"Gold is hard to find, but it is even more difficult to mine." Bob Buchans, the speaker, should know. As the man behind the CMP funds (a once-popular investment vehicle for flow-through share financings), he was responsible for funding part of the exploration in almost every new gold mine that has attempted production these past couple of years.
And he has watched, first-hand, how many of them went from the triumph of discovery to the misfortune of production gone bad. Speaking to a gold conference recently in New York, he said, "I can immediately think of a half-dozen new Canadian gold mines where the grand opening parties turned into nightmares for the owners * A half-dozen? Actually, five mines in total closed only months after the ribbon-cutting ceremonies. Another six are operating below expectations, while another seven that seemed slated to become producers never made it that far. On the positive side, 15 new mines came on-stream with only the usual teething problems. (See accompanying tables for specifics.)
Many people in the industry are reluctant to talk publicly about why things went wrong for certain operations. The memory of these failures -- Seabright Resources' (now Westminer Canada's) Beaver Dam project, D'Or Val Mines' (now Aurizon Resources') Beacon mine, the Ketza River project of Canamax and Pacific Trans-Ocean, and Noramco's Golden Rose, to name a few -- is not yet distant enough.
They were also worried that it might turn into an exercise in finger-pointing rather than a constructive analysis of failures. Yet, now is the time to figure out what did happen and offer an initial analysis of the success of flow-through financings (for most of these mines were flow-through-funded at some point during their exploration phases). If for nothing else than to help prevent similar disasters in the future, this analysis will be worthwhile.
What follows, then, is an attempt at an overview of the problems that plagued some of the projects that failed and the role of flow-through in those failures. After interviews with dozens of company officials, mining analysts and other industry experts, a number of explanations emerged:
Too many explorationists were in too big a hurry.
The money was too easy.
Promotional zeal, not technical competence, motivated some would- be mine-finders.
Some engineers seem to have been too optimistic when estimating costs.
There weren't enough good technical people around.
And finally, even a cursory glance at the list reveals that most of the failures belonged to juniors, who had little if any operating experience.
Those interviewed consistently referred to what one analyst has called "the haste factor."
Terence Ortslan of Deacon Morgan McEwan Easson says "it's very simple, really. Everyone stressed timing and fast return."
Indeed, the historical average of a mine's growth from discovery to production is about seven years. Yet some of these mines were slated for production within two years of discovery. Some mines, says Ortslan, were ordering equipment before the feasibility study was completed.
Mining analyst Rick Cohen of Brown, Baldwin, Nisker says "the stock market puts incredible pressure on companies to get that bankable feasibility study, to put that mine into production." Of course, the analysts themselves must bear some of the blame for this. Without their bullish recommendations, it would have been difficult for them to convince investors to put up the hundreds of millions of dollars spent placing these mines into production.
When money is dangled in front of a junior company that has a promising mineral deposit, there is a very strong temptation to go ahead with production even though reserve outlines are maybe a little sketchy. After all, the money may not be there next year.
"The financing has just been too easy," says Bill Roscoe of Roscoe Postle Associates. It begins with exploration. "Most of the mines that didn't turn out used flow-through funds. There were some examples where the Canadian Exploration Expense rules were stretched too far. There were not enough checks on flow-through, and the easy money led to abuses and a lack of checks and balances. You have heard that mines are made and not found. But for every one that is made there are 100 headframes out there rotting."
Others say too many investors relied on promoters' reputations rather than on the fundamentals of ore reserves in the ground. For example, Noramco Mining, which recently wrote off $61.4 million, was an investment star among junior resource companies in 1987. Senior company officials embarked on a cross-country tour to bring Noramco to the attention of the investing public. The company had ambitious plans which, in the final analysis, may have been too ambitious. It was supposed to have at least three mines in production by 1990. Now, it has precious little to show its investors for the tens of millions that were raised back in 1987. Only one of the three projects reached the mine stage, and that operation has since closed.
"Noramco had too much money and too little experience," says Michael Pickens of Yorkton Securities. "They had no infrastructure." The sheer number of new mines in Canada in such a short period, a mine-finding rate unmatched in this country's history, has predictably caused a severe shortage of experienced mining people. "Not enough grey hair out there," as Pickens puts it.
Not unrelated to this are the instances of exploration people trying to put mines into production. "Exploration people usually have trouble trying to become mine operators," says David James of Richardson Greenshields. It doesn't take an expert to see that most of the mines which have run into these problems are being put into production by junior companies with little in-house mining experience. These companies usually depend heavily upon outside consultants to do their studies. There can be a great deal of pressure put on these consultants to come up with a positive study. Otherwise, the company could simply go and find another consultant. Some of these studies would be very qualified when it came to the big question of reserves. But not all of them. As James puts it, "some of those engineering reports had very flamboyant writing."
