Placer Dome opts out — Corona goes alone at Eskay

A $10-million feasibility study to be completed next year will be used by International Corona (TSE) as a bankable document to continue development of the Eskay Creek project, now estimated to contain minable reserves with more than three million oz. gold and gold equivalent.

Earlier this year, after lengthy negotiations, the two Vancouver-based majors hammered out a staged joint venture agreement whereby Placer was to spend $240 million to earn an additional 28% stake in Eskay Creek and bring its total interest to 50%.

After completing a 3-month due diligence review, Placer Dome said while Eskay Creek “on its own is attractive and economically viable,” the deposit’s tonnage would not sustain a mine project that satisfies its financial objectives. As a result, it elected not to proceed to the exploration and feasibility stage of its agreement with Corona.

This agreement stated that should a production decision be made, Placer would receive only 50% of the cash flow from operations, with no provision for first paying back capital costs. Corona also had the right to operate the mine, which was to have been built by Placer because of its experience and expertise with metallurgically complex gold deposits.

“The deal was too tough for them (Placer),” Steen said.

Some mining analysts agree, particularly as Placer is facing a tough decision whether or not to develop the Mt. Milligan gold-copper project north of Prince George, B.C., which it acquired in 1990 for $258 million. That decision is still pending, and speculation is heating up that Placer may put the low-grade project on hold or take a writedown of its investment. In any event, it has become difficult to find a mining analyst who isn’t of the view that Placer Dome paid too much to acquire a deposit where the economics were not proven by an audited independent feasibility study. As for Eskay Creek, Placer Dome spokesman Hugh Leggatt said the recent decision reflects the company’s preference for large, bulk-tonnage projects which can contribute significantly to its reserve base (Placer produced 1.4 million oz. gold in 1990). Like many other majors, Placer is also placing increased emphasis on looking offshore for these new elephant-sized gold or base metal opportunities.

“We successfully operate many low-grade mines in various parts of the world, including British Columbia, but one thing they have in common is large tonnages and long mine lives that can provide us with a good return by averaging out the spikes and valleys of metal prices,” Leggatt said. Placer Dome did not release details of its due diligence review of Eskay Creek, although Corona said the calculations of both companies on reserves and grade “coincide generally.” But the companies did not agree on the size of the operation. Corona’s model was based on 400 tons per day, while Placer based its model on 750 tons per day.

A preliminary study by Kilborn Engineering (commissioned by Corona) estimated capital costs of $210 million

for a 400-ton-per-day operation and a production cost under US$150 per oz. Annual

production is projected to

be 250,000 oz. gold and 10 million oz. silver, over an 8-year period. Although Corona plans to advance Eskay Creek to the feasibility stage on its own, Steen said the company has not yet decided what its next course of action will be relative to its various options.

As for Placer Dome, Leggatt discounts speculation that the Eskay Creek decision is an attempt to force a better deal from Corona, or the start of a creeping takeover of that company.

“We are known as straight shooters,” he said.