Going For The Gold -- Peggy Witte Plays High Stakes So Investors Can Strike It Rich
--------------- Royal Oak Mines ---------------
Business: Gold mining.
Holdings: Mines in Canada, the southwestern United States and China.
It's fitting that Peggy Witte is a native of Nevada, that mother lode of high-noon standoffs, free-market capitalism, gold mining - and gambling.
Witte, 41, is chairwoman, president and chief executive officer of Royal Oak Mines, a Canadian gold-mining company that specializes in taking old gold mines that no one else wants and making them profitable. Royal Oak moved its headquarters to Kirkland early this year, to expand its U.S. operations and escape a Canadian personal income-tax rate that its executives considered onerous.
In the four years since Witte incorporated Royal Oak, she has rolled up an impressive and controversial record:
-- She assumed control of several Canadian gold mines from which other companies had already taken the easy pickings. She laid off workers, cut expenses and made the mines profitable.
-- She sent in replacement workers at a bitter strike in Yellowknife in the Northwest Territories. A union worker set off a bomb in the mine, and nine workers were killed. Witte reopened the mine a week later.
-- She tried, and failed, to take over a mining company four times Royal Oak's size.
-- She bought a mine in an area that was the center of a world-class environmental controversy, three months before the British Columbia government declared it a provincial park. Two years later, Royal Oak got a compensation package from the government that will enable it to open a major new mine, one that may increase its production to 1 million ounces of gold a year.
-- She became one of the best in the industry at selling a percentage of her company's current product for delivery at future prices, increasing the company's profit.
Witte amassed this record, her $250,000 annual salary and $75,000 in bonuses, by working 14-hour days. Should you pass the company's corporate headquarters at Lakeview Drive in Kirkland some evening and see a woman padding around the office in leggings and a sweatshirt - that's not the cleaning woman, it's Peggy Witte. A friendly, gracious woman, she continues to work around the clock to persuade investors that Royal Oak is the mining company to bet on.
Why does she do it? "There's money to be made," she says, smiling that Nevada farm-girl smile.
Margaret Witte, always called Peggy, was born and raised in Fallon, Nev. Her father owned and ran a 1,400-acre grain and cattle ranch; her mother was a music teacher. Witte's only sibling, a brother, is a Harvard professor and vascular surgeon.
She credits her farm upbringing with the relentless work ethic that sustains her.
"My dad was always in business for himself," she recalls. "We lived and died by what we made on the farm. Hard work pays off."
Despite a high-school record that included a national 4-H prize for her sewing skills, Witte headed into a college field unusual for a woman of that time. She has a bachelor's degree in inorganic chemistry and a master's in metallurgical engineering.
Her first job, as a production engineer at an Arizona mine run by a large corporation, was an exercise in frustration.
"You can't rock the apple cart" in a large organization, she says. "You can't try this or that."
In 1979, she was recruited by a branch of the Ontario government that advised mining companies on chemical and milling processes. The job enabled her to learn Canadian mining "inside and out," she recalls. Then she started her own consulting company.
But Witte wanted even more - her own mining company. In 1986, she bought control of a public company, Neptune Resources, and set about attempting to buy Colomac, a mine in the Northwest Territories.
But a larger shareholder in Colomac squeezed her out. She sold off her Neptune stock and used the proceeds to help found Royal Oak.
Four years later, the larger company unloaded Colomac to Royal Oak for a fraction of its total investment in the property. It was one of the first, but not the last, times Witte wrested a later success from an apparent failure.
Witte says she loves her job - the interaction of the shareholders, the banks, the mines, the environmental and the human-resource issues in running a publicly traded gold-mining company.
This doesn't mean her job is easy.
Gold mining is tough, dirty work - especially underground mining. The occupational fatality rate is among the highest in the world.
The workers are almost exclusively male - "to sit on a jackhammer all day underground," Witte says, "very few women have the muscle mass you have to have to accomplish underground mining."
It's also a business that lives and dies by the price of gold. "We have no control over the sales price," she says. "Microsoft can produce a better product and market the bejesus out of it" and charge accordingly, she says. "I can't do that. We either have to cut our operating costs, find better mines or sharpen our pencils to find better deals." Depending on the market price for gold, a gold mining company's profit margin can be dazzling or dismal.
Witte has frequently cut jobs and won labor concessions in her search to cut costs. Royal Oak is known in the industry as a high-cost producer because of its strategy of wresting gold from deposits others have left behind.
And it has a troubled labor history.
In 1992, negotiations between Royal Oak and miners at the company's Giant mine in Yellowknife broke down after the union refused Witte's final offer. She hired replacement workers.
In September 1992, an underground explosion killed nine Giant workers, including six union men who had crossed their own picket line and three replacement workers. Authorities determined the explosion was a bomb, and a former striker has been convicted of second-degree murder for setting the blast.
The union involved in the Yellowknife strike has since merged into a larger one. Today, the company deals with two unions, Canadian Auto Workers and the United Steelworkers of America.
The CAW took over representation of the Yellowknife mine about a year ago from the union involved in the strike. Today CAW area director Dale Paterson, based in Winnepeg, says relations with Royal Oak and the Yellowknife workers have improved, though some bitterness over the strike deaths remains.
