INVESTMENT COMMENTARY — Interest in senior Canadian gold producers remains high

Over the past two years, the price of gold has hovered narrowly between US$375 to US$395 per oz. And yet investors remain keenly interested in senior Canadian gold-producing companies, some of which have undergone dramatic changes in the price of their shares as a result.

It was partly for this reason that gold analyst John Lydall of First Marathon Securities undertook a review of 12 of this country’s top gold producers.

In his report, the analyst says “the key to success, both in operating a mining company and investing in it, is cash flows, which are derived from existing operations, and the successful re-investment of those cash flows.” No less important are growth in ore reserves and production at major properties.

Toronto-listed Barrick Gold has enjoyed increasing cash flow as a result of growing reserves and rising production, as have Franco-Nevada Mining (TSE) and Euro-Nevada Mining (TSE). All three are deriving revenue from the Goldstrike mine in Nevada.

For other companies, exploration is essential to growth. One of the more active explorers in the senior gold group is Placer Dome (TSE), which has advanced several projects in Canada, the U.S. and South America to the development stage.

And then there are companies whose success is tied to a single mine. However, many of these “company-building” mines are now past their peak, and the challenge for companies such as Echo Bay Mines (TSE) and Hemlo Gold Mines (TSE) is to develop new gold deposits so that their status as senior producers will be assured into the next century.

In his report, Lydall provides reasons why the 12 companies under review might (and, in some cases, might not) be attractive to investors: * He refers to Barrick Gold’s “unrivalled growth profile, increasing cash flows and strong balance sheet.” And because the shares are liquid and volatile, they are seen as an ideal trading vehicle.

* Lydall recommends Cambior (TSE) on the grounds that the stock will be weak until the Omai mine in Guyana is re-opened. The company is constructing a new tailings dam, and independent consultants are expected to inspect the project before production resumes.

* Echo Bay Mines (TSE) is exploring international joint-venture projects, but until these are developed, Lydall advises buying the stock as a high-leverage gold position for larger gold portfolios.

* While Lydall concedes Hemlo Gold Mines (TSE) is a solid operating company, thanks to the low-cost Golden Giant mine, he suggests it is trading at a high price-to-earnings ratio. The mine has a life of fewer than 10 years, and investors are advised to use Hemlo Gold only as a low-leverage position in large gold portfolios.

* Kinross Gold (TSE) has performed well since it was first listed, in 1993. With production expected to grow over the next few years and further acquisitions likely, Kinross is recommended as a growth-oriented company for all large gold portfolios.

* While Placer Dome posts lower earnings than its major rival, Barrick, the company has a large portfolio of exploration and development projects, which renders it attractive. However, because of its market liquidity and volatility, the stock is recommended only as a trading vehicle.

* Poor operating performances in 1994 and 1995 took their toll on the share price of Royal Oak Mines (TSE). Nevertheless, with the acquisition of the Kemess property in 1996, the company is expected to have a better year ahead. Lydall sees Royal Oak as a speculative buy.

* The diversity of Toronto-listed Teck’s holdings, which include base as well as precious metals, renders the company difficult to assess. But Lydall rates it a buy for three chief reasons: an excellent, long-term growth record; good management; and a strong balance sheet.

* With the purchase of Greek-based Kassandra Mines and cash flowing in from La Coipa, TVX Gold (TSE) is regarded as a potentially profitable producer. Relatively weak earnings do not prevent Lydall from rating TVX as a buy for all gold portfolios.

* He predicts Washington-based Pegasus Gold (TSE) will face another difficult year of operations, and warns investors to avoid the company unless the gold price rises sharply.

* And, finally, both Euro- and Franco-Nevada are recommended as core holdings for all gold portfolios, on the basis that they are expected to enjoy rising revenues and earnings from various gold properties.