Investment Comment Second gold rush led by ERG

One man’s waste is another man’s gold. A trite expression to be sure, but a true one nonetheless. And it is one that is starting to be given serious consideration in the mining industry. A company that is taking it to heart is Toronto-listed ERG Resources.

On the road to becoming one of the major gold producers in Ontario, erg will achieve this status by recovering gold from tailings, that residual waste product from a gold mining operation.

The tailings in this case are in excess of 140 million tonnes, the product of more than 75 years of gold mining in the Porcupine area of Ontario. The company intends to re-treat the tailings at the rate of one million tonnes per month, thereby establishing the second largest gold tailings re-treatment plant. The Anglo-American ergo operation in the Transvaal in South Africa is the largest with two million tonnes of gold tailings treated profitably per month.

In excess of 180,000 oz of gold are expected to be produced by erg in the first two years of operation. What’s more, it will be acomplished with a low unit cost of production, rapid payback of capital and a reserve life of 20 years.

For these reasons analysts Mike Pickens and Robert Sibthorpe of Yorkton Securities strongly recommend the purchase of erg shares at current levels for investors who want to participate in a unique vehicle with strong international investment orientation.

At the time of their report, erg was trading at the $7 level with a 52-week high and low of $7.50 and $2.10, respectively. Around press- time, the shares were still at that level. Tried and true

ERG will be implementing tried and established metallurgical practices in its tailings-retreatment project. “Despite the skepticism expressed in some quarters, the application of this tried and tested technology on the large scale envisaged will guarantee significant and low cost gold production,” say Messrs. Pickens and Sibthorpe.

Tonnages in tailings, the analysts explain, are characteristically very large and grades are very low. As they are already finely ground, they will flow in a slurry by gravity and are easily pumped in slurry form.

The tailings are converted into a slurry on site and then pipelined to the processing plant. Using conventional bulk flotation, pyrite containing the gold is concentrated, then ground to facilitate solution of gold by cyanidation. The degree of grinding is a function of the trade off between cost and recovery.

The gold is absorbed from solution by carbon in leach and after recovery from carbon it is refined by conventional electro winning. High volume and economies of scale are the key to success.

Work to date by erg has consisted of detailed reserve assessments and pilot plant studies by Kilborn Ltd. resulting in a positive feasibility study with construction of a processing plant to begin immediately. Pamour association

Reviewing the background of the company, Messrs. Pickens and Sibthorpe note that erg entered into a joint venture agreement with Pamour Inc. for the exploitation of gold tailings interests held by both companies in the Timmins area. The parties were equal participants in the venture, the assets of which were:

* the right to acquire 88 million tonnes of dormant gold tailings dams together with the right to acquire Pamour’s current and future active tailings dams when these come dormant;

* the erg controlled 52 million tonne Hollinger tailings deposit plus the preliminary feasibilty study on the project carried out by Kilborn Ltd. on behalf of erg.

When commercial production starts from each of the Pamour contributed dams, the unpaid amount attributable to that dam becomes payable within six months and Pamour becomes entitled to receive a 4% net smelter royalty.

As soon as tailings are treated this initiates option payments of $200,000 per year for nine years. When commercial production starts from the Hollinger tailings, the unpaid option payments become payable within six months and a 4% net smelter return is initiated.

Subsequently, during October, 1986, erg and Pamour agreed that erg would acquire Pamour’s interest in the joint venture in exchange for 4,516,791 common shares of erg valued at $3.50 per share. Pamour would retain a 4% net smelter return royalty on production plus a payment of 3.834 cents per tonne of tailings sold to erg. The payments to the vendors of the Hollinger rights remain unchanged.

In related transactions, erg acquired about 32 million tonnes of tailings in the Kirkland Lake area from Jimberlana Canada in return for 556,225 shares of erg. Pamour has agreed to purchase from Jimberlana Canada, the 556,225 shares of erg, together with an additional 579,900 erg shares held or to be acquired by Jimberlana Canada.

On October 24, 1986, Pamour acquired 1,407,988 shares of erg at a price of $3.50 per share by way of private transactions.

The issue of erg shares to Pamour, taken with the acquisition of erg shares as outlined above, will result in Pamour holding a total of 7,060,904 common shares of erg, representing 66.5% of erg on a fully diluted basis. The result of these transactions has produced a more streamlined corporate structure, the analysts note. The project

A one million tonne per month flotation plant, followed by a conventional 100,000 tonnes per month (approximate) concentrate regrind and carbon-in-pulp cyanidation plant, is expected to be in operation in the third quarter of 1988.

At a capital cost of $65 million, this plant is to operate for eight months of the year. It will have an expected operational life of 20 years.

Full production is anticipated in 1989 with gold production attaining 100,000 oz per year in the first years of operations.

For the first five years, tailings will be treated from the nearby Schumacher and Gillies Lake tailings dams. The grade of tailings treated will average 0.45 oz gold per tonne with gold recovery conservatively estimated at 45%.

A gold price of $400(US) per oz is expected to give the project a return on investment of 35% with a 2.6 year pay back of capital.

Production output over the next two decades will trend marginally downward as grades diminish and operating costs rise. However, improving gold prices and gains in recovery may offset these long term trends. Evaluation

Messrs. Pickens and Sibthorpe say evaluation of a mineral development project, especially one as unique as erg’s tailing retreatment project, is difficult because of the high degree of uncertainty associated with the project parameters. But they say an estimate of the project’s ultimate value can be drawn up if certain assumptions are made. This can then be compared to the market capitalization of the company to determine if a buying opportunity exists.

The analysts set the project parameters at 140 million tons of tailings reserves grading 0.013 oz for contained recoverable gold at 910,000 oz. Estimated operating cost per oz amounts to an average of $225. The capital cost estimate of the project comes in at $65 million. The participation of erg is 100%, less a 4% net smelter royalty.

With these parameters and an assumed gold price of $420(US), the Timmins tailings retreatment project has an estimated value of some $220 million to erg shareholders. While this is a pre-tax future value, it is more than three times the current $71 million market capitalization of erg.

This future value figure assumes no credit for other interests or additional reserves, say the analysts. They add, “while there can be no assurance the market capitalization of erg will reflect its estimated value of $220 million our conclusion is that the current share price of erg does not accurately reflect the intrinsic value of the project.”