metal credits bring the average grade up to 0.55% copper equivalent.

Because the mine was scheduled to close in June 1990, maintenance on equipment was minimal and there was no real incentive to increase production and reduce costs. But all this has changed under new management. Morale has improved dramatically and mill throughput is 10-15% higher and averaging about 23,500 tons per day.

Recoveries have dropped marginally but this has been offset by higher copper output and lower unit costs, which are now about 70-72 per lb, The Northern Miner was told. (That cost is all inclusive.) And the next step will be to increase production to 25,000 tons per day, the company added.

Grinding capacity is the limiting factor in the mill at present. And Cassiar’s ore, which is generally quite hard and abrasive, has a fairly high work index of 16.0, unlike its compatriots’ in the Highland Valley of B.C.

Cassiar has about $22 million in redeemable preferred shares outstanding which Anthony T Kana, chief financial officer, said should be paid off by the end of next year. The redemption is expected to escalate because waste removal at the company’s Cassiar asbestos operation will drop sharply next year as the open pit reaches bottom. With the open pit finished, Cassiar will be developing its nearby McDame underground mine at a cost of $50 million, including working capital. Incidentally, the B.C. government has provided Cassiar with a $20- million loan which is repayable (interest and principal) out of 50% of McDame cash flow. An extra $5 million is available to increase capacity later.

When Brinco Ltd. bought control of Cassiar Resources in late 1980 for $88 million in what was essentially a fully-leveraged basis, it borrowed $80 million from a large Canadian bank to finance the acquisition. The Cassiar mine, which at the time was a big money maker, was used as collateral. But asbestos markets deteriorated soon after and Brinco was left with that massive debt load to service.

But three years ago, the company was able to convert that loan (outstanding balance $45 million) to the redeemable preferred shares which pay a dividend “that is considerably lower than prime,” Kana said. Also, Cassiar’s tax liability will be reduced because of expenditures on its McDame underground project which will replace the open pit.

About 60% of Similkameen’s copper has been sold forward this year and Kana said the average “should be a little over a dollar, which is a pretty reasonable profit margin.”