10180 101st Street
Echo Bay Mines Ltd. is one of North America's largest gold mining concerns. Founded in 1964 as a high-risk silver mining outfit, Echo Bay has grown into one of the leading precious-metal mining operations in the world. Echo Bay is respected for its excellence in mining in remote and hostile regions. The company's mining expertise has made it a sought-after partner for joint ventures. Echo Bay has a history of turning a profit on risky enterprises that other mining groups have declined.
Into the Wild: 1960s
In the early 1960s a group of Edmonton entrepreneurs operating under the name Northwest Explorers saw an opportunity in Canada's northwest. A forgotten silver claim, a dormant mill, and a new railroad were the ingredients N.S. Edgar, E.R. Mead, and A.J. McBeth saw as the recipe for a fortune. The Edmonton businessmen devised a plan to finance and operate a silver mine near Canada's frigid Great Bear Lake. The venture centered around a silver deposit first discovered in 1935 by the Consolidated Mining and Smelting Company, later known as Cominco. Cominco had drilled two adits--gradually declining tunnels--in the mid-1930s, to check the ore grade and extent of the vein. Concluding that the Echo Bay claim would not be profitable, Cominco tabled the idea indefinitely.
The Northwest Explorers group, remembering the old Echo Bay claims, observed developments in the early 1960s that changed the picture. In 1960 the Eldorado mining operation, located five miles west of the Echo Bay site, shut down. Its facilities seemed destined to rust in the Arctic cold. Meanwhile, the decision to build the Pine Point Railway reduced the transportation problems associated with operating a mine so far north. Armed with this knowledge, and certain optimism, the Northwest Explorers raised the capital, optioned the property, and leased the Eldorado mill. In 1963 new surveys indicated that the mine could turn a profit, and, by October 1964, the Echo Bay mine at Port Radium was fully operative, milling 80 tons of silver ore per day. In 1965 Echo Bay averaged 52.6 ounces of silver per ton of ore, making it the richest silver mine in Canada. By 1966 new drilling indicated that the deposits were much more extensive than anyone had dreamed. Echo Bay bought the Eldorado mill and plant outright, and stepped up production.
Most silver producers mined the metal secondarily to another metal such as gold, copper, lead, or zinc. Echo Bay, however, was one of a handful of mining firms whose principal product at the time was silver. Industrial usage of silver as a conductor of electricity and in photographic films helped keep the metal in short supply and thus priced high. North American consumption was actually twice production. As a result, in the mid-1960s, Echo Bay was extremely profitable.
In 1967 International Utilities Corporation, a Philadelphia, Pennsylvania-based conglomerate, purchased a majority of Echo Bay stock, eventually holding three-fourths of the company's shares. International Utilities operated the company as a subsidiary, focusing on silver production at the Echo Bay mine.
In 1969 Echo Bay experienced a decrease in profits as silver prices dropped and the favorable tax conditions for new mines ran out. Echo Bay's earnings were tied more closely to the price of silver than were the earnings of other companies that mined silver primarily as a byproduct of copper or of other metals. As a result Echo Bay stockpiled silver when prices were low, as in 1971, and mined lower grade ores when those prices were high. This strategy, along with cost efficiency efforts, insured a long life for the mine.
A New Gold Standard: The 1970s and 1980s
Throughout the 1970s Echo Bay remained a medium-sized silver-mining concern excavating the rich veins beneath the frozen earth at Port Radium. In 1975, however, an event occurred that drastically altered the company's make-up. The longstanding U.S. ban on private ownership of gold bullion was lifted, and the metal's price rocketed. The soaring price of gold, which eventually reached US$600 an ounce in 1981, sparked the interest of Echo Bay. In 1979 the company optioned rights to develop the Lupin gold claim from another Canadian mining company, Inco Limited.
The Lupin site was 56 miles south of the Arctic Circle, making it a high-cost operation; but Echo Bay's expertise in mining frozen wastelands had been sharpened through its years of experience at its Port Radium operation, and the company was optimistic it could turn a profit. Lupin's probable and possible reserves were about 2.7 million tons of ore, with a grade of 0.38 troy ounces per ton, giving the mine about a seven-year life expectancy. Financing was raised through a preferred stock and warrant issue, and preliminary planning anticipated active production by 1982. The cost of developing the mine was expected to be C$108 million. Mining leases and permits were purchased in 1980, and the free world's northernmost gold mine began operations on schedule in 1982.
The Lupin mine proved to be a good investment indeed. The mine averaged 156,000 troy ounces of gold during its first two years, making it Canada's third largest gold mine. Production gradually increased during the 1980s, averaging about 195,880 ounces per year in the latter half of the decade. New reserves were found, extending the mine's life. By 1990, the main shaft was deepened to about 4,000 feet, and Echo Bay anticipated production of about 190,000 ounces annually for the foreseeable future.
