Following suspension Friday of operations at a key Australian property, Pegasus Gold Corp. may be on the brink of receivership, according to at least one analyst.
Pegasus shares lost 60 percent of their value in trading Monday, dropping $2.06 to close at $1.38.
Calling Pegasus a “high-cost producer,” Merrill Lynch had lowered the company’s rating from “neutral” to “sell” early in the day.
Sell they did. More than 5 million shares traded hands as investors unloaded shares of Pegasus, which maintains offices in Spokane.
David Christensen, who wrote the Merrill Lynch report, said Pegasus “will not survive the current price period of weakness.”
Leanne Banker, an analyst with Salomon Brothers, also downgraded Pegasus Monday, giving the stock an “underperform” ranking.
Spurring the decline was the announcement Friday that Pegasus was taking a $353.3 million write-down and suspending operations at its Mt. Todd mine in Australia.
To industry watchers, the announcement sounded more like the shot heard ‘round the world.
Christensen of Merrill Lynch based his evaluation on the same thing that forced closure of the Mt. Todd operation - production costs that far exceed current gold prices.
In the most recent quarter, Pegasus reported production costs of $330 per ounce for the mine, which is located in Australia’s Northern Territory. Pegasus bought complete control of the Mt. Todd mine in 1995. After reaching a 14-year low of $299 on Friday, gold closed Monday at $303.75 in London and New York.
“They can’t make any money with the price of gold where it is right now,” said Mark Bowlby, a financial consultant with D.A. Davidson & Co. in Coeur d’Alene.
Along with the gap between expenses and earnings, the chasm separating debt and equity could help spell the end for Pegasus.
With $122 million now in default on its revolving line of credit, the company will be forced into receivership if lenders require immediate payment, according to Christensen.
Pegasus is a prime example of the kind of highly-leveraged gold company that stands at risk in the present market, Bowlby said.
“They borrowed money to buy properties,” he said, adding that Pegasus has a debt-to-equity ratio of 72 percent due to the acquisitions. “When you do that and those properties don’t make money, you’ve got problems.”
The Mt. Todd shutdown is only the latest installment of bad news for the Australian gold mining industry. Twenty of the country’s mines were closed or in the process of closing in the third quarter of this year.
With as many as 25 percent of Australia’s gold mines running at a loss under prevailing gold prices, more closures are expected, said Keith Goode, a Sydney-based gold analyst with Bell Securities Ltd.
Up to 10 percent of Australia’s gold production could be “under threat,” he estimated.
The mining industry group, Australian Mineral Economics, said Monday that even before gold prices bottomed out last week, 50 percent of world gold production was unprofitable.
Statistics like those are shrinking the ranks of stalwart supporters. Even gold’s traditional role as a hedge against inflation and financial uncertainty is being questioned. Some experts believe a healthy economy has created an environment in which there is nothing left to hedge against.
“Look at the day the market was down 500 points,” said Alan Rifkin, an analyst at Piper Jaffray. “One would think gold would have been a flight to safety. But it wasn’t that way at all.”
Vanessa Motto, a researcher at the CPM Group in New York, takes the opposing view.
“Next year, gold’s role as a currency hedge looks strong, so we’re predicting higher prices,” she said.
CPM Group is also forecasting a decrease in gold supply, but said the closure of Mt. Todd and the loss of its projected 260,000 ounces a year “shouldn’t have a significant effect on the industry.”
Combined with other closures, however, the shutdown could shift the market over the long term, Bowlby said.
“With this mine being shut down, expectations are very poor for (gold) mining stocks,” he said. “At some point, you could see other mines going out of business, so the survivors with good balance sheets could become very good investments down the road.”
Whether Pegasus survives will depend on the outcome of meetings between company officials and lenders. Pegasus President and CEO Werner G. Nenecker and John W. Pearson, vice president of investor and public relations, were in New York City and Toronto Monday and could not be reached for comment.
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