Corona’s low costs prompt Homestake bid

The proposed merger between Home stake Mining (NYSE) and International Corona (TSE) is expected to result in Homestake becoming one of the world’s largest gold producers with anticipated 1992 production of 1.8 million oz. and reserves of about 20 million oz.

Other major North American gold mining companies include American Barrick Resources, which expects to turn out 1.2 million oz. gold this year. LAC Minerals and Echo Bay Mines are both nearing the million-oz. threshold. The middle-tier producers, including Amax Gold, Battle Mountain, Cambior Inc., FMC Gold, Hemlo Gold, Teck Corp., Corona, Pegasus Gold and TVX Gold, are followed by a third-tier group of smaller producers.

Most of these North American companies, including Corona, came to prominence in the 1980s, a decade in which world gold production is estimated to have increased by more than 70%. But the industry is now considered to be in a period of consolidation after this huge expansion, and not all gold companies are expected to survive. Prices have steadily weakened — the yellow metal recently slumped below US$350, a 6-year low — and the gold market also appears to have lost much of its traditional volatility.

Analysts note that although the industry is in a severe profit squeeze at current prices, investors are continuing to buy or hold gold shares in the belief prices will soon rise.

But analysts say most gold companies aren’t believers, because when the price does rally the futures market becomes swamped by producer selling which quickly aborts the rally. “Management of gold mining companies spends large sums of money jetting round the world to address gold conferences, talk to fund managers, investors or anyone who might buy their shares,” notes a June, 1991, research report by Yorkton Securities. “Yet, by their insistence on selling much of their gold in forward markets, they demonstrably do not believe in the product they are mining.”

Canadian producers are now complaining that the Canadian government has also gotten in the act by selling off part of its gold reserves, which means they must now compete with their own government for gold sales.

Homestake Mining is one of the few companies that does not hedge its gold production, a strategy which has made its share price more volatile than many other producers. But the company believes its shareholders will achieve benefit from this policy over the long term, although it has conceded to analysts that hedging was a “good choice” during the continued decline of the 1980s.

“We’re bullish about gold,” says Conger, adding that in his view, the gold mining industry expansion of the 1980s will be reversed during the coming decade.

He points out that South Africa’s position of dominance in gold mining is declining quickly: the country accounted for less than 40% of free world production in 1990 from 70% in the early 1970s. And he believes gold production in the U.S. “and particularly Australia” will decline because the easily recovered oxide deposits will soon be depleted and because cost increases will make marginal gold deposits uneconomic.

This bullish outlook is more than rhetoric. In recent years Homestake has divested itself of its base metal, uranium and oil and gas interests in order to return to its historical role as a pure gold company. And this exposure to gold will be increased by the proposed merger with Corona, also a “pure gold play” since a reorganization resulted in its non-gold assets being transferred to Dundee Bancorp (TSE), now Corona’s largest shareholder. A good portion of Homestake’s gold production — which totalled 1.04 million oz. in 1991 — still comes from its namesake mine in South Dakota, an operation that has produced over 36 million oz. since its discovery in 1876. Homestake is now spending US$23 million to further explore the deposit, including mineralization that was discovered more than a mile below surface and three miles north of the mine.

The open pit McLaughlin mine is 70 miles north of the company’s headquarters in San Francisco, and operates profitably in the toughest environmental climate in the U.S. The mine began operations in 1985 and is the site of the first successful application of autoclaving, or acid pressure oxidation, to process refractory ore. This process is likely to be used at Eskay Creek which has metallurgically complex reserves.

As well, Homestake owns 73.3% of North American Metals which operates the Golden Bear gold mine in northwestern British Columbia, also a refractory deposit.

The Homestake offer to Corona has been approved by the directors of Homestake, but is still conditional on Homestake shareholders’ approval. Corona’s board is prepared to recommend acceptance of the offer subject to receipt of a fairness opinion. Dundee Bancorp has already agreed to tender its shares to the Homestake offer.

Homestake also agreed to provide Corona with up to US$130 million of credit support which will permit Corona to draw up to an additional US$62 million under one of its credit facilities. The credit support is not contingent upon the success of the Homestake offer.

The share exchange takeover bid is on the basis of 0.35 of a Homestake common share for each of 83.8 million Corona common shares; 0.54 of a Homestake common share for each of 1.13 million Corona series A first preference shares; and 1.08 of a Homestake common share for each of 2.76 million Corona series C first preference shares.