MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMENTARY — A defensive strategy for accumulation

Bargain-hunting in the junior exploration business during hard times has proved to be a durable strategy for speculative investors. That the time appears to be right for this strategy, with many juniors apparently undervalued by the market, is the theme of a number of recent analytical reports from brokerage houses.

Canaccord Capital analyst Graeme Currie writes in a recent Daily Letter that he considers “current valuations of many juniors nothing short of cheap,” and that some companies are “too inexpensive to ignore.” He recommends accumulation of seven junior companies, and says a number of others — particularly those with large cash reserves — could be good targets for accumulation over the coming months.

His recommended strategy is to buy these issues only on weakness, or to set narrow price limits so that small profits can be locked in before the market douses an overheated stock.

Sutton Resources (STT-T), which has an 85% interest in the Bulyanhulu gold project in the Lake Victoria gold belt of northern Tanzania, announced in early September that construction of the mine and mill at Bulyanhulu would be deferred until gold prices showed firm indications of recovery. Other aspects of the project, including reserve delineation drilling, road building and site earthworks (such as the tailings pond) were to continue on schedule.

Sutton needs to raise about US$50 million through equity financing, and at current prices (around $6 per share) the company’s management did not want to accept a high level of dilution. If Sutton’s share price moves higher, a less dilutive equity financing would become possible.

Cumberland Resources (CBD-T) continues to see increased resources from gold projects in the Northwest Territories: its wholly-owned Meadowbank project and the Meliadine West project, where it holds a 22% interest. Substantial drilling was done on Meadowbank over the past field season, and early results showed potential for increased near-surface resources.

Pangea Goldfields (PGD-T) has been building up resources at several projects in northern Tanzania, as well as its Victoria project in Peru. Currie likes the company’s large working capital reserve and its net gold resources, both current and expected.

High River Gold (HRG-T) owns interests in two producing gold projects, both of which showed improved performance in 1998. The New Britannia mine in northern Manitoba saw its unit costs decline to US$235 per oz. from US$274 in the previous year, and with a large hedge position for 1998 (81,000 oz., almost 90% of production, at US$465), the company is expected to have excellent cash flow.

Although current cash flow is earmarked for debt repayments, New Britannia is looking at a minimum mine life of six more years, with potential resources that could double that. High River also has a 23% interest in Russian gold producer Buryatzoloto, which also cut its costs substantially in 1998. Currie also likes the potential of High River’s Taparko project in Burkina Faso.

Indochina Goldfields (ING-T), the Robert Friedland vehicle that made a grand entry into the market only to be caught by the 1997 collapse of the junior exploration sector, has a 50% interest in the Monywa copper project in Myanmar, which is close to startup. Monywa has a minable reserve of 155 million tonnes grading 0.47% copper, in oxide ores suitable for solvent extraction and electrowinning.

One consequence of gaining a listing at the top of the market worked in Indochina’s favor: it had US$65 million in cash in mid-1998, and took in US$10 million when it turned a million ounces of forward sales into cash. Balanced against that was a US$30-million debt incurred when Indochina took up an interest in the Bakyrchik gold mine in Kazakstan; Indochina wrote down the carrying value of Bakyrchik by US$78 million last year, and is now in negotiations to decrease its interest in the Steppes’ most notorious money pit in exchange for a reduction of the debt to US$5 million.

Currie also likes base metal explorer Atna Resources (ATN-T), for its portfolio of projects in the Yukon and its strong balance sheet. It holds a 40% share in the Woverine massive-sulphide find, and is earning a 65% interest in a new discovery at the Wolf prospect, both of which are in the Finlayson Lake area of the Yukon.

Atna is contesting the disposition of the remaining 60% of the Wolverine project, held by Boliden (BOL-T), arguing that it has a right of first refusal on the interest Boliden proposes to sell to Expatriate Resources (EXR-V).

Currie also tips Romarco Minerals (R-T), for its property adjoining the Midas gold discovery in Nevada. Midas partners Franco-Nevada Mining (FN-T) and Euro-Nevada Mining (EN-T) recently offered about $33 million in Franco and Euro shares for Romarco’s Midas property, with the deal yet to be approved by Romarco shareholders. Romarco also has a new package of exploration property in the Goldfields area of western Nevada.