Analyst sees best buys at bottom of food chain

Gold analysts have watched the yellow metal’s sluggish performance for several years now, with some keeping the faith better than others. John Ing of Maison Placements Canada still ranks among the most bullish, though he concedes that recent price rallies have been short-lived, in part because of a stronger-than-expected U.S. dollar.

Looking ahead, Ing believes the greenback is vulnerable to a major correction that would send shock waves through currency markets. He also says slashing interest rates isn’t enough to kick-start America’s economy, which is plagued by structural problems caused by high debt levels, and overcapacity and overinvestment in the technology sector.

As for the gold industry, Ing says mine supply has declined steadily because of low prices. Furthermore, central bankers have restrained sales since the Washington Agreement, and falling interest rates have made it less profitable for producers to sell forward and hedge. “Thus,” he adds, “the inevitable law of supply-and-demand must take hold, and gold’s widening deficit will cause an explosive upward move, sparked initially by short-covering.”

Although rallies to date have benefited mid-cap producers such as Goldcorp, Agnico-Eagle Mines and Meridian Gold more than their senior counterparts, Ing believes that small-cap companies are the ones to watch in the months ahead. “This junior-priced group is trading, on average, at half of the market-cap multiple per ounce of the more senior stocks — they’re simply better buys.”

Ing’s top ten picks include numerous “fallen angels,” former high-flyers grounded by low prices and negative investor sentiment. The list includes Crystallex International (KRY-T), whose share price soared to more than $11 based on a quixotian quest for the Las Cristinas 4 and 6 concessions in Venezuela. Although that legal battle came to naught, the gold company has since reinvented itself by acquiring the Tomi mine and Revemin mill to complement the San Gregorio mine in Uruguay. “Crystallex should produce 125,000 ounces this year, and has targeted 200,000 ounces in 2002 at a cash cost under US$200 per ounce, up from 95,000 ounces last year,” Ing says.

Eldorado Gold (ELD-T) also made the list, despite reporting a loss of $900,000 on revenue of $9.3 million last year. Ing says the company’s fortunes depend on the wholly owned Kisladag project in Turkey, which could produce 100,000 oz. annually. Eldorado expects to produce 115,000 oz. this year at an average cash cost of US$129 per oz.

Glamis Gold (GLD-G) got a thumbs-up for its new flagship mine in Honduras, which began production last year. The US$27-million, St. Martin mine is expected to produce 80,000 oz. annually over a 10-year life. Cash costs at this heap-leach operation are a mere US$113 per oz.

Another of Ing’s picks is junior producer High River Gold Mines (HRG-T), which last year cranked out 127,000 oz. gold at a cash cost of US$133 per oz. from mines in Manitoba and far-eastern Russia. Buryatzoloto is now Russia’s third-largest producer, turning out 127,000 oz. at a cash cost of US$160 per oz. (shared by High River and its local partner).

Iamgold (IMG-T) was an obvious choice, given the stellar performance of the Sadiola Hill mine in Mali, operated by partner AngloGold. Cash costs last year were a mere US$102 per oz. Iamgold also owns 40% of the nearby Yatela mine, which hosts 12.3 million tonnes grading 3.6 grams gold, with a cash cost of US$175 per oz. “Iamgold is a potential takeout candidate, possessing strong cash flow and manageable debt load,” Ing writes.

Kinross Gold (K-T), though a senior producer, made the list owing to its “junior” share price and the progress made to restructure its balance sheet and pare high-cost operations. “The shutting down of Refugio [in Chile] eliminated a costly cash drain,” Ing notes. “Meanwhile, Fort Knox in Alaska is processing higher-grade feed from the True North satellite deposit, increasing low-cost ounces. Kubaka in Russia continues to perform well, and the discovery of the high-grade Birkachan deposit might extend that life.”

Ing is also watching Miramar Mining (MAE-T), though he concedes that an improved gold price is needed to give a boost to the company’s work at the Hope Bay joint venture in Nunavut. It is the largest exploration project in Canada, with seven rigs at work on surface and two underground.

Northgate Exploration (NGX-T) also got the nod, albeit with the caveat that a refinancing bridge is still needed. The company acquired 95% of the struggling Kemess gold-copper mine in northern British Columbia, previously operated by Royal Oak Mines. Annual production is forecasted at 260,000 oz. gold and 74 million lbs. copper, at a cash cost of less than US$150 per oz., net of byproduct credits.

Philex Gold (PGI-T) was cited for the “elephant-sized exploration potential” of the new Boyongan copper-gold discovery in the Philippines. Operator Anglo American holds rights to 60% of the project, where drilling last year returned 365 metres grading 0.81% copper and 1.9 grams gold. Two subsequent holes returned 388 metres of 1.07% copper and 2.03 grams gold and 393 metres of 1.58% copper and 2.39 grams gold, respectively. A resource estimate is expected later this year, or in early 2002.

Ing also is keeping an eye on St Andrew Goldfields (SAS-T), which recently raised $6 million and eliminated almost $3 million of debt. The junior is focused on advancing the Taylor gold project, near Timmins, Ont., which hosts 2.5 million tonnes grading 7.76 grams gold per tonne. “An underground development project, expected to cost $20 million, could result in St Andrew’s becoming a 50,000-oz. producer,” Ing notes.