Echo Bay takes $40-million writedown on Alta Bay venture

Echo Bay Mines (TSE) is taking a substantial writedown on its 40% interest in the Alta Bay joint venture this quarter. The US$39.7-million writedown, which includes half of Echo Bay’s US$41.3-million investment in the money-losing Robinson gold mine in Nevada, will reduce Echo Bay’s fourth-quarter earnings by US$32 million (32 cents per share), after estimated tax benefits of US$8 million.

Combined with the company’s $9 share price and US$356-million long-term debt, the writedown could make it difficult for Echo Bay to raise the capital required to develop the Kensington and Alaska- Juneau deposits, says analyst Peter Cavelt in Cavelti’s Gold Mines Report. Echo Bay is pinning its future production hopes on the two Alaskan joint ventures.

Having allowed its option to purchase the Robinson mining lease to lapse in June, Echo Bay has exchanged its working interest in Robinson, the largest property involved in the Alta Bay joint venture, for royalties on future gold production and US$2 million in cash from Alta Gold (NASDAQ) and Magma Copper (AMEX).

Estimated to be worth US$19 million, the royalty interests include a 6% net smelter return on all gold produced at Robinson’s gold operations and 2% of all gold produced in future copper operations. The 2% royalty is subject to a maximum of US$12.5 million.

The Robinson mine, which represents about 4% of Echo Bay’s total gold production, has been operating at a loss for nearly two years. In the first nine months of 1990, cash production costs averaged US$330 per oz., excluding royalty payments of US$39 per oz. to Kennecott Corp. Echo Bay’s share of the production was 24,251 oz.

Echo Bay’s decision to sell its interest in the Robinson lease clears the way for Alta and Magma to purchase the 12,000-acre property, which they plan to mine primarily for copper. Under the current lease from Kennecott, the partners can only mine gold deposits on the property.

Magma Copper has assumed responsibility for property reclamation and some of Echo Bay’s environmental liabilities.

Aside from the Robinson writedown, Echo Bay is also writing off its entire US$15.2 million investment in the Sunnyside, Golden Butte and Pan gold properties. On the Easy Junior property, scheduled to resume production in early 1991, Echo Bay will write off a partial investment of US$4.2 million.