Northwestern B.C.'s pioneer mines finding the going rough (June 18, 1990)

Pioneering mine operators are finding it rough going in the area north of Stewart, B.C., paralleling the border between British Columbia and Alaska and including the Stikine Arch. They hope that the challenge does not foreshadow the performance of future mining ventures in this rugged, remote and sometimes harsh region. The three recently opened mines are the Johnny Mountain mine owned by Skyline Gold (TSE), the Premier mine owned by partners Westmin Resources (TSE), Pioneer Metals (TSE), and Canacord Resources (VSE), and the Golden Bear mine owned by North American Metals (TSE) and Chevron Minerals.

Stepping back in time to the heady days of 1986-87 when even the uninitiated investor or speculator was making big and easy money, one can hardly imagine any of these highly recommended plays being anything but successful.

The first mine to come on stream in the area was Skyline’s Johnny Mountain, high atop a mountain near the Iskut River north of Stewart, B.C.

Diamond drilling and underground development in 1986 and 1987 created considerable excitement as assays commonly over one ounce gold per ton propelled the company’s share price from the $1.25 level in September, 1986, to more than $10 by January, 1987.

Reserves at the time were estimated at over 900,000 tons of 0.73 oz. gold while the potential of the deposit was touted at more than four million tons of 0.50 oz.-per- ton material.

Mine development and construction continued throughout 1987 with the share price rising to $17 by August. Reserves at the property had also risen, totalling 120,000 tons grading 1.25 oz. plus an additional drill-indicated reserve of 162,000 tons grading 0.75 oz. gold and inferred reserves of 655,000 tons grading 0.65 oz.

Following the stock market crash in October, the issue settled at the $10 level and despite startup delays and a slight capital cost overrun, Skyline’s share price climbed back to the $17 level by mid-1988. The subsequent barrage of buy-recommendations from Howe and Bay streets at this point were unable to propel the price above its $17.75 high and the issue has been looking back ever since.

During mill commissioning in mid-1988 the company estimated commercial production would begin in the following quarter. By October, however, the mine was experiencing startup problems primarily in the mining operations and throughput was only 200 tons per day versus a design capacity of 300 tons per day.

The delay to full production was evident in the company’s financial position as at Oct. 31, 1988. The company showed a working capital deficit of almost $6 million and long-term debt of $9.5 million.

By year-end the share price had dropped below $9 as the company tried to iron out its problems. A revised ore reserve figure of 686,000 tons grading 0.57 oz. did not help the situation.

The hiring of a new President, William Price, resulted in a number of operating changes designed to solve the problems. This coupled with the move by Ron Shon, chairman and largest shareholder, to put the company on the block boosted the stock back over the $10 level.

When no acceptable bids surfaced, the stock dropped to under $7 per share and the company began searching for a joint venture partner who would put up money for further exploration and development around the property.

With no partners forthcoming, the share price plunged below $4 and Skyline decided to go it alone, initiating a $2-million exploration program. The program was to be funded from operating cash flow and flow-through share financing.

The following month reserves were reported at 876,000 tons grading 0.55 oz., and at mid-year the operation was running at 320 tons per day with recoveries averaging about 85%. This was a significant improvement to startup recoveries as low as 61%. Despite what appeared to be a turnaround on the milling side, the mill was still plagued with lower than forecast ore grades from the mine.

The stock traded side ways at $4 to year-end as investors hoped for a turnaround to the mine fortunes.

With commercial production still not achieved by 1989 fiscal year- end, the state of Skyline’s balance sheet had not improved and has in fact worsened. The company’s working capital deficit as at Oct. 31, 1989, was more than $4.5 million and long-term debt had climbed to almost $17 million.

Investors continued to hold their breath until rumours that the mine was facing an imminent shutdown sent the stock over a waterfall to a low $1.70 this April. The shares subsequently rebounded to $2.50 after the company denied the rumour.

Improvements to the milling operation would certainly portend a turnaround. With a new regrind circuit in place, recoveries have gone up to about 90% and production rates are up to design at 350 tons per day.

