INVESTMENT COMMENTARY — Gold markets spurring new interest

Senior gold producers have benefited the most from the recent run-up in gold prices, and with price-to-earnings (and cash flow) ratios becoming somewhat rarefied, the market has started to come round to junior producers and mine developers as well as some exploration companies.

Many second-tier gold producers have already enjoyed impressive moves over the past month. These include: Royal Oak Mines (TSE), up over 75% at $7.68; Glamis Gold (TSE), up 60% at $11; Viceroy Resources (TSE), up 57% at $11.38; and Rayrock Yellowknife Resources (TSE), up 33% at $14.75.

Long-ignored companies in the midst of developing gold projects have also experienced good moves since the beginning of April. Among them: Bema Gold (TSE), up 42% at $1.77; Prime Resources Group (VSE), up 61% at $3.85; and Crown Resources (TSE), up 20% at $6.

The rise in the gold price could not have come at a better time, said Douglas Hurst, mining analyst at McDermid St. Lawrence.

A great deal of money has been made in the diamond stocks, and the market, flush with cash, is starting to consider the junior gold explorers, Hurst explained.

He believes Coral Gold (VSE) has one of the premier exploration properties in North America. The Robertson property is adjacent to and north of the Pipeline gold discovery on the Cortez project in Nevada’s Carlin trend. (Cortez is 60% owned by Placer Dome (TSE) and 40% by Kennecott.) Amax Gold (NYSE) can earn a 60% interest in the Coral ground by completing a bankable feasibility study and, so far, has concentrated its efforts on the centre of the property, where Coral operated an unsuccessful open pit from October, 1988, to August, 1989. Drilling on the 39A zone has returned wide intersections, including Holes CAT-5, which returned 125 ft. from 470 ft. to 595 ft. grading 0.1 oz. gold per ton, and CAT-6, which returned 150 ft. from 620 ft. to 770 ft. grading 0.16 oz. gold.

Another Hurst favorite is Eldorado (VSE) which, in addition to holding promising properties in Mexico, is completing a feasibility study on the La Colorada project in that country’s Sonora state. Eldorado is earning a 70% interest in the property and has an option to buy the remaining 30% from Campbell Resources (TSE). Preliminary minable reserves are estimated at 4.4 million tons grading 0.041 oz. gold, and the company expects to begin heap leaching this year.

Hurst also considers Manhattan Minerals (VSE) and Baja Gold (VSE) to have excellent gold exploration prospects in Mexico.

Donald Poirier, mining analyst at Brink Hudson Lefever, does not see a bull market developing in junior gold exploration stocks just yet. But he does expect funds to continue flowing into companies nearing production. While admitting the pickings are slim, Poirier named Eldorado Minerals as his current favorite because of its near-term production plans.

He also likes Granges (TSE), which, he said, is an excellent way to play the recent rejuvenation in the Crofoot/Lewis mine owned by Hycroft Resources & Development (TSE) in Nevada.

Hycroft, which is 50.5%-owned by Granges, recently extended the life of Crofoot/Lewis and this should enable Granges to recover all the $26.6 million owed to it through previous loans.

Douglas Leishman, mining analyst at Yorkton Securities, said he would not be surprised to see the market pick up for gold exploration stocks, reiterating the theory that diamond-trading profits are looking for a solid home. With regard to British Columbia, Leishman favors both Newhawk Gold Mines (TSE) and Tenajon Resources (VSE), noting that they have good assets and management with operating experience.

Newhawk plans to spend about $1.6 million exploring its Sulphurets properties in northwestern B.C. this year.

Meanwhile, Tenajon, in a 50% joint venture with Westmin Resources (TSE), plans to spend $520,000 this year at the SB property north of Stewart, B.C. The joint venture mined 113,049 tons averaging 0.26 oz. gold per ton in 1991 and plans to explore the neighboring Kansas zone this year. High-grade intersections have been encountered in the zone, including 17 ft. grading 2.07 oz. gold, 11.5 ft. at 3.77 oz., and 6.6 ft. at 10.25 oz. Ronald Nethery, mining analyst at Haywood Securities, is very bullish on the long-term prospects for gold and agreed that a further rotation of investor interest in gold explorers is likely.

He noted that both silver and platinum have pushed through 2-year highs, while gold is approaching its 2-year high at the US$375-level. He said that, although some consolidation may take place, he would be a buyer on any pull-backs in the gold market.