Mining industry thrown an unexpected lifeline by Ottawa

If mining observers were staring into their crystal balls last October and predicting the demise of many junior sector companies, some recent developments are forcing the pessimists to take another look.

After trimming the share prices of junior mining companies by an average of 40%, and damaging investor confidence in small capitalization companies, the Oct 19 crash initiated an industry shakeout which is still in full swing.

Nevertheless, while the market debacle posed major problems for juniors with large projects to finance, the industry has been thrown an unexpected lifeline by the federal government and some of the highest metal prices this decade.

To the surprise of almost the entire mining industry, the federal government, recently announced a new grants system to replace the 33 1/3% earned depletion allowance which is being eliminated next year.

Scheduled to kick in Jan 1, 1989, the Canadian Exploration Incentive Program (CEIP) will direct $200 million annually to a hungry junior resource sector by giving a 30 cents grant for every $1 spent on grass roots exploration.

Interested observers like Syngold Exploration (TSE) President Barry Symmons are still waiting to see how the new grant system will work but they expect it to make life easier for a grateful resource industry. Copper prices

“In principle, it seems to be good,” he said.

In combination with high copper and nickel prices, the new financing program promises to make it more difficult for cash-rich predators like Northgate Exploration (TSE), Kerr Addison Mines (TSE) and Metall Mining (TSE) who are in the hunt for acquisitions.

“Without it, a lot of junior companies would have fallen by the wayside or be swallowed up by medium sized mining firms,” said Simmons.

“The introduction of CEIP has taken some of the heat off the junior sector and it will be interesting to watch and see what happens,” added Mike Pickens, a senior analyst at Yorkton Securities in Toronto.

“While flow-through money is still available, because the average guy isn’t thinking about his tax bill, its not as readily available as it used to be.” Mining companies raised about $1 billion via flow-through in 1987, but that figure is likely to fall to about $110 million in 1988.

But a reduction in the availability of flow-through dollars isn’t the only problem facing juniors. Non tax driven money needed to cover overheads and office salaries is hard to come by in a slow market, according to Robert Cudney. Northfield Capital

As chairman of Toronto-based Northfield Capital (ASE), Cudney was one of the first victims of the Oct 19 market downturn. After Northfield’s share price dropped, he was forced to back out of a joint venture with Queenston Gold Mines (TSE) at the highly regarded Kirkland Lake West property near Kirkland Lake, Ont.

“CEIP should make a positive difference, but investors are likely to be more selective in future and the real grass roots properties will be back-burnered until the market picks up,” he said.

While Cudney said his group which includes Rockford Minerals, Northfield Minerals and Northern Ranger Minerals (ASE), are completely financed with $10 million to complete their 1988 programs, he was not planning to take on anything new. “We will concentrate on the stages that are closest to production,” he said.

The industry is still in the process of going through an evolution in terms of mergers and takeovers and the shakeout will continue, according to Symmons who maintains that even without CEIP, the juniors which have been successful, would have survived anyway.

But if the junior companies have gone through some tough times, cash-rich seniors like Metall Mining and Northgate Exploration haven’t had it all their own way either. Western Mining

With $160 million in its treasury from the sale of its Chibougamau gold/copper mines to Australia based Western Mining Corp., Northgate recently set itself a 7-month deadline to complete the major gold acquisition which shareholders have been promised.

The fact that Northgate recently turned down the opportunity to acquire one of British Columbia’s hottest juniors, offers an interesting insight into the dilemma facing management of senior mining companies, said Thomas Komlos, a senior mining analyst at Dean Witter Canada in Toronto.

Since a lot of exploration projects are long term in nature, corporate planners are making their decisions based on what will happen a decade from now, he said.

According to Komlos, since most of the gold prospects with a lot to offer are already known and because base metal reserves are running out, during the next three or four years the trend may change away from gold towards copper, nickel and zinc.

For all of those reasons, it’s not a great time to be out there trying to acquire mining companies or orebodies, said Robert Morgan, Metall’s vice-president, finance.”Even now in the latter stages of a cycle, the equity markets are still very strong and acquisitions are expensive.” Australian gold

In a bid to rid itself of its “holding company image” Metall’s three- man acquisition team has has attempted to acquire a direct joint venture interest in some Canadian and Australian gold and base metal projects. Equipped with $190 million in its treasury, the mining wing of West German metals giant Metalgesellschaft AG is more than capable of achieving its plan.

