Mining analysts Graeme Currie and Andrew Muir of Canaccord Capital are advising investors to focus on junior exploration companies that have strong management and the funding in place for active, high-potential projects.
Though they acknowledge that the market’s interest in junior mining stocks “is like a bug on the windshield for the internet and e-commerce sectors,” the analysts point to the recent strength showed by such companies as
The analysts are predicting an average gold price of US$325 per oz., though they concede this will not be enough to breath new life into the sector. “The bear has been behind us for some time,” they write in their 1999 year-end market review, adding that the road to recovery is expected to be long and slow.
Currie and Muir recommend five companies as buys:
Cumberland
Cumberland Resources holds interests in two well-advanced exploration gold projects in Nunavut: Meliadine (West and East) and Meadowbank.
The Meliadine West project, just 20 km north of Rankin Inlet, hosts an inferred resource of 6.5 million oz. in four zones totalling 23.7 million tonnes grading 8.5 grams gold per tonne (uncut).
Meliadine West covers the western half of a 70-km-long gold belt. Australia’s
The four zones are within a 5-km radius of one another, with the bulk of the resource contained in the Tiriganiaq zone, which hosts 13.7 million tonnes grading 9.7 grams, equivalent to 4.3 million oz. In 1999, WMC completed a $6.7-million program of infill drilling that targeted the Tiriganiaq deposit, and a revised estimate is expected in the coming weeks.
Regional exploration in 1999 led to the discovery of a glacially transported, angular, mineralized boulder train in a 2-sq.-km area, 12 km west of Tiriganiaq. Samples from 39 boulders yielded gold values ranging from 0.1 to 65 grams, or 11 grams on average. The boulders are believed to originate from a buried geophysical target that is slated to be drilled this year.
A 1998 scoping study by H.A. Simons concluded that Meliadine West can support a 400,000-oz.-per-year underground and open-pit operation over a mine life of 10 years, provided resources containing at least 4.8 million oz. can be blocked out.
A preliminary exploration budget of $10 million has been proposed for 2000. Currie and Muir speculate that WMC may take a three-pronged approach at Meliadine West, consisting of: “development of underground access at Tiriganiaq, likely late in the season, both to drill from underground and take several bulk-tonnage samples along several faces of the deposit; further surface drilling on the primary Tiriganiaq, Pump and Wolf zones; and ongoing surface exploration, inclusive of drilling, along the favourable Pyke fault trend.”
Cumberland and Comaplex are 50-50 partners in the Meliadine East project, which covers the eastern 30-km extension of the Meliadine belt and includes the Discovery zone. Discovery contains 2 million tonnes grading 6.7 grams, equivalent to 400,000 oz. A highlight of last year’s $1.2-million exploration program was the discovery of the J2 zone, which hosts a series of parallel quartz veins. A 6-hole program intersected gold mineralization along a 300-metre strike length. Highlights included 2 metres of 6.07 grams, plus 2 metres of 40.19 grams in hole 197, and 2 metres of 25.82 grams in hole 196.
Cumberland’s other key asset is its wholly owned Meadowbank project, 70 km north of Baker Lake. Prior to the 1999 exploration program, four zones were found to contain 8.8 million tonnes averaging 6.15 grams, or 1.7 million oz. About three-quarters of the resource is potentially minable by open-pit methods at an estimated stripping ratio of greater than 7-to-1.
In 1999, the company completed 61 drill holes totalling 6,100 metres, as well as extensive trenching, the results of which are being incorporated into the resource base for the prefeasibility study, due in the first quarter.
Currie and Muir believe that capital costs for a 2,000 tonne-per-day, 110,000-120,000-oz.-per-annum operation could fall well below US$100 million, with cash costs in the range of US$165-175 per oz., providing for a “robust project.”
Earlier scoping level studies indicate the project has the potential to produce an annual 120,000-150,000 oz. over a 10-year life, with low cash costs.
“This Canadian-focused junior continues to provide excellent value as current net ounces in situ are being valued, at today’s market cap, at less than US$10 per oz.,” state the analysts. “For 2000, total exploration expenditures could exceed $14-16 million. We continue to recommend this junior.”
Cumberland is currently trading at $1.90 in a 52-week range of $3.50-1.55. The company has 26.3 million shares outstanding and $6.3 million in cash.
Eldorado Gold
At 92, Eldorado Gold was also recommended as a buy, with a 12-month target price of $1.60 per share. The company has a cash position of about $6 million, with 73.5 million shares outstanding. For 1999, Eldorado expects to have produced 190,000 oz. at a cash cost of US$202 per oz. from two wholly owned mines: Sao Bento, an underground operation in Brazil, and La Colorada, an open pit in Mexico. During the first nine months of 1999, Eldorado produced 148,202 oz. at a cash cost of US$198 per oz., compared with 143,369 oz. at US$259 per oz. for the corresponding period of 1998.