Probably the most common error made by geologists and engineers on these projects was the estimation of grade, or the amount of dilution that would occur with the chosen mining method. At Noramco's Golden Rose, the grade was supposed to be 0.23 oz gold per ton, yet the mine only produced at a grade of 0.055 oz. At Tartan Lake, which is still operating, the original reserve grade was 0.31 oz gold per ton, but this has since been reduced to 0.19 oz. Puffy Lake, at last report, was running 0.12 oz material through the mill, compared with the original prediction of 0.233 oz. With only a few exceptions, the grade of every new gold mine goes down between the feasibility study and actual production. At the luckier mines, this means a major increase in the costs-per-ounce. At other mines, it means the end of the road, the grand opening turned horror story.
Why are grades so difficult to forecast? Is there something wrong with current methods that the grades are so consistently over-estimated? "People tend to be optimistic about reserves," says Roscoe. "They don't allow enough for dilution. They don't treat high-grade samples properly. You have to look at the distribution of the samples to decide on the area of influence of a high-grade sample. The high grade maybe shouldn't carry half way to the next sample. You have to decide what is justified. People think they will find more when they go underground. At lots of times you do, but at lots of times you don't. You have to base your decisions on what you have rather than on what you hope for."
Rick Cohen agrees. "Everybody seems to think that because there is some high grade, there will be a nugget effect. That is not always the case." Another analyst, who preferred not to be named, suggests that "the biggest problem is too little information. The grade wasn't there in the first place. You have geologists who don't understand the mining business."
The introduction of the computer to calculate reserve estimates hasn't proved to be the big benefit that it was supposed to have been. For some deposits, the use of computers works well. For others, they are so far off that the original computer model looks nothing like the deposit that mining eventually reveals. As our unnamed analyst puts it, "part of the problem was the rocket scientists with their computer models. These models were developed for the porphyry copper deposits, and don't apply when it comes to gold."
Cohen says: "There is too much use of computer models without the old hand-plotting -- straight interpretation between two points. It doesn't have the human touch. Reserve calculation is as much an art as a science." The Nickel Plate mine is a case in point. Costs per ounce have escalated to US$300 from the original prediction of only $120. This is mainly because of a reduction in grade from the 0.133 oz per ton announced in 1987 down to 0.088 oz a year later. This cost the company a writedown of $108 million. Company spokesman Peter McBride says the computer ore reserve calculation treated the deposit as continuous when, in fact, it was very uneven.
"We went back to a first-principle hand calculation, the old-fashioned way based strictly on the knowledge you have. That is when reserves went down. Maybe the lesson is that the geologists and the engineers should work closer together, and I'm not just saying that about the Nickel Plate." For a company the size of Corona, the news isn't all bad. At the David Bell mine, near Marathon, Ont., the grade rose to 0.37 from 0.33 oz.
While grade is one of the key factors, operating costs can be just as important. For some reason, the people who prepare feasibility studies sometimes have just as much trouble estimating operating costs as they have judging grade. The Golden Bear project, in British Columbia, is an example. Originally, the cost per ounce was estimated at $136 (us). Since the operator, North American Metals, was taken over by Homestake Mining Co., cost estimates have risen to between $210 and $240. This rises to between $360 and $400 when construction costs are included, and they have to be when a production decision is being made.
Says Cohen: "Too many feasibility studies are done on the basis of what other mines are doing, not on the basis of what the new mine will cost. New mines nearly always cost more to operate than older, established operations." In some cases, the reasons for the optimistic grade estimates and low operating cost estimates are simply promotion.
"These companies want to be known as producers," says Andrew Murray of Continental Securities. "They want a producer in their pocket. There is pressure to put the mine into production." It didn't hurt that a great deal of the money came from a relatively small group of investment houses in London, England, who all got hot on North American gold mines at the same time in 1986.
"London was booming and money was pouring in then," says Richardson's James.
Pickens looks at it another way. "Everyone was more concerned with share prices than with the technical side."
It should be noted that while most mines have some problems getting started, others manage to get going virtually problem-free. The Golden Patricia mine, operated by Bond Gold Corp., is a case in point. For starters, this mine is operated on a fly-in basis -- something that always causes extra headaches for planners. Then there is the orebody, with an average width of 0.60 m (about 2 ft). Yet, the start-up went relatively smoothly, coming a month ahead of schedule. The grade came in higher than planned, at 0.642 oz per ton. It helped, of course, that the company had behind it the talent of Bond Gold, a world-renowned gold miner.
The rate of new gold mines in Canada is expected to continue at its high level for at least the next two years, a result of the billions spent on exploration during the past half-decade. Are there going to be more problems, more failures? "The conclusion that comes out of this," says Murray, "is that there are going to be other problems in the future. The idea is perhaps that they should take another year or so before going ahead."
Other analysts predict that junior companies will not be so reluctant to bring in major companies to act as partners in the future. After all, there is nothing like actual mining experience in a company, right from the purchasing agents to the underground mechanics, to bring a new operation into production with as little trouble as possible.
Kerry Knoll is a Toronto-based freelance writer and president of Glencairn Resources.
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