Operating a mine so far north had unique problems, transportation being the most severe. When the Lupin mine was constructed in the early 1980s, all the materials had to be shipped in by airplane, at great cost. Each winter, Echo Bay spent about US$3 million to build and maintain a 360-mile ice road, 340 miles of which was over frozen lakes. Between January and April, trucks delivered much of Lupin's supplies for the year, including some five million gallons of diesel fuel and 15 million pounds of chemicals, explosives, and other bulk materials. Some 700 to 900 roundtrips were made every winter between Lupin and Yellowknife, taking 24 hours each way. The ice road allowed Echo Bay to avoid the even higher cost of air freight. Although the cost of operating a mine so far north resulted in an 'Arctic premium' of about 35 percent, the high grade of the z-shaped ore deposit at Lupin allowed the mine to operate profitably.
The opening of the Lupin mine in 1982 coincided with the closing of Echo Bay's flagship silver mine near Port Radium. After 19 years, the original Echo Bay silver operation was tapped out. Echo Bay Mines had been transformed from a silver miner to a gold miner, and with the transition came new anxieties. Gold mines generally traded on the open market at a much higher price-to-earnings ratio than silver mines or conglomerates; and Echo Bay's parent, International Utilities Corporation, feared a corporate raid. In 1983 International Utilities spun off Echo Bay's shares directly to its own shareholders, who benefited from the higher stock values of a publicly owned gold mine. The parent company, meanwhile, decreased the risk of a hostile takeover.
Echo Bay's success with the Lupin operation inspired the company to expand further into the gold-mining industry. In 1984 Echo Bay acquired the Copper Range Company from Louisiana Land and Exploration, for US$55 million. Echo Bay was interested by the Round Mountain gold mine in Nevada, which was 50 percent-owned by Copper Range. Two other gold mining firms--Homestake Mining Company and Case, Pomeroy & Company, Inc.--each owned a quarter of the mine. The Round Mountain mine used heap leaching, a process that allows cheap mineral recovery from low-grade ores. With this method, deposits previously disregarded can be mined profitably. Echo Bay Chairman Robert F. Calman told the Wall Street Journal in December 1984 that in buying Cooper Range Company, 'We've bought the expertise as well as the company.'
Further Expansion in the Late 1980s
Heap-leaching technology would prove invaluable to Echo Bay in future ventures. Simplified, the process begins with recovery of ore from the traditional open pit. The ore is then crushed into pebbles smaller than an inch in diameter, and placed on massive impermeable pads that extend for acres. The three-story-high heaped ore is then sprinkled with sodium cyanide for 100 days. The solution penetrates the ore, bonding with the gold and silver, which then runs off to a collection drain. The precious metal-pregnant solution is then pumped into tanks where it is concentrated by a carbon absorption and desorption process. Gold and silver are then removed from the concentrated solution by electrolysis and refined into doré bars--part silver, part gold with some impurities. The doré is then sent to a separate refinery for processing into pure bullion bars.
With its expertise in Arctic mining and heap-leach processing, Echo Bay set out on a program of exploration and acquisition. In late 1985 the company agreed to buy the Sunnyside gold and silver mine in Colorado from Standard Metals Corporation for US$20 million plus royalties. In 1986 Echo Bay bought several properties from Tenneco, including three gold mines in Nevada--Borealis, Manhattan, and McCoy--for US$130 million and royalties.
The McCoy mine turned out to be a jewel. Several months after it took over the operation, Echo Bay discovered a massive gold deposit one mile from the McCoy mine. Known as the Cove deposit, the discovery contained an estimated 1.2 million ounces of gold and 53 million ounces of silver. Later estimates assessed Cove's riches at 4 million ounces of gold and 250 million ounces of silver. Plans for a new mill, to be ready by 1989, were developed. Heap leaching began in 1988.
The combined McCoy and Cove mining complex covered 110 square miles, and in 1989 produced 246,800 gold equivalent ounces, which included silver value converted to gold ounces at the average market price ratio, twice the 1988 level. Both mines operated with open pits and underground ramps; they share milling and leaching facilities. By the end of 1989 Echo Bay had invested US$383 million in the acquisition and development of McCoy and Cove. The company expected to mine 350,000 gold equivalent ounces from the operation in 1990, at a cost of about US$240 per ounce.
In 1988 Echo Bay entered a joint venture with Silver King Mines and Pacific Silver Corporation. Echo Bay's Sunnyside mine in Colorado, Illipah mine in Nevada, Easy Junior and Pan development properties in Nevada, and Pacific Silver's Robinson and Golden Butte mines in Nevada would be operated by Silver King. The deal promised to improve Echo Bay's overall gold output in the long run while allowing the company to concentrate its own efforts on other projects. Subsequently, the operating partner became known as the Alta Gold Company.
In 1987 Echo Bay decided to expand the Round Mountain mine. The mill at the Manhattan mine, located 18 miles from Round Mountain, began processing Round Mountain's high-grade ores. Milling is preferred to heap leaching where an ore grade measures a certain richness because more gold can be milled out of the high grade ore than can be recovered by leaching. The complex, including the Manhattan operation, was expected to produce 440,000 ounces of gold in 1990. New reserves placed the mine's active life at 15 years at that rate.
