TECH CORP. An Eye for the Bottom Line

Although Teck Corp.’s financial reports carry tidy, organized s naps hots of the company and its investments in exploration companies, it’s clear that Teck has no textbook formula in acquiring or dealing with them. One thing that can be said with certainty is that Teck wants its assets to perform. And when an exploration company is successful, Teck will share its interest to spur development and to reduce risk. The final form doesn’t matter; increasing the value of an asset does. Take, for example, Consolidated Silver Standard Mines. Unlike many vse-listed junior exploration companies, css enjoys a large and varied property portfolio, healthy working capital and income from its properties. In fact css earned 17 cents a share last year.

Css was incorporated in 1946 to develop the Silver Standard mine, near Hazelton in central British Columbia. In its 12-year life, the mine proved to be one of the four richest B.C. silver mines. By pioneering the use of helicopters for exploration in central and northern British Columbia, the company discovered enough silver, porphyry copper, molybdenum and precious metal properties to ensure continued investor interest.

When Teck moved west in the late 1960s and sought western exploration exposure, Silver Standard was running short of funds. Teck acquired its 32% equity position by financing css’s exploration programs, beginning in 1969. Two years ago Teck proposed that css’s board consider Bob Quartermain, a field geologist, as new president. Teck had been impressed by Quartermain’s performance in development drilling at Hemlo.

Since taking over, Quartermain has pushed exploration on css’s portfolio of 30 properties while strengthening its balance sheet. Last year $477,000 was spent by css and others on 14 of them. Those programs were sufficiently encouraging that a number will be under option this year, resulting in a reduction of direct exploration expenditures by css.

Among css’s more interesting properties, most of which are precious metal, copper and silica, is a gold property near Smithers, B.C. Inferred reserves are 60,000 tons grading 0.32 oz gold per ton. At Dome Mountain, css has optioned another promising gold property to Total Erickson Resources. A third property near the Erickson gold mine at Cassiar, B.C., features similar geology and good gold values. A rare earths property in the Yukon yielded grab samples that assayed as much as 3% combined rare earths, 3.5% zirconium and 15% thorium.

Css defrays costs through royalties, option payments, equity and flow- through share offerings, and sales of other shares received for properties. Early this year, Silver Standard netted more than $400,000 by selling shares of Blackdome, British Columbia’s newest gold producer. Css had traded certain key claim blocks for shares early in Blackdome’s development. Css’s working capital now stands close to $1.4 million.

One property may soon go into production. The Tuscarora property in Nevada is leased to Freeport-McMoRan Gold Co. whose Jerritt Canyon gold mine is four miles away. Freeport plans to mine Tuscarora where reserves are 1,192,000 tons grading 0.158 oz gold per ton with an additional 311,500 tons of heap-leachable material. Css receives advance royalties and retains a 2.19% net smelter royalty.

Teck’s shares in css, which were trading at $1 at presstime, are worth about $860,000. Saying he prefers to spend his time on geological matters rather than promoting the stock, Quartermain adds: “If I’m doing my job right, the market will respond.” The stock’s 1987 low was 70 cents .

Css is but one of six Teck investments in exploration and operating companies. Others include Highland- Crow Resources (13%) and Golden Knight Resources (30%). The Highland-Crow story predates Teck’s move west. Highland-C row was formed in 1977 through an amalgamation of five companies. Its main asset is now the Pickle Crow mine, which contributed substantially to Teck’s early growth. From 1935 to 1966, the mine, 250 miles north of Thunder Bay, Ont., produced 1,446,214 oz of gold and 168,757 oz of silver. When Teck closed it in 1966 as a result of fixed gold prices and labor shortages, substantial reserves grading 0.33 gold were left in the workings.

For 11 years, the mine remained a “non-performing asset worth next to nothing,” in the words of John May, president of Teck Explorations. Then Teck turned Highland-Crow management over to Gordon Keevil, a geologist and nephew of Norman Keevil Sr, who had been involved in exploration activities unrelated to Teck.

In 1985 and 1986, Highland-Crow spent $2 million on the old property, resulting in proven reserves of 154,177 tons grading 0.33 oz gold per ton; probable reserves of 345,597 tons in two zones grading 0.32 oz per ton; and possible reserves of 2,712,290 tons grading 0.20 oz per ton. At current gold prices, potential exists for open pit and underground operations.

