Echo Bay won’t increase its stake in Magino, Magnacon

Large North American gold producer Echo Bay Mines (TSE) has decided not to proceed with a plan to exchange its shares in the Muscocho group of companies for a direct interest in the group’s struggling Magino and Magnacon mines in the Wawa area of northern Ontario. Echo Bay said it made its decision largely on the basis of a recent assessment of minable reserve grades and mining costs.

The plan called for Echo Bay to exchange its approximate one-third ownership of the common shares of Muscocho Explorations (TSE), Flanagan McAdam Resources (TSE) and McNellen Resources (TSE), plus $10 million in cash and a $5-million loan facility (which was subsequently increased to $10 million), for a 50% interest of the Magino mine and a 37.5% interest of the Magnacon mine.

Echo Bay, which would have taken over as operator of both mines, would also have gained an interest in exploration properties surrounding the mines.

Minority shareholders of the three Muscocho companies involved recently voted in favor of the deal.

Muscocho President J.T. Flanagan, in a prepared release, said the companies are now meeting with their major creditors and legal counsel to examine their options.

The proposed transaction was announced at the end of 1989 and was scheduled to be completed by about the end of April.

Echo Bay Chairman Robert Calman said the company estimates Magnacon’s minable ore-reserve grade is down by 28% and underground mining costs per ton are up by 16%, and Magino’s grade is estimated to be 17% lower and mining costs 16% higher, compared with an assessment last November.

“In November, our estimates of cash production costs were approximately US$350 per oz. for Magino and US$330 for Magnacon. Today, regrettably, the current and foreseeable cash costs of producing gold, particularly at Magnacon, are significantly higher than the gold price,” Calman said.

Echo Bay will now write off the balance of its investment in the Muscocho group for the first quarter of 1990 with a charge to earnings of US$42.2 million (43 cents per share). An earlier charge to earnings of US$2 million (20 cents per share) was made at the end of 1989.

The Magino produced 23,000 oz. gold in 1989, its first full year of production. The Magino, which went into production last year, has yet to reach full commercial production. The Muscocho operations contributed 1.6% of Echo Bay’s total 1989 gold output, Echo Bay said.

Echo Bay purchased its original interest in the Muscocho companies in April, 1988, when Magino was in its startup phase and Magnacon in its exploration stage.

Muscocho and McNellen each has a 50% interest in the Magino. Flanagan McAdam has a 50% interest in the Magnacon, with Muscocho and an unrelated company, Windarra Minerals (TSE), each having a 25% interest in the mine.