No one could have foreseen ’80s problems, opportunities

The 1980s were highly successful years for Conwest Exploration. Over the 10-year period from 1980-89, the company reported total operating profits of $311 million, earned a total of $120 million in net income after tax and paid dividends to shareholders of $48 million. Nevertheless, it was a decade of changes that were impossible to foresee. The following excerpts from the directors’ report to shareholders in Conwest’s 1989 annual report show just how dramatically those changes affected one company during the decade. As Conwest entered the decade, the 1980 annual report made special mention of several assets — Adanac’s Ruby Creek molybdenum deposit, Faraday Resources’ Madawaska uranium mine, and the royalty interest in the Griffith iron ore mine. All three were believed at the time to have a rosy future that would figure prominently for Conwest.

The molybdenum business was the first to remind us that the mining industry is quick to respond to high commodity prices and by 1981 the handwriting was on the wall; high molybdenum prices had come and gone and the Adanac deposit’s time was pushed off to the future.

The uranium business taught us another lesson. The decade of the 1980s was forecast to be the coming of age for the nuclear industry. That was before Three Mile Island and the steady succession of plant delays, deferrals and cancellations. The reality for the nuclear business was a steady downhill slide for 10 years; the uranium price probably has yet to touch bottom. In any event, the Madawaska mine was history by 1982.

The Iron Bay Trust royalty from the Griffith mine was a core investment for Conwest and the mine was thought to be a mainstay for Stelco as a low- cost, raw material source for many years into the next century. It was difficult to foresee at the beginning of the decade that fierce foreign competition and low-cost ore sourcing around the world would result in a severe disruption of North American steel-making business and the Great Lakes iron ore trade, but indeed it happened and a “safe investment” almost overnight became a writeoff.

These three episodes are good examples of how change can wipe out shareholders’ equity, not to mention the human costs and the social disruption to workers and people in the affected communities.

On the positive side, however, the story of the Nanisivik mine shows how perseverance can pay off.

In August, 1982, when interest rates were high, base metal prices were low and base metal shares where completely washed out in the market place, there was a forced liquidation of the control of Mineral Resources International, which had an effective 35% interest in and operating control of the Nanisivik zinc-lead-silver mine on Baffin Island.

MRI had a total stock market capitalization of slightly more than $10 million at the time. Conwest bought an initial stake of 10% for a cost of about $1 million. We could easily have bought more, but at the time, 10% seemed enough. We had absolutely no strategic ambitions for this investment.

Over the next several years, Conwest increased its investment in MRI while MRI consolidated ownership of the mine itself. By the end of 1987, MRI had become a Conwest subsidiary and MRI owned a 100% interest in the Nanisivik mine.

This investment has become a real winner for Conwest. The Nanisivik mine has been very successful replacing ore reserves. The current reserve life index is about the same as in 1982, albeit the grade is slightly lower.

Whether the high zinc price level of the last two years is sustainable, Conwest anticipates Nanisivik will be a major contributor to profits and cash flow well into the decade of the 1990s.

Conwest has also built up significant oil and gas assets during a decade of highly volatile prices. While it has provided the company with reasonable cash flow during that period, the company anticipates improvement in oil and gas prices in the future.

These examples point to the need to avoid complacency in investment assumptions, the need to question constantly the accepted conventional wisdom, the critical importance of being a low-cost producer, the importance of trying to anticipate change rather than reacting to change, and the vital importance of maintaining a healthy debt to equity ratio.