Analysts’ Comments (January 30, 1989)

In July Noranda Inc. (TSE) started what some believe will lead to a complete takeover of the Toronto based nickel miner by purchasing Falconbridge shares on the open market. At press time Noranda had accumulated a 19.9% interest.

But Falconbridge Chairman Bill James recently set the cat among the pigeons by threatening not to cancel the 12% of its shares owned by McIntyre Mines (TSE) of Toronto after Falconbridge buys McIntyre’s interest. The move would prevent Noranda’s 19.9% stake in Falconbridge from increasing to 25%.

Noranda has long coveted Falconbridge’s prized Kidd Creek, Ont., zinc/copper operation but as investors await the next move in this unfolding drama, the short term outlook for the nickel miner appears to be good. “Trouble free operations and strong metal prices should ensure earnings-per-share maintenance at a sound level in 1989,” said Dean Witter Canada analyst Thomas Komlos.

“A special dividend payment of $4.75 per share and repurchase of a control block from Placer Dome have caused a temporary setback to the balance sheet but cash flow should enable debt to be reduced to about $500 million from $907 million by the end of the year,” adds Prudential Bache analyst Alan Ferry.

Falconbridge common shares were trading recently on the Toronto Stock Exchange at a 52-week high of $28.50 thanks to a spree of institutional buying.

But Komlos says, Dean Witter’s price/previous year-end book value ratio analysis suggests a 12-month appreciation potential to over $30.

“The possibility of a revised higher bid for Falconbridge shares should provide some upside potential to the company’s stock price,” said Merrill Lynch Canada’s senior base metals analyst Graham Eacott. He sees per share earnings for the nickel miner dropping to $3.60 in December 1989 from $4.41 at the close of 1988.

Predicting how Hudson Bay Mining & Smelting shares will perform in 1989 is no easy matter. Prognostications are complicated by two facts. HudBay, which is this country’s third largest copper and fourth largest zinc producer, is a wholly- owned subsidiary of a billion dollar U.S. corporation, Inspiration Resources of New York.

In addition, shares of HudBay are convertible to Inspiration shares on a one-for-one basis. So HudBay’s 1989 share performance will reflect how well Inspiration performs. This means taking Inspiration’s coal, agribusiness, leasing and gold mining arms into account, a task few analysts are willing to tackle.

Terra International, Inspiration’s agribusiness arm, for example, was expected to generate revenues of $800 million(US) in 1988, according to Inspiration’s Executive Vice- President and Chief Operating Officer Burton Joyce. This, compared to HudBay’s 1987 revenues of about $260 million, makes Inspiration more of an “ag play” as well as a “metals play.” This fact tends to discourage rather than encourage an active following among mining investment analysts.

Ivan Obolensky, senior vice- president research for Josephthal, a New York-b ased brokerage firm, estimates Inspiration will chalk up diluted earnings of $1.28(US) per share in 1989 compared to 35 cents in 1987 and an estimated 93 cents in 1988. These projections were based on an average copper price for 1989 of 90 cents per lb and a zinc price of 50 cents per lb.

At the recent trading price of $7.75, these projections translate into a low price-to-earnings ratio of about 6.05, making Inspiration a buy.

In 1988 American Barrick Resources (TSE) began to achieve the kind of growth that most gold mining companies can only dream about.

Gold production from seven operations increased to 325,000 oz at a cost of $240(US) per oz from 225,000 in 1987 and output is expected to accelerate to at least 800,000 oz by 1992.

Nevertheless, analysts are far from unanimous in their support for the Toronto-based gold producer. For example, Yorkton Securities analyst Bob Sibthorpe advised his clients recently to switch from Barrick to Corona Corp. (TSE).

“American Barrick appears expensive at current prices relative to the group,” he said.

Barrick shares were trading recently on the Toronto Stock Exchange at $19.25 in a 52-week range of $28.75 and $18.25. By comparison, Corona’s were at $7.38 in a range of $10.25 and $6.63.

“Barrick’s share price performance has been weak indicating poor defensive characteristics,” said Sibthorpe. “Its average ranking in profitability, profit margin per ounce and production growth do not justify its very low value ratio. In addition, the company carries a significant debt load in what is a relatively debt free sector,” he said. Dean Witter Canada, on the other hand is recommending the Barrick shares as a longer term buy for investors willing to hang in until its growth potential is achieved. Per share earnings should rise to 80 cents in 1989 from 60 cents last year, according to Dean Witter analyst Michael Jalonen.

However, Jalonen says an ownership dispute over the Mercur mine in Utah could be a potential thorn in what he calls Barrick’s impressive growth profile.

