Placer agrees to Cerro Casale sale (October 27, 2005)

With its attention focussed on three recently approved development projects, Placer Dome (PDG-T, PDG-N) has decided to sell its stake in the contentious Cerro Casale copper-gold project in Chile to minority partners Bema Gold (BGO-T, BGO-X) Arizona Star Resources (AZS-V).

Under an agreement in principle, Bema and Arizona Star would jointly pay Placer $10 million upon a positive construction decision. The pair can then decide to either make annual gold payments of 10,000 oz. over five years after production begins, and 20,000 oz. for a subsequent 7 years, or fork over an additional $70 million.

“We did not see a reasonable likelihood of Cerro Casale meeting our current investment requirements,” said Placer CEO Peter Tomsett in a prepared statement.

Tomsett said the proposed deal, which is expected to by the end of the year, would allow his company to focus on its other development projects while recovering its expenditure on Cerro Casale should a mine be developed.

In late September, Placer concluded that the 51%-owned Cerro Casale project was “not financially viable at this time” under the terms of its partnership agreement. Instead, the major said it will develop its 60%-owned Cortez Hills gold project in northeastern Nevada, Wallaby underground project at the Granny Smith gold mine in Western Australia, and the Pueblo Viejo gold-silver project in the Dominican Republic.

Soon thereafter, Bema and Arizona Star handed Placer a notice of default under their shareholders’ agreement, claiming that Placer had failed to use its reasonable commercial efforts to arrange financing for the project, and complete an updated feasibility study.

The pair also warned that they would pursue arbitration and use all “legal avenues” to reclaim Placer’s stake in the project if its defaults were not remedied within a month.

Says Bema CEO Clive Johnson: “We are pleased to have reached this agreement which, upon completion, will allow Bema and Arizona Star to pursue other opportunities for the development of Cerro Casale and allow Placer Dome a mechanism to recover their investment upon the project’s successful development.”

“Placer Dome spent considerable time and effort on the project and their work and technical expertise added significant value to the property,” he added.

Cerro Casale is currently owned 51% by Placer, 24% by Bema Gold, and 25% by Arizona Star. If Placer’s stake was reclaimed, the project will revert back to Bema (51%), and Arizona Star (49%).

Annual production from the high-altitude project has previously been pegged at 975,000 oz. of gold and 130,000 tonnes of copper at cash costs of US$115 per oz. (net of copper credits) and total costs of US$225 per oz. for at least 18 years. The operation carries a price tag of US$1.65 billion, up from a previous estimate of US$1 billion.

At last count, Cerro Casale had measured and indicated resources totalling 1.1 billion tonnes grading 0.71 gram gold per tonne and 0.26% copper, plus an inferred resource of 171 million tonnes of 0.63 gram gold and 0.33% copper. The estimates (inclusive of reserves) employ a cutoff grade of 0.4 gram gold.

Meanwhile, Placer is continuing with prefeasibility studies on the Donlin Creek refractory gold project in Alaska and Mount Milligan copper-gold deposit in northern British Columbia.

On the financial front, Placer saw its third-quarter earnings more than quartered from a year ago to US$34 million. That translates to US8 per diluted share, and compares with year-ago earnings of US$148 million, or US34 a share.

The recent third quarter results include a pre-tax net loss of US$39 million relating to the company’s metal hedge positions, of which US$23 million arose from maturing gold hedges. Meanwhile, quarterly sales grew by around 8% to US$488 million.

Placer said its quarterly production of 901,00 oz. of gold was in line with expectations, while its efficiency programs were successful in “offsetting a portion of cost pressures.” Still, total cash costs jumped 22% to US$288 per oz. and total production costs were up 20% to US$348 per oz. owing to higher energy, fuel and commodity costs, and stronger Canadian and Australian currencies.

During the corresponding period of 2004, Placer produced 888,000 oz. of gold at a total cash cost of US$235 per oz. and total production cost of US$291per oz.

Looking ahead, Placer expects to produce around 3.6 million oz. of gold in all of 2005, with total cash costs forecast at around US$280 to US$285 per oz.

The company plans to reduce its costs by streamlining its business processes, research and development groups, and information technology strategy.

On the sales side, Placer realized an average of US$412 for each ounce of gold sold, compared with the quarter’s average spot price of US$440 per oz., as it delivered production into all maturing hedge positions.

At quarter’s end, the company’s precious metal hedge book contained 8 million oz., or 13% of reserves, and had a mark-to-market value of negative US$993 million, a US$218 million improvement over the end of 2004. The company expects to trim its hedge commitments to 7.5 million oz. by the end of 2005.

Placer had cash and equivalents of US$952 million at the end of September, down US$79 million from the beginning of the year; the company’s net debt was US$1.15 billion.

Placer currently has just shy of 436.7 million common shares outstanding.

Shares in Placer were 20 higher at $19 even in late afternoon trading in Toronto following the news on Oct. 27; Bema was 11 better at $2.93.Meanwhile, Arizona Star was up half a buck to $4.90 on the TSX Venture Exchange.