Investment comment TVX offers exposure to S. America

While car manufacturers and high tech specialists look to Japan and the Far East for innovation and higher productivity, precious metal mining companies, regard South America as the new land of opportunity.

Attracted by some very lucrative tax breaks and a promising geological environment, a number of Canadian companies are harvesting the untapped mineral reserves of Chile and Brazil.

Some of the more prominent outfits include Lac Minerals (TSE), Cominco Ltd. (TSE), Noranda Exploration (TSE), Granges Exploration (TSE) and Rayrock Yellowknife Resources (TSE). But for the investor who wants to add some South American exposure in his portfolio, Consolidated TVX Mining (TSE) is the horse to play on, says Burns Fry Ltd. Toronto mining analyst Jean-Charles Potvin.

Perhaps more so than its competitors, Toronto-based TVX has emphasized its strong Latin American ties in a bid to woo investor interest. A native of Brazil, Chairman Eike Batista was a pioneer buyer during the Amazon gold rush in the 1970s. His father Dr Eliezer Batista was minister responsible for Brazilian mines from 1960 to 1964 and is currently chairman of Companhia Do Vale Do Rio Doce (CVRD), the world’s largest iron ore producer. Bottom line

While it is obviously the strength of its properties rather than the birthright of its executives which will mean most to TVX’s bottom line, cultivating its South American contacts appears to be paying off.

In partnership with Autram, a Brazilian company controlled by Eike Batista, TVX holds varying interests in four Brazilian gold mines, making it the second largest gold producer — with over 55,200 oz this year — in a country The Economist magazine recently described as the unstoppable colossus of the south.

Brazil’s gross domestic product of around $280 billion makes it number one among developing countries and since 1980 the government has been paying a “black market” price for gold which typically carries a 25% premium to the official exchange rate.

New government legislation stating that mining companies operating in Brazil must be controlled by Brazilian nationals will have no impact on the company’s current operations, President Ian Telfer said recently.

The proposed legislation allows foreign-controlled companies five years to transfer majority ownership and voting control to Brazilian residents.

As the 49% owner of a Chilean gold-silver deposit, TVX will add over 1.4 million oz silver to its 1989 production quota when La Coipa mine gets up and running early next year. TVX properties

From there, TVX will quadruple its metal production capacity in late 1990 when it commissions a 15,000- ton-per-day milling facility, says Potvin who after four visits to the TVX properties, is convinced that the company can turn production from its five mines into some very strong earnings growth.

The properties include:

* TVX’s 22.3%-owned Brazilia open pit mine which poured its first gold bar, Nov 24, 1987. Located about 190 km south of Brazil’s federal capital — Brasilia — and operated by Rio Tinto Zinc (51%), the operation is expected to yield almost 120,000 oz gold in 1988 at a cash operating cost of $165 per oz.

Given the large ore reserves available (86.2 million tons grading 0.0185 oz in all categories), the potential exists for a 50% increase in mill throughput, Potvin says.

* A 42.8% net profits interest in Mineracao Nova Astro’s Salamangone gold mine located in northern Brazil’s Amapa region. The mine is expected to produce 43,000 oz gold this year. Recovery rate

With a $20-million flotation mill designed to process 110,000 tons anually in place, TVX is anticipating an 85% recovery rate at a cash cost of $110 per oz.

* A 50.1% net profits interest in the Teles Pires gold project which encompasses the mining rights to all 300 km of the Teles Pires River in the northern part of the Mato Grosso state. After producing 200,000 cu yd in 1987, production is expected to remain steady at 500,000 cu yd this year through to 1992.

* A 46.7% net profits interest in the Xapetuba heap leach gold mine which is expected to produce 11,000 oz gold this year at an average cost of $182 per oz. Located in the State of Rio Grande do Norte, Xapetuba includes 12,355 acres of mineral rights and the second of two gold- bearing quartz veins will be explored over the next few months.

“Gold mineralization has been outlined over a 7.5-km strike length and offers the potential for future production increases,” said Potvin.

* In February, TVX acquired a 49% interest in what could be its most prized asset when Chilean mining company Compania Nacional de Mineria did some complicated wheeling and dealing to acquire the La Coipa gold deposit from Consolidated Goldfields. La Coipa

* TVX holds a 49% interest in CNM which is controlled by Batista. Located 1,000 km north of Santiago, La Coipa was developed to feasibility by Goldfields which spent about $20 million on the property. But a land work dispute involving over 40 law suits, persuaded the British mining giant to sell the property in exchange for a small royalty interest.

Assuming that La Coipa goes into production as planned, Potvin sees earnings of $1.26 per share next year based on a $450(US) per oz gold price and $6.13 per oz silver rising to $1.52 in 1990 and $2.63 in 1991. The TVX issue was trading recently on the Toronto Stock Exchange at $7.38 in a 52-week range of $20.38 and $6.63.

“The stock still shows excellent potential even if gold were to trade in the $350(US) to $400 range,” said Potvin. “Upside capital gain potential is enhanced by the prospect of new precious metals discoveries being made in Brazil and Chile,” he said.