Investment Comment More growth seen for Pegasus, a pioneer heap-

The executives at Pegasus Gold may not have heard the old saying about the guy who tried to get blood from a stone, but if asked about the mining company which became famous for extracting gold from low grade ore, their response should be quite different.

Long before companies like Gordex Minerals and American Barrick Resources had ever heard of heap leaching, the Spokane, Wash.,-based company was testing the low grade mining method at its Zortman/Landusky mine in north- central Montana.

Pegasus began exploring the area in 1975 and production started four years later as an open pit, heap leaching operation with ore reserves of 35 million tons grading 0.029 oz gold per ton.

In the interim, Pegasus has become so adept at mining gold where others fear to tread, that the company is expecting to produce 270,000 oz gold from its four mining operations in 1988.

As the tse- and nasdaq-listed company prepares to reach those lofty goals, Merrill Lynch of Toronto is touting Pegasus as a recommended buy.

Trading on the Toronto Stock Exchange at $17.75, in a 52-week range of $33.88 and $11.25, Pegasus is a long-term buy with above-average potential, says analyst Robert Cook. Production levels

The recommendation comes at a time when Pegasus has grown from a 1-mine $40-million company to a 4-mine, $200-million company in the space of just two years.

Much of a 500% increase over 1985 production levels will come from the first open pit operation which Pegasus has operated using conventional production methods.

Located in Jefferson Cty., Mont., the Montana Tunnels project was officially opened in July, 1987, and it is expected to produce an average of 106,000 oz gold, 1.7 million oz silver, 26,000 tons zinc and 5,700 tons lead annually for the next ten years.

With reserves of 41.2 million tons averaging 0.027 oz gold, 0.52 oz silver, 0.72% zinc and 0.27% lead, it is one of the world’s lowest grade, conventional gold mining operations.

Pegasus acquired a 100% working interest in the mine from U.S. Minerals Exploration in exchange for financing the project into production. usmx will be entitled to a 5% net profits interest during payback and 50% net profits interest after that.

Pegasus also owns a 29.4% equity interest in usmx. Merrill Lynch calls that a key investment. Montana Tunnels

In addition to its Montana Tunnels output, Pegasus expects to produce 80,000 oz gold and 175,000 oz silver annually from the Zortman/ Landusky project where the company has used economies of scale and effective cost contr ol programs to make costs there one of the lowest in the North American gold industry.

At Pegasus’ Florida Canyon Mine in the Imlay mining district 40 miles southwest of Winnemucca, Nev., full production was delayed by modifications to the processing unit.

While the Florida Canyon produced 3,800 oz during the final four months of 1986, at full design capacity, the project should average around 65,000 oz annually.

Pegasus’ other producing heap leach mine, the Relief Canyon, is located 20 miles east of Lovelock, Nev. on the south end of the Humboldt range and around 40 miles south of Florida Canyon.

First discovered in 1979, Pegasus acquired the operation from Lacana Mining in July, 1986. A low grade, disseminated, epithermal gold deposit within a breccia unit, the mine contains reserves of 5.3 million tons grading 0.030 oz gold.

Production there is estimated at 30,000 oz annually from 1.5 million tons of ore and it is being operated as a unit of nearby Florida Canyon. Record earnings

During the first nine months of 1987, Pegasus reported record earnings of $11.1 million(US) or 54 cents per share compared to $1.99 million or 15 cents per share during the same period in 1986.

Third quarter profits were $7.02 million or 30 cents per share on sales of $34.8 million compared to $1.6 million or 12 cents per share on sales of $12.4 million during last year’s third quarter.

As a result, Cook sees earnings of 87 cents per share for all of 1987 rising to $1.72 in 1988. The Merrill Lynch analyst says he is basing those estimates on a $475 gold price.

“Although we have reduced our 1988 earnings estmate to $1.72 from $1.95, this reflects a lower forecast average gold price than a shortfall in production,” the Cook report states.