Of Witte, he says: "if you deal with the past, at some point in time there was a degree of contempt for the rights of workers. She may have been supplied some bad advice." Recently, Paterson says that Witte has taken a hands-off approach to the mine, letting the local mine management deal with labor. In his opinion, that's an improvement.
Harry Hynd, district director of the steelworkers' Ontario division, says his union's relationship with Royal Oak is "checkered, but not nearly as bad as the long strike in the Northwest Territories."
"It's a difficult industry. It's an unsafe industry, quite cyclical. There are times when they make money and times when they don't," Hynd says.
Witte has said she was deeply affected by the Yellowknife deaths, but she remains committed to cutting costs - eliminating a couple of dozen jobs at a mine is preferable to shutting down the whole operation and throwing an entire community out of work, she says.
"With Giant, we could not have continued operating" under the existing agreement, she says. "We had to have the concessions. We didn't get them."
Turn of events
In 1994, Royal Oak became involved in a takeover attempt that would land Witte on the cover of Maclean's, Canada's version of Time and Newsweek. Witte put up the equivalent of $2.4 billion in cash and shares for Lac Minerals Ltd., a Toronto-based mining company.
In the end, the company went with a slightly lower offer from American Barrick Resources Co., North America's largest mining company and the third-largest mining company in the world. Analysts said the market was skeptical of Royal Oak's financial wherewithal to successfully run the much larger Lac operations.
Witte didn't waste much time nursing her wounds.
In April 1993, Royal Oak had done a rather strange thing - it bought a 40 percent share in a company that owned a British Columbia mining property in imminent danger of being confiscated by the government for environmental reasons.
The so-called Windy Craggy area of British Columbia is right across the U.S.-Canadian border from Glacier Bay National Park in Alaska. Environmentalists feared a proposed mining project there would taint the Canadian and adjacent Glacier Bay watershed. But a company, Geddes Resources, had acquired the right to mine the property.
Royal Oak bought 40 percent of Geddes' shares for $10 million in April 1993. In June 1993, the government announced the creation of the park, effectively confiscating Windy Craggy.
Witte says she was never worried. "Canada is a civilized country," she says. "You can't take property without compensation."
Indeed. Last month, the government announced its compensation package for Royal Oak, one that had analysts conferring the title of "genius deal-maker" on Witte.
In compensation for taking Windy Craggy, the government announced $49 million in payments to Royal Oak, plus $104 million in promises of infrastructure improvements to the Kemess mining project in northern British Columbia. The improvements include power lines, a hospital, an airport and personnel recruitment. When all those improvements are paid for out of future dollars, Witte says the total government subsidy will actually approach $117 million, for a total package of $166 million. The government has also promised to facilitate the approval of any environmental or other permits needed for the project.
Meanwhile, Royal Oak has acquired the whole of the Kemess project for a total of about $151 million in cash and shares. Witte is thrilled. Kemess "was an uneconomic prospect," she says. "Now, it's grossly economic."
According to the company's projections, Kemess will boost the company's production from about 400,000 ounces per year to the 1 milllion-ounce-per-year range, which is something of a benchmark for gold-mining companies.
"It vaults her into the bigger leagues," says Michael Fowler, an analyst with the Toronto firm Levesque Beaubien Geoffrion. Analysts also note that Kemess, if successful, will turn Royal Oak from a high-cost producer to a company that can mine at least some of its gold at more reasonable prices.
One exception to the general cheer surrounding the Kemess deal is the assessment of John Hainey, an analyst with Sanwa McCarthy Securities in Toronto.
Hainey says the economic benchmark for gold mining is about 1.5 grams of gold per ton of rock. Kemess holds about 0.5 grams of gold per ton.
"The gold content is lower than at any mine I know of that's in operation," Hainey says. "How the hell can they get that out? They can. But at what cost?"
Witte responds that Kemess will produce copper as well as gold and contends that "when you add the copper to it, you double the revenue."
She's got the smarts
Hainey and other analysts give Witte credit for tremendous smarts. Royal Oak, like other gold companies, makes some of its profit by selling some product for future delivery, an elaborate gamble that requires astute forecasting of prices. Witte's record at wringing profit from those transactions, which involve from 10 percent to 25 percent of the company's produced gold, is matched only by American Barrick, Hainey says.
Witte clearly believes her company is on the upswing. The price of the stock, traded on the Toronto Stock Exchange and the American Stock Exchange, has risen to about $4 from $3 a share since Aug. 1. Revenue has grown from $113.67 million in 1992 to $162 million last year; profit from $11.4 million to $22.1 million.
Still, the degree of the company's success is tied to the price of gold.
Witte believes the price will rise for two reasons: The first is her belief that accelerating labor costs in Africa will soon shut down marginal mines; the second is that Asians - Chinese in particular - have a love for gold both as an investment and as jewelry, and the Asian economy continues to boom.
And she has her record of promises kept to show to potential investors.
Last year, after the Lac deal went on the ropes, Witte boldly promised her stockholders that in five years, the company would produce 1 million ounces a year. That prospect seemed infeasible - until the Windy Craggy deal.
"We've always done what we said we were going to do," Witte says. "We said that in five years, we'd produce 1 million ounces. And now, we have the guarantee of a long mine life."
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