Ketza ore reserve mishap puts PTO near bankruptcy

A serious ore reserve miscalculation at the Ketza River gold mine near Ross River, N.W.T., has put Pacific Trans-Ocean Resources (TSE) in a financial quandary.

A joint venture partner with Canamax Resources (TSE) at one of Canada’s newest gold mines, Pacific Trans-Ocean is working against the clock to find someone willing to provide the company with enough funding to pay off a $3 million debt and fulfill its long term obligations.

At a shareholders meeting in Edmonton, President Frank Ager told a packed house that his company is in a precarious financial position and if a refinancing isn’t arranged by Dec 29 it could be in “bad shape.”

Pacific-Trans Ocean’s problems stem from mine development costs which were $6 million above the amount specified in the original feasibility study and the fact that a financing agreement with Lloyds Bank is based on a reserve figure that was 20% higher than exists on the Ketza property.

When Canamax announced in a feasibility study that its reserves were 460,000 tons grading 0.45 oz gold per ton, the company thought it was working with a specific gravity level of 3.1.

Specific gravity, which is the ratio of a mass of a body of rock to the mass of an equal volume of water at a specific temperature, is used by mining companies to calculate ore reserves. Given a certain volume of rock, the specific gravity provides a factor to determine how much that rock will weigh.

Because Canamax is working with massive oxides in an orebody that is considered relatively unique in Canada, it has been difficult to get a handle on the in situ density of the ore says Jim Smith, Canamax’s vice-president mining. “Our problems were also compounded by the porosity of the material,” said Smith.

After several months of milling and underground surveying, Canamax realized that it was working with a specific gravity of only 2.5. That means that 25% more volume is needed to get a ton of ore than originally estimated. It also means that the Ketza reserves — and therefore the life of the operation — has been cut by about 90,000 tons.

While teething problems at Ketza have largely been overcome — about 3,600 oz was mined in October at a millhead grade of around 0.394 oz — Canamax is now under pressure to find more ore to keep the operation going longer than the 2 -year lifespan which 300,000 remaining tons will support.

Under the terms of a 20,544-oz gold loan agreement with Lloyds, Pacific Trans-Ocean is committed to delivering 1,284 oz gold per quarter at a 3% interest rate over four years. Ager says his company will be unable to fullfil its obligations to Lloyds unless an additional 619,000 tons of possible sulphide reserves grading 0.219 oz are placed in the mineable category.

The sulphide ore lies on the other side of a fault separating the Peel zone which is being mined at the moment for oxides. If and when the sulphides are declared mineable, Canamax and Pacific Trans- Ocean could upgrade the 350-ton- per-day mill to 450 tons and mine the oxides and sulphides simultaneously. But no decisions are likely to be made until the results of studies undertaken on behalf of both companies by Strathcona Mineral Services (retained by Pacific Trans- Ocean) and Derry Michener, Booth and Wahl (retained by Canamax on behalf of the joint venture) are available.

Meanwhile, Pacific Trans-Ocean has drawn the balance of a $3 million convert ible loan to pay development costs owed to Canamax. With the help of financial advisor Andras Research Capital, it is looking for long term financing to release it from its obligation to lender Central Capital Management, a Toronto-based merchant banker.

Under an agreement with Central Capital, interest on the $3 million loan is payable at a rate of 13.75% and the principal is to repaid by Dec 29.

If Pacific Trans-Ocean fails to pay, Central Capital has the right to convert the money owed to it into shares of the company to a maximum of 3.4 million or 15% of the Pacific’s outstanding shares.

But Ager said the merchant banker is more likely to declare Pacific-Trans Ocean in default on its loan.