Investment City issue considered undervalued

Vancouver-based City Resources (TSE) is attempting to bring what should be British Columbia’s largest gold producing mine into production by October, 1989.

Located on the Queen Charlotte Islands, off the province’s coast line, the Cinola deposit is expected to produce 175,000 oz gold in year one, increasing to 192,000 in the second year. Due to grade fluctuations, average production will then even out at about 115,000 oz during the mine’s 10-year lifespan.

Despite the concentration of mercury, arsenic and antimony in the deposit and major concerns about protecting the local environment, Continental Securities of Vancouver is recommending the City Resources issue as a buy for aggressive accounts.

“We believe that the shares priced at $3.25 are undervalued relative to prices paid by acquisitors of similar sized projects in British Columbia, said analysts Anthony Garson and Andrew Muir.

They were trading on the Toronto Stock Exchange recently at $3.30 in a 52-week range of $3.70 and $2.15.

“On the basis of net present value and earnings it is our opinion that the shares are fairly valued in the $5-$6 per share price range,” they said. “This is primarily derived from an application of a 10 to 15 x price/earnings ratio for 1989-90 earnings discounted to current levels.” Cinola deposit

While Cinola is regarded as City’s principal asset, the company is also involved in a joint venture with Radcliffe Resources (VSE) on another Queen Charlotte Islands prospect called the Graham property.

Located northwest of City’s Cinola, it is scheduled to churn out 180,000 oz annually from an open pit operation. Under the joint venture agreement, City was entitled to earn a 50% interest in the 6,200- acre property by spending $500,000 on a 4-hole program which started in April.

According to the Continental report, Graham’s net present value at a $450 per oz gold price and discounted at 15%, adds up to between $20 and $25 million.

The company also has a 50% interest in a group of eight mineral properties in Papua New Guinea. With geological reserves of 1.25 million oz in ore grading 0.2 oz, the Wild Dog property is the most advanced. Management believes the deposit is amenable to open pit mining and attempts are being made to prove up at least 500,000 oz by mid 1989.

Meanwhile, due to low metal prices, Cinola was almost forgotten until City’s parent company Australia-based City Resources (Asia) took it over in 1986. Two years further on, the Cinola deposit hosts 27.3 million tons of grade 0.062 oz gold per ton, in mineable open pit reserves. Based on extensive drill core data and underground drifting, those reserves were calculated by Wright Engineering using a 0.032-oz cutoff grade. Possible reserves

As reported (N.M., Dec 14/87), an additional 220,000 tons of grade 0.055 oz have been placed in the possible reserve category and overall waste-to-ore stripping ratio will be 2.08:1.

According to Continental, the ore is hosted in four to five various lithologic units and initially presented some concerns with respect to metallurgical recovery success and costs. But City is planning to use a new low temperature, low oxidation procedure called the Arseno process which has proven to be the most cost-effective way of treating Cinola ore because of the pyrite and marcasite content. Sufficient bench scale tests have been completed to suggest a consistent 90% or better recovery rate.

A Wright Engineers feasibility report says operating costs will vary from $207(US) per oz for the first two years of production to $322 per oz over the next eight years. The approximately $110 million capital costs are being financed via a gold loan and after-tax cash flow rate of return is 19.18% at a gold price of $450 per oz.

As a result, the project is being financed on a 20% equity to 80% debt basis and the debt is repayable over a maximum 6-year period of approximately 33,000 oz annually.

However, City Canada may require funds in excess of the capital cost for working capital purposes,” said Muir and Garson. “This could be raised either through the private placement or a larger gold bullion loan.” Environmental concerns

As Continental points out in its report, environmental considerations are a key factor in bringing the Cinola deposit into production. Control of potential acid mine drainage, control of water quality impacts, and protection of the high value fish habitats of the Yakoun River are the key environmental issues for City Resources.

The proposed mining and reclamation plans, the mill process selection, the location and layout of the plant site, and water and waste management plans all reflect this priority, said the Continental analysts.

As reported (N.M., Dec 14/87), recent drilling has indicated that there is higher grade mineralization (as much as 10% higher) below the bottom of the pit which could be mined by bulk underground methods. But initially at least, the operating rate is projected to be 2.3 million tons of ore annually.