By Gordon Austin

YOGO, MONTANA - On May 15, 2001, Pacific Sapphire Co. Ltd. (Pacific) defaulted on a lease/purchase option agreement with Roncor Inc., owners of the Yogo sapphire property in Montana's Yogo Gulch. In doing so, it became the latest in a long line of companies whose attempts to mine Montana sapphire have ended in failure.

From the original discovery of sapphire on the Missouri River in 1865 to Pacific's latest venture, there have been few success stories.

The list of companies that have fallen by the wayside begins in the early 1900s with New Mine Sapphire Syndicate, which operated Yogo from the early 1900s to 1929. Others include American Gem Corp., Gem River Corp., Intergem Inc., and the famous worldwide mining company AMAX Inc., just to name a few. Pacific's case illustrates what so many people saw in the property - and why so many of them didn't make it.

Pacific Cascade Resources Corp., which later became Pacific Sapphire, was incorporated in May 1996 in British Columbia, Canada. In December of the same year, Pacific signed a letter of understanding with Roncor, Inc. that granted Pacific the right to evaluate the Yogo sapphire property and either lease or outright acquire it. On April 16, 1997, Pacific entered into a lease/option to purchase contract with Roncor which required Pacific to either buy the property or leave by April 15, 2001.

A view of the sapphire processing operation against the wide-open plains of Montana. Photo courtesy Pacific Sapphire.

In addition to its own evaluation of the deposit, it appears that Pacific - whose management comes from a background in metal mining - relied heavily on the advice of consultants for its picture of the gemstone market. Pacific was apparently told that there would be no problem in selling large quantities of the Yogo sapphire for $175 per carat, despite the fact that equivalent sapphire from other deposits sells for much less.

Believing that recouping its investment would be no problem, Pacific proceeded to raise about US$3 million worth of funds, services, and property to set up the operation. However, the fundraising took nearly three years, and in the meantime the clock was ticking.

Pacific representatives disclosed that under the lease/option agreement, the company was committed to making a number of annual payments for a total value of $1.3 million by April 2001. If the company bought the property, the purchase option required an annual royalty payment of 3 percent of net returns, minimum $500,000 per year, until a total of $9 million was paid.

Both Roncor and Pacific were given the right to mine a maximum of 5,000 tons of ore annually during the lease period. Annual exploration and development costs of up to $2 million went to Pacific; any sales funds over that amount were to be held in escrow. If Pacific bought the property, the funds in escrow and the value of sapphires on hand at that time, minus exploration and development costs, would be divided equally between Pacific and Roncor. If the property was not purchased and the lease ended, Roncor would receive all of the escrow funds and sapphires on hand.

A funding shortage meant Pacific was late in setting up sapphire processing. Photo courtesy Pacific Sapphire.

During the lease period, Roncor had the right of first refusal to purchase up to 10,000 carats of cuttable rough sapphire. The price of the rough would be equal to 50 percent of Roncor's published prices for finished goods. After the purchase of the property, Roncor would have the right to purchase up to 25 percent of the annual production at the lowest price available to Pacific's customers. This right to purchase would be terminated if Roncor were paid $9 million within six months of the exercise of the option to purchase. If the 25 percent purchase rights were terminated, Roncor would have the right to buy up to 20,000 carats of cuttable rough annually.

The project was in trouble from the start. The initial shortage in funds meant Pacific was slow in getting started on mining, according to Pacific Sapphire Investor Relations Manager Paul LaFontaine. Physical sampling and production did not begin in earnest until after July 2000. By August 31, the company had mined and stockpiled about 5,000 tons of potential sapphire-bearing material. A recovery plant was designed, purchased, refurbished, and constructed on-site, and it began operation on October 1.

By the end of the operating season, the plant had processed more than 2,400 tons of ore, recovering approximately 9,200 carats of cuttable sapphire.

By the end of February 2001, Pacific reported total sapphire sales of $133,542 - not nearly enough to offset exploration and development costs during 2000, or to make the final $1 million payment due to Roncor in April 2001.

On April 20, 2001, Pacific and Roncor announced that they were rescheduling the payment until January 2, 2002. In consideration for the rescheduling, Roncor was to receive 397 carats of sapphire rough (valued at $50,000) and four payments of $62,500 each starting April 30, with the final payment to be made by August 1. Pacific failed to make the April 30 payment and requested another restructuring of the agreement. Roncor refused.

Ron Kunisaki of Roncor stated, "The old contract relationship is over, [but] they may come in with a new deal. Roncor is talking with a number of people about the future of the Yogo mine. Pacific is welcome to submit an offer to compete with the others."

On June 20, Pacific announced that they had stopped all mining and processing activities on the Yogo sapphire property and planned to commence reclamation as required by the agreement with Roncor.

To date, Pacific has not reached accord with Roncor on a new deal, although they hope to do so. Pacific executives say that they believe they can still develop the property, and after so much time and money has been spent on development they want to try.

Yogo sapphire is found throughout the property. Photo courtesy Pacific Sapphire.

Pacific reports its inventory of blue Yogo sapphires is selling at a premium price, and funds from the sale of these sapphires will be used to support current and future activities. The fate of that inventory is in dispute, however, since under the original lease/option agreement all stones revert to Roncor upon termination of the lease.

It would appear that Pacific Sapphire is out of the Montana sapphire business, perhaps a victim of undercapitalization - or bad financial advice.

Many dealers that I spoke with said that they believed the Yogo sapphire is a highly specialized gemstone with a restricted market. None of them thought that it was possible to sell enough wholesale Yogo sapphire at its premium price to meet the $500,000 minimum annual royalty, not unless new markets were developed.

The numbers looked good on paper. According to Pacific's 2000 annual report, the company was comfortable that they could process about 120,000 tons of sapphire-bearing materials per year. Based on their sampling program and estimates of yield of cuttable rough, that would indicate about 456,000 carats of usable rough per year. At a cutting yield of 20 percent, total annual production of cut gems would be about 91,000 carats, mostly in sizes of 5 mm or less.

At the $150 to $175 per carat the company was expecting to charge, that would translate to sales of between $13.7 million and $15.9 million, more than enough to cover the minimum royalty and their estimated production costs of $910,000 per year.

So far so good. But the question is, who buys 91,000 carats of sapphire per year, especially melee sizes? Certainly there's a market with the high-volume manufacturers, but would they pay the premium prices? At a more realistic price of $100 to $150 per carat, Pacific might still have made the sales it needed. But developing those industry contacts and contracts takes time, and that was one thing the company didn't have.

It's easy to see why the potential of Montana sapphire has attracted so many large-scale miners, but whether any of them can run a profitable commercial mining operation remains a question for the future. So far the only success stories have been the small commercial and hobbyist operations, a reflection of how specialized the market for Montana sapphire is. The key to the future of the gem is whether or not an enterprising company can expand that market to compete on a global scale.