CURRAGH EMERGES FROM RECESSIONARY STORM

Curragh Resources had planned on, and insulated itself against, a recession that would last no longer than nine months. Long-term debt was converted so that principal payments would only begin in 1996. To weather a recessionary siege, it shored up the working capital base — by the last quarter of 1990 Curragh had cash on hand of $90 million.

“We were prepared for six to nine months,” said Cliff Frame, Chairman and CEO of the six-year-old zinc/lead mining company. “We’ve managed to survive an 18-month recession.”

To do that, the operations and head office have cut their payrolls by about 20%, staff salaries have been frozen, exploration has been temporarily suspended (except for on-going ore requirements) and productivity has picked up. (For some details on productivity, please see the Faro mine visit story.) This year, Frame is intent on improving the working capital base.

In spite of these efforts, 1991 was a disappointing year. The operating loss at the mines reached $28.4 million. Anyone with rudimentary arithmetic skills could figure out why. When Curragh was making money — 1988, $61.5 million in net income; 1989, $60.7 million; 1990, $32 million — its receipts per pound of zinc went from 55 (U.S.) in 1988 to a peak of 86.9 in 1989. In 1991, it received an average 51. An early warning sign came in the 1990 fourth quarter when Curragh posted its first quarterly loss since early 1987.

On top of the mining loss, Curragh severed its cherished ties with Asturiana de Zinc (ADZ), a big Spanish smelter that was to have provided Curragh with assured markets for some of its concentrates in a unified and economically powerful Europe. Curragh took a one-time charge of about $50 million to cut the ADZ link. (The total loss for the year was $98.3 million.)

The ADZ connection was forged in 1990 when Curragh paid $140 million for a 20% equity interest. For $20 million, ADZ acquired 30% of the Stronsay deposit (formerly Cirque) in northern British Columbia. Besides having assured entry for Curragh concentrates within the European Economic Community (EEC), Frame also secured seats on the board of ADZ and an agreement to try to create an international marketing arrangement with the smelter. As well, ADZ agreed to buy 5% of Curragh for $35 million (which became $41 million on closing because of a price adjustment).

It was on this key point of a joint marketing group that the deal eventually came unglued, Frame said. “The joint marketing group would have moved us up into the mainstream (as a partially integrated producer with both mines and an interest in a smelter).” Hedging to insulate against falling metal prices would then have been possible on the London Metal Exchange. Because zinc miners like Curragh lack actual tradeable metal, they can hedge only at tremendous risk and cost.

Why did the marketing arrangement evaporate? “The groups (Curragh and ADZ) couldn’t agree on the organization of the sales marketing group. As a consequence, we unwound all the arrangements.” Frame said. However, the parting was amicable and ADZ will still be taking Curragh concentrates in the future.

Frame points out it was ADZ money — to the tune of $62 million — that contributed in part to developing both Sa Dena Hes (its second Yukon operation) and a portion of Westray, the Nova Scotia coal mine. As well, Stronsay has been advanced to feasibility. “That’s how we were able to develop two mines,” Frame said. “We didn’t funnel money from Faro to develop Westray.”

The recession, however, has stalled Stronsay. “We’re not putting more money into Stronsay. We own it 100% and we’ll probably sell a piece of it, say 25%-30%.” Some people might wonder why, if the zinc/lead market currently is so ruinous, Curragh should venture another mine. Frame himself posed the question and volunteered the answer. “Does the market need another lead/zinc producer? No. But two to three years down the road, the answer will be yes’.” He also confirmed that Westray is for sale, in whole or in part. “I like that project and have very mixed feelings about selling it.”

The Grum deposit on the Vangorda Plateau at Faro is also caught in a cash squeeze. Without Grum ore, the Faro concentrator would be hungry for feed now that the Faro underground and open pit are both depleted. “People have talked about a production gap from our Faro operations. If we are delayed (in stripping Grum because of a lack of financing) we will have a production slump, but not a gap. We’ll mill stockpiles and remnants in the meantime.” Curragh has been awaiting federal Cabinet approval on a loan guarantee of about $40 million. (At press-time, Curragh was loaned $5 million by the Yukon government to continue stripping Grum. Curragh will put in another $5 million. Negotiations with the federal government continued.)

Hard times or not, the chief executive’s spot is precisely the post to which Frame had aspired when he graduated from the University of British Columbia in 1956 with a B.A.Sc. and an engineering degree. “When I graduated, I decided to become a millionaire and someday I wanted to be in the position where I was calling the shots in building mines the right way and creating jobs.”

During the early part of his career he shuttled between Denison Mines and Inco Ltd., always with an eye to greater responsibilities and bigger projects. He went directly to Elliot Lake from university in 1957 as shift boss. At the age of 24, he was a mine captain. In 1960, he left Denison and joined Inco as chief mine planning engineer at its Manitoba division. After taking on the development of several new mines and expanding the original, he returned to Denison as assistant manager in 1966. He switched again three years later, becoming Vice-president, Operations, for Inco’s Australian and Indonesian subsidiaries. “My goal was to get international exposure and I got it in Japan.” He initiated the development of the $135-million Phase I Soroako Nickel project.

In 1972, he broke the Inco/Denison pattern by signing on with Tara Mines and seeing through to production the Irish lead/zinc mine, the biggest in Europe. Three years later, he returned to Denison, this time in Toronto as Vice-president, Exploration and Mining Operations. It wasn’t his first invitation to join head office. Several years earlier, he had declined.

