MINING MARKETS & INVESTMENT NEWS – INVESTMENT COMMENTARY — Geomaque gets nod for staying the course

“Back to basics” might best describe the approach taken by some mining analysts as they scour the reeds looking for producers with a track record of profitability and the potential to expand operations in this period of weak gold prices.

Donald Poirier of Goepel McDermid Securities believes Toronto-based Geomaque Explorations (GEO-T) fits the bill. In a research report, he cites the junior producer’s “growing production profile” and nine consecutive quarters of profitability as the basis for a recommendation to “accumulate” shares in the company.

Geomaque has 45.6 million shares outstanding and currently trades at below $2. Poirier points out that this trading level represents a 25% discount to net asset value of $2.50 per share, largely because of poor investor climate for gold stocks. But he sees better days ahead.

“In our opinion, Geomaque has been one of the better stories in the junior gold sector,” Poirier writes. “Starting with a small exploration concession in Mexico, the company was able to transform mineral potential into cash flow. This achievement clearly set Geomaque above its competition since few exploration groups have the fortune and perseverance to own a project that developed into a successful mine.”

Geomaque’s cornerstone is the San Francisco mine, an open-pit, heap-leach operation in northern Mexico’s Sonora state. The mine has turned out more than 100,000 oz. gold during the past two years, and cash costs have averaged US$241 per oz. The company reported earnings of US$107,000 in the 1998 first quarter (based on production of 13,161 oz. gold) and has working capital of US$10 million.

“Geomaque has established itself as a credible mine operator,” Poirier writes. “The mine is generating a good cash flow and has been a profitable enterprise since inception. The reserve base of the mine has grown and production has been increased, which has served to accelerate cash flow.” A capital program, completed in 1997, resulted in a switch to larger equipment and the introduction of a conveyor system. These changes, coupled with an increase in reserves, enabled the company to increase production and lower costs. Total mining and processing costs fell to US$5.96 per tonne last year from US$6.99 a year earlier. At the same time, minable reserves doubled; they now total 21.5 million tonnes grading 1.02 grams gold per tonne.

As a result of these changes, Geomaque’s gold production this year from the San Francisco is expected to reach 67,000 oz. The total is expected to climb to 120,000 oz. as the company’s second mine, Vueltas del Rio, comes into production.

Poirier’s report includes a progress update from Geomaque’s Vueltas del Rio property in northwestern Honduras, which benefits from road access and on-site hydro power. A feasibility study for this project is expected to be completed by the end of the third quarter.

The property hosts two known zones of mineralization: San Juan and Main.

Resources for both total 12.6 million tonnes grading 1.61 grams, with the bulk of this (9.6 million tonnes) outlined in the Main zone.

Poirier notes that half of the gold resources at Vueltas are sulphide-bearing, while adding that preliminary metallurgical tests indicate that the material is non-refractory and leaches well.

Geomaque envisions a mine capable of producing up to 70,000 oz. gold per year, with capital costs of US$15 million. Additional work, including metallurgical studies, is required before the company can determine the optimal size of a processing plant at the Vueltas del Rio property. Surface exploration is planned for this year.

Poirier notes that while Geomaque has been successful to date, the company is by no means immune to the effects of low gold prices. He also cautions that the company will require an equity financing for the Vueltas project in the next years and that “there is a risk that this financing could proceed at prices dilutive to the asset valuation of the company.”