Investment Comment Growth oriented Canamax, is still a buy

A highly qualified management team equipped with the financing to open a mine per year by l991 makes Toronto-based Canamax Resources a definite buy according to Gordon McCreary, mining analyst with Alfred Bunting & Co. Ltd.

A pioneer of flow-through share financing in l983, Canamax is emerging as a significant gold producer with three projects under construction, two additional projects at an advanced exploration stage and a large portfolio of precious metal exploration projects thoughout Canada.

Canamax’s Bell Creek project near Timmins, Ont., became the company’s first gold producer when ore shipments to a custom mill began, in January, l987. A 50% joint venture with Pamorex Ltd., the mine is expected to produce 18,000 oz of gold in l987 and rise to an annual rate of 25,000 oz in l988.

Although Bell Creek will be a relatively small gold producer (Canamax’s portion 13,000 oz per year initially) with cash production costs hovering above $200(US) per oz annually, current reserves are expected to sustain production for about 10 years.

Canamax’s second producing mine is expected to be the company’s 50% owned Ketza River gold project south of Ross River, Yukon. A feasibility study has recommended a daily milling rate of 350 tons grade 0.45 oz per ton, resulting in annual production of 123,400 tons per year.

As operator with a 50% joint venture interest and a recently acquired 20% net profits underlying royalty, Canamax’s portion of production is forecast at 26,000 oz annually with cash production costs in the $200-220 range.

Joint venture partner (Pacific Trans-Ocean) can put each company in an equal position by buying one-half of Canamax’s recently acquired 20% net profits underlying royalty for cash. At the recent annual meeting, President John Hansuld told shareholders that his company’s Kremzar gold property near Wawa, Ont. should be producing by September l988. Canamax became the 100% owner after acquiring Algoma Steel’s 50% joint venture interest for $9 million.

Under the agreement, Canamax granted Algoma a 4% net smelter royalty payable after payback in the mid-l990s.

The initial production rate is expected to be 500 tons per day grading 0.20 oz. gold per ton but recent exploration success on an adjacent wholly-owned Lochalsh property, could lead to a near doubling of throughput by the early l990s.

According to Mr McCreary, with superb logistics, mining conditions and metallurgy, Kremzar will be a low cost producer (cash production costs below $200 per oz) even though the grade is only about 0.20 oz per ton.

“Assuming mill throughput increases to 800 to 1,000 tons per day, economies of scale should result in cash production cost of about $175 per oz,” he said.

Canamax’s fourth and fifth gold mines are expected to be the Matheson and Clavos projects located north of Timmins, Ont.

Canamax directors agreed to purchase a 34.56% interest in the Matheson gold project from Procan Exploration. It encompasses an extensive land position of 280 claims straddling the Destor Porcupine fault east of Matheson Ont.

The project includes two gold deposits — the Mattawasage deposit located adjacent to and on the geological extension of the Holt- McDermott mine of Barrick Resources in Holloway Twp., and the 42 East deposit located in central Holloway Twp. 3.5 km to the northeast.

Upon completion of the purchase, Canamax will own 100% of the project properties and Procan will retain a 5% net profits royalty from production.

A $2.6-million underground exploration and bulk sampling program is currently being initiated on the 42 East deposit where drill indicated reserves are estimated at 576,000 tons grade 0.216 oz per ton.

In addition, a $1.1-million surface drilling program is being concentrated on both deposits as well as other gold targets indicated by previous drilling.

The Clavos project is a large tonnage lower grade deposit operated by Canamax (67%) on behalf of joint venture partner Bruneau Mining (33%) which is itself 40% controlled by Canamax. According to Mr McCreary, continued exploration successes at Clavos will result in a l988 shaft-sinking program which could ultimately lead to the construction of a mill by l990.

“By l990 we expect Canamax’s portion of annual gold production to exceed 100,000 ozs with cash production costs in the $200-220 per-oz range.” said Mr McCreary.

In addition, he predicts that large annual exploration expenditures, while dampening earnings, will provide excellent exposure to many exciting Canadian gold exploration plays under the guidance of a highly qualified management team.

On a relative basis, he recommends Canamax as a buy at current prices ($11.50) for exposure to an emerging gold producer with a clean balance sheet and a high quality portfolio of exploration projects.

When the research report was written, Canamax shares were trading at $11.50 on the Toronto Stock Exchange, just below its 52-week high of $14.25 but well above its $4.50 low point. At press time, the shares were trading at $10.38.

Assuming a gold price of $425 per oz, this year’s production is estimated at 52,000 oz. Earnings for 1987 are estimated at 5 cents per share rising to 25 cents per share from 53,000 oz in l988 and on to 50 cents from 88,000 oz in l989.

Earnings projections from l988 onwards are based on a gold price of $400 and Mr McCreary points out that attainable full year earnings power can be dri ven by a significant exploration find.

“We are talking about a company which has changed in status from a retail news oriented play to an institutional quality type gold investment,” he said.

“When the stock stood at $4.50, last year, Canamax had made no definitive production decisions. Now the company is equipped with a clean balance sheet and a tangible number of projects coming down the shoot.”

During l987, Greenwich, Conn., based Amax increased its ownership in Canamax from about 32% to 40% in recognition of Canamax’s as a rapidly growing gold producer.

Canamax reported cash and short term deposits of $12.6 million on Dec 31, l986, compared with $10.2 million for the same period last year.

While he wouldn’t say how much further the stock will appreciate between now and l991, Mr McCreary indicated that any additional exploration finds could have a significant impact.