The company has reduced its cash costs considerably, largely as a result of vigorous cost-cutting. In the nine months ended Sept. 30, 1999, Eldorado earned US$3.4 million (or 5 per share) on sales of US$46.4 million, compared with a year-earlier loss of US$115.6 million ($1.58 per share). The 1998 loss included a writedown of US$108.1 million on sales of US$50.5 million.
“While cash flow is positive, earnings will remain only marginal over the next three years due to a 100% hedging program at an average price of US$297 per oz.,” state the analysts. “Cash flow in 2000 is estimated at US18 per share, which, given a price/cash flow (P/CF) multiple of six times, justifies a share price of $1.60.”
The Sao Bento mine remains the company’s backbone. At the end of 1998, the mine hosted proven and probable reserves of 743,800 oz. in 2.5 million tonnes grading 9.18 grams gold. The total resource stood at 4.5 million tonnes grading 10.85 grams, equivalent to just under 1.6 million oz. Currie and Muir expect Sao Bento to have a life exceeding 10 years, averaging 125,000 oz. per year at a cash cost of US$185 per oz. La Colorada, on the other hand, is entering its final two years of production at 50,000-60,000 oz. per year.
Eldorado is also advancing two wholly owned gold projects in Turkey: Efemcukuru and Kisladag.
Efemcukuru contains a total resource of 2.5 million tonnes averaging 13.71 grams gold, equivalent to 1.1 million oz. The proven and probable portion is estimated at 1.8 million tonnes grading 13.14 grams, or 748,000 contained ounces. Upon receipt of land-use permitting, the company will begin a full feasibility study for an 80,000-oz.-per-year underground mine, utilizing a conventional flotation and gravity circuit.
Prefeasibility work indicates potential for an 800-tonne-per day operation producing 87,000 oz. per year over 10 years at an average cash cost of US$176 per oz. Capital costs are pegged at US$45 million.
Drilling at Kisladag in western Turkey has outlined a 3.4-million-oz. resource in a gold porphyry deposit containing 73.9 million tonnes grading 1.43 grams gold. About 17% of the resource is oxidized, the balance being a mixture of transitional and sulphide material. State Currie and Muir: “The consistent distribution of mineralization grading 1.4 grams gives us confidence that the next phase of drilling should confirm, or even expand, the current resource, which could support potential production of up to 250,000 oz. per year.”
Corner Bay
The shares of Corner Bay Minerals are rated a strong buy. The company has been advancing its fully owned Alamo Dorado silver project in the northern Mexican state of Sonora. A recent prefeasibility and reserve study by Tuscon-based Mintec indicates potential for a low-cost, heap-leach silver-gold mine. The study estimates a total resource of 74.8 million tonnes averaging 41 grams silver and 0.16 gram gold, equivalent to 119 million contained ounces silver-equivalent. The deposit remains open to the north-northwest and downdip.
An open-pittable reserve is modelled at 49.6 million tonnes grading 52 grams silver and 0.19 gram gold, or 100 million oz. silver-equivalent, at a projected stripping ratio of 0.39-to-1. The study assumed a silver price of US$5.28 per oz. and a gold price of US$300 per oz.
At an annual production rate of 5.1 million tonnes, the project would produce an average 6.5 million oz. silver-equivalent over 10 years. According to Currie and Muir, this is equivalent to production of 114,000 oz. gold per year at US$145 per oz. Capital costs are projected at US$30 million. A starter pit contains 4.1 million tonnes grading 130 grams silver and 0.32 gram gold, equal to 19.8 million oz. silver-equivalent. Life-of-mine direct operating costs are estimated at US$2.50 per oz. silver-equivalent.
Preliminary metallurgical tests by Tuscon-based Metcon Research indicate recoveries of 89% for gold and 67% for silver from initial bottle-roll studies on four composite samples taken from drill-hole chips. A more detailed study focused on a pair of mini-column leach tests on reverse-circulation drill material. Recoveries averaged 90% for gold and 89% for silver. Metcon concluded that the precious metals displayed fast kinetics and will be amenable to heap leaching. More column leach studies are under way, incorporating 1,200 metres of large-diameter core samples.
The Canaccord analysts estimate that the net present value for Alamo Dorado, on a per-ounce basis, is nearly 40% of the current silver price. Gold projects are typically only 10-15% of the realized gold price. Moreover, the analysts report that the internal rate-of-return (IRR) is an astounding 100%, which means another company could offer a takeover bid for Corner Bay at US$6.50 per share and still make a minimum 18% IRR.
