WITTE’S ROYAL TOUCH

Few mining executives have faced such complex and demanding challenges as those taken on recently by Margaret (Peggy) Witte, the hands-on chairman, president, and chief executive of Royal Oak Mines.

Witte’s ability to meet those challenges is only partly reflected by the company’s latest operating and financial results. Royal Oak turned out 245,469 oz. gold last year from mines in the Northwest Territories, Ontario and Newfoundland. And despite a US$18 decline in the average spot gold price, net income rose to $11.4 million in 1992 from $8.6 million a year earlier.

This year the company expects to produce 335,000 oz. gold at a cash cost of about US$280 per oz. — from three mines that not long ago were better known for producing more red ink and headaches than gold. What’s more, Witte has her eye on two other challenges, the mothballed Colomac gold mine north of Yellowknife and the Windy Craggy project in northwestern British Columbia.

The Colomac acquisition is a coming home of sorts for Witte, who acquired and advanced the project through her first junior company, Neptune Resources. In the late 1980s, Neptune raised about $150 million to develop Colomac into a mine, including $90 million from a bank loan. The equity portion was provided by Northgate Exploration and U.S.-based Gold Reserve.

Witte’s plan to produce 200,000 oz. gold from the open pit operation was unquestionably ambitious. Mining analysts expressed concern over the property’s remoteness (137 miles northwest of Yellowknife) and hostile climate, as well as the cost of on-site electrical generation from diesel-powered generators. Others wondered if this young, aggressive woman had what it took to run a mine and manage a company.

Certainly, the professional ingredients were in place. Witte has an M.Sc. degree in metallurgical engineering from the Mackay School of Mines in her native Nevada, and years of technical experience in this field. And she had learned business skills from running her own consulting company, Witteck Development.

With Colomac however, Witte got on stage, but she didn’t get to perform. When a small but crucial part of the financing package fell apart, Northgate secured its control position and squeezed her out. The Canadian major went on to develop the mine and build a new 10,000-ton-per-day carbon-in-pulp mill powered by its own 13.5-megawatt power station. But project costs soared over $200 million, start-up and operating problems surfaced, gold prices weakened, and a cash-squeeze forced a decision to shut down after only one year of production (146,400 oz.).

Does Witte think she could have done better? “It’s hard to say yes or no, but I believe yes, if the banks and creditors had agreed to restructure, and if at least the bank loan had been protected by forward hedging.”

Witte admits she was personally hurt when Northgate pushed her aside. “I viewed Colomac as a parent views a child and the day they took over, I knew it would die a slow death.”

Human nature being what it is, Witte no doubt appreciates the irony of acquiring Colomac from Neptune in a swap-for-shares deal that works out roughly to five cents on the dollar. The mine will be bought, free of all debts and encumbrances, for 3.5 million common shares of Royal Oak, plus a five-year operating royalty if the gold price exceeds US$400 per oz. What goes around, comes around.

But if Colomac is put back into production, it won’t be for sentimental reasons. Mike Werner, now manager of N.W.T. operations, will be overseeing a detailed feasibility study this summer that will take a hard look at reopening the mine in 1994. Reserves in three zones are reported as 19.6 million tons containing over one million ounces of gold (averaging 0.053 oz. gold), and exploration potential is considered excellent.

While the upside is obvious, Witte says shareholders are protected on the downside if a decision is made not to re-open the mine. “We would probably liquidate the assets for their salvage value.”

Royal Oak has carved a niche for itself by identifying and acquiring under-performing or under-valued mining assets at bargain prices. This strategy was put into motion in 1989, when Witte and long-time partner Ross Burns acquired a shell company and set out to find a new acquisition. “By this point I had learned a few lessons from the Colomac experience,” Witte recalls. “I knew Rome wasn’t built in a day, and I knew this was not a time to build major projects.”

In late 1990, with only $1 million in the Royal Oak treasury, Witte launched her $35-million initiative to acquire the Pamour group companies from the creditors of Giant Resources of Australia. Eyebrows were once again raised. The corporate structure was complex, and the two labor-intensive mines at Timmins and Yellowknife were bleeding — production costs were nearly US$400. But Witte surprised critics and completed the financing (about $16 million of equity and $19 million of debt) during a period of weak financial markets.

Part two of the Royal Oak strategy is the turnaround, and that came quicker than anyone expected. The ink was barely dry when unprofitable operations such as the narrow-vein mining at Timmins and a tailings retreatment plant in Yellowknife were closed, and cost-cutting measures put into place. The workforce was reduced by about 120, and administrative costs slashed when offices were moved from Toronto to a modest location in Vancouver. The Pamour companies were eventually merged with Royal Oak, and a hedging program was collapsed to pay off all long-term debt.

