Financing Three Golds

INTRODUCTION Lac Minerals Ltd., a significant North American producer of gold and other metals for over three decades, recently completed the financing for its third discovery in an eight year period. From 1975 to 1982, three important gold deposits in Quebec and Ontario: namely Bousquet, Doyon and Hemlo, were located and tested by company geologists. When current development plans are complete, Lac will have injected $400 million into these deposits. A discussion of these projects and their financing reveals some extraordinary challenges faced by top mining management. Responses to these challenges developed by Lac management may interest executives planning to proceed with new North American gold or base metal mines. MINE DE BOUSQUET In 1976, we explored a property containing a large low grade surface gold deposit. The geologial setting was exciting and we tested recent rethinking about the volcanigenic genesis of gold and base metal occurrences. These ideas helped pus to persist in drilling a nearby conductor and 600,000 ton, 0.22 ounce/ton orebody was outlined. With gold at $Cdn.150 per ounce the feasibility was approved and work started February 1978. Availability of a company custom mill 35 miles away reduced our immediate capital needs to $8.5 million. First of all, understanding the geological significance of results at Bousquet was critical. Mine and surface exploration geologists at Lac are continually and closely working together to better understand the nature of gold deposits in the Shield. This management emphasis on both pure and mine geology meant that a much larger ore reserve could confidently be predicted. (A proposal to quickly develop and ship the ore to a nearby company mine was discarded.) Instead of designing just for the initial plan of 500 tons per day we therefore included headframe, shaft and hoisting capacity for 1,700 tons and provided a compartment for future shaft deepening. These prebuilt additions were welcomed within two years. The type of collaboration whereby surface and mine geologists make study and field projects of each other's problems sets the foundation for this predictive ability. At Lac, the traditional responsibility for and supervision of the mine geologist by the mine manager is modified by this collaboration. This adds interest and scope to the geologist's work and lets him think beyond production requirements. Besides such management considerations, dedicated, professional geologists with integrity and lots of practical experience are needed to plan successful developments like Bousquet. Second, projecting future bullion revenue was critical and our experience selling production for future delivery gave us a way to ensure that loan repayment at term would not be jeopardized by falling metal prices. Output from a single mine is often reduced or curtailed for numerous reasons, so "selling forward" is done best and with least risk by companies like Lac with more than one or two producing locations for that metal. At first, a forward marketing program was considered unwise, speculative and unorthodox by analysts and other producers. Declining markets in the early 1980s prolonged gold project capital recoveries however, and critics were better able to appreciate the usefulness of such a tool. The notion that gold miners shouldn't sell forward is rooted in the belief that long-run gold prices will rise as modern social theory implementation in democracies inevitably erodes currency values. Selling against this trend goes against this industry belief or "ethic" and is at odds with the company shareholder who expects the gold price to rise not fall. Nonetheless, an efficient tool is available to the gold producer (not to most other metal producers) to quickly disengage from adverse price trends or to lock in spot prices instantaneously for two years or more of profits. Gold had recently retreated from U.S.$200 to $104 and now had reversed to $150. Lac had been forced to close several of its producers during the late 1960s because central bank-controlled