Investment Comment QPX has Placer Dome’s backing

Finding a listed company that offers a combination of potential for capital gains associated with penny mining stocks and blue-chip credibility isn’t easy. Some might say it’s impossible. Other investors, however, sometimes try to get the best of both worlds by looking for a junior company that has the backing of a major.

There are a few of them around. Inco acted as promoter for Fort Knox Gold, for example, Noranda regularly takes down stock in companies it’s dealing with and Teck Corp. has built a reputation on being able to work with juniors.

Of course, having a senior mining company in the background is no guarantee of success. Major mining companies make mistakes, too, and when they do the mistake can be on a major scale.

But investing in a junior stock in which a Noranda, an Inco or a Teck has invested can be reassuring. If you lose, your fellow shareholders are some of the best in the business, so at least you can feel you’re in good company, if that’s any consolation.

QPX Minerals (VSE) is one of the juniors with an impeccable pedigree. It was sired by Placer Dome (TSE) earlier this year as a vehicle for grassroots mineral exploration and specifically for exploration on the QR gold deposit near Quesnel, B.C. Placer Dome still holds 62.1% of the 7.25 million shares outstanding with the balance held by the public.

Drill-indicated reserves on the QR stand at about one million tons grading 0.2 oz gold per ton.

Brokerage firm Jones, Gable and Co. says the potential for expanding ore reserves is considered excellent.

“Recent drilling immediately east of the Main zone, is believed to indicate the presence of a new deposit labelled the East zone,” says a report from the Toronto brokerage firm.

The property is slated for production by the end of 1989 at a capital cost of about $15 million. Based on a production rate of 400 tons per day, the mine should produce about 25,000 oz of gold annually during the first four years of operation at an average cash cost of $165(US) per oz., says the report. That would mean an average cash flow over that 4-year period, before financing and taxes, of about $8 million and a total payback of two years.

Jones’ report suggests earnings by year two of operation should be 40 cents per share. While that projection may be influenced by the “vagaries of gold and currency fluctuations,” Jones points out that “it is apparent that QPX Minerals has in a remarkably short period of time established the prospect of a sustained earning’s base.”

The report goes on to say: “Three key strategies combine Placer Dome’s expertise in orebody development with the exploration skills of Mine Quest (QPX’s predecessor private company), utilize Canadian Exploration Expen se flow- through funds to work a large number of projects each year and ensure feasibility and production financing on a predetermined basis.

“Another notable feature is the predetermined back-in production financing agreement which ensures QPX shareholders get a real equity interest in properties without share or property dilution.”

QPX Minerals has what Jones Gable calls “the key ingredients essential for a successful ongoing mining company.” Whether it makes the most of those ingredients remains to be seen.