“But most most people we talk to are attempting to sell a minority interest in the company while remaining in control of their orebody, said Morgan.

According to Morgan, the recent agreement involving Echo Bay Mines (TSE) and the Muscocho Group of companies offers the best example of current trends.

While Echo Bay paid $50 million to acquire a significant minority interest in Muscocho Exploration (TSE), Flanagan McAdam Resources (TSE) and McNellen Resources (VSE), Muscocho President Terry Flanagan and partner John McAdam have retained control of the soon-to-be-producing Magino and Magnacon projects near Wawa, Ont. Muscocho Group

“We looked at a similar deal with the Muscocho people but Echo Bay obviously wanted that type of deal more than we did,” said Morgan.

As Northgate and Metall continue to scour the continent for any appropriate buys, here are some of the acquisitions involving junior mining companies since the Oct 19 stock market collapse:

* Nov 9, 1987 — Kerr Addison Mines agrees to buy 1.2 million class A shares of MSV Resources (ME) at $3 per share. The agreement gave Kerr Addison a 20% stake in MSV and an interest in two promising gold projects in northern Quebec. They include the Eastman project east of James Bay, in which MSV is close to earning a 49% interest from Placer Dome Inc. (TSE) and the Silidor project at Rouyn- Noranda where MSV holds a 20% interest with partners Noranda Inc. (TSE) (55%) and Cambior Inc. (TSE) (25%)

Nov 30, 1987 — Pamour Inc. (TSE) acquires 507,000 Class B shares of Dickenson Mines (TSE) at prices ranging from $11(C) and $16.25. Pamour’s 9.9% shareholding gives it an 8.2% voting interest in Toronto-based Dickenson but papers filed with the Securities and Exchange Commission (SEC) in Washington, D.C. say Pamour will seek representation equal to 30%.

Documents file with the SEC indicate that Texas oilman T. Boone Pickens has acquired a 4.8% stake in San Francisco-based Homestake Mining through his holding company Mesa Limited Partnership.

* Dec 28, 1987 — Western Mining Corp. of Australia signals its intention to be a major player in the North American precious metals fraternity by agreeing to acquire the assets of Northgate Mines Inc., Seabright Resources (TSE) and Grandview Resources (VSE).

Under the agreement, Western payed $160 million for Northgates Chibougamau, Que., gold copper mines — the Copper Rand and Portage Island and a 35% stake in Norbeau Mines.

Western also paid $92 million for (10.7 million Seabright Resources shares at $8.50 per share) Seabright’s Beaver Dam and Forest Hill mines in Nova Scotia and $95 million for Granview’s heap leach gold mine east of San Francisco, Calif.

Jan 18, 1988 — Belmoral Mines (TSE) spends $5 million for 6.2 million shares of Yorbeau Resources (ME) and 10 million share purchase warrants. Under the agreement, Belmoral can attain a 50.6% interest in Yorbeau after exercising the warrants at $1 over two year.

Yorbeau’s principle asset is the Astoria outside Rouyn, Que. where reserves in all categories stand at 1.4 million tons grading 0.18 oz gold per ton.

* Jan 25, 1988 — Through a reverse acquisition agreement, a private company called Mingold Resources obtains an option to acquire a 50.1% controlling interest in Golden Range Resources (TSE) of Toronto.

Under the deal, Mingold will acquire one million Golden Range shares at $1.50 per share, an additional one million shares at $2.50 and one million shares at $3.50 exercisable up to Sept 1, 1990.

Through Golden Range, Mingold will raise flow-through funds for explorationat 12 properties including the Hudvam polymetallic prospect near Flin Flon, Man.

* Jan 25, 1988 — Western Mining Corp. announces a $101 million takeover offer for Toronto- based Western Goldfields (TSE) whose principal asset is the Hog Ranch project in Nevada.The tender offer is at $11.25 per share for about nine million shares outstanding.

* Feb 8, 1988 — Hayes Resources (TSE) buys a 58% interest in SherrGold Inc. (TSE) for $17 million cash and 2.4 million common shares. SherrGold operates the McLellan gold mine northeast of Lynn Lake, Man., which began operations in early 1987.

* Feb 22, 1988 — Northgate Exploration acquires a 13% stake in Campbell Resources (TSE) of Toronto (and an option to increase its interest to 19.6%) for an aggregate purchase price of $19.75 million.

