Investment comment Galactic returns to broker’s good books

After its credibility was severely damaged by operating problems at the Summitville gold mine in Colorado, Galactic Resources (TSE) appears to be back in the good books of at least one British brokerage house.

The Vancouver-based gold producer has been added to the recommended list of London-based Kitcat and Aitken and Co.

“With four new gold mines coming into production over the next three years, it is time for investors to take a second look at Galactic,” say Kitcat analysts Charles Kernot and Michael Coulson.

The shares were trading recently on the Toronto Stock Exchange at $5.88 in a 52-week range of $17.88 and $5.75. They also trade on the Vancouver and Montreal exchanges and the National Association of Securities Dealers Automated Quotations (NASDAQ).

While Galactic is in the midst of a busy year — capital requirements for fiscal 1988 are estimated by the company to be $41 million — Galactic promises to increase its gold output from 88,000 oz to nearly 500,000 oz in three years.

As reported (N.M., Aug 22/88), Galactic recently closed a series of transactions worth $39.4 million with Homestake Mining of San Francisco which gives the former company a 50% interest in a potential (10,000 to 20,000 tons per day) California gold producer called the Bodie property, plus an option to acquire Homestake’s 40% residual interest in a potential heap leach gold producer called the Spanish mine. In exchange, Homestake received 2.5 million Galactic common shares. Balance sheet

Even though a capital outlay of about $280 million (U.S.) by 1992 will put a significant strain on Galactic’s balance sheet, the Kitcat analysts feel that the company can cope.

“The loans will largely be gold backed and therefore the interest payable will be very much lower than straight bank debt,” say Kernot and Coulson. “It is unlikely that Galactic will run short of cash ($2.7 million at year-end) and we are not overly worried about the future unless a new, large acquisition is made,” they said.

With financing in place, the Kitcat analysts believe that the Galactic team has the experience to make the most of its projects. “The company’s management team has benefitted from mistakes made in the past, particularly at the Summitville operation where lack of attention to the region’s weather conditions led to significant cost over-runs,” the Kitcat report says. After snow slid onto the leach pad in May 1986, the pad had to be totally rebuilt. Other projects

Two years further on, Summitville has now settled down and should produce about 80,000 oz gold annually over the last five years of its lifespan. Other projects scheduled to come on stream in the next three years are as follows: The 48%-owned Ridgeway gold mine, operated by BP Gold, will start production in the final quarter of 1988 at a rate of about 158,000 oz annually over the first four years of its lifespan.

Located 25 miles northeast of Columbia, S.C., it will be financed via a combination of equity investment by the company and a $56 million gold bullion loan, guaranteed by letters of credit totalling $125 million.

Ivanhoe will be the next on stream at an initial rate of about 64,000 oz per year. Located on the Carlin, Nev., gold trend were at least 12 major gold deposits are known to exist, Ivanhoe contains about 83.5 million tons of grade 0.034 oz gold per ton.

The first phase of a 3-part feasibility study was completed at the end of May and construction of heap leach facilities designed to extract a portion of the oxide ore is under way.

A production startup at Ivanhoe will be followed by Quartz Mountain property by the end of 1989. Galactic is currently earning a 50% interest in the property from Quartz Mountain Gold (TSE). Quartz Mountain

Situated in south central Oregon, the property contains a number of gold showings including the Crone Hill and Quartz Butte deposits which host 66.4 million tons of 0.030 oz gold in drill proven and probable reserves (at a cut off grade of 0.15 oz). Reserve estimates are based on assays from 577 drill holes at 100-ft centres.

Near-term plans include feasibility studies on the three major deposits to be completed by the year end. The construction of the mine will then commence and production should start by the end of 1989 at a rate of about 150,000 oz gold annually.

A more long term project is a huge gold-copper porphyry project which Galactic has agreed to develop with Philippines-based partner Lepanto Consolidated Mining.

Located in the Pine forests of the Philippines Benquet province, it contains approximately 292,200,000 million tons of grade 0.041 oz gold, 0.77% copper per ton (using a 1.3% copper equivalent cut off).

However, since the Lepanto deposit is contained about 3,000 ft below surface, it will take around five years to complete the development phase. Meanwhile Lepanto and Galactic have incorporated their respective 60% and 40% interest into a company called Far South East Gold Resources. Galactic will now spend the next six months attempting to raise this company’s share of the $169 million needed to bring the massive deposit to a production mode.

With a 1989 production rate of 207,840 oz from four mines (Summitville, Ridgeway, Quartz Mountain and Ivanhoe) Kernot and Coulson see earnings of 68.6 cents per share. With increased production at Ivanhoe and the Bodie on stream at 230,000 oz annually, per-share earnings would increase to $1.07, the Kitcat analysts say.