MINING MARKETS & INVESTMENT NEWS — Royal Oak’s performance worries analyst

Mining analyst Roger Chaplin of T. Hoare & Co. describes the 1997 results of Royal Oak Mines (RYO-T) as “disastrous” and sees little upside for the beleagured gold producer.

Chaplin is not encouraged that Royal Oak made an operating profit of $9 million last year before interest and depreciation. Instead, he points to the factors that contributed to the company’s net loss of $135.2 million for 1997: depreciation charges of $22 million; a loss on foreign currency and commodity contracts of $46 million; interest charges of $27 million; $40 million taken as a writedown of mining assets; and $34 million as a loss on investments.

“It is worrying to see a number of rather large, non-operational losses at Royal Oak,” Chaplin notes in a recent research report. “The loss of $46 million on currency and commodity contracts (of which $22 million was realized and $24 million is a provision) and the loss of $34 million on investments were major factor[s] in the large loss. The loss on the investment book was understandable in 1997 — though it begs the question, ‘Why so much in investments?’ — but the loss on commodity contracts in a period when most companies were reporting massive gains is worrying. Royal Oak has enough problems losing money on its operations at these low gold prices without losing cash in other ways.”

Royal Oak turned out 351,349 oz. gold last year at an average cash cost of US$330 per oz. Chaplin notes that the closures of the Colomac mine in the Northwest Territories and the Hope Brook mine in Newfoundland cut production in the last quarter to 66,919 oz. gold while cash costs fell to US$274 per oz.

Royal Oak recently raised US$120 million in new debt, which will be used partly to repay existing loans and to complete the Kemess gold-copper mine in British Columbia. The company’s shares were given an upward bounce to $1.70 from $1.20 when the 11th-hour financing was made, however Chaplin is not convinced that the opening of the Kemess mine will solve all of Royal Oak’s financial problems.

Chaplin is skeptical about Royal Oak’s low cash-cost projections and concerned that problems may still crop up during the completion and startup of Kemess. “On this basis, we continue to recommend Royal Oak Mines as a sell,” he adds.