INVESTMENT COMMENT Delaware’s Snip venture with Cominco gives it

While Toronto-based Brown, Baldwin, Nisker Ltd. usually reserves its judgment for larger gold mining concerns, it has come up with a research report on what it calls an exciting junior play with lots of risk- oriented appeal.

Vancouver-listed Delaware Resources either owns or is involved in a number of projects across the country but it is a 40% interest in Cominco Ltd.’s Snip property in northern British Columbia which makes Delaware a buy, says analyst Richard Cohen.

Located in the Iskut River area 110 km northwest of Stewart, B.C., the 1,675-ha-property is accessed by a 70-km dirt road that connects with the Stewart Cassiar Highway.

With inferred reserves standing at 1.2 million tons grading 0.75 oz gold per ton, the Snip property is thought to host one of the largest untapped gold reserves in western Canada. As reported (N.M., Dec 14/87), reserves are defined as drill inferred because the spacing isn’t sufficient for drill indicated.

According to Cohen’s research report, current reserves warrant a 500-ton-per-day mill which should produce in excess of 115,000 oz annually at a cost of $140(US) per oz. Snip Claims

Under a revised agreement, Delaware is spending up to $4 million in order to earn up to a 100% interest in the Snip claims. When Delaware has either spent the full amount, or elects not to fund the program any further, Cominco has the option to earn back up to 60% by spending 2.25 times the difference between the total expenditures of the two companies.

With 46,000 ft (73 holes) of diamond drilling completed this year, an underground exploration program, designed to confirm the continuity and grade of the deposit through lateral and inclined development, is scheduled to get underway in February.

Of the 73 holes drilled, Delaware reports that 46 had ore grade intersections and the most significant area, the Twin zone, has been drilled o n 165 ft-centres over a strike length of 2,100 ft.

Additional reserves could justify up to a 1,250-ton-per-day operation and total gold production at the higher rate is estimated at 215,000 oz annually at a similar cost, the report says.

A production decision is expected this spring and when production begins in late 1989 or early 1990, there are two possible scenarios under which the mine could operate, the Cohen report says. Capital Costs

Under Cohen’s best case scenario, a 2-million-ton deposit at a grade of 0.7 oz gold per ton will support a 500 tpd milling operation. Capital costs are estimated at $25 million and Delaware’s 40% share would add up to $10 million.

Cohen says Delaware has sufficient financing in place to fund the majority of their capital requirements with the remainder available through gold loan facilities.

Under this set of circumstances, Cohen sees fully-diluted annual earnings at $1 per share by 1990 assuming a gold price of $450(US) and a British Columbia tax rate of 51%. Pre-tax cash flow would be in excess of $2.20 per share.

As a result, the analyst says a 10- to 15-times price-earnings multiple would imply a future stock price of between $10 and $15 per share.

If, under a second scenario, five million tons grading 0.5 oz are delineated (Cohen warns that the potential for this is based on very limited geological information), he believes that a deposit of that size would warrant a mill expansion to 1,250 tpd for an additional capital cost of $15 million.

Due to economies of scale, the report says operating costs are estimated to decrease to $90 per ton and annual production would be in the region of 205,000 oz annually. Higher Multiple

In this scenario, earnings are estimated at approximately $1.70 per share but since a larger operation would command a higher multiple, Cohen estimates that the stock could reach $25 per share based on a 15 multiple.

At $8.13 (when the report was written) on the Vancouver Stock Exchange, the stock is currently trading between 9 and 10 times 1990-91 earnings at the lower production rate of 500 tpd.

At the higher production rate, and with 7.02 million shares currently outstanding, bbn says Delaware is trading at an estimated four to five times prospective earnings.

The Delaware issue was still trading (at presstime) at $8.13 in a 52- week range of $9.50 and $1.75.

“The stock price is at least 50% undervalued based on our base case estimate of two million tons in reserves,” said the bbn report. “We also believe there is good potential for eventually defining a 4- to 5-million-ton deposit that could justify a tripling of the present share price,” it said.

“On that basis, the risk-reward ratio looks excellent.”