Homestake sides with Placer: Eskay Creek is overvalued

Even though a feasibility study hasn’t been completed for the Eskay Creek project north of Stewart, B.C., two of North America’s largest gold mining companies announced or plan substantial writedowns of the high-grade gold deposit.

International Corona (TSE) operates and holds about 46% of Eskay Creek through its interests in Prime Resources Group (VSE) and Stikine Resources which each owns 50% of the property. By way of a share exchange offer, Corona is in the process of being acquired by Homestake Mining (NYSE). Placer Dome (TSE), which has a 22% direct interest in Eskay Creek, reduced the carrying value of its investment by $50 million to $56 million earlier this year when it announced significant writedowns at several of its other properties. But Corona said the writedown was “inappropriate” because the value of Eskay Creek would not be known until the feasibility study was completed.

More recently, Homestake announced it would reduce the carrying value of Corona’s investment in Eskay Creek to $84 million from $269 million, for a total writedown of $185 million (US$160 million).

Corona estimates that capital costs for a mine would be about $210 million, while Homestake’s estimate was $308 million based on its experience with mining in remote areas and with processing of metallurgically complex ores. Corona assumed US$400 per oz. gold in its estimate of recoverable value, while Homestake used a gold price of US$360 per oz.

The differences in capital cost estimates and gold price assumptions amount to US$54 million. The remaining US$106 million reflects US$74 million relating to differing accounting policies, as well as a US$32-million difference in gold mineralization estimates.

Mining analysts point out that Homestake’s conservative accounting policies and writedowns of Eskay Creek will leave the company well positioned for profits to flow more directly to its bottom line when the mine reaches production.

Several years ago, Homestake acquired a gold mine in northwestern British Columbia now operated by North American Metals, a subsidiary. Last year, after writedowns of more than US$56 million, Homestake concluded it would not be able to recover its investment in the mine.