Doug Ashbury
Northern News Services

NNSL (Jan 08/99) - Financially-troubled Royal Oak Mines has defaulted on debt payment to some creditors.

Failure to meet the commitments prompted Moody's Investors Service to downgrade its debt rating for Royal Oak's $264 million in senior subordinated notes. Moody's also lowered Royal Oak's senior implied rating. Moody's move came just weeks after Standard & Poors dropped its debt ratings on Royal Oak.

As well, Moody's two ratings have been placed under review for possible further downgrade.

The move reflects the Royal Oak's "considerable" amount of debt, lack of liquidity, and the continuing low gold and copper prices, Moody's said.

Royal Oak stock hit an all-time low Wednesday, closing at 33 cents, down six cents.

In an attempt to soften its debt burden, Royal Oak will defer interest and principal payments on more than $498 million of debt until Feb. 15, according to Moody's.

Prior to mid-February, Royal Oak will attempt to renegotiate terms of its $181-million, short-term senior secured debentures, about $42 million in commodity hedge debt, $19.5 million of equipment loans from Canada's Export Development Corp. and $264 million in senior subordinated notes.

"We are currently in discussions with (Royal Oak)," Trilon President George Myhal said Wednesday.

Last year, Trilon arranged $181 million in Royal Oak financing. Trilon holds $75 million of that debt in the form of senior notes.

Trilon has first call on Royal Oak's Kemess South gold-copper mine in B.C., which went into production in October.

"We continue to think (Kemess South) is a world class property," Myhal said.

When Royal Oak defaulted on its debt payment to Trilon, the payment amount owing was $1.8 million.

Asked if Toronto-based Trilon was interested in taking control of Kemess South, Myhal said Trilon is a lender and has no aspirations to own the mine, but if payments are not made, action may need to be taken, he adds.

In September, 1997, Royal Oak projected gold production costs below $119. Moody's notes costs have risen to "below $226 ($120 US) per ounce of gold." Gold is trading at about $435 ($288 US) an ounce.

Yellowknife Mayor Dave Lovell said the city also faces a delinquent Royal Oak.

As of Dec. 31, Royal Oak was in tax arrears.

The company owes $738,000 in taxes to the city as well as $12,000 in interest on that debt.

Lovell said he has been in contact with Giant mine manager John Stard.

The city has asked for a payment plan but as of Tuesday no plan had surfaced.

Lovell also said an operating mine in tax arrears is better than a mine closed down.

As long as Giant continues to operate, its 280 employees are adding to the economy by paying taxes and buying goods and services locally, Lovell said.

Ultimately, the city could seize Giant's assets. But Giant comes with huge liabilities. It will cost millions of dollars to clean up the site. There are thousands of tonnes are arsenic trioxide stored underground at Giant.

Last year, the NWT Water Board, a federal body, required Royal Oak to up its clean-up security deposit over the next few years.

The water board also required Royal Oak to submit an interim report on arsenic trioxide management. That report has been received.

As well, Royal Oak was to submit a full abandonment and restoration plan by Nov. 1, 1998. This is a deadline the company has failed to meet.

To help extend the life of the Giant mine, the federal government is considering providing $3 million over two years for exploration. The money would have to be used for exploration and may be paid back depending on future developments, life higher gold prices. Last year, Royal Oak received $1.5 million form the GNWT and city for exploration (the city's share was $150,000).

Mineral Resources director Dave Nutter with Indian Affairs and Northern Development said the federal funds "would not be to address the company's (current) financial situation. (It is) not up to us to try and judge if the company will weather this current financial situation. If we wait, we may find by that time it's too late."

But before any decision is made to give Royal Oak money, money must first be found and that has not yet happened, Nutter adds.