Pegasus Gold Seeks Protection From Creditors Struggling Company Blames Slumping Gold Prices For Chapter 11 Filing

Making good on a threat made last week, Pegasus Gold Corp. Friday filed for Chapter 11 bankruptcy protection and announced plans to reorganize the financially troubled Spokane-based mining company.

The reorganization, which Pegasus officials said will take at least a year, is in response to a persistent debt load, now at $213 million.

The outstanding debts are attached to a revolving line of credit and convertible notes used to finance projects like the Mt. Todd gold mine in Australia. Pegasus shut down that operation in mid-November and posted $433 million in losses in the third quarter of last year.

Mt. Todd, shut down due to high production costs and low market prices for gold, held half of the company’s reserves.

“The other shoe has dropped,” said Manford Mallory, an analyst with Research Capital Corp. in Toronto.

“The first shoe fell a couple of months ago when they wrote off the Australian operations.”

“It was no surprise,” Mallory added. “This bankruptcy has been widely rumored in the investment community.”

On Jan. 9, lenders notified Pegasus that its line of credit debt had been “accelerated” and was considered payable.

At that time, John Pearson, vice president of investor and public relations for the gold company, said Pegasus was prepared to file for debt protection if lenders demanded immediate payment. Friday’s bankruptcy filing, which took place in Reno, Nev. - a state in which Pegasus operates the Florida Canyon open-pit gold project - apparently had more to do with timing than pressure from lenders.

“They have still not demanded payment, nor have the convertible notes demanded payment,” Pearson said. “We looked at the length of time we’ve spent in discussion with lenders and the progress being made and we realized that, to really move this reorganization forward, it was going to have to take place in a court setting.”

Pegasus President and Chief Executive Officer Werner G. Nennecker said an 18-year low in gold prices was behind his company’s financial problems. Under bankruptcy protection, the outstanding debt will be stayed, Pearson said, meaning Pegasus won’t have to make interest payments until after reorganization. Interest alone has been costing the company $15 million to $17 million a year.

Pegasus cleared its pending contracts over the past few weeks and has cash reserves of about $16 million, Pearson said. “That will be our working capital going forward,” he said. The company plans to keep its Spokane offices open and the 35 workers there employed.

“We cut staff here by about 40 percent in August, so we’re about as bare-bones as we can go,” Nennecker said Friday from his Spokane office.

The fate of 635 other Pegasus employees at two mines in Montana and one in Nevada will depend on gold prices. The Montana Tunnels and Diamond Hill projects in Montana appear safest, since production costs there are about $235 an ounce - still below the faltering market price for gold. But Florida Canyon in Nevada, where costs approach $335 an ounce, may be closed if gold can’t manage a comeback.

“We have our own price curve on cost of production in the mines,” Nennecker said. “Mt. Todd was the first to go and Florida Canyon will be next if prices don’t turn around.

“If gold goes down further,” he added, “there may be no mines that make sense to operate.” Other large mining companies have been hit almost as hard as Pegasus. Echo Bay and Barrick Gold both took $300 million write-downs during the third quarter of 1997. In the months leading up to those losses, mining companies shut down more than 20 gold projects worldwide.

Pegasus filed for the equivalent of Chapter 11 bankruptcy in Australia on Dec. 11. The company closed its Black Pines open-pit gold mine near Burley, Idaho, last week. The American Stock Exchange dropped the Pegasus listing Friday. The stock had lingered at 62 cents a share for some time and closed there Thursday. Pearson said that the exchange would welcome his company back aboard if the reorganization proves successful.

Investors, however, might not be as quick to embrace Pegasus - a reaction Nennecker said he understands. “There’s no question there will be some people upset with us and rightly so,” he said. “But the gold is not going anywhere. The ounces are still there waiting for prices to come back. We’re still a viable play.”

Viability depends entirely on what happens in the precious metals market, said Research Capital’s Mallory. “The big question is, can you wait for a rebound in gold prices and get Pegasus back on the ground?” he said. “That’s going to be difficult to accomplish.”

After the Mt. Todd closure, Pearson said the future of Pegasus Gold “was in the hands of the lenders.” On Friday, he said: “It all comes down to where the gold price is going.”

, DataTimes