Falling gold prices plagued Drumlummon mine

2013-04-26T09:00:00Z 2015-06-20T21:45:03Z Falling gold prices plagued Drumlummon mineBy EVE BYRON Independent Record missoulian.com
April 26, 2013 9:00 am  • 

HELENA — The company that now owns the Drumlummon gold mine near Marysville recorded a net loss of $17.8 million in 2012, compared to a net income of $12.4 million for U.S. Silver in 2011, according to the year-end statement of U.S. Silver & Gold.

U.S. Silver merged with RX Gold — owner of the Drumlummon Mine — in July 2012 to form U.S. Silver & Gold, and a spokesman for the company said the net income reported in 2011 was for U.S. Silver alone. RX Exploration, the Drumlummon’s former parent company, recorded a net loss of $2.7 million for its fiscal year 2011, which was down from a loss of $4.7 million in 2010, according to the website minesite.com

The decrease in earnings in 2012 is attributed to the Drumlummon Mine for a variety of reasons, but mainly was due to $14.4 million loss in value at the gold mine.

“When the two companies merged last August, the accounting value ascribed to the Drumlummon Mine at that time was around $25 million,” said Darryl James, a spokesman for Drumlummon Gold Corp. “As a result of the gold price declining from $1,700 to $1,400 and the rising costs of gold production at the mine, it was determined … that this value was ‘impaired’ — the Drumlummon was not worth that much anymore — and an accounting write-down of $14 million was taken.”

Other issues cited by U.S. Silver & Gold for the downturn in value includes higher depreciation, lower realized silver prices as well as higher cost of sales, higher general and administration expenses, higher exploration costs, higher stock-based compensation expense and lower income-tax expense for 2012 compared to 2011.

The company announced Wednesday that it is suspending operations at the mine and laying off more than 100 employees by June 28, citing recent precipitous drops in the value of gold. Officials note that it’s costing more to develop gold at Drumlummon — about $2,300 an ounce — than the current market value of $1,400 per ounce.

In a letter given to employees on Wednesday, Bob Taylor, the chief operating officer, wrote that at this time, given current gold market conditions, “it is expected that the closing of regular operations will be permanent.”

However, in a press release mine owner U.S. Silver & Gold Inc. backed off of the permanent closure statement, saying it would put its Drumlummon Mine on “care and maintenance” status. In recent weeks, the price of gold has dropped from a high of $1,888 per ounce in August 2011 to $1,431 per ounce at the close of the market Wednesday. At that price, production at the Drumlummon is not considered “economically viable,” U.S. Silver & Gold President Darren Blasutti said in a press release.

Operations at the Drumlummon Mine were lower than expected during the fourth quarter of 2012 in both tons and grade, with James noting that it seemed as though the Charly Vein, which had been highly productive, was seeming to play out.

“We were not seeing the kind of reserves we had before, and exploration was not showing veins that were easy to get to,” he said.

So attention was turned to the Northstar and Frankie veins, which were smaller high-grade vein areas that decreased tonnage. Additionally, toward the end of 2012 the company was experiencing ongoing “ventilation challenges” and “weather-related air reversal” inside the mine, which prevented miners from reaching active headings.

While those issues were resolved, with the drop in gold prices and the difficulties at the Drumlummon, U.S. Silver & Gold decided earlier this year to focus attention instead on developing their silver mines in Idaho’s Silver Valley/Coeur d'Alene Mining District.

As part of that shift, they cut the exploration budget for the Drumlummon mine from $5.9 million in 2012 to $1 million for 2013. The company also is moving equipment, inventory and supplies to its Idaho operations.

The company noted the area where it will be drilling in Idaho is close to existing infrastructure that has both spare hoisting and spare milling capacity, requires no ore transportation for milling and no additional permitting.

James said it’s not as though U.S. Silver purchased RX Gold and didn’t know what it was getting into. Instead, he characterized the merger as a “reverse acquisition” with the RX Gold management team in control of U.S. Silver & Gold, and the majority of the newly combined board coming from the RX Board.

“Hence, this is not a case of U.S. Silver not understanding the asset in the acquisition,” James said.

During the first quarter this year, Drumlummon produced about 21,000 ounces of silver and almost 2,200 ounces of gold. The managers reduced operating costs during that time by about $1.5 million — done in part by reducing some salaries and bonuses — but the mine’s gold and silver production was lower and costs were still greater than what was budgeted, according to a statement by the company.

“This was principally due to chronic issues with mine equipment availability and servicing, and lower than anticipated gold and silver grades,” U.S. Silver & Gold said on its website. “As a result of equipment issues, the company milled approximately 35 percent fewer tons than what was budgeted at gold and silver grades that were approximately 25 percent below budget estimates.”

The company also is undertaking other belt-tightening measures, including cutting $10 million in exploration, capital projects and capital development costs from the 2013 budget and saving at least $1 million by reducing general and administrative costs at the corporate office and at its Galena Mine Complex in Idaho. In addition, the Idaho mine site has initiated a hiring freeze and will eliminate any non-budgeted overtime.

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