Investment Comment Lots of upside to Muscocho

A rapidly emerging Canadian mining finance house is how Michael Villeneau of the investment firm of Morgan Grenfell describes Toronto-listed Muscocho Explorations.

An established gold and silver producer in Canada, Muscocho poured its first gold four years ago. This year the company, headed by President Terrance Flanagan and vice-president John McAdam, is expected to produce 20,000 oz of gold and 120,000 oz of silver from its Montauban property, 50 miles west of Quebec City.

The company’s commitment to exploration and its interest in associated companies spell further growth. Over the next couple of years Muscocho should emerge as a medium-sized gold producer and for this reason, Mr Villeneau recommends the purchase of Muscocho shares.

The Montauban property originally operated as a lead zinc mine, but after the sulphide zones had been mined out, Muscocho purchased the property and re-evaluated the gold zones. This led to the start-up of production in 1983 with 6,647 oz of gold and 8,492 oz of silver produced.

Access to the mine is via a ramp and mining has been by the shrinkage stope method. Costs per tonne are exceptionally low, notes Mr Villeneau, and enables the deposit to be cash positive even with relatively low grade. Mill throughput is 385 tonnes per day with recoveries around 90% using cyanidation and zinc precipitation. South at Montauban

In 1986, the group brought on its second operating mine at Montauban, called the South mine. In that year the group effectively made the transition from the North mine to the South mine. Production was lower at 13,952 oz of gold in 1986, down from 19,942 the previous year. This was the result of lower over-all grade during pillar recovery from the North mine and because of metallurgical problems with the new mine. Production, however, is back to plan with an expected 20,000 oz of gold to be produced in the current year. Costs per oz of gold and gold equivalent produced are currently around $170(US) *

Ore reserves are 600,000 tonnes grading 5 g per ton of gold and about 70 g of silver and are sufficient for five years production.

The potential for expansion of reserves is very good, says Mr Villeneau. A prospect ramp is being driven onto the Marcor property adjoining Montauban, which could be providing mill feed in the not- too-distant future and help prolong the life of the operation. 50% in Magino

Muscocho has a 50% interest in the Magino property in the Wawa area of northern Ontario with McNellan Resources holding the balance. It should be noted that Muscocho holds 17% of the equity of McNellan and has board representation.

After an extensive program of surface drilling, Muscocho is now underground at Magino. A ramp has been completed — to the 200 ft level and drifting is taking place on seven parallel gold bearing veins. The zone of mineralization is 600 to 700 ft wide and has been traced along a continous length of 5,400 ft.

The current reserve indications are about 2 million tonnes at 8.6 g per tonne above the 500 ft level. Indications are the vein system, which is near vertical, extends to depth. The potential reserve of the deposit could be 10 to 20 million tonnes, says Mr Villeneau.

Plans for the development of the Magino are currently being finalized. The cost is expected to be about $20 million, of which Muscocho’s share will be $10 million.

Construction of a conventional Merrill-Crowe cyanidation mill with a gravity circuit and an initial capacity of 360 tonnes per day could start in June of this year. The cost of the mill is around $5 million with a further $1 million for preparation of the tailings area.

The current mine plan calls for shrinkage stoping and mine development to be under way by the end of the summer. Cost of production is estimated at $66 per tonne or about $200(US) per oz.

Initial production at a rate of about 30,000 to 35,000 oz should start late this year. After one-year production, the group should have enough working places to double the mill capacity to 720 tonnes per day and output to 60,000 to 70,000 oz. The cost of mill expansion would amount to $1 to $2 million. Operator at Magnacon

The group’s second major is the Magnacon property at Mishibishu Lake, also in the Wawa area. Muscocho is operator with a 25% interest. Flanagan McAdam Resources has a 50% interest and Windarra Minerals has the remaining 25% interest.

The Magnacon structure extends for a length of two miles. An underground ramp has been driven to intersect the ore zone some 300 ft below surface and over 1,000 ft of drifting has been completed. Drill indicated reserves are estimated at 900,000 tonnes at a grade of 5.5 g per tonne, including 600,000 tonnes at 7.2 g per tonne.

However, says Mr Villeneau, following underground work, that indication looks like an underestimate. A 245 ft drift averaged 11.7 g per tonne with a width of 8.9 ft. Current underground work indicates the grade could be 30% above the reserve estimates.

The present plan is to make a production decision by the end of this year with the aim of being in production in 1988. Although Magnacon is a few months behind Magino, preliminary indications are that costs should be similar. The ore is contained in one large vein eight to 12 ft wide and the group could look to start the operation at 550 tonnes per day to produce 40,000 to 50,000 oz per year. Other Exploration

A budget of $750,000 has been set for the Gwillim Lake project at the Chibougamau area of Quebec. Muscocho and Flanagan McAdam each have 43.3% interest in the property and Noranda has the balance. Drilling so far has encountered significant gold intersections and a decision to go underground could be made over the next couple of months.

Because the group does not wish to dilute the exploration success already achieved in Muscocho with further grassroots exploration, it has a policy of giving off projects to associated junior companies in which it has equity interests.

Besides its 17% equity interest in McNellan, Muscocho holds 8% of Chesbar Resources, 8% of Flanagan McAdam, 22% of McAdam Resources and 18% of Tashota Nipigon Mines.

Mr Villeneau says all the associated companies have several interesting projects. Chesbar is perhaps the most advanced with a production decision expected soon on one of its properties. Financial position

Muscocho has been a heavy user of flow-through share financing. Last year it arranged a total of $8.1 million in this manner while the total for this year stands at $10 million.

After the issue of 1.6 million shares for this year’s flow-through season, Muscocho will have a total of 17.1 million shares fully diluted. The company has no debt.

Cash flow in 1986 amounted to $2 million, although after non-cash charges the group only just broke even. This year, there should be a substantial improvement with earnings reaching $2.5 million and cash flow of $4 million.

Around presstime Muscocho was trading on the tse at the $7.50 level.