Investment Comment Silver project, a boon to Rea Gold

As suggested in a recent review by Dean Witter Reynolds Canada Inc. there are many good reasons for investing in Rea Gold Corp., but first among them is the company’s 30% interest in a high grade silver property in British Columbia.

Located 28 miles northeast of Kamloops, the 6,000-ac Samatosum mine will be the lowest cost silver producer in North America (and one of the lowest cost producers in the world) when production begins in late 1988.

At the end of 1986 reserves at the mine stood at 739,000 tons grading 0.04 oz gold per ton, 20.9 oz silver, 0.95% copper, 2.43% lead and 2.08% zinc.

In partnership with Minnova Inc., (formerly Falconbridge Copper), Vancouver-based Rea Gold has been attempting to fully delineate the orebody since Minnova encountered a new high grade zone there in late 1985.

Since then, drilling has dramatically increased those reserves but Minnova is not releasing the latest results until later this month.

In the Witter report by analyst Gordon Bub, total mineable reserves (assuming 20% dilution) are estimated at 970,000 tons grading 27.2 oz silver, 0.038 oz gold, 1% copper, 1.45% lead and 2.78% zinc.

According to Mr Bub, these reserves can sustain the mine for approximatley 6 1/2 years at an estimated mill rate of 500 tpd during the open pit phase and 400 tpd during the underground phase. Capital costs

At these milling rates, the report estimates open pit production at 6,111 oz silver and 9,845 oz zinc by 1990. When the operation goes underground in 1991, annual production will drop to 2,646 oz silver and 4,725 oz zinc.

Mr Bub said unit costs per oz of silver produced are estimated at 30 cents per oz during the first two years of open pit mining, increasing to $3.00 per oz when underground mining commences.

Capital costs are estimated to be in the area of $20 million with Rea Gold contributing $6 million.

Minnova can earn a 100% interest in the property, subject to a 5% net smelter royalty, by spending $930,000 before Nov 4, 1988, preparing a feasibility study and paying Rea $50,000 upon notification that it intends to place the property into production.

Rea will earn its 30% undivided interest by contributing 30% of the capital costs or convert its working interest into a 12.5% net proceeds of production interest.

“In our opinion, Rea will elect to back in for a 30% undivided interest,” said Mr Bub, who regards the company as well financed.

Rea Gold recently raised $4,750,000 through a private placement of one million units consisting of one common share plus one share purchase warrant.

“The funds from this placement together with exercise of the warrants will be more than sufficient to cover Rea Gold’s share of the capital costs required to place the mine into production,” said Mr Bub. Zinc-lead project

The company also raised $2.8 million through a recent flowthrough issue to fund some of its other properties. They include a 50% interest in a zinc-lead silver project located 29 miles northeast of Clearwater, B.C. where a 14,000- ft diamond drill program is under way. Reserves are estimated at 1,643,000 tons averaging 8.6% zinc, 1.4% lead and 0.25 oz silver per ton.

Rea also has a 50% interest in nine mineral claims in the Similkameen area of B.C. and a 50% interest in 9-claim gold property in the Vancouver Mi ning Division, B.C.

According to Mr Bub, Rea Gold shares are significantly undervalued in relation to other tse-listed silver producers like Equity Silver Mines and United Keno Hill Mines which are trading at 38.3 and 20.6 times Witter’s earnings per share estimates at a silver price of $7.50(US) per oz. (At presstime, silver stood at $7.82.)

“If similar multiples were applied to Rea Gold’s estimated earnings per share for the first full year of operation (1989), the issue should be priced at between $22.66 and $42.13,” he said.

Rea Gold shares were trading recently on the Toronto Stock Exchange at $8.25, just below its 52-week high of $9 but well above its 50 cents low point.

However, Mr Bub’s upside price target is a minium of $11 to $12 under existing market conditions. Based on gold and silver prices of $425(US) and $7.50 respectively, he sees earnings per share of $1.12 in 1989 dropping to 48 cents after 1991.