DOME’S NEW DAY

Once upon a time in a land rich with gold, investors, both both domestic and foreign, looked to one gold miner — a giant in the realm — as the only reliable protector of their battered paper currencies. The benevolent giant was content for it had few competitors. And the investors were pleased. Until one day when young, little-known miners began to emerge, aggressively challenging the giant for gold investors’ dollars. The upstarts continued to grow in strength and numbers. And the investors were pleased, for their investments grew at an astonishing rate.

A fanciful tale, perhaps, but one that reflects Canada’s gold mining industry today. Just five years ago both Canadian and foreign investors thought of one Canadian gold mining company when they considered long- term gold investment — Dome Mines. There were really no alternatives in terms of size, liquidity and assured future production.

But Dome, as investors have come to know it during more than 75 years of operations, exists no longer. It merged this summer with one of its subsidiaries, Campbell Red Lake Mines, and Placer Development of Vancouver to form a new company called Placer Dome Inc. With annual production of almost one million oz, it will far outstrip any other North American gold producer.

As well as being the continent’s premier gold producer, the Placer Dome merger creates an impres sive new player in several other mineral commodities. Its operations, which include Falconbridge Ltd. (inherited through Dome’s 25% equity interest), add up to annual production of 6.2 million oz of silver, 36 million lb of copper, 38 million lb of zinc and three million lb of nickel. That’s not including byproducts of cobalt, platinum and molybdenum and significant oil and gas production as well.

But the merger is an indication of how the mining game — and particularly the gold-mining game — has changed in the past five years and of how Dome missed opportunities for growth of the early 1980s, as international investors shunned politically troubled South Africa for North American and Australian gold producers. While other emerging gold mining companies grabbed once-in-a-lifetime chances to acquire gold reserves by paying with newly-issued stock, Dome was hamstrung by its equity position in, and onerous obligations on behalf of, debt-ridden Dome Petroleum. What’s more, Dome’s conservative management “culture,” which had served the company well over the three-quarters of a century during which it developed, was reluctant to change its ways.

The perennial flagship of the Canada’s gold mining industry, the venerable Dome and its subsidiary, Campbell Red Lake Mines, have been Canada’s premier gold producers since the 1950s. Until, that is, the upstarts began to nibble at their throne — companies like Echo Bay Mines and American Barrick Resources. They began drawing some of the attention investors used to reserve for the Dome group.

“It used to be that when gold prices moved, you would punch in crk as the proxy for gold,” says James Perrone, vice-president of metals research at Walwyn Stodgell Cochran Murray. “Today it’s Echo Bay.” (Crk is the Toronto Stock Exchange symbol for Campbell Red Lake.) Institutional investors now look for vehicles that offer not just gold output and liquidity but aggressive management, future growth, low operating costs and long-life reserves.

Since 1983 a group of new companies has emerged to fit the bill. Probably the finest example of this new type of pure gold vehicle is Echo Bay. In April, 1983, when gold prices were averaging $430(US) per oz, the company went public at $5 per share. Today, although gold prices are essentially the same, Echo Bay trades at more than $36 per share. Estimated gold production for 1987 is 480,000 oz. In 1983, when the company’s Lupin mine opened in the Northwest Territories, gold production totalled 118,000 oz.

American Barrick is another such company. Like Echo Bay, its growth has been remarkable. In three years, Barrick has seen gold output grow to an annual 186,000 oz from 65,000 oz in 1984. And every one of those ounces has come from acquisitions financed by combinations of debt and equity. “Echo Bay went from zero to equal with Dome in five years,” says Richard Cohen, a mining analyst with Brown, Baldwin, Nisker of Toronto. “Although Dome is still the name which comes to mind when one thinks of gold, Echo Bay and American Barrick are giving the Europeans something to think about.” Cohen notes that both Echo Bay and Barrick have made astute acquisitions of gold reserves throughout North America, effectively building up gold reserves and gold output by prudent use of stock. “Dome, however, has not used its stock effectively,” he says. The company has not used it to acquire other gold properties. They (the Dome group) had the opportunity to become the premier gold mining company in North America.”

Perrone agrees, adding that “Dome has not come up with the Mercurs, Tennecoes and Round Mountains. Its only acquisition was Lac Minerals at $38.” The Mercur mine in Nevada is the crown jewel of the growing American Barrick empire, having produced 111,000 oz of gold in 1986. Echo Bay made waves as a result of the 1986 acquisition of all the gold mining assets of Tenneco Inc. for $36 million(US).

During these years, Campbell Red Lake plunged into Detour Lake, a large open pit mine near James Bay in Ontario, which has been plagued by problems since opening in 1984. A rescue operation mounted this year is expected to save the mine by moving it to an underground phase.

Underlying the major differences between the old and the new companies are their respective philosophies toward investor relations. American Barrick was packaged to meet the specific needs of institutional investors looking for pure gold plays. In order to inform potential investors, Barrick aggressively tells its story throughout Europe, Canada and the U.S. In general the new companies “are more promotional and investor-oriented,” says Robert McEwen, vice-president of csa Management. Csa manages Goldcorp Investments, a Canadian gold fund in Canada which trades on the tse. Echo Bay is no different, mounting tours of its properties regularly for mining analysts, investors and the press. Its slick operations pitch a bullish story while providing the information required by analysts to make investment decisions.

The growing competition has not gone unnoticed at Dome. Last fall, for the first time in years, the company arranged a major 2-day tour of all its gold operations for a group of mining analysts and investors. This was quickly followed by the scrapping of Dome’s conservative reporting of reserves in favor of current, less stringent industry standards which report both proven and probable reserves. The new reserve reporting has upped reserves at all the Dome group companies’ operations. At the Campbell mine in Balmertown, Ont., reserves stand at 7.6 million tons grading 0.68 oz gold per ton — a more impressive figure than the previously reported two million tons of proven ore grading 0.66 oz.

These changes, plus a strong gold price, have had their effect. At the beginning of 1987, Dome’s common shares were languishing at $9. Just prior to the merger announcement, the issue traded at $22. At the $9 price, Perrone felt all the company’s negative factors were fully discounted. These included exposure to Dome Petroleum through a 22% equity interest and a loan guarantee on $225 million of Dome Petroleum’s debt.

In the information circular distributed in May, when the merger plan was announced, Placer and Dome recognized the importance of gaining prominence among the myriad of new gold plays in order to maintain the interest of investors. The amalgamated company’s “strong balance sheet and substantial cash flows should provide greater capability to finance future expansions than the individual amalgamating corporations,” says the circular in its summary of reasons for the amalgamation.

The creation of Placer Dome marks the end of an era for Canadian gold mining companies. Dome, as a separate entity,
exists no longer, having gone the way of its many illustrious contemporaries, such as the mighty Hollinger Consolidated Gold Mines. But the Dome tradition that began in South Porcupine continues in a new company — a gold mining giant that will undoubtedly make its presence felt in investment communities for many years to come.