Investment comment Audrey Resources’ a “near-producer” with good

Speculating on a penny miner that’s punched a few holes in the ground and turned up decent widths at a respectable grade can be exhilarating. You can revel in the stock’s rising price or, conversely, fret over precipitous stock price declines as exploration turns up dud holes.

Some investors shun emotional rollercoasters and, of course, the big potential payoff in capital gains. Give them the stock of sturdy performers, the big companies like Noranda or Inco, and they are content. They’ll hang on through good times and bad, collect the dividends when they come, and count the paper profits when metals prices boom. Between these two extremes — the fickle grassroots junior and the entrenched producers — lie a class of stocks that can be called the near-producers.

Audrey Resources (TSE) is a good example. Production at its Mobrun polymetallic mine near Rouyn/ Noranda, Que., has been suspended. It had been producing copper, zinc, gold and silver from open pit and underground (and making money at it) when it decided to build its own mill. That decision was made when surface diamond drills poked into a much larger massive sulphide deposit that ensures the mine a long life. So in sacrificing a few months of production, Audrey is deepening the existing shaft and building a mill. It will take 10 months and a capital outlay of approximately $17 million for the mill. Another $6 million should cover the cost of underground development. And Audrey will be back in business by next summer.

The company is well-financed, having lined up $22 million in bank credit, a $6.1-million private placement with Northgate Explorations (TSE) (which holds a 20% equity interest in Audrey), and a $2.2-million government grant. Share dilutions from new equity financings to pay for the mill and mine development seem improbable.

John Kearney, president of Northgate, said his company bought into Audrey because it was an existing producer that had good exploration potential.

“The property has significant exploration potential. The new 1100 lense is interesting and fairly large,” he said. Northgate has put two people on the Audrey board of directors, and Kearney said that some time in the future it might increase its equity position.

Audrey’s share price, meanwhile, has slipped from a high of $5 plus change to $2.20.

In every stock, there is risk. Audrey’s shares are no different. Things could go awry as definition drilling progresses on the big, new orebody that’s been discovered. As the mill works up to full capacity, recoveries could fall below expectations. But again, with the company’s experience from the previous milling of Mobrun ore by Minnova Inc. (TSE) (which holds a 30% interest in the mine), the likelihood of serious mineral dressing snags is minimal.

However, the company has no control over the vagaries of the stock market in general or the prices of base and precious metals. A renewed bull market in equities, especially within the mining sector, would probably buoy Audrey’s share values. But the general mood on Wall and Bay streets is not bullish. As well, plenty of analysts are waiting for base metals prices to finally peak out.

One other issue remains to be considered. Audrey President Guy Hebert once ran Aiguebelle Resources, which had a gold mine that failed in northwestern Quebec. Mr. Hebert would go a long way to getting that monkey off his back if the Mobrun mine proves a success.