Investment Comment Conwest pins hopes on oil rebound

While a steep decline in oil and gas prices took a large bite out of Conwest Exploration’s 1986 cash flow, few natural resource companies can boast such an enviable track record. In business for 48 years, the company has not lost money since 1975 and despite a $6-million drop in net income during 1986, the company is planning to triple its oil and gas production and reserve base over the next three years.

“Tripling our oil reserves is an ambitious assignment but we believe it can be accomplished through both increased exploration exposure and our strong financial capacity to undertake new acquisitions,” President John Lamacraft told The Northern Miner recently.

That’s why Toronto-based Andras Research Capital Inc. in a research report written by analysts Grahame Notman and Paul Roberts, is advising investors to buy the stock.

The report titled Cash, Expertise and Quality, calls Conwest “a unique natural resource company, somewhat reminiscent of Noranda Inc. in its early dynamic growth days.30” Notman and Roberts say the energy and mining sectors provide a growing nucleus of cash flow for a company which boasts an extraordinarily strong financial position. Working capital currently stands at $103 million.

Conwest’s assets include a 44% interest in Mineral Resources International (MRI) which has producing oil interests in Skinner Lake and Browning, Sask., and Swan Hills, Alta.

Current oil production is approximately 700 barrels per day and cash flow exceeds $2.5 million annually. On March 31, mri had proven and probable reserves of 2.5 million barrels of oil and 4.2 billion cu ft of gas.

mri’s principle asset is the Nanasivik mine (zinc, lead, silver) located on the northern tip of Baffin Island in the Yukon. It continues to be one of the world’s lowest cost zinc producers. The cost of producing 79,900 tonnes of zinc concentrate in 1986, remained about the same for the fourth straight year. Based on current milling rate, mine life is estimated in excess of four years but consistent success in ore reserve replacement indicates that operations will persist for much longer than that.

Conwest also holds a 27% interest in Faraday Resources which sold approximatley 80% of its oil reserves for $4.3 million cash in 1986. Warren Explorations, in which Conwest holds a 33% interest, has accumulated a Canadian reserve base of 428,000 bbl of oil equivalent and is producing more than 100 bbl per day.

Although net cash flow from oil and gas operations for 1986 was down 36% to $12,230,000 compared with 1985, Conwest believes it is well positioned to take advantage of the slump in oil prices and expand its oil and gas assets in 1987.

With oil at $15 to $18(US) per bbl of oil (down from over $30 per bbl in late 1985), Mr Lamacraft’s optimism is supported by the Andras research report.

“We are predicting that the fundamentals for the Canadian oil and gas industry will be stronger in 1988,” it says. Among Notman and Roberts’ predictions is a 10% increase in oil and natural gas production. Prices should firm slightly to $1.70C/mcf, they say, and oil production will be marginally higher at 1.3 million bbl per day.

As a result, based on $18(US) bbl ($24.25C/bbl) next year, Roberts and Notman see a 15% rise in Conwest’s oil and gas cash flow in 1988 to approximately $17 million ($1.55 per share).

During 1986, Conwest exchanged its 25% interest in Hemglo Resources for two million shares in Hemlo Gold Mines Inc., the company formed to combine the various ownership interests in Noranda Inc’s Golden Giant mine. Mr Lamacraft called Conwest’s 2.3% interest (worth around $52 million) the single best investment equity agreement that Conwest has made in its 38-year history.

Reserves at the Golden Giant mine are estimated at 22.9 million tons grading 0.28 oz gold per ton. At current mining rates (2,400 tonnes per day) these reserves represent about 20 years of production. The mine is expected to produce 300,000 oz in 1987 and 330,000 oz in 1988.

While Conwest’s 14% interest in Consolidated Professor Mines represents the company’s main window on the world of gold mining — planned output of up to 40,000 oz gold per year could start within 18 months — a 35% interest in Chance Mining is of “primary significance”.

In 1982, Chance granted Kidd Creek Mines an exploration option on one of 10 claim groups in the Timmins, Ont. area. where $850,000 and 25,600 ft of surface diamond drilling has produced some encouraging results.

As previously reported in (N.M., May 25/87), Conwest recorded 1987 first-quarter net income of $18.10 million or $1.72 per share compared with $3.8 million or 34 cents per share for the same period last year.

With a recent debenture issue, Conwest is in an extraordinarily strong financial position with liquid assets exceeding $130 million, says the report. “Contrasted with most non-precious metals natural resource companies, which are in retrenchment, if not implosion modes, Conwest is aggressively pursuing widespread opportunities.30” it says.

With partial liquidation of the Hemlo Gold holdings Notman and Roberts see earnings per share of $2.72 for this year dropping to $1.12 in 1988.

Conwest shares were trading recently at $14.25, just below its 52-week high of $15.88 but well above its $7.63 low point.