Royal Oak gains consent of US bondholders to draw down loan

With only $63,000 in cash at the end of the first quarter and a working capital deficit of $105 million, Royal Oak Mines (RYO-T) has finally reached agreement with the majority of its subordinated bondholders in the United States and will soon begin drawing down funds under the terms of a US$120-million senior debt financing arranged with Trilon Financial of Toronto.

The funds will be used to repay the company’s existing US$44-million senior secured notes now outstanding, bring the company’s accounts payable up to date and provide sufficient working capital for the startup of the Kemess gold-copper mine in north-central British Columbia.

Royal Oak needed the consent of 51% of its US$175-million senior subordinated bondholders before it could begin drawing down the US$120-million loan. That consent was granted in exchange for a 6.4% fee, payable in treasury shares of the company at a price of US$1.125 per share, an adjustment of the coupon rate of the senior subordinated notes from 11% to 12.75%, and the issuance of security subordinate to the senior secured notes. As part of the deal, Royal Oak will have the right to redeem the senior subordinated notes immediately.

The new US$120-million debt issue covers a 2-year term and carries a junk bond interest rate of one-month London Interbank Offer Rate plus 6%, which equates to a rate of approximately 11.7%. Under the terms of the loan agreement, Royal Oak will also pay Trilon a 1.6% gross royalty per year on Kemess’ revenue, to a maximum of US$14 million. In addition, Trilon will receive a 2% fee for the loan.

In the event Royal Oak cannot repay the principal amount of the loan or refinance the loan’s terms, and is in default, Trilon would assume ownership of a US$120-million share of Kemess, ahead of the subordinated noteholders.

Royal Oak reports that startup of the $470-million Kemess mine has begun, following completion of the mill and tailings pipeline. Over 9 million tonnes of waste have been stripped from the open pit during the preproduction phase.

Once in full production, Kemess is slated to average 250,000 oz. gold and 60 million lbs. copper per year over a mine life of more than 16 years. The cash cost is projected to average US$133 per oz., based on a copper credit of US80cents per lb. If the copper price were to hit US90cents or US$1 per lb., the cash costs would fall to US$106 per oz. or US$79 per oz., respectively.

Royal Oak is optimistic that Kemess will produce 168,000 oz. gold and 41 million lbs. copper in 1998 at a cash cost of US$128 per oz. gold, net of copper credits. The 168,000 oz. gold represents 67.2% of the mine’s projected yearly average.

Minable reserves are estimated at 210.2 million tonnes grading 0.62 gram gold per tonne and 0.21% copper, equivalent to a contained 4.17 million oz.

gold and 996 million lbs. copper. The stripping ratio averages 1.16 to 1, and life-of-mine recovery rates are expected to average 78% for gold and 82% for copper.

For the first three months of 1998, Royal Oak reported earnings of $2.3 million (or 2cents per share) on revenue of $22.4 million, versus a loss of $8.1 million (6cents per share) on revenue of $48 million in the corresponding period of 1997. Cash flow, before changes in other operating items, was $900,000 in the first quarter of 1998, compared with a cash deficit of $500,000 in the same quarter last year.

The improvement in operating results follows the closures of the Hope Brook gold mine in Newfoundland and the Colomac gold mine in the Northwest Territories.

Gold production from continuing operations at the Giant mine in the N.W.T.

and the Pamour and Nighthawk gold mines in Ontario totalled 45,557 oz., down 5% from the 47,999 oz. produced in the first quarter of 1997. Total production from all operations in the first three months of 1997 was 85,080 oz. gold.

Average cash costs from continuing operations were down 16% at US$280 per oz., compared with US$332 per oz. a year earlier. The average cash cost for all operations a year ago was US$372 per oz.

Royal Oak realized a gold price of US$345 per oz. during the quarter, a 17% premium over the average spot price of US$294 per oz.