“I didn’t want to come to Toronto without lots of mining experience. I wasn’t a lawyer, I wasn’t an accountant, I wasn’t a financial man. So I had to be a miner.” He was hired by John Kostuik, Denison’s general manager and top technical person, and a person whom Frame, then 41, viewed as a mentor. “It’s vital (in a career) to have people to look up to, as in athletics. It’s vital to copy and benefit from an older person’s experience, assimilating some of their experience and even copying them. Your own personal style and traits will evolve by themselves.” (The allusion to athletics is not accidental. At the age of 18, Frame was a standout with the Jr. Trail Smokeaters. He turned down an opportunity to play with the New York Rangers’ junior A team in Winnipeg. That also meant rejecting a possible entree later to the NHL club. Frame figured he needed two years in Winnipeg. Because of his age, only a year remained to prove himself.)

Kostuik first hired Frame in 1957, when the novitiate engineer was just “a young, energetic buck who had come from a good university.” Harry Peterson, the general manager at Inco’s Thompson site, also influenced Frame. “He was a man I also admired.” Peterson had induced Frame to take up Inco’s Australian offer.

But with his last stint at Denison, Frame truly had arrived in the big leagues. Over the period 1975 to 1984, towards the end of which Frame became Denison’s president and chief operating officer, the company would spend $2.3 billion on projects worldwide.

In 1978, Denison signed a contract with Ontario Hydro to supply it with 6 million lb. of uranium annually. Secure uranium supplies were much desired back then. Hydro financed virtually the entire $468-million Elliot Lake expansion. “At the time the contract didn’t look that good,” Frame said. “We could have supplied that material to France.” Hydro was later — in 1990 — to cancel the contract, killing the entire Denison operation in Elliot Lake.

Denison was also nibbling in the late 1970s at the far richer, but nascent Saskatchewan uranium fields. “We made a deal with the owners of a significant proportion of that field (in the Athabaska Sandstone Basin) and El Dorado and the Saskatchewan government took it. They ganged up. It would have been a very nice complement to the Elliot Lake camp. They went together and paid the price we had set.”

Frame also directed the financing (with a consortium of 55 international banks for $950 million in project loans) and executed the development of the $1.3-billion Quintette coal complex in northeastern British Columbia. Troubles began soon after startup. “We solved the mining problems,” Frame recalls. The orebody itself was more folded and faulted than the exploration drill holes had indicated. “It wasn’t a simple set of seams. But we felt at the time the thing had been punctured like a sieve. With 20/20 hindsight maybe 50-ft. or 25-ft. centres might have been the right thing to do.”

Once the mining improved, Quintette should have been much better off. But then the marketing agreements began to unravel. The Japanese, minority equity holders and the contractual buyers of the metallurgical coal, demanded price rollbacks as worldwide demand for coal, and the price it once commanded, slumped. In effect, Quintette was its own worst enemy, because its coal, added to world supplies, resulted in the glut.

Frame left Denison in 1985. “I felt a sense of relief when I left Denison. A divorce never happens instantaneously.” Despite his leavetaking, he only has good things to say about his former boss, the late Stephen Roman, the founder of Denison. “I liked him very much, I admired him, and learned an awful lot from him. He was a mentor. He had a natural aptitude for business and great perception.”

Frame re-emerged in the spotlight a few months later, in May, 1985, when he formed Curragh with Ralph Sultan, a UBC classmate, associate professor of economics at Harvard University and formerly chief economist of the Royal Bank; and James Hunt, a New York lawyer and investment counsellor. They obtained a 90-day option on the closed Faro mine and then pieced together the $124.6-million purchase price from private investors and a $17.5-million federal government unsecured note repayable out of cash flow, federal and Yukon government guarantees of up to 85% on a $15-million bank loan, and a $3-million incentive grant from the territorial government. Curragh also won a reduction in power rates.

Detractors, very public ones, decried the proposed reopening. “What is the point of providing 100 jobs there (at Faro) if you are going to lose 100 jobs elsewhere?” asked a Kidd Creek executive in a story in The Northern Miner.

Another zinc competitor opined that there simply wasn’t “enough room for extra production on the market.”

The criticism, said Frame, annoyed him. “But it was the best thing that happened. Everybody loves an underdog,” and that’s what the public carping achieved. Of the economic merit of a second go at Faro, Frame said: “It was ripe for a re-opening if anybody did their homework.” The previous owners had fallen badly behind in stripping and were chasing ore, he said. But even with the advent of Curragh, it wasn’t exactly duck soup. “We were down to our last dollar before we started accumulating money (in 1987). It wasn’t a free ride.”

And it isn’t a free ride today. Major exporters, like Curragh, are buffeted by the twin chill winds of unfavorable exchange rates and depressed prices for their products. Metal prices are low and the Canadian dollar is high, much higher than in the last recession when it touched 70 U.S. “We’re so vulnerable to lead/zinc price fluctuations. We stand out until we get diversification from such things as Westray. We have leverage and it can work on the upside. The (equity) markets will not reflect our reserves until we go into an up-cycle.”

In addition, the smelters are squeezing producers. “They’re trying to get the best they can (in terms of treatment charges.) This year, I feel they’ve gone overboard a bit. But the tide will turn. When this happens, people (the producers) don’t forget. We’ve got long-term memories.” Frame believes the smelters should exert less pressure on producers and spend their efforts instead on developing consumer awareness and new uses for zinc and lead.

Frame says the next upturn could be considerably aided by east European surge in demand. “What they’re going to want are moving vehicles. I don’t care if that means cars, tractors, mini-cars or lawn mowers. That takes batteries, sheet metal, die castings, the works. In the long term it looks pretty good.” On the supply side, Frame feels that many operations in the former communist bloc are uneconomic — “the grades aren’t high enough and technologically they can’t compete.”

Interestingly, on the day we were interviewing Frame, a request from an east European country had come through the marketing office for 50,000 tonnes of zinc metal. Unfortunately, Curragh does not sell the metal, only concentrates.

Is there anyone out there with a cheap, environmentally-sound zinc smelter for sale?