Special guests at our Annual Shareholders meeting in June included Tom Perry-Smith (Perry-Smith & Company CPA and newly elected auditor) and John Scully (Pacific Stock Exchange specialist for our OAU listing). All of us had the opportunity to discuss corporate affairs with Tom and John. Charles I. Brown, Willard P. Fuller, Jr., Michael Meister Miller, Richard Clarke Sorlien and Brian R. Van Camp were re-elected by shareholders to serve as directors. Officers for the coming year are: Michael Meister Miller - President, Brian R. Van Camp - Secretary and Charles I. Brown - Treasurer. Several people asked about having a mine tour. Perhaps our June 1991 meeting will be held in Alleghany to accommodate those requests.
As you previously were informed, in October 1989 our lessee abruptly ceased its mining operations. It cited low gold prices and an unworkable partnership agreement as primary reasons. On July 23, 1990, Royal Gold announced a restructuring of the Kanaka Creek Joint Venture (KCJV). Royal Kanaka Creek Corporation holds a 73.14% interest in the venture. Under the terms of the restructured joint venture agreement, Lucky Chance Mining (LCM), which currently holds a 26.86% interest in the KCJV, will be obliged, at the request of Royal Kanaka Creek, either to fund Royal Kanaka Creek's share of operating losses, or to allow Royal Kanaka Creek to take a disproportionate share of operating profits, from the Sixteen to One Mine, until the sum of such losses and disproportionate profits equals $2,041,400 (the "carried amount"). After LCM has funded the Carried Amount, it shall become a 49% interest holder in the Venture, and Royal Kanaka Creek's interest shall then be reduced to 51%.
Our lease with KCJV calls for both monetary and work performances in addition to a minimum royalty payment. Kanaka Creek Joint Venture may satisfy the work requirement by mining 90,000 cubic feet of ground (90,000 cubic feet is about 7,500 tons). These conditions were mutually agreeable to protect original Sixteen to One from financial impact due to an inactive lessee. Talks are underway to determine the feasibility of KCJV meeting this requirement. Some relief may be given in return for another type of consideration in the event KCJV is unable to satisfy its contractual obligations. The size and scope of work to be undertaken the balance of this year has not yet been determined; however, laid off crew personnel are returning to work. Initial plans call for extensive shrink stoping in the productive ore zone that extends from the 1583 level to the 2283 level. Production will come from high-grade while mill grade ore will be stock piled for future processing.
Royal Gold also announced it has entered into an exploration and interest earning agreement with Billiton Minerals U.S.A. Billiton is a division of Shell Oil Company. Pursuant to the terms of the Agreement, which is cancelable upon 30 days' notice, Billiton will undertake a program of environmental assessment and exploration that could last for up to one year. While such work is progressing, Billiton will pay the KCJV a fee of $50,000 per month to provide basic services to facilitate Billiton's exploration and assessment work. Following completion of its exploration program, Billiton may elect to become a 60% working interest holder in the Venture and operator of the Sixteen One Mine. Upon making such election, Billiton's equity interest in the assets currently held by the KCJV would be proportional to amounts theretofore spent by Billiton on exploration, development, and in fees to the Venture. Billiton may ultimately earn a 60% equity interest in the Venture assets by expending a total of $6,000,000 on exploration and development, and in fees to the Venture.
Stanley Dempsey, Royal Gold's chairman, stated that "the Kanaka Creek/Billiton agreement constitutes a major positive development that could lead to significantly enhanced production from the Sixteen to One Mine." The above information has been extracted from a news release ISSUED BY royal Gold on July 23, 1990, entitled "Royal Gold announces Sixteen to One agreement with Billiton Minerals, U.S.A." If you wish to receive the full report, let me know.
"Truth is like a diamond that has many facets and
no view can claim to see its entirety."
All of you must realize by now that while we are a small gold mining company, our promotional philosophy is unlike the vast majority of "junior" mining companies. My newsletters are for shareholders and are not designed to encourage non-shareholders to by stock. I report the facts to you so you can determine the merits of your investment. Opinions, when rendered, are usually very conservative. It is interesting to note that the Security Exchange Commission (a public regulator of data issued by public corporations) is encouraging corporate presidents to "loosen up" and offer shareholders some analytical insight into the interpretation of its factual disclosures. While movement in this direction poses new risks, I believe it is a healthy move for responsible corporate American business. And frankly, I am not afraid to offer you some opinions about gold, gold mining and Original Sixteen to One.
Kanaka Creek Joint Venture
What does the Billiton entry into Alleghany mean? It is a financially sound company because of its roots in Shell Oil. While this is indeed a "major positive development" adequate working capital is on factor of sustaining a high-grade mine. Whether Billiton remains or forgoes the opportunities to participate in the Sixteen to One/Rainbow Mines, our company along with KCJV will reap benefits. When I met the Billiton regional manager in my office in Alleghany, on e of his expressions particularly hit home. We were discussing what he hoped to learn from his exploration program. Hard reserves is not a requirement. Billiton needs to confirm the existence of an un-mined vein system with geological conditions similar to those known as favorable for the deposition of gold. He said it will take faith to mine in Alleghany. He is right. Faith in your beliefs is required to invest the time, money and energy to produce gold from our claims. In this fashion the underground miners (and mine owners) function as the gold miners/owners functioned for one hundred years…gold is where it is, and it ain't where it ain't.
Our needs in Alleghany are not yet met from gold production. Therefore, outside money is required to fuel our underground mining operation. Management determined that on e million dollars is required to execute a sensible second phase for the Red Star Mine. Two million dollars provides the company with additional options that will increase the likelihood of mining gold capable of self-sustaining future activities.
In return for working capital, I have proposed up to a 20% equity interest in the company. This exchange of assets between the company (treasury stock) and an investor (money) seems reasonable, just and equitable for all parties. With the above in mind, the remainng step is to locate the investor.
Boston Gold Show
The spring 1990 show was presented for mining people to meet financial people. There were also work shops, seminars, panel discussions and individual presentations on gold related topics. I met many interesting people. One of whom, Paul Sarnoff, chaired an interesting workshop. His six criteria for review of a gold mining company are:
1. Management Quality - Do they work for the shareholders or for themselves?
2. Financial Structure and Condition of Company - A most important document is the annual president message. He suggests reading the last five years collectively to determine if reasonable goals are set and achieved. I left his workshop knowing that our company will pass his criteria for investment.
3. Quality of the Resource - Development must lead to production. You do not make money moving rock but finding gold.
4. Growth Potential - Build a meaningful company not an empire.
5. Sensitivity to the Gold Price
6. Yield Consideration - Balance risks to the company and what is in it for shareholders.
Other gold tidbits from the show include:
1. No one knows who instigated the sell off March 23, 1990, that drove gold prices down. Those mentioned were Saudi Arabians, Germans, British, Swiss, Japanese, Americans and Russians. No one knows if it was a banker move, a government move or a businessman move. Analysts provided arguments for all of the above.
2. Open pit operations in North America are under increasing environmental constraints. Ore is becoming less profitable with depth as well as its change from oxides to sulfides.
3. Exploration companies will find it difficult to attract capital.
4. The Europeans desire to lead the world in mine financing.
5. The number of gold analysts will dwindle. Stock purchasers will become more selective than any time since gold was de-controlled in 1975.
My last though for you this summer of 1990, is contained in this statement.
"There is a lot of difference in pioneering for gold and pioneering for spinach." — Will Rogers
Michael Meister Miller