Pegasus Gold (PGU-X) has responded to the depressed gold price by announcing its intention to close down the Mt. Todd gold mine in Australia's Northern Territory.
The company also took a nearly US$400-million writedown, most of which is attributed to a readjustment of the carrying value of Mt. Todd.
"It no longer makes sense to operate Mt. Todd, given the continued deterioration of the gold price and the cost structure of this project," says Pegasus President Werner Nennecker.
The company recorded a writedown of US$353 million (or US$8.55 per share) for Mt. Todd, as well as US$26.8 million (or US64cents per share) for the Zortman operation in Montana. For the Beal Mountain operation and the Pullalli project, in Montana and Chile respectively, the company took writedowns of US$2.7 and US$13.9 million.
News of the writedown sent Pegasus' stock tumbling from a price of US$3.44 per share to US$1 on Nov. 19. Trading was heavy, totalling more than 8 million shares on the American Exchange and more than 1 million in Toronto for 5-day period ended Nov. 19.
As a result of the writedowns, Pegasus is in default of certain of its restrictive covenants under its US$150-million revolving credit facility.
Pegasus has implemented a cash conservation plan to get a handle on operating costs at its various mines. Among possible courses of action, the company is considering: shutting down additional mines; deferring further capital expenditures; reducing general and administrative costs; scaling down exploration programs; and monetizing all or a portion of its hedge portfolio.
The company has hedged more than 1 million oz. gold at an average price of US$421 per oz., which has a market-to-market value of US$70 to US$80 million.
Barring any action taken by its creditors, the company believes it has located sources of liquidity to continue operations through 1998. As of the end of the third quarter of this year, Pegasus had cash and cash equivalents totalling US$15.9 million. Additional assets, not including the hedging portfolio, were valued at US$78 million.
For the third quarter of 1997, Pegasus reported a net loss of US$432.8 million (or US$10.47), compared with a loss of US$7.8 million (19cents per share) for the same period last year. The loss in the third quarter of 1997 included non-recurring and non-cash charges totalling US$421.3 million (US$10.19 per share).
Excluding these charges, Pegasus posted a net loss of US$11.5 million (28cents per share) for the third quarter, compared with a loss of US$1.3 million (3cents per share) for the corresponding period in 1996.
In November 1996, having completed a positive feasibility and made a production decision, Pegasus commissioned the mill at Mt. Todd. The first gold was poured in January of this year. The third quarter of 1997 was the first period of sustained operations for the company, but the mine failed to perform to expectations.
During the 3-month period, mill capacity reached only 84% of capacity, as the crushing circuit was not crushing the ore finely enough, creating a shortfall. Gold production suffered and operating costs increased. Also, the company spent more than it expected on power, cyanide and contract mining costs.
Gold recovery averaged 74%, compared with the projected 84%.
Pegasus commissioned a consultant to evaluate possibilities for improving the gold recovery and reduce processing costs. The work, completed in August, recommended three improvements: production of a copper concentrate to mitigate copper levels in the ore; installation of screening before quaternary crushing; and implementation of a coarse ore reject system.
Unfortunately, these changes would not have resulted in enough cost savings to allow operations to continue. Total cash costs for the nine months of 1997 were US$344 per oz., even though gold production totalled 63,900 oz., up from 19,200 oz. in the corresponding period of the previous year.
The company's last hope for continued production is an independent review, which is scheduled for December.
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