Utah-based Gold Standard claims that Getty Oil, the previous owner of the mine, improperly converted Gold Standard’s 25% interest in the mine to a 15% net profits interest and that Gold Standard had a right of first refusal when the mine was sold.

“Although Barrick contends that the case has no merit, a potential negative impact of the final outcome should not be discounted,” said Jalonen.

Despite attempts by Metall Mining (TSE) to shed its holding company image, the investment community will continue to regard Metall as a management firm at least in the near term.

“How can you not be known as a holding company when you own bits of this and bits of that,” said a Toronto analyst who declined to be identified. Nevertheless, he and other analysts are recommending the shares for those seeking a mining stock to tuck away for a few years.

During 1989, Richardson Greenshields of Canada analyst Ray Goldie predicts that Metall shares will do no better than the Toronto Stock Exchange’s metals and minerals group as a whole.

“However, because of the long term value inherent in Metall, and because the company’s strong cash position will enable it to take advantage of investment opportunities during the next downterm, Metall will probably outperform the group over the next five years,” said Goldie.

The Metall issue was trading recently on the Toronto Stock Exchange at a new 52-week high of $11.75. Its low point during the year was $8.63.

But some upside potential may rest with the fact that the shares have tended to trade in a range of 15% to 25% discount. “This would imply that Metall shares could increase in value by at least $1 based on current market values,” said Prudential-Bache securities analyst Alan Ferry.

In addition, he believes that a positive Supreme Court of Canada decision in the Corona Corp. (TSE)/LAC Minerals (TSE) dispute over ownership of the Williams mine at Hemlo, Ont., could increase Metall’s net asset value ($14.10 on Oct 20) by an additional 50 cents to 75 cents per share through its 10.4% stake in Teck Corp. (TSE).

Ferry is predicting that per share earnings will rise from 75 cents in 1988 to 95 cents in 1989.

With higher base metals prices making big profits for Noranda Minerals, the mining arm of Noranda Inc. (TSE), the question for management becomes how to invest its riches. One of the giant metal company’s acquisition targets appears to be nickel-copper producer Falconbridge Ltd. (TSE).

Thwarted in its attempt to purchase the major shareholding of Placer Dome (TSE) in Falconbridge last year (Falconbridge itself ended up buying the Placer shareholding), Noranda went to the open market and purchased a 19.9% interest. It also made known its intention to acquire another 10% of the company’s outstanding shares.

“There is little doubt Noranda wishes to achieve a clear control position,” wrote investment dealer ScotiaMcLeod in a recent publication.

It is an opinion shared by more than a few analysts, who feel Noranda is most interested in Falconbridge’s Kidd Creek copper operation at Timmins, Ont. Noranda processes a portion of the Kidd Creek concentrates and is said to be desirous of maintaining that feed to its smelting facilities.

Yorkton Securities notes the acquisition of Falconbridge shares by Noranda is part of a plan to make the company the world’s premier diversified natural resources corporation. “Noranda remains our premier choice among base metals producers,” wrote the investment firm.

Noranda’s star gold producer, Hemlo Gold Mines (TSE), operates the successful Golden Giant mine at Hemlo, where low production costs are the order of the day. While millhead grades at the mine dropped last year and costs per ounce rose, Bunting analyst Electa Aust said lower costs per ton in 1989 in conjunction with stable millhead grades should help to reduce the production cost per ounce.

The newcomer on the block, Corona Corp. (TSE) sprang into major prominence last year by consolidating its five main associated companies and overnight becoming a senior North American gold producer. The move wasn’t without complications, however.

Despite a 50% interest in the David Bell mine at Hemlo and the recent openings of a couple of new gold mines, and the possibility the company will win the lawsuit (with LAC Minerals) over ownership of the Williams mine at Hemlo, Corona’s earnings picture has analysts concerned.

“Over the longer term, Corona still compares favorably with other senior gold stocks. However, earnings over the last two quarters (the second and third quarters of 1988) have been a major disappointment and, for the short-to-intermediate term, investors contemplating a LAC hedge would be well advised to consider Teck as an alternative,” wrote Mike Steeves of Yorkton Securities. (Teck Corp. is Corona’s partner at the David Bell mine and would acquire a 50% interest in the Williams mine should the lawsuit go in Corona’s favor.)

Because of the lawsuit, investment comment tends to group Corona and Lac together, often leading to interesting statements such as Moss Lawson analyst Vay Jonynas’ observation that “neither company is a straight gold play at the moment.” According to the analyst, Corona is the favorite to win the lawsuit because of the two court rulings which have already gone its way.

The share prices of both companies experienced downward drifts in December, a reflection, Jonynas said, of year-end tax-loss selling by investors.

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