Investment Comment High grade ore makes Skyline a buy

It isn’t often that a company can contemplate a production decision with reserves of less than 130,000 tons in the ground. But at the Johnny Mountain gold property in northwestern British Columbia, that’s exactly what Vancouver- based Skyline Explorations is planning to do this year.

Recommended in a research report by Continental Securities of Vancouver as a buy for risk-oriented investors, Sykline is planning to produce around 60,000 oz gold during the first year in operation.

What makes the wholly-owned Johnny Mountain a feasible mine is not the volume of its reserves but its high grade ore. On June 15, when Continental published its report proven probable reserves at the property stood at 385,000 tons of grade 0.785 oz gold per ton.

However, an additional 700,000 tons of possible reserves grading 0.590 oz brings the Johnny Mountain total to 1,058,000 tons of average 0.644 oz. Most of the reserves are contained in the Discovery and 16 Vein structures but a couple of secondary vein structures called the Gold Rush and Zephrin are also located on the property.

With underground work continuing, operations will commence on a small portion of a remote 15,900- acre property called the Reg claims. As reported (N.M., Feb 16/87), the Stewart-Cassiar highway is about 42 miles away and the property is accessed via helicopter from Wrangle, Alaska. Mill underway

By February, the company had completed 42,000 ft of diamond drilling in addition to about 3,860 ft of drifting and 1,130 ft of raising.

Commissioning of a 400 ton per day mill is under way and production is expected to begin this fall. At an initial rate of 200 tons per day, the mill is being designed to produce gold gravity concentrate, a copper concentrate containing gold and silver and a gold/silver dore bar.

With silver and copper providing credit towards costs, a shrinkage stoping operation will cost in the order of $240 to $275 per oz during the first year. “In subsequent years, costs may rise to well over $300 peroz if grades decline,” said analysts Anthony Garson and Andrew Muirb.

Total capital costs were reported in January at $28 million but according to Muirb and Garson, costs will increase to $32 million by October due to expenses incurred during the start-up and tune-up period. Construction delays due to poor weather conditions have also pushed the project slightly over budget.

“Notwithstanding the cost overruns, it is evident that Skyline’s cumulative cash flow, particularly during the first three years of production will be an impressive $40 million,” said the Continental analysts. Capital invested

“In 1989, the return on capital invested and shareholders equity is projected to be a substantial 15%, 17% and 20% respectively,” they said.

At year-end, the company’s long term debt position increased to $4.2 million from $44,501 in 1986. However, the company’s year-end cash position also increased to $12.2 million from $165,530 at the same time last year.

As reported (N.M., July 4/88), Skyline recently obtained a $5.5 million bank line of credit for mill construction, mine development and working capital, pending cash receipts from gold sales.

“Though the share price of Skyline Explorations has appreciated from Continental’s May 26 recommendation of $11.75 and $14.75, we continue to recommend the purchase of Skyline’s shares by aggressive accounts,” said Garson Muirb.

The Skyline issue was trading recently on The Toronto Stock Exchange at $16.88 in a 52-week range of $17 and $8.75.