Giant Yellowknife, a long-term bet

For investors on the lookout for a long-term bet with above average potential, Merrill Lynch mining analyst Robert Cook is recommending Giant Yellowknife Mines. One of Canada’s “major league” gold producers with over 128,000 oz in 1985, Giant Yellowknife recently merged its operations with those of Pamour Inc.

In return for Pamour’s Timmins mining operations (over 100,000 oz) and a 37% interest in Akaitcho Yellowknife Gold Mines, Giant Yellowknife paid Pamour $17.5 million in cash and 2.7 million shares.

The agreement gave Pamour a 50.2% controlling interest in Giant Yellowknife which now produces more than 200,000 oz gold annually from seven mines in Timmins and N.W.T. They include the Giant and Supercrest properties near Yellowknife.

“With the acquisition of Pamour’s five Timmins, Ont., properties, the outlook, nature and stature of the company is considerably changed,” said Mr Cook in a recent quarterly update.

As reported (N.M., July 6/87) the company plans to spend around $100 million on a 5-year program which it expects will see gold production increase from current levels to 300,000 oz per year.

Most of the planned expansion will come through greater underground development at Yellowknife and by increasing open pit production and introducing heap leaching, at Timmins. For example, Giant will spend $25 million to build a tailings re-treatment plant, plus a further $2.8 million on a heap leaching program at Timmins.

According to Giant President D. J. Emery, the re-treatment mill could add around 37,000 oz annually to the company’s Yellowknife operation. Production increase

“We believe that emphasis will continue to be placed on reaching higher production levels, said Mr Cook.

However, he says an over-all production increase will come hand in hand with a hike in Giant’s production costs. The closure of the Salmita mine, one of Canada’s biggest little gold mines and a major contributor to Giant’s N.W.T. operations, will be a factor in that production cost increase.

Located northeast of Yellowknife, it produced 15,000 oz this year, but despite recent attempts to locate new reserves, no further gold production is expected.

“We believe Giant’s average cost of production will now be in excess of $325 per oz,” said Mr Cook.

The merger also took a large bite out of Giant’s working capital. It fell from $27.9 million at the close of fiscal 1986 to $8.4 million at the end of March, 1987. “Nevertheless, the financial condition of the company remains excellent, with negligible debt,” he said.

Earnings, based on nearly double the former gold output, but with 62.4% share dilution, were sharply higher in the first quarter of 1987 and should continue strong throughout the year.

“With new emphasis on open pit operations at Timmins, including some heap leaching of lower grade ores, we believe the prospects for longer term earnings growth are good,” he said.

Based on a gold price of $450(US), he sees earnings per share of $1.25 in 1987 rising to $1.72 in 1988. Operating earnings

During the first quarter of 1987, the company reported net income of $3.516 million or 50 cents per share compared to $469,000 or 11 cents per share in the first quarter of 1986.

The Yellowknife and Timmins Divisions had operating earnings before writeoffs of $2 million and $1.2 million respectively. When the Merrill Lynch report was written, Giant shares were trading at $24.50 on the Toronto Stock Exchange, just below its 52-week high of $28 but well above its $13.25 low point.

At press time the issue had risen to $26.5.