Royal Oak proposes acquisition of Colomac

In a deal that works out to be roughly 5 cents on the dollar, Royal Oak Mines (TSE) is proposing to acquire the Colomac gold mine and related assets 130 miles north of Yellowknife, N.W.T.

The acquisition would be a coming home of sorts for Royal Oak President Peggy Witte who lost control of Colomac when her previous company, Neptune Resources, was taken over by Northgate Exploration (TSE) in 1990. Colomac was developed into a mine, but the open-pit operation was not an economic success, and production was suspended after a year.

Royal Oak plans to buy Colomac free of all debts and encumbrances for 3.5 million of its shares (now trading at about $2.90 per share) plus a 5-year operating royalty payable only when the average annual gold price exceeds US$400 per oz. The price is bargain-basement, considering that more than $200 million was spent to bring the mine into production.

The deal is expected to close by the end of March but is conditional on regulatory and other approvals, renegotiation of an existing royalty, further due diligence and a formal agreement. If completed, the acquisition would be consistent with the company’s strategy of identifying and acquiring under-performing or undervalued mining assets at bargain prices. Colomac has a new 10,000-ton-per-day carbon-in-pulp mill powered by its own 13.5-mw power station. Total reserves for all three zones are reported as 19.6 million tons containing more than one million oz. gold (averaging 0.053 oz. per ton).

With the right operating plan, Royal Oak said Colomac has potential to produce 180,000 oz. gold annually with a cash operating cost of less than US$300 per oz. The previous operator produced 146,400 oz. during the mine’s year-long run. Unit costs were high because of the high fixed costs and because at times the mine ran at less than capacity.

Royal Oak is proposing to conduct a feasibility study this summer that will determine whether the mine will be re-opened next year at an estimated capital cost of about $15 million. If such a decision is made, overhead costs will be shared with Royal Oak’s Giant gold mine at Yellowknife. Ross Burns, Royal Oak’s vice-president of exploration, said the Colomac property has “excellent” exploration potential. A program to further explore previously outlined zones of interest is planned, including zone 24 where previous drilling intersected 0.24 oz. gold per ton over 25 ft. Drilling in zone 27 returned widths and grades similar to those found in the Main zone, with the best hole returning 90 ft. of 0.085 oz. gold.

“These zones open up new and exciting possibilities,” Burns said.