Under the deal, Northgate bought 10. million share purchase warrants from Great Lakes Group Inc. (a merchant banking wing of Toronto- based Brascan) and 1.3 million common shares from other vendors.

Campbell’s principle asset is the Joe Mann gold-copper mine in Chibougamau which is scheduled to produce 65,000 oz gold this year.

* March 7, 1988 — Homestake Mining of San Francisco makes unsolicited $ 32 million(C) $4 per share offer for North American Metals (ME) which is rejected by management.

North American and Chevron Minerals have an equal interest in the Golden Bear project near Dease Lake, B.C. which is scheduled to start production at a rate of 64,000 oz annually, late this year.

* March 14, 1988 — Total Erickson Resources (TSE) is granted an option to acquire, at cost, all the shares of Getty Resources (TSE) tendered under a previous takeover bid. Total Erickson is a subsidiary of Total Resources (Canada) which acquired 12.4 million Getty shares, representing 87.5% control) at $11 per share in January, at a cost of about $136.9 million.

Getty’s main asset is its 49%- owned joint venture with Noranda in the Tundra gold project about 130 miles northeast of Yellowknife. With 26.4 million tons grading 0.18 oz gold per ton, the deposit is regarded as the largest undeveloped gold resource in Canada.

* April 4, 1988 — Homestake Mining makes follow-up $5 per share offer for all of North American Metals outstanding shares. The offer is conditional upon Homestake acquiring a 51% controlling interest.

* April 11, 1988 — Dickenson Mines bids to join the second tier of North American mining companies after acquiring a 33% equity stake in Wharf Resources (TSE). The Toronto company also reveals plans to acquire partner Cambior Inc’s 34% stake in teh Arthur W. White gold mine near Red Lake, Ont.

* April 18, 1988 — Northgate Exploration agrees to acquire a 15% equity stake in Geddes Resources (VSE) of Toronto for $5 million. Geddes’s main asset is the Windy Craggy massive sulphide deposit in northern B.C. Northgate also acquires 680,000 shares (20%) of Holmer Gold Mines (ASE) for a consideration of 60,000 Northgate shares.

Under the agreement, Northgate also acquires 300,000 flow-through common shares from Holmer at $1 per share and an option on an additional 300,000 non flow-through common shares at $1.15.

The agreement gives Northgate a fully-diluted 32% interest in Holmer which has optioned a 50% interest in the Briston Twp. gold property near Timmins, Ont. to Chevron Canada Resources.

* April 25, 1988 — Edmonton- based Echo Bay Mines gains a foothold in the eastern Canada gold industry by agreeing to acquire a substantial stake in the Muscocho group of companies.

Under the agreement, Echo Bay will invest $50 million to acquire a 21% stake in Muscocho Exploration, 23.1% of Flanagan McAdam Resources and 27.1% of McNellen Resources.

* May 2, 1988 — Hemlo Gold Mines agrees to finance Windarra Minerals’ (VSE) participation in Magnacon gold project near Wawa, Ont., through a gold loan repayable out of 80% of Windarra’s cash flow from the project.

The agreement also calls for an exchange of 1.5 million Windarra shares for 150,000 Hemlo shares.

* May 9, 1988 — Dickenson Mines President J.O. Kachmar tells shareholders that his company is investigating the possibility of an amalgamation with Wharf Resources. The new entity would be capable of producing 135,000 oz gold annually.

* May 16, 1988 — Placer Dome says it wants to divest itself of its almost 25% interest in Falconbridge Ltd. (TSE) Placer has a 14% share intenresnt in the nickel producer representing about 15.6 million shares. Thought to be worth about $500 million, Placer’s Falconbridge shares are held directly and through 52.9%-owned affiliate, McIntyre Mines (TSE).

Placer Dome also owns Falconbridge debentures worth $135.4 million, the debentures convertible into about 6.2 million additional shares of the nickel company, and warrants. Kerr Addison Mines sells a 28% interest in Golden Shield Resources (TSE) of Toronto to DRX Inc., a U.S. company for a consideration of $12.6 million.

* May 30, 1988 — Franco-Nevada Mining (TSE) of Toronto says it will sell its 4% net smelter return and 5% net profit interests at American Barrick Resources’ (TSE) Goldstrike mine in Nevada for about $250 million.