INVESTMENT COMMENTARY — Queenstake seen as attractive

Buying out-of-favor stocks is seen by many as a good way of following the first part of the buy-low/sell-high rule.

Yorkton Securities sees value in Queenstake Resources (TSE), which recently traded at the 70 cents level, up from the 52-week low of 62 cents touched in November, 1994.

The company’s share price has followed a steep and steady descent since hitting a high of $4.75 in the fourth quarter of 1993.

Yorkton points out that the Venezuelan gold exploration sector is so out of favor at the moment that Queenstake not only looks to be good value on the basis of its exploration potential, but it is also likely to benefit from an expected improvement in investor sentiment towards that sector in general. The company also has a healthy cash position of $6.4 million, or about 32 cents per share based on the 19.7 million shares outstanding. Queenstake’s principal asset is its interest in the Bizkaitarra concession in the Kilometre 88 region of Venezuela. The property lies immediately east of Placer Dome’s Las Cristinas concessions, where a large gold deposit is undergoing feasibility work.

Queenstake holds its interests through a 90%-owned Venezuelan subsidiary, which can acquire the alluvial and hard-rock rights to the concession by paying US$6 million over seven years. Queenstake is responsible for the first US$1 million, US$750,000 of which has been paid, with the balance of US$250,000 payable Feb. 22, 1995, through the issue of 150,000 shares. Vengold (TSE) will be responsible for the remaining US$5 million under an option agreement to acquire up to a 65% interest in the concession’s hard-rock rights.

Vengold can acquire an initial half interest in the hard-rock rights by funding the project through feasibility, and it can earn a further 15% interest by arranging project financing.

Queenstake retains 100% of the alluvial rights, which include material to a depth of 10 metres.

However, the company’s work on the property’s alluvial potential has not met with a great deal of success. A 2,700-tonne-per-day gravity plant was built in late 1993 to exploit known surface and tailings deposits. The tailings were generated by local miners using primitive mining techniques and mercury to recover gold.

To date, Queenstake has been unable to recover the fine gold in the surface material at economic production rates, and commercial-scale operation of the plant has been suspended.

Meanwhile, exploration on the underlying hardrock rights met with some success over the past year, including the discovery of a new zone identified as the 61 North Zone where 12 out of 13 reconnaissance holes returned values grading better than 1 gram gold per ton over widths ranging from 1 to 29 metres.

Auger drilling, totaling 500 holes to an average depth of 7 metres, outlined at least three sub-parallel, steeply dipping, northerly trending structures over a strike length of more than 500 metres and a width of 100 to 150 metres. Out of the 500 holes, 47 returned gold values down to the bottom of the hole, indicating a potential bedrock source for the mineralization. The best intersections included 26.7 grams, 6 grams and 5.9 grams over the entire length of three holes.

Vengold recently started a new phase of drilling on the property, with an initial six holes planned to test the 61 North zone.

Drilling is also planned on the Blue Lagoon zone, a shear structure identified by a 75-metre-long-by-10-metre-deep pit mined during past operations.

Initial results from Vengold’s drilling are expected in April. Yorkton points out that the release of the feasibility study for the development of a US$400-million mine at Placer Dome’s Las Cristinas deposit is expected by mid-year. The investment firm believes a positive production decision would likely provide a significant boost to market sentiment for other Venezuelan projects.