Hemlo Gold shares flood back to Canada

As much as $20-million worth of stock in Hemlo Gold Mines, one- fifth of the shares sold by Noranda Inc. in Europe, came back to Canada within two days of the initial public offering, estimates one industry analyst.

Noranda put 12.2 million shares of the company up for sale at $19.25 Feb 3 reducing its stake in the recently-formed company to 50.1% from 62.4%. Hemlo Gold owns and operates the Golden Giant gold mine at Hemlo, Ont., expected to produce more than 300,000 oz of gold a year by the time it reaches full production in late 1988.

The issue, although one of the most eagerly awaited of any Canadian gold mining issue because of the quality of the Hemlo property, is reported to have met with some resistance in Europe because of the price. With 87.3 million shares outstanding, the company will have the largest market capitalization of any Canadian gold mining issue including such well established producers as Campbell Red Lake Mines, Placer Development and Echo Bay Mines.

Hemlo Gold, however, has about $200 million in debt and will have very little in the way of cash — none of the proceeds of this issue will be received by the cmillion in debt and will have very little in the way of cash — none of the proceeds of this issue will be received by the company — thereby impairing its potential to grow.

In fact, a rights issue is anticipated shortly in order to finance expansion of production at Hemlo and to finance future exploration and possible acquisitions.

In Canada, however, demand has apparently been greater than could be met by the seven million shares sold here by Noranda. As a result, up to a million of the shares alloted for Europe were sold there and quickly sold back into Canadian hands within two days of the issue at up to a 75 cents premium.

Hemlo Gold is seen by mining analysts worldwide as a core holding for investment portfolios. With proven and probable ore reserves of 23 million tons grading 0.283 oz gold per ton, it is expected to be a major, low-cost (about $110(US)) gold producer for at least 25 years.

By the same token, however, some analysts says there is little upside potential for speculation in the issue. It will almost certainly be a steady money maker for years, but its ability to grow is not so evident.

The U.S. market was frozen out of this issue in order to avoid the red tape involved with registering the issue for sale there. However, many U.S. investors were able to “come in the back door” to gain some shares in Hemlo Gold by earlier picking up shares of Goliath Gold Mines or Golden Sceptre Resources.

Shares of those two companies, which originally held the Hemlo ground on which the Golden Giant mine was put down and financed the early exploration work, were swapped for shares of Hemlo Gold in January. Sceptre shares were traded 1-for-1 while Goliath shares were traded for 1.2495 shares of Hemlo Gold.

As a result of that restructuring and this issue, about half of the shares of Hemlo gold — about as many shares as Echo Bay has outstanding in total — will be actively traded. That should ensure that Hemlo Gold will be a very liquid issue on the Toronto Stock Exchange, perhaps a market leader.

U.S. investors may buy the shares directly once they are listed, but that potential impetus to increase prices — the increased market of U.S. investors — may have been dulled somewhat by their access to Sceptre and Goliath. Those two issues will trade on the TSE until Feb 11.

The issue will provide $223.6 million for Noranda. It plans to use that money to reduce its debt which stood at about $2 billion at the end of 1986.

The Golden Giant mine began producing gold in April, 1985. In the nine months ended Sept 30 it was milling at an average rate of 2,259 tons per day with an average millhead grade of 0.335 oz gold per ton and a recovery rate of 95.1% to produce 193,284 oz at a cash operating cost of $109 (US) per oz.