Investment Comment ERG issue a bargain, analyst says

While ERG Resources is preparing to test its brand-new Timmins, Ont., tailings project, the company’s annual meeting in Montreal was obviously not at the top of anyone’s social calendar.

An uneventful meeting was attended by two shareholders and no fresh news was reported. But if the apparent lack of interest in the 66%-owned Pamour Inc. subsidiary put a damper on the proceedings, it came as no suprise to Toronto mining analyst Robert Sclater.

“Few research analysts have ever looked at anything in the Pamour group of companies,” said the Andras Research Capital analyst who is recommending the erg issue.

He said the issue is a bargain and a definite buy at current levels. It has been trading at around $2.70 on the Toronto Stock Exchange in a 52-week range of $7.75 and $2.30.

The Pamour group includes, erg, Giant Yellowknife Resources and Pamorex Minerals.

When Pamour was an outpost of the Noranda group, and Giant Yellowknife a subsidiary of Falconbridge Ltd., investors tended to look at each company as a little gold kicker within a much larger company, Sclater said.

“If they were going to buy any stock, they tended to buy the larger company or other established gold producers.” Tailings project

Erg’s ambitious tailings project near Timmins has also prevented the company from selling itself to a skeptical mining and investment community.

“Canadians haven`t yet warmed to erg, primarily because they appear to harbor a deeply held perception that mining tailings isn’t really mining and the process doesn’t work anyway.”

Nevertheless, erg is just four months shy of a mill tuneup at the Timmins project, where 120,000 oz gold is expected to be produced by the close of fiscal 1989 (20,000 oz this year and more than 100,000 oz in 1989).

The subject of some controversy in Timmins, the company plans to build the world’s second-largest gold tailings re-treatment plant by re-treating 140 million tonnes of tailings at a rate of one million tons per-month.

The Anglo-American ergo operation near Johannesburg, in South Arica is successfully re-treating two million tonnes of gold tailings per-month, said Sclater, who visited the South African operation recently.

Since a number of ergo engineers are working at the Timmins project, he has given erg a strong recommendation, without any reference to the company’s other assets. Processing risk

“Few mines anywhere begin operations with sufficient reserves for a 20-year mine life and almost no mining or processing risk,” said Sclater. As reported (N.M., May 4/87), reserves at the project stand at 140 million tons of tailings grading 0.013 oz gold per ton for contained recoverable gold at 910,000 oz.

With cash operating costs in 1989 of under $150(US) per oz, an expected 2.4-year payback and an inferred 1989 cash flow of about $36 million, erg is valued in the $10-to-$11-per-share range, said Sclater.

As long as gold prices stay in the $450-per-oz range, he sees 1989 earnings rising to $1.20. His recommendation comes at a time when a subsidiary of Australia- based Pioneer Concrete is assuming control of Pamour-parent Giant Resources from Ariadne Australia.

Despite opposition from a couple of minority sharholders, the acquisition went ahead last week without a hitch. “This will settle who owns what and allow Giant Resources to begin the important task of coming to grips with its Canadian investments,” said Sclater. They represent about 60% of the Australian company’s 1987/88 after-tax profits.

Giant Chairman Robert Needham will appear at a Prospectors and Developers of Canada meeting in Toronto next month. By that time, a final announcement is expected on additional financing for erg’s Timmins project. Assuming dilution

At $3 per share (when the report was written), erg is capitalized at about $45 million assuming dilution from the 80% gold loan/20% equity financing package. “This represents an incredibly low capitalization of $450 or $351(US) per oz of annual production,” said Sclater.

It is interesting to note that the Andras report comes almost a year after Yorkton Securities analyst Robert Sibthorpe gave the erg project a similar recommentation.

On April 13, 1987, when the report was written, erg was trading at $7.