Pegasus Gold -- from boom to bankruptcy

And for a time, the founders of Pegasus Gold Inc. captured the spirit of the myth, soaring from the ranks of "junior" mining companies to become a major figure in the industry.

But then gold prices plummeted, and Pegasus crashed to Earth, leaving U.S. taxpayers to cover the tens of millions of dollars it will cost to repair environmental damage at abandoned mines -- even as it reorganized and paid generous bonuses to executives who kept the more profitable pits working.

Hard-rock mining is a never-ending tale of boom and bust and of fortunes made and lost. Yet Pegasus shows how even the most successful firms can dig a fortune from public land without paying a penny in royalties to the owners, then plunge into bankruptcy and leave the public to clean up the mess.

Incorporated in Canada in 1973, Pegasus pioneered "heap-leach" techniques used to extract tiny amounts of gold from ore bodies otherwise too poor to exploit at a profit. From modest beginnings, the Spokane-based firm grew as gold prices soared in the 1970s and 1980s, operating mines in Nevada, Montana, Idaho and Australia at its peak.

Hard times came in the mid-1990s, as the company was planning to start operations in Chile.

From a high of more than $850 in 1980, gold prices had steadily slipped over the years, hitting $238 in December 1997. Even with heap-leaching, Pegasus couldn't make money at those prices. It closed its Australia mine and mothballed plans for South America.

Things looked grim, but that didn't stop the company from flying its leased corporate jet or paying its seven top managers $1.2 million in bonuses from 1995 to 1997. More than half went to President and Chief Executive Officer Werner Nennecker, whose annual base pay was $350,000.

Nennecker bought a $602,000 house in Spokane less than a month before Pegasus filed for bankruptcy on Jan. 16, 1998.

"I am convinced that the company's foundation is strong. ... Pegasus can once again establish its position in the gold industry," Nennecker told reporters on the day the bankruptcy papers were filed.

It echoed his words of a year earlier: "We're going to get there. I don't know exactly how right now, but we'll get there."

Hobbled by a persistently low gold price, Pegasus never got there.

"The money had been borrowed and spent, and then the commodity prices fell out of bed," John Pearson, Pegasus' vice president in charge of investor relations, would say later.

In court papers, Pegasus listed assets of $158 million and liabilities of $194 million. But even in bankruptcy, Pegasus paid out more executive bonuses, despite initial opposition from creditors and from state and federal officials in Montana, where it left closed mines to be cared for by the state.

"People don't understand why anybody's going to be paid any kind of bonus by a company that's in bankruptcy," U.S. Bankruptcy Judge Gregg Zive said to Pegasus' lawyers at an April 1998 hearing. Still, he allowed the firm to dish out more than $2 million in bonuses after Nennecker said the money was needed to keep Pegasus executives on board as the firm struggled to reorganize.

In an interview, Nennecker said bonuses are common feature of a bankruptcy. "They made sure enough people stayed in to complete the reorganization," he said. "It is in the best interest of everyone -- the employees, the government, the creditors." He said lawyers representing the creditors and government agencies agreed to the bonuses.

News accounts from the time, however, describe them as being opposed. And Sen. Conrad Burns of Montana, a strong supporter of the mining industry, blasted the bonuses as "inexcusable."

Nennecker said the bonuses had to be paid because they were owed to executives who met management goals. As for his home purchase just before the company filed for bankruptcy, Nennecker said, "You sell one house, you buy another. I don't see what that has to do with anything."

In early 1999, a new company named Apollo Gold emerged from bankruptcy court. It would operate profitable mines, leaving three to be dealt with by the state of Montana. One of those mines was the Zortman-Landusky, which had produced $300 million in gold over 20 years and left Montana a $33 million cleanup bill -- $36 for each state resident.

"That was a big, bad deal," said Jan Sensibaugh, director of the Montana Department of Environmental Quality.

Jeff Barber of the Montana Environmental Information Center said Pegasus' "total disregard for the rape they undertook on the environment here in Montana and elsewhere should not be tolerated by anyone. Why should they and other foreign companies be permitted to take billions of dollars of precious metals out of public lands and leave it to the states and federal government to come up with the money to clean up their messes?"

And it's turning out that not all the money originally posted in bonds is necessarily available for cleanup. Because of the way the Zortman-Landusky bond was structured, the surety company may be able to avoid paying the entire cost, Sensibaugh said.

"That's one area that the state is working very diligently on to correct for future situations, to make sure we're not victimized by whatever artful language is inserted by attorneys," said Peter Werner, a Department of Environmental Quality engineer.

Pearson, the former Pegasus official, said he has not kept up with the problems at the Montana mines.

"The bonds that were put into place were what was approved by the state agencies as being appropriate for cleanup," he said.

The bankrupt company was essentially taken over by its creditors, said Ron Parker, who was installed as Apollo's chief executive.

"Those (former Pegasus) entities that survive on their own provide jobs and tax revenues," Parker said. "That's life in bankruptcy."

And even today, not everyone considers Pegasus a failure.

Frank Duval, one of the firm's founders, notes that "Pegasus ... produced millions of ounces of gold, employed a lot of people and paid a lot of taxes and salaries."

Duval was a Pegasus consultant in the 1980s, but resigned in 1987 at about the time he settled charges brought against him by the U.S. Securities and Exchange Commission. The SEC charged that Duval and two Pegasus officers violated the law by selling the company part of a Nevada mine without informing Pegasus managers that they had a financial interest in the property.

Duval is now president and chief executive officer of Sterling Mining Co. and is trying to open a new mine at Rock Creek near Noxon, Mont.

P-I reporter Andrew Schneider contributed to this report. P-I reporter Robert McClure can be reached at 206-448-8092 or robertmcclure@seattlepi.com