INVESTMENT COMMENTARY — Analysts predict Bre-X climb

With two successful drill programs completed and a meteoric rise in the company’s share price, it is not surprising that many mining analysts are following the fortunes of Bre-X Minerals (ASE) and affiliated company Bresea Resources (ME).

Several analysts, including Dorothy Atkinson at Pacific International Securities and Felix Freeman of Scotia McLeod, believe the stock could reach $20 in 12 months’ time.

Bre-X’s cornerstone property is the Busang gold project in East Kalimantan, Indonesia. Since acquiring an interest in the project in early 1993, the company has delineated three zones of interest known as the Central, Southeast and North zones.

Bre-X has completed two phases of drilling and is well on its way to completing a third. Most of the drilling has been focused on the Central zone, testing mineralization to depths of less than 150 metres below surface. The latest round of drilling will be finished by mid-November, and a new resource calculation will be presented shortly thereafter.

Gold resources within the Central zone are estimated at 3 million oz. Both management and analysts alike believe the entire property may well contain more than 8 million oz.

This view is confirmed in reports by ScotiaMcLeod and Pacific International Securities published in mid-July.

ScotiaMcLeod asserts that the Central zone could contain 3 million oz,. and points out that three holes drilled in the Southeast zone have intersected impressive intersections with grades sufficiently economic for an open-pit operation. While three holes do not make an orebody, the report says visual indications from other holes on two other drill sections support claims that building a resource of 6 to 8 million oz. is plausible.

Atkinson, meanwhile, states that the Busang is worth US$600 million, based on a valuation of US$75 per oz. of reserves. With 20.8 million shares outstanding on a fully diluted basis (and assuming a further dilution of 10%), the total number of outstanding shares would rise to 22.9 million. This equates to a net asset value per share of US$26.22 or $34.10 (Canadian) per share.

By discounting this value by 40% (a typical rate applied to exploration companies at the prefeasibility stage), the figure would drop to $20.46 per share. As development continues and resources are upgraded, Atkinson would lower the discount rate, creating additional upside potential.

Atkinson also predicts that Bre-X’s affiliate, Bresea, will continue to perform well. Bresea owns a 26% interest in Bre-X, and the analyst predicts that the affiliate could also reach $20 per share within six to 12 months.