Investment Comment Earlier acquisitions pay off for Echo Bay

An aggressive acquisition policy appears to be paying off for Edmonton-based Echo Bay Mines.

After paying Tenneco Inc. $130 million in late 1986 for a number of precious metal properties in the United States, Echo Bay’s gold output was up 56% from 1986 production levels.

Echo Bay poured 500,507 oz gold in 1987 and the company has committed itself to a 1989 production total of 700,000 oz.

Such a healthy growth rate has boosted the Echo Bay balance sheet and made the company one of the key gold stocks on the Merrill Lynch recommended list.

While maintaining relatively low production costs of $207 per oz of gold, Echo Bay reported record earnings of $48.5 million(US) in 1987 compared with $25.9 million in 1986. Long-term debt stands at $70.73 million or about 20% of common shareholders equity.

“The balance sheet is sound with a 1.97 working capital ratio and a debt-to-equity ratio of only 0.20,” writes analyst Catherine Gignac in Merrill Lynch’s latest quarterly update.

“Trading recently on the Toronto Stock Exchange at $25.88 in a 52-week range of $39.63 and $20.88, the shares offer an average potential for appreciation over the long term,” she said. Price scenario

However, the near-term outlook doesn’t appear quite so rosy. In view of a $475(US) gold price scenario, Gignac rates the shares as neutral over the intermediate term.

Based on 1988 production, Echo Bay is North America’s fifth largest gold producer with one Canadian and six U.S. mines.

The largest U.S.-based contributor to Echo Bay’s gold production is the McCoy heap leach mine in Lander Cty., Nev. While it produced 90,788 oz gold from open pit operations in 1987, Echo Bay is currently developing a large low grade gold/ silver deposit on the same claim block.

With reserves standing at 2.1 million oz gold and 97.3 million oz silver in the proven and probable category, the Cove deposit, is scheduled to be brought on stream in mid-1989.

Echo Bay is also attempting to dig more gold from the Borealis and Manhattan mines which were also part of the Tenneco deal.

Located 10 miles south of Echo Bay’s 50%-owned Round Mountain operation in central Nevada, the Manhattan produced 24,855 oz gold from two open pits in 1987. However, a relatively low (68.9%) recovery rate encouraged Echo Bay to look at metallurgical improvements in the operation. Borealis mine

Although the Borealis open pit mine in central Nevada produced 45,459 oz last year, the deposit appears to have limited potential and Echo Bay is drilling the Northeast Ridge to develop additional reserves.

A $140-million(US) expansion program at the Round Mountain mine where Echo Bay holds a 50% interest is expected to double the mine’s capacity when the operation is completed later this year. Gold production at Round Mountain was up from 83,825 oz in 1986 to 95,289 oz in 1987.

North of the border in the Northwest Territories, Echo Bay has just completed the second phase of a development program at its Lupin mine where production remained steady at 193,105 oz compared to last year. The program is designed to provide access down to the 2,130 ft level.

In a bid to expand ore reserves and increase the mine’s life expectancy beyond five years, the company will eventually deepen the mine to the 2,370-ft level.

On the exploration front, Echo Bay is spending $6.7 million on underground exploration at Nuinsco Resources’ Cameron Lake gold project 55 miles southeast of Kenora, Ont. In return for financing the program, Echo Bay earned the right to increase its interest in Toronto-based Nuinsco from 37% to 50.1%. Main zone

As reported (N.M., Jan 26/87), drill indicated reserves on the Main zone now stand at 1.6 million tons with a weighted average grade of 0.16 oz to a depth of 1,000 ft. Of that amount, one million tons grading 0.2 oz, includes a higher core grade of 516,000 tons grading 0.258 oz undiluted.

A $2.5-million underground exploration program and feasibility study is also progressing at the Kettle River joint venture project in Washington State where Gold Texas Resources and Crown Resources are involved.

Under an option agreement, Echo Bay can earn a 60% interest by spending $10 million by 1992 while the joint venture partners share a 40% interest.

As reported (N.M., Aug 10/87), drill-indicated open pit reserves totalling 3.5 million tons grading 0.127 oz are hosted in the Key East, Key West and Overlook areas.

An additional 472,000 tons grading 0.247 oz in the Overlook and Granny areas could be mined by underground techniques.

Based on an average gold price of $445, Echo Bay earnings should increase from 52 cents in 1987 to 57 cents in 1988, Gignac says.