Royal Oak reports loss for third quarter — Writedown, low gold price take wind out of company’s sails

Continued weakness in the price of gold has led Washington state-based Royal Oak Mines (RYO-T) to revalue its assets at a gold price of US$300 per oz. and take an $86.4-million writedown on its mining assets and investments.

The company reported a third-quarter loss of $107.4 million (or 72 cents per share) on revenue of $21.9 million, compared with a loss of $2.4 million (2 cents per share) on $53.9 million in the corresponding 3-month period last year.

The drop in revenue reflects a decrease in gold production, which was caused by last year’s closure of the Hope Brook and Colomac mines and by a decrease of 21% in the average realized price of gold from US$412 to $324 per oz.

For the first nine months of 1998, Royal Oak incurred a loss of $140.1 million (98 cents per share) on revenue of $66.9 million, versus a loss of $62.6 million (45 cents per share) on $160.8 million in the comparable period in 1997. The writedown of $86.4 million for the current year to date compares with a $39.7-million writedown in 1997.

During the third quarter, net cash used in operations totalled $5.4 million (4 cents per share), compared with cash flow of $34.6 million (25 cents per share) in the year-ago period. In the 9-month period ended Sept. 30, 1998, cash used in operations totalled $78.8 million (55 cents per share), versus $37.2 million (27 cents per share) a year ago.

During the third quarter, gold production from continuing operations at the Giant mine in the Northwest Territories and the Pamour and Nighthawk mines in Timmins, Ont., totalled 44,633 oz. — an 8% decline from the 48,630 oz. produced in the same period of 1997. Cash costs averaged US$252 per oz. for the 3-month period, compared with US$299 per oz. in 1997. The reduction in cash costs is attributed to sustained cost-cutting measures and a stronger U.S. dollar.

Added production from the Hope Brook and Colomac mines, which closed in September and December, respectively, of 1997, boosted third-quarter production that year to 94,505 oz. at an average cash cost of US$310 per oz.

During the first nine months of this year, gold production from continuing operations was 135,922 oz. at a cash cost of US$263 per oz., versus 145,917 oz. at a cash cost of US$316 per oz. a year ago. Total gold production in the first nine months of 1997 was 284,430 oz. at a cash cost averaging US$344 per oz.

Operating results for 1998 do not include production from the new Kemess South mine in north-central British Columbia, which achieved commercial levels in early October. Revenue from the sale of gold and copper contained-in-concentrates during startup and commissioning has been netted against startup costs.

In the third quarter, Kemess produced 37,051 oz. gold and 9.8 million lbs. copper. Total production since startup is 40,096 oz. gold and 11.1 million lbs. copper.

The success of Kemess is critical to Royal Oak’s future, according to President Margaret Witte: “We are very pleased with operations at our Kemess South mine. The mine has now been in commercial production for over a month, and the operating performance is meeting our expectations.”

Kemess is designed to produce an average of 250,000 oz. gold and 60 million lbs. copper over a mine life of about 16 years. Cash costs are projected to average US$133 per oz., based on a copper credit of US80 cents per lb.

Minable reserves are estimated at 210.2 million tonnes grading 0.62 gram gold per tonne and 0.21% copper, equivalent to a contained resource of 4.2 million oz. gold and 996 million lbs. copper. The stripping ratio over the life of the mine averages 1.16-to-1, whereas recovery rates are expected to average 78% for gold and 82% for copper.

Royal Oak expects to produce a total of 280,000 oz. gold from all operations in 1998 at a cash cost of US$240 per oz., net of a copper byproduct revenue credit of US75 cents per lb. The company has produced a total of 176,018 oz. to Sept. 30, including 40,096 oz. from Kemess.

In related news, Royal Oak is attempting to refinance US$120 million of short-term senior debt financing with a long-term conventional project finance facility at a significantly lower interest rate. The US$120-million debt issue was arranged with Trilon Financial of Toronto to complete construction of the $470-million Kemess mine.