El Peon off to good start Investment Commentary

Following a visit to the newly opened El Peon gold mine in Chile, National Bank analyst Kerry Smith has issued a “focus buy” recommendation for the mine’s owner and operator, Meridian Gold (MNG-t).

“The operation was built at a cost of US$77 million in only 11 months, and has had a fairly smooth startup — a credit to the management team at El Peon,” Smith notes in a recent research report. “Problems to date, including power and various mechanical problems, have largely been resolved.”

El Peon is expected to produce 250,000 oz. gold and about 3 million oz. gold this year at cash costs well below US$100 per oz., primarily from open pits. Underground mining is ramping up, and the mill is now taking feed from underground, as well as from stockpiled open-pit ore.

El Peon is expected to boost Meridian’s total annual production to about 400,000 oz. at a cash cost of US$125 per oz. this year. The company’s other operations are in the western U.S. The Beartrack mine in Idaho turned about 130,000 oz. gold last year and is expected to contribute to cash flow over the remaining two years of operation. In Nevada, Meridian and partner AngloGold are planning to spend US$10 million exploring the Jerritt Canyon mine property. At the Rossi property, also in Nevada, partner Barrick Gold (ABX-T) plans to carry out 15,000 ft. of drilling as part of deal to earn a 60% interest. Deep Carlin-type gold deposits are the target here.

More work is planned for Venturina, a joint venture in Mexico. On its own, Meridian continues to explore its El Peon property, about 160 km southeast of the coastal city of Antofagasta. At year-end, Meridian had outlined reserves and resources totalling 9.4 million tonnes grading 9.3 grams gold and 150 grams silver per tonne, equivalent to 2.8 million oz. gold and 46 million oz. silver.

“Further resource additions are likely, given the potential on the property,” Smith notes. “Drilling in 2000 will continue to focus on the core area around El Peon, with 130 drillholes currently planned. This drilling will focus on several high-priority targets within 2 km of the mill.”

Also planned are 45 holes to test targets outside the core area.

Meridian currently trades at below $10. However, Smith sees potential for its shares to reach $14 in the next year. “Meridian has an attractive asset base, high exposure to gold, a relatively low degree of hedging and a strong balance sheet,” he concludes. “The company is well-managed, and we believe significant exploration potential remains at El Peon.”