MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMENTARY — TVX adds operating muscle to face challenges in Greece

Mining analysts have been taking a closer look at TVX Gold (TVX-T) since the company took on new projects in Greece and beefed up its management team to address concerns about a lack of operating expertise.

Earlier this summer, analyst Pierre Vaillancourt of Deutsche Bank Securities issued a recommendation to “accumulate” the mid-tier gold producer, which has about 161.8 million shares outstanding. He set a $4 target for the company, then trading just below $3.

Toronto-based TVX expects to produce a total of about 525,000 oz. gold this year from its flagship, 50%-owned La Coipa mine in Chile, the 50%-owned Crixas mine and 49%-owned Brasilia mine, both of which are in Brazil, and two Canadian operations. The company’s domestic projects include a 32% stake in the Musselwhite mine in Ontario, and 50% of the New Britannia mine in Manitoba.

The Greek projects, though not without risk, are expected to boost annual production to more than 1 million oz. gold by the year 2001.

Analysts Christy Ahn and Daniel McConvey of New York-based Goldman Sachs recently assessed TVX, largely in response to growing interest in the upside potential of the Olympias and Skouries projects in northeastern Greece. But the prestigious firm stopped short of issuing a buy recommendation. Instead, it rated TVX as a “market performer,” sandwiched between “market outperformer” and “market underperformer.”

“We believe that the company offers one of the more exciting, albeit risky, long-term growth stories in the gold mining sector due to its development properties in Greece,” the analysts wrote in their report. “However, our rating reflects our decision to value TVX without giving full credit to the Greek projects, in view of several issues that may hinder their timlely development. Furthermore, our rating reflects our bearish outlook on the gold market for the next twelve months; our price forecast is US$300 per oz. for the remainder of 1998 and US$325 for 1999.”

The critical question, the New York analysts ask, is whether the the Greek projects will proceed. TVX must first resolve a legal dispute over ownership, obtain construction and environmental permits and secure finacing in a weak commodity price environment.

Vaillancourt also does not give short shrift to the potential risks associated with the TVX’s growth plans, saying the third quarter of this year will be “critical” for the Greek projects. “The company is hopeful for a favorable decision on the pending litigation surrounding ownership and is awaiting site pre-approval at Olympias and Skouries. If these hurdles are overcome, much of the speculation surrounding the properties will be removed.”

The lawsuit was launched by the Alpha group, a former partner which alleges that TVX used its confidential information to develop an operating concept for the project. TVX argues that its contractural relationship had terminated before it acquired rights to the project in a government auction. It also argues that the information was publicly available in the auction.

Goldman Sachs believes the “worst-case outcome” for the litigation is that the Alpha Group would be awarded a participating interest, as originally envisioned (12%, with the right to buy an additional 12%).

The prize is a historic mining district poised for revival. Acquired in 1995 for US$47 million from a bankrupt state mining concern, the property is estimated to contain a gold resource of more than 9 million contained ounces.

The gold at Olympias is refractory, though studies to date show that bio-oxidation processing will result in economic recoveries. This mine is envisioned to produce 225,000 oz. annually, at cash costs below US$125 per oz., net of byproducts credits from silver, lead and zinc.

Both an open-pit and an underground mine are planned for Skouries, with ore processed by standard flotation and smelting. The operation is expected to produce more than 250,000 oz. gold each year at cash costs below US$100 per oz., net of copper credits.

By the end of this year, TVX expects to have completed a feasibility study for Olympias and a final study for Skouries. TVX must then raise financing of up to US$250 million for the former, and up to US$300 million for the latter. Other capital requirements may come from European Union grants.

But before construction can begin, TVX must have all necessary permits from the Greek government, which raises another contentious issue. While support from the national government is strong, local opposition, which has plagued the project from inception, lingers.

The report from Goldman Sachs notes that residents are wary about potential damage the operations may cause to the environment and to the tourism industry. “Specifically, they have been concerned about the location of the processing plant and the tailings dam,” the analysts write. “Much of the local residents’ impression of a mining operation could be attributable to their experience with the previous Greek operator, which did not run its mine to international mining standards.”

The analysts from Goldman Sachs point out that, given all these challenges, and given, too, the size and scope of the Greek projects, a high-quality management team “is crucial for success.” Other analysts who follow TVX agree.

TVX, for most of its life, has had little operating experience. Even today, it operates only one of its mines — New Britannia in Manitoba. This lack of operating experience and expertise had been perceived as an area of weakness by investors and analysts alike.

In recent years, however, TVX has added industry heavyweights to fill the gaps on its management team. David Murray, previously with Rio Tinto, is now president and chief operating officer. Former Echo Bay executive Cliff Davis is head of North and South American operations, and Ken Sangster, previously with Outokompu and Rio Tinto, heads European operations.

The addition of Yiannis Drapaniotis as head of the Greek operations also was lauded by analysts, who note that, as a native Greek, the seasoned mining executive could be instrumental in improving relations with the local community and addressing their environmental concerns.