With 10.1 million shares outstanding, Corner Bay is trading at $2.75 in a 52-week range of $3.04-27.
Aurizon
At 72, Vancouver-based Aurizon Mines has been under steady accumulation over the past six months, rising from a 52-week low of 50. The company is a 50% partner in the Beaufor and Sleeping Giant underground gold mines, and holds a 100% interest in the Casa Berardi gold project, all of which are in the Abitibi region of Quebec. For the first nine months of 1999, Aurizon earned $2.6 million (7 per share) on revenue of $20.6 million, versus earning $2.1 million (6 per share) on $17.9 million in revenue for the corresponding period of 1998. Operations generated a cash flow of $5 million (13 per share) for the recent 9-month period, compared with $4.3 million (12 per share) a year earlier.
Beaufor produced 33,908 oz. in the first nine months of 1999 at a cash cost of US$217 per oz., whereas production from the Sleeping Giant mine was 53,914 oz. at US$211 per oz. Aurizon’s attributable share was 43,911 oz. at a cash cost of US$213 per oz., compared with 41,119 oz. at US$203 per oz. in the corresponding period in 1998. For 1999, the company expects to have produced about 60,000 oz. at US$213 per oz.
At the end of 1998, proven and probable reserves at Beaufor stood at 898,000 tonnes grading 8 grams, equivalent to 230,600 oz. An additional resource was estimated at 520,000 tonnes averaging 6 grams, equivalent to 101,000 oz.
At last report, the Sleeping Giant mine contained proven and probable reserves of 730,000 tonnes grading 12 grams, or 281,000 contained ounces. A further 130,200 oz. are hosted in a mineral resource of 464,000 tonnes averaging 8.7 grams.
Last year, Aurizon completed an aggressive, 76,000-metre program of exploration drilling at Casa Berardi, boosting the measured and indicated resource in the West and East mines to 6.9 million tonnes grading 7.41 grams gold, equivalent to 1.6 million oz. Inferred resources are pegged at 2.2 million tonnes grading 9.18 grams for an additional 665,000 oz.
The Casa Berardi project comprises 140 sq. km along a 43-km section of the Casa Berardi fault. The property centres on the East and West mines, which are set 5 km apart. Both mines are accessible from surface by ramp and connected by an underground rail drift. Existing infrastructure includes a 2,200-tonne-per-day mill, a tailings pond, and a fleet of mining equipment. Between 1988 and 1997, the two mines produced 690,000 oz. gold from 3.7 million tonnes averaging 6.7 grams.
Engineering and metallurgical studies are well-advanced, and an internal prefeasibility study is nearing completion. Currie and Muir see the potential for a 120,000-to-180,000-oz.-per-year mine at a projected cash cost of US$190 per oz.
“While resources at Beaufor and Sleeping Giant total 743,000 oz. (6-year mine life), the exploration success at Casa Berardi offers the potential for a new long-life mine for the company,” write the analysts. “Aurizon now has a market capitalization of US$10 per oz. The potential development of Casa Berardi (to boost production to more than 200,000 oz. annually) supports an accumulate recommendation.”
At Sept. 30, 1999, Aurizon had $4.3 million in working capital and a long-term debt of $3.5 million, with 38.3 million shares outstanding.
Pacific Rim
The analysts recommend Pacific Rim Mining, with 20.6 million shares outstanding, as a speculative buy at $2.12. The issue is currently trading at the upper end of a 52-week range of $2.50-60.
In September 1999, Pacific Rim optioned the right to acquire the Luicho property in Peru, 450 km south of Lima. The company has made an initial payment of US$200,000 and can earn a 100% interest by paying an additional US$400,000 in year one, US$1 million in year two and US$24.2 million in year three.
Luicho sits at an elevation of between 1,700 and 2,900 metres in rugged terrain. The property is accessible by foot trails and is 10 km from a local gravel road. There is evidence of past superficial mining, with numerous short adits.
The main target area is 1,850 metres long and averages 250 metres wide. Pacific Rim has so far collected 2,018 chip samples from this structural corridor, the average grade being 2.34 grams gold. In areas of good exposure, sections of the zone were often sampled by continuous, 2-to-3-metre channels over lengths of 10-100 metres. Higher-grade sections include 23 samples averaging 17.25 grams gold and 26.8 grams silver over 32 metres. According to Currie and Muir, results such as these demonstrate potential for high-grade pockets, which could enhance the bulk-minable potential of Luicho.
“Pacific Rim has acquired an option on a property that, in the current gold market environment, represents one of the best early-stage targets we have recently seen,” states the pair. “The company has sufficient current working capital to drive through the planned first phase of exploration drilling (some 12,000 metres) to begin in the second quarter. This target provides the geological potential for a 5-million-oz.-plus discovery.”
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