Foreign expansion planned — Viceroy to acquire stake in MK

A recent agreement will allow Viceroy Resource (TSE) to increase its position in the Castle Mountain open-pit gold mine in southeastern California.

Under the arrangement, Viceroy will acquire 9 million common shares representing 46.4% of MK Gold (NASDAQ). The transaction is a private one, involving MK Gold’s largest shareholder, Morrison Knudson. The shares are priced at US$4.75 each, resulting in a total cash purchase of US$42.7 million plus 1.75 million non-transferable warrants of Viceroy, exercisable at $8 per share. The closing date for the transaction is March 31.

Viceroy operates and owns 75% of the Castle Mountain mine, with MK holding the remaining 25%. The mine churned out 125,870 oz. for the 9-month period ended Dec. 31, 1994, at a cash cost of US$160 per oz. This compares with 104,400 oz. at a cash cost of US$208 per oz. during the same period in the previous year. During the third quarter, cash costs were at a record low of US$132 per oz.

Viceroy earned $9.6 million on sales of $51.9 million for the period, compared with earnings of $7.9 million on sales of $40.9 million achieved in the same period in 1993. The mine generated cash flow of $26 million for the period (almost

$3 million per month), and Viceroy anticipates its long-term debt will be paid off by March 31 — some 14 months ahead of schedule. Since startup in April, 1992, Castle Mountain has produced more than 375,000 oz. MK’s interest in the mine, combined with its 53% stake in the nearby American Girl operation, gives the company an attributable gold production of 70,000 oz. for the year. (New York-listed Hecla Mining holds the other 47% interest in the combined open-pit/underground operation at American Girl.) Notwithstanding Castle Mountain, Viceroy believes MK’s most important asset is the Jerooy project in the former Soviet republic of Kyrgyzstan. Construction is expected to begin this year, with production scheduled for 1997 at 150,000 oz., and to continue at that rate for nine years. The operating cost is projected at US$140-150 per oz.; the capital cost, at US$133 million (of which financing is partially secured).

Open-pit reserves are estimated at 2.5 million tons averaging 0.11 oz. in the proven and probable category, while underground reserves are believed to exist in the range of 4.3 million tons averaging 0.3 oz.

MK will receive 65% of the net proceeds until its equity investment is repaid, and thereafter 30% of the net cash flow. The company’s other assets include a 49% interest in the Boroo gold project in Mongolia and a 37% stake in seven gold concessions of Arlo Resources (VSE) in Panama. Viceroy is involved in various foreign exploration projects through its 30%-owned associated companies, Channel Resources (VSE) and Pacific Wildcat Resources (VSE). The former is exploring in West Africa while the latter is active in Indonesia and Southeast Asia. The soon-to-be-listed Oro Belle Resource, another associated company of Viceroy, will focus on South America.