A $2.5-million program leading to the preliminary feasibility stage is now under way. Highland-Crow says gold- bearing formations appear to be continuous from surface to at least 4000 vertical feet. The lateral extent of the deposit is unknown. Work to date suggests the viability of a 600-ton-per-day mill which could be operational by late 1988.

Highland-Crow has other interesting development bets. One is a 2. 5% net smelter interest (Teck holds another 2.5%) in another former producer, the Golden Rose. This mine, 40 miles north of Sturgeon Falls, Ont., is being redeveloped by Emerald Lake Resources, a related company. Geological reserves on the property now exceed two million tons grading 0.24 oz gold per ton. Production at a rate of 400 tons-per-day will begin in mid-1987.

Highland-Crow also has a 1.5% net smelter interest in property east of Val d’Or, Que., on which D’Or Val Mines, a Hughes-Lang Group company, has spent more than $9 million. D’Or Val says a feasibility study may be complete by early summer.

At Highland-Crow’s current stock price, Teck’s formerly worthless asset is valued at about $5 million. Teck retains a continuing right to provide production financing and the right of first refusal for equity financing.

In contrast to css and Highland- Crow, Golden Knight Resources was inactive until four years ago. Then Golden Knight became involved in its now-famous joint venture with Inco Ltd. in the Casa Berardi district of northwestern Quebec. After raising and spending more than $10.4 million on exploration to earn and retain its 40% interest in the joint venture, Golden Knight and Inco, the project manager and 60% joint- venture partner, announced in mid- February that three zones in the Golden Pond deposit contain just short of 10 million tons grading 0.22 oz gold per ton. Inco and Golden Knight were expected to have announced a production decision by mid-April for the East zone. Its reserves are 2,790,000 tons grading 0.25 oz gold per ton.

Teck’s relationship with Golden Knight began when Harold Keevil, a broker with Canarim Investments and Norman Keevil Jr’s brother, brought to Teck’s attention the fact that Bruce McDonald was seeking financing. In a 10-minute meeting later that day, Teck agreed to underwrite the company to the tune of $1.5 million and secured ongoing financing rights.

The association grew when, shortly thereafter, Teck provided $400,000 in financing for McDonald’s new Noramco Capital Corp., earning a 15% interest in Noramco.

Noramco subsequently organized funding for Golden Knight, Highland-Crow, Emerald Lake and other exploration companies in which Teck has interests. Gordon Keevil is the link between Teck and McDonald, president of Noramco. Tec k’s interest has fallen to 9.5% since Noramco went public, but it is nevertheless worth at least $7.7 million.

In early 1986 Teck acquired effective control of Golden Knight by purchasing 1,495,000 shares of Golden Knight for $2,468,493 and 402,445 shares of Teck. These shares were valued by Teck at $7,645,000. The agreements left Teck with 30% of the issued capitalization of Golden Knight. So, for $9.1 million, Teck acquired a 12% interest in a substantial new gold orebody. To maintain its 30% interest, Teck’s holdings in Golden Knight have since increased to 2,470,000 shares. Their market value is now $42 million.

The success of the Inco-Golden Knight joint venture is well-known, but the full potential of their property is not. The joint venture now holds 882 claims which extend 26 miles along the east-west strike trend. In the immediate area of the Golden Pond, which covers a strike length of 2.5 miles, four mineralized zones of economic interest have been discovered. Reserve estimates are based on diamond drilling of three of these zones. Nine other gold anomalies tested by overburden drilling remain to be diamond-drilled.

Inco and Golden Knight recently announced a 2-phase, $23.7-million exploration program on the Golden Pond West zone where reserves are calculated at 4,215,000 tons grading 0.19 oz gold per ton. A 1,500-m incline, a 12,000-ton bulk sample and 55,500 m of drilling are planned. Golden Knight will partially finance its portion of the $9.2 million first phase through a flow-through agreement with cmp 1987 (Quebec) Resource Partnership Co.

These various developments will guarantee Teck participation in a number of potential gold mines. It is almost too obvious to say that Teck’s investments have been shrewd. The company has certainly profited from the revival of interest in gold in Canada and from the popularity of flow- through funding.

But Teck has also been timely in making the right bets. Teck’s managers have provided credibility, expertise, funding and encouragement to its junior partners who have enjoyed wide berth to do their best. And Teck’s flexibility has resulted in relationships that have grown organically rather than by policy decree. For Teck, the foot in the passenger-side door can lead to the driver’s seat — for comparatively little money and minimal risk.