Placer Dome battles operating costs

Along with efforts to explore for and acquire base metal properties, management of Placer Dome (TSE) intends to further improve the company’s operating performance this year.

“Our profit margins are being squeezed by lower metal prices and by upward pressure on operating costs,” Placer Dome President Tony Petrina told shareholders at the company’s recent annual meeting.

Despite a 5% increase in gold production, Placer Dome earned $17.6 million in its 1991 first quarter, down considerably from the $35.1 million earned in the comparable 1990 period. The average cash cost of gold production in the quarter was unchanged from the year-earlier period at US$254 per oz., but it represented an increase of 27% over the company’s 1990 fourth quarter.

To offset the effect of lower gold and copper prices, Placer Dome uses a forward selling program. It generated about $65 million in extra revenues last year, and the company expects to realize a price of at least US$435 per oz. for about 61% of its gold production during the final three quarters of 1991. This is no small feat for a company which now has consolidated gold production in excess of 1.7 million oz. a year.

But Petrina said some of the company’s gold mines are currently operating with costs above the spot price, and are only profitable in the short term because of the forward selling programs.

“Either the gold price goes up, or costs must come down, or the mine closes,” he said. The move to battle high operating costs explains why some tough decisions were taken at the company’s Dome mine in Ontario last year.

“With a workforce of 750, the mine was losing $1 million a month,” Petrina said. “Today, by working smarter we have 370 employees and indications are that we are turning it around.”

The company is also reporting an improvement at the joint-venture Big Bell mine in Australia, which also had high costs in 1990. Despite these improvements, Placer isn’t expecting to recover its original investment in the open pit gold mine which was written down in value last year.

Petrina said that the Detour Lake and Sigma gold mines in eastern Canada are also showing improvements to their cost structures and that all mines are continuing to seek ways to keep costs down.

Turning to future prospects, Petrina said the company is well on the way to completing a feasibility study by the third quarter of this year for its Mount Milligan gold-copper project north of Prince George, B.C.

Depending on the results, Petrina said the project has the potential to increase Placer Dome’s gold reserves by almost 25%, and copper reserves by 160%.

“We expect Mount Milligan to have competitive cash production costs notwithstanding the low ore grade,” Petrina told shareholders. “It will, however, require a substantial capital investment probably in the order of $440 million.”

Preliminary studies envisage an open pit mine producing 66,000 tons per day at a strip ratio of 2-to-1, and a conventional mill to produce 280,000 oz. gold and 80 million lb. copper annually. A production decision will depend on the outcome of the feasibility study and permitting procedures.

As for Eskay Creek in northwestern British Columbia, Petrina said the company remains a minority shareholder because extensive discussions with Corona to find a “mutually acceptable way to increase our interest to 50% have not borne fruit.” Placer’s interest in Eskay Creek is through its 45% interest in Stikine Resources which owns 50% of the deposit.

“As a large investor we would like to see the deposit developed sooner rather than later and in an efficient manner that will maximize the return to all shareholders,” Petrina added. “We also believe that our mine development capabilities would have brought value to this project.”

Placer Dome announced a 1991 exploration budget of $65 million, with about 40% of this directed to base metals. New exploration offices were recently opened in Venezuela and Mexico.

On the environmental front, Petrina announced the appointment of Henry Brehaut, formerly senior vice-president of Canadian operations, to the position of senior vice-president of environment. An environmental committee was also formed which will submit regular quarterly reports to Placer’s board.

“We have no quarrel with demands for environmental responsibility,” Petrina said. “We do take issue, however, with people who treat the environment as a political or quasi-religious issue rather than a scientific problem with scientific solutions.”