But lower head grades continue to hurt results, averaging about 0.42 oz. in the first quarter ended Jan. 31. This is substantially below reserve grades reported in the company’s latest annual report which had broken ore grading 0.60 oz., proven ore grading 0.62 oz. and probable reserves grading 0.56 oz.

Bill Price notes that ore dilution is not the problem. The discrepancy lies in the measuring technique used to calculate grades. While working very well in one section of the mine, the same sampling technique appears to over-state grade in other sections of the mine. Ore reserves may, therefore, require some reassessment.

Another item which may require rethinking is the company’s practice of capitalizing development expenses since there has been some difficultly in replacing mining reserves. Price indicated that Skyline would likely be reviewing this in the near future. Cash operating costs, excluding general or interest expenses, totalled $4.1 million in the first quarter for the 30,973 tons mined and milled. Equivalent to about $133 per ton, or at $430 gold, a break-even grade of about 0.31 oz.

Building a road into the area would help Skyline enormously. The company estimates that saving in transportation cost would be in the order of $200,000 per month or $2.4 million per year which would flow directly to the bottom line.

Another potential positive on the horizon will be results of a $2- million follow-up drilling program planned for this summer between the mine and the Snip deposit which borders on the north of the company’s claims. The company is particularly encouraged by exploration results from two areas, the Broson and the C-3.

Financing for the program will likely come from a flow-through issue (the company has been grandfathered). Skyline is also looking at other financing alternatives including some form of a joint venture on the north end of the property.

In any event, Price noted that the ultimate future of the company could lie in this area.

Yet another project in the area which looked great on paper but has since run into difficulties is the Premier project, 51% owned and operated by Westmin Mines (TSE).

The remainder of the project, just north of Stewart, B.C., is owned 40% by Pioneer Metals (TSE) with Canacord Resources (VSE) holding the balance.

In early 1987, the project was estimated to contain minable reserves of 1.86 million tons grading 0.089 oz. gold and 1.17 oz. silver per ton. Based on gold and silver prices of US$390 and US$5.40, the project was expected to have a 2-year payback. Operating costs were estimated at US$134 per oz. for gold and US$3.06 per oz. for silver with a total capital cost of $62 million.

By May, 1989, construction was finished and the mill was undergoing a tune-up phase. The capital cost was more than the original estimates, finally totalling $92 million but production forecasts were on stream, pegging gold at 77,000 oz. and silver at 890,000 oz. per year when the mill completed its break-in period.

Problems began when grades were not as predicted. During the third quarter of 1989, the mill performed to specifications averaging more than 2,000 tons per day with recoveries for gold at over 86%. Grades, however, were well under expectations averaging about 0.046 oz. for the third quarter.

During t
he fourth quarter of 1989 and the first quarter this year, the gold grade had improved to 0.07 oz. per ton, although the tonnage had dropped, averaging about 1,700 tons per day.

Westmin is in the process of optimising the mining plan in an attempt to bring grades and production levels up. Known mining and milling costs were used, and the mining cutoff grade was increased in order to raise head grades.

In addition, a plan is in the works to joint venture a nearby gold-silver property owned by Tenajon Resources. With grades of more than 0.50 oz., the underground deposit should produce about 50,000 oz. of gold per year over its 3-year life.

The primary problem encountered at the Golden Bear Project, the most recent producer in the area, were large capital cost overruns.

Located north of the Stikine area near Dease Lake, the mine is a joint venture between North American Metals (TSE), the operator, and Chevron Resources.

The capital cost went from an original estimate of $36 million to a final cost exceeding $80 million. In addition, cash operating cost had gone from an original prediction of US$136 per oz. to about US$270 per oz.

The combination of the two increases drastically changed the overall economics of the project — although it will still be profitable on a cash basis assuming the new operating cost projections prove correct.

Commissioned in late 1989, the mill has not yet reached commercial production. Problems have been encountered with the mill’s roaster, and for the time being non-refractory ore is being processed.

Startup problems are not unusual for new mining ventures, so it can only be hoped that these three mines have seen their worst and that fortunes will improve.