Noranda deal boosts Hemlo’s growth plans

The recent offer of Noranda Inc. (TSE) to sell to Hemlo Gold Mines (TSE) all of its gold assets in exchange for 8.6 million common shares of Hemlo and about $10 million in royalties, was accepted recently by a special committee of the Hemlo board.

The assets to be exchanged include Noranda’s interests in the Harker-Holloway joint venture with Freewest Resources (TSE), the Brewery Creek project in the Yukon and the Silidor gold mine in Quebec, and a 60% stake in Crown Butte Resources (TSE).

Together those assets are expected to give Hemlo much needed growth potential at a time when Hemlo Gold’s only producing asset, the Golden Giant mine in northwestern Ontario, is declining. While Golden Giant is expected to produce 424,000 oz. this year, down from 442,300 oz. in 1990, the Noranda assets are expected to add 195,000 oz. to Hemlo Gold’s annual gold output by 1995.

However, they are also slated to increase Hemlo’s production costs to around US$155 per oz. from US$124 last year.

Based on Hemlo Gold’s May 1 trading price of $9.29, the transaction is valued at $80 million. However, Hemlo and Noranda have agreed that the $10 million in royalties should be reduced by 50% if any of the Brewery Creek, Holloway or Crown Butte projects don’t come into production within five years.

Still subject to regulatory approvals, the purchase arrangements will also permit Hemlo to return to Noranda any of the exploration properties within three years if there are material environmental problems.

If approved, the deal is expected to close within the next couple of weeks. Noranda owns 50.8% of Hemlo Gold.