In April 1988 Echo Bay Mines acquired significant interests in the Muscocho mining group of companies--consisting of Muscocho Explorations Ltd., Flanagan McAdam Resources Inc., and McNellan Resources Inc. The deal included the purchase by Echo Bay of C$26.5 million worth of newly issued common shares and C$23.5 million in convertible bonds. Echo Bay agreed not to increase its interests in the group to more than 33 percent for six years. Muscocho group's Magino and Magnacon properties in Ontario, and the Montauban mine in Quebec, represented Echo Bay's first participation in eastern Canadian mines.
The acquisition proved a major disappointment for Echo Bay, however. By mid-1989, Muscocho's Magino and Magnacon mines were far behind schedule. Echo Bay traded its one-third equity in Muscocho plus some cash and loans for 36 percent direct ownership of Magnacon and 50 percent of Magino; and Echo Bay also became the mines' operator. Although the Muscocho investment was a costly write-down for Echo Bay, the future of the two mines it retained from the deal was bright.
In February 1990 Echo Bay began operating its 70 percent-owned Kettle River gold mine in Washington state. The mine was expected to produce 110,000 ounces of gold annually, and the possibility of discovering additional reserves seemed excellent. Other promising ventures for Echo Bay's future included two major mine development properties in Alaska. The Alaska-Juneau mine was at one time the largest gold mine in North America. It was shut down during World War II. Echo Bay owned 85 percent of the mine and was preparing in 1990 to start large-scale production, expected to be about 365,000 ounces annually by 1993 or 1994. By 1990 Echo Bay also owned 50 percent of the Kensington mine located 45 miles north of the Alaska-Juneau property, and was studying the feasibility of starting operations there. The ore body at Kensington was considered especially rich, three times the grade at Alaska-Juneau. The company hoped to mine 200,000 ounces of gold per year at a cost somewhat lower than its other operations.
Gold Market Goes Bust
However, the early 1990s brought hard times to the world gold market, and the effects on the company's fortunes were nearly disastrous. The price of gold rose a mere one percent between 1989 and 1990, while mining expenses rose 11 percent, leaving Echo Bay with a net loss of US$59.7 million for fiscal 1990. After some crucial write-downs--including the Muscocho Group investment--the company entered 1991 determined to increase production by 12 percent. With worldwide gold production growth virtually at a standstill, and with economic prosperity in Asia opening up potential new markets, the company was able to see a small profit in 1991. However, the benefits of this aggressive strategy were only temporary, and 1992 brought decreased overall revenue and a net loss of $31 million.
Determined to jump-start its slumping business, Echo Bay sold six million of its common shares in July 1993, with the aim of increasing its operating revenue and freeing up resources for future investment. In 1994, after managing to cut production costs to US$199 per ounce, the company began actively pursuing new exploration opportunities overseas. In June it formed a joint venture with International Gold Resources to develop mining operations in Ghana; that same month it partnered with Santa Elina Gold Corp. to launch an exploration project in Brazil. In March 1995 it entered into an agreement with TVI to bid on the Kingking property in the Philippines. Echo Bay's efforts reflected a broader trend throughout the mining industry in the mid-1990s, as companies poured record amounts of money into international exploration projects, particularly in South America, Australia, and Southeast Asia. By October 1996 Echo Bay had become the fourth largest spender in the industry.
Unfortunately, massive investment did not prove to be the cure for the company's problems, and in 1996 Echo Bay saw its revenues plummet to US$337.3 million--compared to US$360.7 million for 1995--while suffering a net loss of over US$175 million. Further exacerbating the company's financial woes were the continual difficulties involved with getting the Alaska-Juneau properties operational. A series of battles with the EPA over environmental issues had made it difficult for the company to obtain permits, and production costs were proving exceedingly high. By 1996 the company recognized that the expected yield of the mines would fall far short of original estimates, and in January 1997--after 12 years and over US$100 million invested--Echo Bay announced plans to terminate the Alaska-Juneau project.
By this time gold prices had fallen to an 18-year low, and Echo Bay was forced to scale back a number of its new operations. In April 1997 the company sold off its option in the Mexican Dolores property, which it had acquired the previous July, and in October it was compelled to decline to exercise its option on the Kingking project in the Philippines. In early 1998 it announced the temporary closing of the Lupin mine, a move that resulted in 650 layoffs. During this time the company reduced its overall workforce by one-third, and cut production by 25 percent. Fiscal 1997 was the worst in company history, bringing a net loss of US$420.5 million.
However, it appeared Echo Bay had gotten the damage under control; while the company continued to experience losses for the next two years, they were significantly less drastic--US$20.1 million in 1998, US$37.3 million in 1999. A number of key divestments, coupled with signs of improvement in the gold market, made it possible for Echo Bay to announce plans to reopen the Lupin mine by April 2000. In the third quarter of 2000 the company enjoyed net earnings of US$9 million, and seemed to have gotten back on an even keel.
Principal Competitors: Anglo American plc; Barrick Gold Corporation; Newmont Mining Corporation.