New owner of Jerritt Canyon Mine hopeful

Same mine, different perceptions: When Meridian Gold of Reno sold its 30 percent share of the Jerritt Canyon Mine 60 miles northwest of Elko this summer, the company cited the mine's high production costs as a big reason for its decision.

At a cash cost of $257 an ounce, Jerritt Canyon didn't fit with Meridian's drive to be a low-cost producer.

But those same production costs aren't a big concern to Queenstake Resources Ltd., the Canadian company that bought Jerritt Canyon from Meridian and Anglo but Queenstake is making a big bet that gold prices will stay high.

Chris Davies, the president and chief executive officer of Queenstake, which is based in New Westminster, British Columbia, told analysts last week that his company thinks it can reduce operating costs and improve production at Jerritt Canyon fairly quickly.

In the next 18 months, Davies said Queenstake believes the mine will produce about 150,000 ounces of gold a year at a cash cost of $250 an ounce.

That's roughly what the property produced under the ownership of Meridian and Anglogold.

But Queenstake also plans to invest about $51 million during the next seven years to improve the mines' operation, and some of that investment will allow the company to focus on processing higher-grade ores.

As it reduces the tonnage it runs through its processing units, the production costs should decline, Davies said.

The company projects it ultimately will be able to reduce production costs to $240 an ounce.

By comparison, Newmont Gold, the state's biggest gold miner, reported last year that its cash costs in Nevada ran $215 an ounce.

But Davies acknowledged that Queenstake is making a big bet on continued strong gold prices.

"This project is very price-sensitive," he told analysts.

Much of Queenstake's forecasting for Jerritt Canyon assumes that gold will be around $360 an ounce.

It was $365 last week, but gold's five-year price has swung from a high of $414 an ounce in 1996 to a low of $252 in mid-1999.

Davies said Queenstake plans to protect itself from a downdraft by hedging its production at $330 an ounce.

To swing part of the purchase price, Queenstake borrowed $20 million at 7 points over prime that's 11 percent at current rates.

The loan requires $2.5 million payments each quarter.

Davies told analysts he's highly confident the mine's production will cover the debt payments.

Whatever the risks, the acquisition quickly moved Queenstake out of the crowded ranks of emerging gold companies.

Before the Jerritt Canyon deal, Queenstake's sole mining operation was 42.5 percent ownership of start-up Mexican mine.

That property's total production last year was 4,482 ounces of gold.

Jerritt Canyon produces that much gold every 11 days.