Royal Oak plans $81-m writedown

Royal Oak Mines (RYO-T) plans to take a pretax, US$81-million writedown as a result of lacklustre gold prices and restrictions on its ability to hedge gold production.

Using a gold price of US$300 per oz., Royal Oak recalculated the value of its assets in order to determine the recoverability of its investments. As a result, the company opted for the writedown, which will show up as a non-cash charge in its third-quarter financial statements.

The writedown is not expected to have a significant effect on cash flow from the company’s operations and earnings (before interest, taxes, depreciation and amortization) in 1998. However, the writedown will affect the value of Royal Oak’s assets at its mining operations in Timmins, Ont., and Yellowknife, N.W.T., as well as certain exploration and development properties.

The company says its new Kemess south mine and its overall Kemess property position is not affected by the writedown.

Kemess came into commercial production on Oct. 7 after testing both primary and secondary ore types. During startup the operation produced 38,300 oz. gold and 11.2 million lbs. of copper.

Royal Oak has been limited in its ability to hedge its gold production, owing to unspecified agreements related to its debt. The lack of a hedging program has caused the mining company to sell its gold production into the spot market.

The spot price of gold has averaged US$294 per oz. in 1998, compared with US$331 and US$387 per oz. in 1997 and 1996, respectively.

Forward sales over the past six years had increased Royal Oak’s realized gold price to as much as US$93 per oz. from US$20 per oz.

“We believe it is prudent to take the writedown in the third quarter as we do not expect the gold price to increase significantly in the near term,” says Margaret Witte, president of Royal Oak. “Although we have been successful in reducing average cash costs at our Timmins and Giant operations to below US$270 per oz. in the first half of this year, the current gold price is expected to decrease the amount of gold contained in minable ore reserves and therefore could affect the mine life.”