INVESTMENT COMMENTARY — MK Gold seen as undervalued

Brokerage house Robertson, Stephens & Co. recommends MK Gold (NASDAQ) as a buy, describing it as an “undervalued gold miner with a bright future.”

And yet, despite this positive outlook, investors appear unwilling to pay up for the issue, which recently traded at the US$3.50 level, compared with a 52-week trading range of US$2.63 to US$7.13.

MK holds interests in two gold producers in southeastern California, including a 53% stake in the American Girl mine and 25% in the Castle Mountain open-pit heap-leach operation. (The remaining interests in each project are held by New York-listed Hecla Mining and TSE-listed Viceroy Resources, respectively.)

Production attributable to MK from the two operations totalled 37,553 oz. for the six months ended Sept. 30, 1994, at a cash cost of US$240 per oz. For 1995, Robertson, Stephens projects production of 75,000 oz. at US$248 per oz. Production growth is tied to the Jerooy gold project in the former Soviet republic of Kyrgyzstan. MK holds a 30% interest in the combined open-pit/underground mine, and construction is to begin this spring. The project is expected to be fully commissioned by spring, 1997. The company is providing US$35 million of the US$133-million capital cost, with the balance being raised through non-recourse loans. MK will receive 65% of the cash flow (the balance being split 70-30) until its equity investment is paid off.

Annual production at Jerooy will start at about 175,000 oz. and average 150,000 oz. over its projected 9-year life. The cash cost is expected to average US$140 per oz.

Looking forward, the brokerage house projects corporate production of 105,000 oz. in fiscal 1997 at a cash cost of US$203 per oz., increasing to 173,000 oz. in 1998 at US$162 per oz. Operating cash flow per share is forecast at US61 cents for 1995, US68 cents for 1996, US$1 for 1997 and US$1.66 for 1998. Turning to reserves, MK’s share of contained gold in its three projects totals 1.15 million oz., or about US$43 per oz. based on an adjusted market capitalization.

Production at American Girl is expected to continue through fiscal 1997, with a further 21,000 oz. attributable to MK’s account after mining ceases. Production at Castle Mountain will likely continue through the year 2000, and Robertson, Stephens sees good potential in extending the mine life into the next century.

The company is seen by many as a potential takeover candidate, now that plans by Viceroy Resources to buy a 49% stake in MK from parent company Morrison Knudsen have collapsed.

However, Richard Winters, a mining analyst at Robertson, Stephens, does not see it that way. He thinks MK is too small to be of interest to any of the majors. As for the possibility of a takeover by a group of juniors, Winters doubts whether any of MK’s peers have the strength or flexibility to complete a takeover at a time when gold markets are relatively weak.

MK has 19.4 million shares outstanding, US$45.5 million in cash and US$21 million in long-term debt.