August 23, 1997 in Nation/World

Pegasus To Scale Back Operations, Eliminate 90 Jobs Spokane Mining Company Blames Low Gold Prices For Austerity Measures

By The Spokesman-Review
 

Pegasus Gold Corp. will lay off 14 of its 49 Spokane employees because of low gold prices, the company said Friday.

The Spokane layoffs are part of the 90 layoffs for Pegasus worldwide. Layoffs begin immediately, the company said.

“We can’t run a business hoping for better gold prices,” said President and Chief Executive Officer Werner G. Nennecker. The company had to assume gold prices will decline more and cut its costs now, he said.

The company will lay off two officers and cut its engineering, network computer and governmental affairs staffs. It will sell its company plane and lay off employees at three mines - Montana Tunnels in central Montana, Florida Canyon in Nevada and Mt. Todd in Australia.

The company also will postpone development plans at its Zortman Mine in Montana and its Pullalli project in Chile.

“We hate to dismantle the team we have built, but the economic reality is we have no choice,” Nennecker said.

The move, which will save the company $4 million the first year, comes in the wake of Pegasus’ aggressive attempt to stay afloat during weak gold prices.

In July, gold prices plunged to a low of $314 an ounce during trading on the Comex division of the New York Mercantile Exchange. It was gold’s lowest price since 1985. Pegasus’ stock plummeted to $5.63 a share, barely one third of its $16-per-share value in 1990.

Pegasus stock closed at $4.50 a share Friday, down 6-1/4 cents.

Gold prices have slowly risen to $323 an ounce since July 3, when prices hit their 12-year lows. However, that increase has been a minimal help to a company that produces gold at $430 an ounce, analysts say.

Pegasus bought gold to sell at higher prices this year, while gold remained low, but now it must begin selling at $435 - only $5 more than it costs to produce it, analysts say.

“You can see how they need to implement austerity measures,” said Larry Strauss, analyst for Canaccord Capital Corp. in Toronto.

Strauss said the company’s costs skyrocketed because of low-grade ore.

Last year Dayton Mining Co. of Vancouver, British Columbia, canceled merger talks with Pegasus that would have created the eighth-largest mining company in North America. Dayton shareholders rejected the deal.

During its second quarter, ending in June, Pegasus lost more than $3 million, almost twice the $1.7 million loss in the second quarter of 1996.

The company did protect itself last year by buying gold at higher prices and agreeing in advance to sell at high rates.

“While the gold price was low, they managed to protect their revenues by hedging,” Strauss said.

But after the company sells those higher-priced reserves, it will have to face market prices.

Nennecker said he is unsure how long it would take to get past current difficulties. It will take higher gold prices, possibly around $400 an ounce, before Pegasus makes any other moves.

Few analysts believe gold prices will increase, since central world banks have announced they plan to sell off much of their gold reserves.

“There is a lot of reason to think that (gold prices) may (fall) and few reasons to think there will be a bullish move anytime soon,” Strauss added.

And if that happens, Pegasus won’t be the only gold company to be hit hard, Nennecker said. “This isn’t by any means a Pegasus phenomenon,” he said.

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