Increased gold production tops on Northgate’s agenda

With a healthy working capital of just over $18 million, Northgate Exploration is out seriously shopping for a new acquisition in the precious metals arena. .T No small task, as President John Kearney readily admits. Other companies have the same idea. Prices are high and opportunities are few.

But Northgate’s shopping list comes equipped with a strict set of criteria to make the job somewhat easier.

“We’re looking at properties which will produce between 20,000 and 50,000 oz of gold per year,” the president explains. The property must be located in North America. A heap leach project in the western U.S. is a possibility, but at the same time the company is not averse to the traditional underground mine. Properties in the development stage are also being looked at, as are those with exploration or expansion potential.

“At this stage, we don’t have a particular short list of properties,” says Mr Kearney, “but we do have a number under intense consideration.” The trick, he says is to pick a good one.

Making an acquisition is a prime objective this year, says Mr Kearney. It’s part of a 3-pronged growth strategy aimed at boosting Northgate’s annual gold output to the 100,000-oz level and 150,000 oz a little bit down the road.

Increasing gold production is certainly not a revolutionary new phenomenon with Northgate. Actually it has become somewhat of a tradition. This past year, the company’s two producing mines in the Chibougamau camp of Quebec — the Copper Rand and the Portage — yielded a record 81,500 oz of the yellow metal, up from the 79,300 oz produced the previous year and an amazing 80% increase from the 45,500 oz produced from these mines when they were acquired by the company in 1981. Slow but steady burst

“We’re certainly not suddenly bursting into the gold scene just when gold has become fashionable,” stresses Mr Kearney. “We’ve been at it for five years.”

A look at the numbers clearly illustrates Mr Kearney’s point. The company has spent the last five years in a slow but steady transition from being a large producer of zinc, lead and silver in Europe to become the 12th largest gold producer in Canada.

Back in 1982, gold accounted for just 48% of the company’s total revenue from metal production of $55.2 million. Copper that year accounted for a 39% chunk. In each subsequent year gold’s contribution to revenue has grown while copper’s contribution has diminished. The latest 1986 figures show 70% of metal revenue derived from gold and only 28% from copper.

But it is important to note this increase in gold production was achieved not at the expense of ore reserves. In fact, ore reserves at the two mines have increased about 20% from 6.7 million tons at the end of 1980 to 8.1 million tons at a grade of 0.077 oz gold per ton and 1.63% copper at the end of 1986. This represents reserves of approximately 627,000 oz gold and 265 million lb copper. All reserves are in the proven and probable categories and are open both laterally and at depth.

The average gold head grade of ore mined last year was 0.138 oz. This compares to an average reserve grade of 0.077 oz. This difference didn’t just happen overnight, says Mr Kearney. Rather it is a trend that has been continuing for quite some time, when in each year the mined grade of gold was higher than the reserve grade. This difference is partly due to the characteristics of the ore where many small high grade lenses are either undetected by drilling or the grade is cut in ore reserve calculations.

While gold production has grown over the past five years, the total mine operating costs have remained almost constant. Tighter cost controls and improved productivity have meant a steady increase in operating margins over the years. Mine operating profit, which amounted to $2 million in 1982, $6.5 million in 1984, and $11.2 million in 1985, stands at the end of 1986 at $17.2 million. Expansion through exploration

What the next five years will bring obviously remains to be seen. But one thing is certain: gold production will go up. And property acquisition is just one avenue towards this goal. Expansion through exploration is another, says Mr Kearney.

Right now the Copper Rand mill, which treats ore from both mines, processes 650,653 tons of ore which represents just 65% of its design capacity. Mr Kearney would like to see this spare mill capacity utilized. To achieve this the company is actively exploring for new sources of ore in the Chibougamau area.

There are two parts to this effort: one is deep exploration in the old mines located on the property and the other is the exploration of a number of gold targets that exist on the unexplored parts of the property.

It was once thought, says Mr Kearney, that ore bodies in the Chibougamau camp did not extend below 1,800 ft. However, as Northgate is now operating at its Copper Rand and Portage mines around the 3,600-ft level this thinking has been revised. This has led to an exploration program at depth at the Copper Cliff mine which has been shut down since 1974. At that time, the mine’s lowest level was 1,600 ft with no exploration done at depth.

An exploration drift is now being driven towards the Copper Cliff mine from the 2,700 level of the Copper Rand mine. The drive is expected to reach its target this June and at that time a minimum of six 2,500-ft holes will be drilled in a fan-shaped pattern to examine the area and other gold-bearing structures in the vicinity. The program is expected to come in around $600,000 and is being partially funded by the Quebec Ministry for Mines and Native Affairs.

Meanwhile, on surface, a $700,000 drilling program has been launched on Dore Lake about two miles southwest of the Copper Rand. The object is to follow up encouraging results from the 1986 program which identified three adjacent mineralized shear zones.

One zone has an apparent strike length of 2,200 ft and varies in width from 300 to 400 ft. A 9.9-ft intersection from last year’s drilling provided values which average 0.28 oz gold and 2.16% copper at a depth of 500 ft. A total of 30,000 ft of diamond drilling is planned, 20,000 ft from the ice during the winter program and 10,000 ft after break-up using a jack-up drill rig.

Mr Kearney estimates the lead time involved in developing a new source of ore at the Chibougamau camp may be two or three years as another production shaft would be required. Boosting bottom line

Any exploration success would go a long way to boost the company’s bottom line. For despite increases this year not only in revenue, mine operating profit and cash flow from operations, the company still opened a bottle of red ink to pen in a bottom line loss of $4.8 million.

The main reason for this loss was a $10.4-million non-cash loss in equity in associated companies, mainly due to the writedown of the carrying value of their oil and gas properties.

Mr Kearney admits these write- offs are frustrating but believes “they are now behind us,” adding that this year’s first quarter is expected to show a profit.

One area where great strides have already been made is the reduction of the nearly $95-million debt incurred to finance the acquisition of the Chibougamau mines back in 1981. Long-term debt now stands at $28.6 million, less than half of what it was at the beginning of 1985 and almost one quarter of what it was in 1981.

Although the debt is not due until 1993, Northgate’s cash plus readily marketable investments amounting to $27 million is more than enough to repay the balance of the debt at any time.

However, as Mr Kearney says, the company feels comfortable with its current debt level. The key is to maintain flexibility should financing be needed to fund production growth, now the most important objective for the company. Northgate: a 5-year review (in million $)

1986 1985 1984 1983 1982 Revenue $65.9 $59.6 $68.1 $61.5 $56.1 Net earnings ($4.8) ($2.1) $2.0 ($9.8) ($12.9) per share (34 cents ) (19 cents ) 19 cents ($1.05) ($1.67) Debt (long term) $28.6 $42.3 $60.8 $68.4 $67.6 Equity $77.0 $80.4 $63.8 $60.7 $50.1 Debt/Equity Rati .37:1 .52:1 .95:1 1.12:1 1.34:1 Working capital $18.5 $13.4 $10.3 $14.5 $3.7 Production Summary

1986 1985 1984 1983 1982 Tons ore milled 650,653 688,257 740,410 750,765 731,121 Gold oz 81,473 79,309 77,469 60,167 50,222 Copper (million lb) 19.9 22.7 22.9 24.1 22.7 Silver (oz) 111,000 131,256 131,915 134,288 125,264