Investment Comment Blackdome picked as winner investment comment:

The combination of high earnings, low-cost production and a generous dividend policy leads analysts Rick Cohen and Bill Richardson of Brown, Baldwin, Nisker Ltd. to recommend the purcase of shares of Blackdome Mining Corp. Located 140 miles north of Vancouver, B.C., the Blackdome mine started operations on May 16, 1986. By Sept 30 of that year, the mine produced 18,000 oz of gold at an estimated cash cost of $140(US) per oz. In just over four months from start of operations, the company earned $2.9 million or 35 cents per share with cash flow amounting to $6 million or 72 cents per share and declared its first dividend of $1.2 million or 15 cents per share.

Assuming a gold price of $425 per oz, this year’s production is estimated at 52,000 oz at a cost of $142 per oz including a cost of $31 per oz for exploration. Earnings are estimated at $1.15 per share and the dividend is expected to be $1 per share or higher, making Blackdome the highest yielding gold stock in Canada, write Messrs Cohen and Richardson. 12 gold-bearing veins

The deposit itself consists of 12 known gold-bearing veins with an aggregate length of almost seven miles. The gold is hosted in quartz veins, typical of many similar deposits throughout British Columbia and the western U.S. These veins are about 6 ft in width.

As of Dec 31, 1985, mine reserves were 203,000 tons grading 0.79 oz gold per ton and 3.76 oz silver with the majority contained in the No 1 vein. Those reserves are equated to 160,000 oz of gold.

Reserves as of June 30, 1986, were reported at 245,000 oz and “we expect that the reserves have increased to substantiate mine operations beyond 1993,” write the analysts, adding that all reserves to date have been located on the No 1 and No 2 veins, with undeveloped potential in other veins.

Prior to 1984, Heath Steele Mines, a subsidiary of Noranada Inc., had the Blackdome property under option. The option was dropped but Blackdome continued on with the exploration program. In 1985, an engineering feasibility report recommended that the mine be put into production at a rate of 200 tons per day. MFC funding

Funding for the project was obtained primarily through a $8.5 million issue of Blackdome shares to Mining Finanae Corp., then known as Condolidated Barrier Reef.

MFC now controls 50.3% of the 8.3 million shares in Blackdome.

The deposit is mined using a cut- and-fill method for its underground operations. Some ore is also mined from the surface. The cut-and-fill method is expensive, say the analysts, but it minimizes dilution.

A 200 tpd modular mill recovers about 92% of the gold and 74% of the silver. About 60% of the gold and silver is recovered in the gravity circuit. This “free gold” is then poured into bars and shipped to refiners. The remainder of the gold is recovered as a flotation concentrate which is shipped to a smelter for further refining.

Mining and milling costs are estimated at $85 and $30 per ton, respectively. Other costs including administration and exploration add an additional $46 for a total of $161 per ton. Healthy balance sheet

Blackdome has 8.3 million shares outstanding with a book value of $2.30 per share. The company has no debt and has an estimated $8 million in working capital. This year’s earnings are estimated at $1.15 per share assuming a mill feed grade of 0.80 oz and a gold price of $425 per oz. Cash flow is estimated at $2.07 per share.

This year’s cash flow strongly benefits from the non-taxableprice of $425 per oz. Cash flow is estimated at $2.07 per share. This ed at $2.07 per share. This 2.07 per share. This year’s cash flow strongly benefits from the non-taxablemillion rice of gold. Earnings increase by 51 cents per share for every $100 rise in the price of gold.

Predicting the grade of ore in a vein type mine, such as Blackdome is a very difficult task, say the analysts. Typically drill information gives an indication of where the quartz mineralization occurs, though drill assays are usually not representative of the gold content of the rock.

Messrs Cohen and Richardson say that earnings would increase from $1.15 per share to $1.50 per share at a mill feed grade of 0.90 oz. Similarly operation costs would decline from $142 per oz to $127 per oz.

While leverage works both ways, “we believe that our base case ore grade of 0.80 oz is reasonable. In fact, it is our understanding that the mine has recently been processing ore with a gold grade in excess of 1.1 oz per ton,” they write. The company will continue to explore the property for additional reserves. The mill was designed to be expanded and an increase in the production rate will be made if warranted. A 50% increase in production rate would add an estimated 80 cents per share to the analysts’ estimate of $1.15 per share.

At the time Messrs Cohen and Richardson wrote their research report, shares of Blackdome were trading on the TSE at the $11.13 level with a 52-week high and low of $11.88 and $5.50, respectively. At press-time Blackdome shares were at the $13.75 level.

Looking on a price-earnings basis, the analysts would be inclined to give the stock a multiple of 13 to 15 times which implies a value on the stock of $15 to $17. While some gold stocks trade in excess of 40 times earnings, the lower reserve life and variance in the ore grade suggest that a lower multiple is more appropriate, they say.

Given a higher mill feed grade of 0.90 oz gold per ton, earnings rise to $1.50 per share. Hence a multiple of 13 to 15 times could imply a share price of in excess of $20. Dividends From a dividend perspective Blackdome will be the highest yield gold stock in the country. The company’s policy will be to pay out roughly 70% of net cash flow as a dividend, but not to exceed the earnings. This would imply an annual dividend of about $1 per share assuming a fully taxable position. At the stock price of $11.13, the dividend yield would be 9%. Payback Period

The anaylsts calculate Blackdome’s payback period at nine years. Blackdome is trading at $1277 per oz of production and at $425(US) gold, it earns $283(US) per oz in pre-tax cash flow. On an after-tax basis, it takes nine years to recover that $1277 investment. Blackdome’s payback period is one of the lowest of any of the gold stocks that we follow, writes Messrs Cohen and Richardson, adding “this further supports our expectation for appreciation in the stock.”