Hemlo to write down Central Crude

Hemlo Gold Mines (TSE) is considering taking a writedown on its investment in the Eagle River, Ont., gold joint venture with Central Crude (TSE), said President John Harvey at the company’s recent annual meeting in Toronto.

After electing not to develop the 60% owned Eagle River project by itself, Hemlo is currently working with Central Crude to find other ways to bring the northern Ontario project into production. But Harvey says the project doesn’t start to look interesting to Hemlo unless gold rises to around US$400 per oz. from US$356, its selling price on the day of the annual meeting.

If the two companies can’t bring it in by the end of this year, Hemlo will almost certainly write off $9.8 million in deferred exploration costs, and may write down the carrying value of $16.4 million invested in Central Crude.

Having reported net earnings in 1990 of $23.6 million or 27 cents a share, Hemlo has not made a provision for a possible writedown in its 1991 earnings estimates of $41 million or 47 cents a share.

While Hemlo paid an average of $5.12 for the 3.2 million (43%) Central Crude shares it now holds, the shares traded recently at $1.80 in a 52-week range of $1.50 and $6. At current market prices, the investment is now worth only $5.7 million to Hemlo, which elected to shelve the project after completing a feasibility study on 2.24 million tons grading 0.25 oz. gold per ton of proven and probable reserves. The 18% return on a capital investment of $21 million is believed to be too low for Noranda (TSE) which recently offered to sell its gold assets to 52% owned Hemlo in return for 8.6 million Hemlo shares.

Designed to provide an impetus for future growth, the assets include Noranda’s interest in the Holloway property in Ontario and equity stake in Freewest Resources (TSE), its interest in Crown Butte Resources (TSE), owner of the New World property in Montana, and a joint venture stake in the Brewery Creek property in the Yukon.

A special committee of Hemlo directors is reviewing the proposal that would also involve the transfer of Noranda’s 55% interest in the Silidor gold mine in Quebec. While Hemlo’s share of production from those assets is estimated to be 195,000 oz. by 1995, they are expected to increase the company’s costs to US$155 per oz. from US$124 last year. However, Harvey said the company would remain a low-cost producer.

Also, Hemlo says a dividend of 10 cents per share has been declared payable June 27 to shareholders of record June 13. Shareholders not residing in the U.S. can elect to receive their dividend in stock.