Placer Dome bucks trend by boosting earnings

Despite low gold prices, Placer Dome (PDG-T) generated stronger cash flow and improved earnings in the 3-month period ended June 30.

With production costs reaching a new low of US$150 per oz., including royalties, Placer reported second-quarter earnings of US$24 million (or US8 cents per share) on revenue of US$312 million for the quarter, compared with earnings of US$15 million (US4 cents per share) on US$314 million for the corresponding period last year. Cash flow between the two periods doubled to US$97 million from US$47 million.

In the first half of 1998, Placer earned US$41 million (US14 cents per share), compared with US$29 million (US9 cents per share) in the first six months of last year. Sales revenue of US$606 million for the first six months of this year was $7 million higher than in the year-ago period, with gold sales accounting for US$502 million; copper sales, US$88 million; and silver sales, US$14 million. Cash flow rose to US$202 million from US$129 million.

Placer operates 14 mines in five countries on four continents. The company’s share of gold production during the second quarter was a record 727,000 oz., bringing production for the first half of 1998 to 1.4 million oz. — 17% higher than a year ago.

Second-quarter cash production costs of US$150 per oz. represent an improvement over the US$208 per oz. posted for the corresponding quarter of 1997. The average cash production cost for the first six months was US$166 per oz., including royalties, compared with US$217 per oz. a year ago.

Placer expects to produce 2.7 million oz. in 1998 at an average cash production cost below US$170 per oz. It plans also to maintain its share of gold production at 2.5 million oz. through the years 1999 and 2000 at production costs below US$200 per oz.

While 10 of the company’s 12 gold mines recorded lower cash costs than a year ago, the gains are largely due to the contribution of the new Pipeline pit and the #2 mill at the 60%-owned Cortez mine in Nevada. Cash cash costs there were US$51 per oz. during the second quarter. During the first half of 1998, the mine contributed 215,822 oz. to Placer’s account at a cash production cost of US$64 per oz.

In a conference call, President John Willson told mining analysts that 1998 is turning out to be another great year for the 60%-owned Granny Smith mine in Western Australia, and added that the Porgera and Campbell mines remain strong contributors. For the first half of 1998, Placer’s share of production from Granny Smith increased by 25% over the year-earlier period to 173,258 oz., while, at the 50%-owned Porgera mine in Papua New Guinea, production was up 2% to 196,071 oz. Production from the Campbell mine, near Red Lake, Ont., increased by 9% to 160,208 oz.

Costs declined at Granny Smith to US$110 per oz. as a result of higher grades, and five other mines recorded cash costs under US$200 per oz., including Campbell (US$134 per oz.), Golden Sunlight in Montana (US$138), Porgera (US$175) and the 68%-owned Musselwhite mine in Ontario (US$180).

The lower cash costs are attributed to higher-grade ore, tighter control of costs and strengthening of the U.S. dollar in relation to local currencies.

Sandy Laird, executive vice-president, told mining analysts that cost reductions at the mines are reasonably sustainable, with the exception of the Pipeline mine, which is extracting the highest-grade ore it has. Cash costs are expected to rise as grades decline and are projected to average about US$100 per oz. over the next two years. Grades will also gradually decline at Porgera and could lead to a slight increase in costs there.

Granny Smith is expected to be able to sustain itself at current levels for a year or so. Regional exploration there is providing some excitement for Placer. A new higher-grade discovery, called Wallaby, was made 8 km north of the processing plant. The satellite deposit is believed to contain somewhere in the order of 1 million oz.

As well as the strong operating results, Placer continues to benefit from a gold hedging program. During the first half of 1998, the corporation realized an average price of US$357 per oz. — 20% higher than the average spot price. The hedging program generated additional earnings of US$90 million, compared with US$32 million in the six months of 1997.

Placer’s proven and probable reserves remain essentially unchanged at 31 million oz., following a recalculation of reserves using a lower long-term price assumption of US$350 per oz. versus the previous US$375. The recalculation resulted in only 200,000 oz. being transferred from reserves to resources.

Exploration and geological remodeling at the company’s mines in the first half of 1998 more than offset what was produced. Porgera accounted for the largest increase in reserves, but these were of a lower grade. An additional 21.4 million oz. are classified as measured and indicated resources.

Now that Placer’s position at Las Cristinas has been clarified once and for all by the recent Venezuelan court ruling that dismissed Crystallex International’s (KRY-T) claim to ownership rights over the gold deposit, the company’s priority is to complete financing for the project.

Las Cristinas is estimated to contain a proven and probable reserve of 323 million tonnes grading 1.1 grams gold per tonne, equivalent to 11.7 million contained ounces. Production is forecast to average 450,000 oz. annually for more than 14 years at an average cash production cost of US$200 per oz.

Total capital costs are pegged at US$575 million.

“We are making good progress in further optimizing the project,” said Willson. “We have continued to refine the design concept and review assumptions behind capital requirements and operating costs. The results of this work are now being incorporated into an update of the feasibility study.”

Once Placer resolves the final terms of the financing (US$495 million has yet to be raised), construction will begin. The company says Las Cristinas could come into production as early as the latter part of 2000.

“We want to put it into production as soon as possible to get the maximum benefit for our shareholders,” stated Willson.

Despite the bearish outlook for bullion prices, Placer continues to maintain a strong exploration budget, with US$115 million set aside for 1998. “Our priority is to use this current window of opportunity to gain access to the best mid-stage properties available and to advance the projects now in our pipeline,” Willson explained.

Aggressive drilling programs are advancing the Donlin Creek gold project in Alaska and the Courageous Creek gold prospect in the Northwest Territories.

Both open-pit prospects are targeted to enter the prefeasibility stage in January 1999.

By year-end, Placer hopes to have expanded on the 6.7-million-oz. resource at Donlin Creek and to have increased a 3-million-oz. resource at Courageous Creek upwards of 5-6 million oz. The measured and indicated resource at Donlin Creek stands at 48.1 million tonnes grading 2.4 grams gold. No data are available for Courageous Creek, though grades are said to be somewhere close to 3 grams.

Placer is actively drilling in Peru on the Carpa gold-copper porphyry target, and the company expects to have a resource defined by 1999.

Exploration drilling at the Mulatos project in Mexico’s Sonora state is targeting the Escondida el Victor deposit, which could add 1 million oz. or more to the project, portions of which average a better grade than the existing resource. Mulatos is estimated to contain a reserve of 49.7 million tonnes grading 1.2 grams gold, equivalent to 2 million oz.

In northern Chile, Placer is advancing the Aldebaran gold-copper property to the feasibility stage. The major can earn a 51% interest in the property, which hosts the large-tonnage Cerro Casale gold-copper porphyry deposit, from partners Arizona Star Resource (AZS-V) and Bema Gold (BGO-T).

A prefeasibility study by California-based Mineral Resource Development in late 1997 estimates Cerro Casale contains a minable resource of 19.5 million oz. gold and 5 billion lbs.
copper. The sulphide portion of the body is estimated to contain 791 million tonnes grading 0.71 gram gold and 0.29% copper, whereas an outcropping oxide portion is calculated at 56 million tonnes grading 0.84 gram gold.

Placer has completed the first stage of drilling at the Cerro Casale body, which, in terms of tonnage and stripping ratio, appears to substantiate and improve the reserve and resource. A revised resource estimate is scheduled for late 1998. Initial drilling on two satellite targets, Cerro Roman and Eva, suggests an additional resource of more than 2.5 million oz. gold.

Placer’s balance sheet remained strong at June 30, with US$356 million in cash and short-term investments. Long-term debt stands at US$615 million.