Windy Craggy settlement prompts Kemess development

The British Columbia government and Geddes Resources (TSE) have resurrected a compensation agreement for the 1993 expropriation of the Windy Craggy copper deposit in the northwestern corner of the province.

Geddes and parent Royal Oak Mines (TSE) hammered out an agreement with the government similar to the proposed deal that collapsed earlier this year. The new agreement includes a cash compensation component, as well as financial assistance for covering the infrastructure costs of developing the South Kemess copper-gold deposit in central British Columbia.

“We had always said we were prepared to compensate for (the expropriation) of Windy Craggy,” says B.C.’s Mines Minister Anne Edwards. “This agreement fulfills that commitment and also provides for the development of the Kemess mine.”

South Kemess is 60%-owned by El Condor Resources (VSE) and 40%-owned by St. Philips Resources (TSE).

Royal Oak, which already owns 39% of Geddes, will acquire the rest of the company on the basis of 0.3 of a Royal Oak share for each Geddes share.

To gain control of the Kemess project, Royal Oak will purchase all the outstanding shares of El Condor on the basis of 0.9 of a share of Royal Oak plus $2 in cash for each El Condor share.

Royal Oak is also offering $3.40 in cash for each share of St. Philips.

The Boards of all the companies are in agreement as to the fairness of the takeover ratios, and the combination is expected to be completed by the end of September (subject to the receipt of shareholder approval).

Upon completion of the acquisitions, Royal Oak will have paid out $67.9 million and issued 20.9 million shares to acquire the North and South Kemess properties.

“We’re extremely excited,” says Margaret (Peggy) Witte, president of Royal Oak and chairman of Geddes. “The whole look of the company has changed with the acquisition.”

The Kemess acquisition adds 4.1 million oz. gold and 1 billion lb. copper to the company’s reserves.

Witte expects Royal Oak’s production figures to improve significantly over the next five years, projecting yearly output of more than 1 million oz. gold (and gold-equivalent) by the year 2000, up from a 1996 estimate of 500,000 oz. Cash production costs for Royal Oak are expected to drop to US$217 per oz. by 2000 from US$290 per oz. projected for 1996.

In addition to $29 million in cash compensation, the provincial government will provide $20 million for an exploration fund to be matched by Royal Oak. The fund will be used to explore and develop properties in British Columbia, with the $49-million total representing the compensation component for Windy Craggy.

A further $50 million will be applied to on- and off-site infrastructure costs for Kemess, in return for a 4.8% royalty on all copper produced from the property.

The government will also provide $49 million, payable over four years, to cover the cost of a 320-km-long powerline.

Additional funding includes payments of $1 million per year over 14 years and $4 million over two years.

The total cost to the government in current dollar terms is $104 million.

A prefeasibility study of South Kemess estimates that a capital cost of $350 million is required to place the project in production.

Minable reserves at Kemess South are estimated at 221 million tons grading 0.22% copper and 0.018 oz. gold per ton, with a stripping ratio of 1.26-to-1.

Based on a 44,000-ton-per-day mining and milling operation, the project should throw off 213,000 oz. gold and 58 million lb. copper per year over its 15-year life. Based on US90 cents-per-lb. copper, cash production costs are estimated at US$119 per oz. gold output over the life of the mine.

With the current strength in the price of copper, Witte expects to complete a copper-for-gold swap that would involve selling five to seven years of copper production forward and using the proceeds to buy gold.

Royal Oak estimates that with the copper swap, gold production from Kemess would approach the equivalent of about 400,000 oz. per year at a cash cost of between US$150 and US$170 per oz.

Upon completion of the acquisitions, Royal Oak will proceed with a final feasibility on South Kemess. Production is expected to begin in late 1997.

Witte says Royal Oak will fund construction of the mine from existing resources, as well as from the sale of up to US$125 million in senior subordinate debentures.

In addition to the North and South Kemess properties, Royal Oak is acquiring the Red Mountain property in northwestern British Columbia from Barrick Gold (TSE). The project has an indicated resource of 2.5 million tons grading 0.26 oz. gold per ton, plus an inferred resource of 1.4 million tons grading 0.13 oz. gold.

Under the Barrick agreement, Royal Oak is required to spend a minimum of $3 million on the property over the next three years.