Quality driving force behind Amax growth

In its recently released 1989 annual report, Amax Gold (NYSE) stressed that quality will be the driving force behind the future growth of the company. The company notes that it plans to grow through early-stage acquisition and through exploration and development of low-cost reserves. The company’s current stable of producing mines certainly reflects Amax’s stated direction. Cash production costs at its three mines average US$132 per oz. gold.

By far the largest influence on this number is the Sleeper heap leach mine in Nevada which produced more than 256,000 oz. gold at an average cash cost of US$109 per oz. last year.

The Waihi mine in New Zealand and the Wind Mountain mine in Nevada respectively produced 71,481 oz. at US$223 per oz. and 30,903 oz. at US$265 per oz.

Waiting in the wings is Amax’s most advanced development project, the Hayden Hill, in Lassen Cty., Calif. The company intends to bring the property into production by 1992 at an annual rate of 145,000 oz. gold per year.

Evidently not fitting in with Amax’s future plans is the company’s investment in Canamax Resources (TSE). Amax notes that it is continuing to evaluate the holding which is not viewed as a core asset for the future.

Amax holds 10.4 million shares of Canamax, equivalent to 47.4% of the company. With more than US$26 million invested in the company and a quoted market value of less than US$17 million, there is little doubt that Amax is not happy with how the investment panned out.

Canamax’s troubles stem from its Ketza River mine, brought on stream in mid-1988. Ketza, in the remote Ross River area of the Yukon, was estimated to contain more than 500,000 tons grading almost 0.50 oz. gold per ton.

What was expected to be a very profitable operation, with costs about US$200 per oz. gold, turned out to be just the opposite. A triple whammy in the form of a capital cost overrun of about $6 million, a drop in grade because of excessive mining dilution, and a decrease in total reserves due to a lower-than- expected specific gravity of ore, all contributed to hurt the bottom line.

Amax notes that Canamax has loan repayments of $1.6 million in 1990 which the company expects can be covered with cash flow from operations and cash on hand. However, Amax expresses some concern over the Canamax’s ability to meet obligations of $6.1 million in each of 1991 and 1992, stating that the company would be required to sell assets and/or find additional financing, neither of which could be assured.