“When we first looked at the Pamour group we saw areas where huge savings could be made,” Witte recalls. “Our plan was to bring in solid technical people to run things — not accountants and lawyers.”

Witte strongly believes in the hands-on approach, spends considerable time at the mine sites (a cross-country dash to each of the mines each month), and is one of the few mining executives that can quote costs for drill bits, or lime, or a new scoop. She pays fastidious attention to the small details that can add up to save big money, and places great emphasis on transferring business skills to senior staff and mine managers. “We run our mines on a cash basis, and that means if a mine manager wants capital for new equipment, he has to be able to show he can cover it.”

The turnaround plan worked well at Giant and Timmins, and by the first nine months of 1991, the cash cost of production was reduced by about US$60 to US$330. Net earnings reached $8.6 million from gold production of 141,738 oz. for the nine-month period, compared with a $4.5-million loss a year earlier.

By the summer of 1992, Royal Oak was pouring gold from its third mine, Hope Brook in Newfoundland. The former producer was acquired from BP Canada in return for five million Royal Oak shares and a five-year royalty effective at gold prices over US$380 per oz.

Those who thought Witte met her match at “Hopeless” Brook — so dubbed because the uneconomic mine was plagued by a series of operating problems, delays, setbacks, and environmental control problems — were again surprised. “Mike Werner did an excellent job at Hope Brook,” Witte said. “The mine turned out 50,000 oz. gold last year (1992) at a cash cost of US$255, which is better than projected.”

With both Hope Brook and Timmins in good shape, and Windy Craggy a project still off in the future, Royal Oak intends to get the Yellowknife division back on track. Costs have been adversely affected by a prolonged labor dispute that began last May. Strike-related costs amounted to $3.4 million in 1992, which if excluded, would have boosted Royal Oak’s net earnings to $14.9 million. (Last year’s average cash cost of production from all mines, US$304, includes all direct operating costs except strike-related costs.)

The labor dispute at Giant turned tragic last September 18, when nine miners died as a result of an explosion later found to have been deliberately set. Witte got the news while on vacation in Hawaii, but without any explanation of what happened. She r
ecalls being so distraught that she didn’t speak a word during the five-hour flight to the mainland. “I thought we had a major ground fall, or some sort of accident. It was devastating.”

Witte met her staff and workforce in Yellowknife, and then met with the widows to reassure them the company would be there for them. Soon came the shocking news that police were treating the case as a homicide. “This didn’t lift any weight off my shoulders. It made me feel worse to know we had a terrorist in our community, to know that our own workforce was murdering our employees.”

Witte says learning to deal with death, and the self-examination it evokes, was a maturing experience. It was one of the widows, Witte recalls, who reassured her that the mine was good for the community and helped her to focus on the living.

Labor relations may still be unresolved at Giant (workers are now attempting to certify a new union), but Witte says the strike is no longer an issue inside the mine gates. And she says the company has a good relationship with the Steelworkers union, which represents both the Timmins and Newfoundland divisions. “Leo Girard will fight for his membership just as hard as I’ll fight for my company, and I respect that. But as a labor leader, he is certainly in touch with economic realities in this country.”

What’s next for Peggy Witte? It’s no secret she may be interested in the Con gold mine in Yellowknife, if the price is right. Word on the street is that Kennecott may divest itself of Con, part of an asset package recently acquired from Nerco Minerals. Royal Oak’s mining divisions may grow, Witte says, but not the head office.

Royal Oak has established itself as one of North America’s most efficient gold producers. Overhead costs are low, and the margin between cash costs and all-in production costs is slim. This enables the debt-free company to remain profitable. For Witte, the bottom line is producing gold economically at all mines.

The company is remarkably financially astute, and these days is doing more dollar hedging than gold hedging to protect its bottom line. “An 85-cent Canadian dollar would hurt us more than a US$15 drop in the gold price,” Witte says. The company has locked in $120 million of forwards at 80 cents Canadian and is well protected on the currency side. On the gold side, the company has only a bit of a floor, in that 45,000 oz. has been sold forward at US$334. (At press time gold had spiked up to US $353 per oz.)

Royal Oak’s consistent operating performance is putting an end to speculation about high-grading, or cutting back on development. “We’re in this for the long term,” Witte says, adding that reserves and development at the minesites are in “better shape than when we took them over.”

Royal Oak has no plans to join the exodus of mining companies from North America. “It (the exodus) provides opportunities for us,” Witte says. “We will go in and pick up the pieces.”