Investment Comment Galactic offers pre-production risk

Although a New York brokerage house has not included Galactic Resources on its recommended list, it says Galactic’s four major properties are interesting vehicles for those investors willing to bear pre- production risk.

Galactic’s Summitville mine, Ridgeway, Quartz Mountain and Ivanhoe properties have yet to become profitable, a Oppenheimer & Co. Inc. progress report says Galactic chairman Bob Friedland has the creative spirit and entrepreneurial ability to make those projects successful.

“Based on existing knowledge of the properties and assuming a gold price of $425(US), cash costs of $250 per oz, $50 per oz capital and overhead costs and a 20% tax rate,” analyst John Tumazos is making the following predictions.

“We estimate Galactic’s share of output from these properties will average 249,000 oz annually with earnings averaging 62 cents per share and cash flow 93 cents per share through 1998,” he said.

But before Galactic can achieve those earnings and cash flow levels, the report says Friedland has a number of hurdles to overcome. Heap Leaching

For example, in the second half of 1986 Galactic’s Summitville mine in Colorado reached only half of its 120,000-oz production level. After heap leaching operations began there in June, 1986, the project which Galactic billed as potentially the world’s biggest heap leach gold mine, had only produced 42,000 oz gold by mid-November 1986.

Hampered by heavy rain, snowfall and the inability of the mining contractor to maintain planned levels of ore removal, the Summitville operation was largely responsible for a $9 drop in the company’s share price ($16.25 to about $7)

If 1987 production levels of 80,000 oz (by June 30 it had produced 24,000 oz) are to be realized, Galactic must continue to confront Summitville’s 10,000-ft elevation, and metallurgy which includes oxide, clay and sulphide chemistries.

The company’s 50% interest in the Ivanhoe property in the Carlin gold trend of Nevada offers a whole new set of circumstances.

The largest of Galactic’s four properties, it hosts an 8-million-ton average 0.045 oz shallow deposit containing 360,000-oz gold and an 80-ft drill hole intercept containing 0.343 oz gold per ton. In his report, Tumazos says it is significant because its geological setting lends itself to a large deposit richer than 0.1 oz per ton. Betze Deposit

“The size of American Barrick Resources’ Betze and Post deposits to the southeast suggest that a 1-2- million-oz goal is reasonable,” said Tumazos.

After Cornucopia Resources acquired the Ivanhoe property earlier this year from usx Corp. for $3.25 million it joint-ventured a 50% working interest in zones deeper than 400 ft to Galactic for 425,000 Galactic common shares.

However, Tumazos admits an assumption that Galactic and Cornucopia will share 100,000 oz in annual production below 400 ft is pure conjecture.

Galactic’s other interests include a 48% interest in the Ridgeway gold property in South Carolina where production is expected to begin by mid-1988.

A feasibility study and environmental permits have been completed and Galactic will bear 48% of the $76-million capital cost to earn 49% of expected output. According to the Oppenheimer report, that adds up to 158,000 oz from 1989 to 1992 and 133,000 oz over the 133,000 oz annually during the mine’s 11-year lifespan.

Since it could contribute 78,000 oz gold to Galactic’s treasury, Oppenheimer considers the Ridgeway property a major source of growth to the company. It is estimated to contain 56 million tons grading 0.032 oz Geological Resource

Galactic’s Quartz Mtn. gold property in south central Oregon contains what Oppenheimer calls a “geological resource” containing 125 million oz grading 0.02 oz at a cut-off grade of 0.01 oz.

A 250-hole drill program, pit design and geological analysis must be completed before a feasibility study is conducted at the property.

Since its large structure and size suggest considerable potential, Tumazos is forecasting production in the 50,000-oz range beginning in 1989. Costs are estimated at $275 per oz or better, according to the report.

“The speculative appeal of Galactic is that the large geologic structures and ongoing drilling programs at Ivanhoe and Quartz Mtn. may prove larger than expected,” said Tumazos’ report.

But even if they are, Oppenheimer says Galactic’s complicated “mining house” structure which separates the major properties into a number of corporations, could be a source of confusion for potential investors.

While an amalgamation of Quartz Mtn. Gold and Galactic Resources was attempted and then deferred, the company will try to combine its interests into a single entity with greater international visibility.

Galactic shares traded recently on the Vancouver Stock Exchange at $7.50.