Slumping oil prices hurt Conwest earnings

While admitting that the recent oil price collapse wasn’t in Conwest Exploration’s business plan, Chief Executive Officer John Lamacraft is quietly hoping that an oil industry rebound could boost his company’s balance sheet.

After a $10-million reduction in oil and gas revenues helped reduce net income from $14.8 million in l985 to $9.6 million on Dec 31, 1986, that seems like extremely wishful thinking. But Mr Lamacraft doesn’t see it that way.

“Despite decidedly bearish short-term fundamentals for the oil and gas business, we remain confident of much improvement over the medium and longer term,” said Mr Lamacraft at Conwest’s recent annual meeting.

“We have set the goal of tripling our oil and gas production and reserve base over the next three years,” he said.

For the first time in several years, Conwest has been actively seeking out and screening exploration plays generated by other oil companies.

“Tripling our oil reserves is an ambitious assignment but we believe it can be accomplished through both increased exploration exposure and our strong financial capacity to undertake new acquisitions,” said Mr Lamacraft. In l986, Conwest’s net cash flow from oil and gas operations was $12.2 million compared to $19 million in l985.

Working interest in oil and natural gas liquids production for the year was 423,000 bbl or 1,160 bbl per day.

Conwest’s oil and gas interests include: a 44% interest in Mineral Resources International, which produced 700 bbl per day from operations in Swan Hills, Alta., and Skinner Lake and Browning, Sask.; a 27% interest in Faraday Resources which averaged 144 bbl per day of oil and 1.5 million cu ft of natural gas; and a 33% interest in Warren Explorations which is producing more than 100 bbl per day of oil equivalent from a Canadian reserve base of 428,000 bbl of oil equivalent.

While the slump in oil prices provided a drag on Conwest’s l986 results, the sale of the Hemlo amalgamation and an underwriting agreement has contributed to much rosier first quarter results.

Conwest reported l987 first-quarter net income of $18.04 million or $1.72 per share compared to $3.8 million or 34 cents per share for the same period last year.

The Hemlo amalgamation resulted in Conwest’s 25% stake in private Hemglo Resources being converted to a 2.3% stake in Hemlo Gold Mines Inc., the company formed to hold all the interests in Noranda Inc.’s Golden Giant mine.

The assets of the new company will be all the Hemlo assets of Golden Sceptre and Goliath Gold, including 156 mining claims adjoining the Golden Giant mine.

The Golden Giant was the first mine in the Hemlo camp to produce gold, pouring its first bar in April, l985. It is expected to produce 260,000 oz of gold this year and 350,000 oz when it peaks in 1988.

Mr Lamacraft called it “the single best investment equity agreement that Conwest has made in its 38-year history.” In l984, Conwest acquired its 25% interest in Hemglo by issuing $6.8 million of retractable preferred shares to the prospectors and grubstakers who had staked the property.

In November, 1986, Conwest received two million shares worth around $52 million representing 2.3% of the new company.

Following the sale of Conwest’s Hemlo interests, the company’s mining interests now include a 44% interest in Mineral Resources International, whose principal asset is the Nanisivik mine (zinc-lead- silver) located on the northern tip of Baffin Island in the Canadian Arctic.

The mine continues to be one of the lowest cost zinc producers in the world. According to Mr Lamacraft, the cost of producing 79,900 tonnes of zinc concentrate in l986, remained about the same for the fourth straight year.

Although zinc prices have declined recently to $790(US) per tonne, prices during 1986 were better than l985. From a low of 70 cents (US) per tonne in November, l985, prices reached a high of $920 per tonne in September, 1986.

Conwest also retained a 44% interest in Hucamp Mines, which owns 19 patented claims adjoining the eastern part of Noranda’s Geco Mine in the Manitouwadge area of Northwestern Ontario.

An agreement with Noranda Inc. entitles Noranda to earn a 70% interest in the property by completing a 2-phase exploration and development program.

The second phase of a $3-million surface drilling program is continuing. Approximately 3,100 ft has been completed and the company says copper-silver intersections are being obtained.

Conwest shares were trading recently on the Toronto Stock Exchange at $14.25, just below its 52-week high of $15.78 but well above its low of $7.58.