MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMETARY — Analyst looks for production boost at Nelson Gold’s operations

Gold projects in the former Soviet Union rarely deliver their riches to western companies without some associated heartache, but mining analyst Michael Jones of T. Hoare & Co. believes that Nelson Gold’s (NLG-T) staying power in Tajikistan may pay dividends in the future, particularly if gold prices begin to strengthen.

Nelson’s main asset is its 44% interest in, and control of, the operations of Zeravshan Gold, plus associated exploration licences in Tajikistan’s Zeravshan Valley. Since taking on the project, Nelson has placed the Jilau gold mine and Taror plant into production. During the full year of 1997, the project reported a net operating cash flow of US$1.76 million. Gold production totalled 73,669 oz. at a cash cost of US$229 per oz. (total cost US$269 per oz.). This year, cash production costs are expected to drop to US$202 per oz. gold.

“Results are on track for the production of 110,000 oz. of gold this year from [Zeravshan], with full-year earnings of US$1.3 million and operating cash flow of US$4.3 million,” Jones notes in a recent research report.

“Further expansion plans to [produce] over 200,000 oz. per annum are under way, as is the possible redevelopment of the Kalana mine in Mali. Financing arrangements are in place to provide corporate-level funds to support Nelson’s aggressive expansion.”

Jones says Nelson’s long-term plans involve replacing production from the diminishing Jilau reserve with a new open pit and underground mine at Taror.

“The recent decrease of the Jilau resource and associated writedowns necessitated by the declining gold price and uninspiring metallurgical test results have provided an opportunity to commission the Taror mine earlier than previously planned,” he writes. “This will utilize the full capacity of the existing, expanded plant, thus saving approximately US$85 million in future capital expenditures.”

The writedowns of US$7.7 million contributed significantly to Nelson Gold’s 1997 net loss of US$8.6 million. In the 1998 first quarter, the company reported net earnings of US$214,000, down from US$387,000 for the same period last year.

Nelson Gold intends to begin production from the underground section of the Taror mine during 1999 at a higher grade, replacing some of the Jilau ore and increasing gold production. Jones notes that development of an open pit at Taror to replace the Jilau ore will ramp total production up to over 200,000 oz. gold per year by 2001, without having to further increase treatment capacity.

On the financial front, Jones notes that the lion’s share of operating profits from Zeravshan are being used to repay loans and expand output.

“This has left the corporate level of Nelson short of working capital,” he notes.

To remedy the situation, the company has arranged for a US$5.6-million financing, plus the conversion of US$1.2 million debt, all at 27 cents per share (the ruling price during the establishment of these arrangements).

Jones also believes that Nelson will put its operating experience to good use at the Kalana mine in Mali, now being acquired from Ashanti Goldfields and JCI. The company hopes to redevelop the Soviet-built operation to initially produce 23,000 oz. gold per year, boosting that to as much as 100,000 oz. annually in the future.

Jones rates Nelson Gold as a “speculative buy.” The company has 77.4 million shares outstanding and trades at 28 cents, down from its 12-month high of 80 cents.