U.S. coal-miner Nerco moves solidly into gold

Choosing between tenure at the University of Alaska or forming his own exploration company, Lawrence Heiner opted out of academia in 1970 and created Resource Associates of Alaska. He hasn’t looked back since.

The company eventually grew into one of the largest mineral exploration firms in the state and seven years ago it was acquired by Nerco Minerals, a wholly-owned subsidiary of Nerco Inc. (NYSE). The parent company, which trades on the New York Stock Exchange, derives about 90% of its revenue from coal mining but in the past five years Nerco has expanded operations into precious metals. Last year this business segment yielded a record 146,000 oz gold and five million oz silver.

Nerco was relatively unknown in Canada until it purchased the Congold mine at Yellowknife for $64 million in December, 1986; Cominco sold the mine to reduce its massive debt load and even Nerco concedes it paid top dollar for the toehold in Canada’s gold mining industry.

But considering what others have shelled out for North American gold production since that time, the price seems very reasonable today. Also, Nerco has significantly increased reserves at Con (to 2.5 million tons grading 0.33 oz gold per ton) since the purchase and gold prices are $130(US) per oz higher.

Nerco hasn’t been sitting on its hands at Con either, The Northern Miner learned on a recent visit to Nerco Minerals’ head office in Vancouver, Wash. (Nerco Inc.’s headquarters are located a short distance away in Portland, Ore.). Indeed, what’s happening at Con follows a pattern set at several other Nerco operations where production was optimized and costs lowered to improve profitability.

Last year, approximately $13.7 million(US) was spent at Con on capital additions and Heiner estimates the mine could produce 135,000 oz gold per year without a new mill. This could be achieved with two production shafts (there is only one at present) and by recovering gold from arsenic residues, he claims.

Discussing plans for the Con mine from Yellowknife, Darrell E. Spilde, general manager and vice- president of Nerco Con Mine Ltd., says about half of last year’s capital budget was spent on new equipment and the rest on mine development. “The mine was way underdeveloped” and mine equipment was “pretty well worn out,” he notes, adding that future emphasis will be on mechanization.

Spilde believes a 100,000-oz-per- year production target is achievable within three years but reaching that goal will require a new production headframe on the C1-B3 shaft. Vancouver-based Kilborn Engineering has done optimization studies on the mine and this near- term goal is realistic in his view. If all goes according to plan this construction project should be completed by year-end. The present 50-year-old headframe is unstable and a temporary collar sheave had to be installed for servicing the shaft.

Recent increases to Con’s reserve base can largely be attributed to the C1-B3 mine workings, says Spilde, who notes that Cominco never carried reserves there because it didn’t have the ability to hoist material from the mine. These reserves tend to be refractory but lower recoveries could be offset by mechanized mining methods and higher milling rates, he emphasizes. Spilde confirms they are “getting excellent drill intercepts in the south side of the mine” and he sees “opportunities in the upper levels of the Robertson side as well.” There are also higher grade reserves in the lower reaches of the Robertson shaft which have yet to be accessed. Explorat ion potential good

Extremely optimistic about the exploration potential at Con, Spilde suggests that sufficient reserves may eventually be found to justify a new mill. Current throughput is 750 tons per day which could rise to 1,000 tons with the addition of a new ball mill. In any event, it would be hard to beat the existing 96-97% recovery rate in the plant, he insists.

Although precious metals are important to Nerco, there’s a lot more to the company than that. Nerco was actually conceived in 1976 as the coal mining arm of Pacific Corp., a diversified electric utility with 49% of its $2.2 billion in annual revenues derived from non- electric sources. Its two major subsidiaries — Pacific Telecom and Nerco, were both formed in the mid-1970s and its fourth line of business, financial services, began operations in 1985. Coal sales last year totalled 31 million tons (production was 25 million) and Nerco ranks among the top 10 U.S. coal companies.

Stephen Semeniuk, manager of research for Canarim Investment Corp. in Vancouver, B.C., has followed Nerco for several years and he feels the company has more than a few things going for it including “the learning curve effect and strong cash flow.” He argues that Nerco has learned to apply capital to improve productivity and the bottom line at several of its operations including the exceedingly low grade Candelaria mine in Nevada. Hard to ignore

“For someone who likes resource companies, this one is hard to ignore,” he contends.

The 3.2-million-ton-per-year Candelaria mine, a heap leach operation, averages 0.004 oz gold and 1.3 oz silver with recoveries of 95% and 77% respectively for the two metals; and its mining costs are among the lowest in the United States. Direct production costs there last year for gold were $260.97 per oz and $4.08 for silver. These costs were slightly higher than Nerco’s Alligator Ridge mine in Nevada and the DeLamar project in Idaho, but 14% lower than Con where the cost to produce an ounce of gold was $305.38. Nerco recession-proof

Semeniuk describes Nerco as “recession-proof because of its long-term coal contracts with major utility customers,” and he concludes Nerco also provides “inflation protection because of its significant gold and silver production.” Oil and gas operations, which in the past “left a string of red ink” behind them, according to one Nerco official, are also expected to contribute operating income in the future. A month ago, Nerco announced plans to acquire working oil and natural gas interests from Placid Oil for $150 million which will quadruple its daily natural gas production rate and triple its gas reserves.

Coal isn’t a “hardrock” commodity but Nerco’s coal contracts are certainly rock hard and long-term. Of its 10 long-term coal contracts, the earliest expires in 1991 and the last in 2016. These are base price escalated contracts with no price opener, something that proved to be a boon for the company during the high inflation of the early 1980s.

Several of these contracts have resulted in litigation and earlier this year Nerco received $37.5 million for the cancellation of a coal contract which will show up on this year’s earnings. An 18-year, 100- million-ton coal contract signed in 1980 was recently converted into a natural gas supply contract which in terms of volume is huge. The maximum annual amounts of natural gas included in the sale range from 20-46 billion cu ft per year. Long-term coal contracts

Nerco’s coal contracts were signed in the early to mid-1970s when supply was a concern and last year one of its contracts was five times the market price for coal. With the glut of coal on world markets, however, competition became cut-throat so Nerco diversified into metal commodities, something at which it has been extremely successful. Even so, Nerco still has tremendous leverage from its long- term coal contracts.

In 1981 Nerco was privately owned by PacifiCorp which derived income from Nerco through dividends. But Nerco was allowed to spend some of its cash flow on diversification so it purchased Resource Associates of Alaska, which was primarily involved in grassroots exploration.

Because the cycle from exploration to mine development takes years, Nerco decided to develop other sources of income and cash flow so it expanded its coal business into the eastern U.S in 1982 and began its disastrous foray into oil and gas. After reporting a $35- million loss in 1985, the division was totally reorganized and it appears to have turned the corner.

Emphasis was soon changed from high risk exploration drilling to development drilling in proven fields and last year $65 million was spent purchasing gas properties.

Nerco bought its first operating mine (Candelaria) in 1983 and a 50% interest in the Alligator Ridge mine from Occidental Minerals that year as well. DeLamar was purchased in 1984, the same year Nerco went public.

In the first quarter, Nerco reported net income of $31.7 million or 95 cents per share, a 111% increase from the previous quarter and with a little bit of luck things could get better. Heiner predicts the company’s oil and gas division will be “solidly in the black this year,” chiding (perhaps) that the “minerals culture has been applied to oil and gas.” He also confirms that Nerco may consider floating a gold subsidiary and opening an exploration office in Canada.