INVESTMENT COMMENTARY — Sulphide potential makes Eden Roc a

Based on gold production from oxide reserves and potential production from new sulphide sources, Canadian investment firm ScotiaMcLeod recommends Eden Roc Minerals (TSE) as a speculative buy.

The analysts based their opinion on Eden Roc’s 84,800-hectare land position in Ivory Coast, one of the largest positions held by a junior company in West Africa.

Most of the property has undergone little, if any, modern exploration. Currently, Eden Roc is searching for oxide reserves in the least explored portion of the property. More than 50,000 soil samples have been taken and several (as yet untested) anomalies have been delineated. Accordingly, Scotia- McLeod considers Eden Roc to be an interesting long-term exploration play which is generating cash flow from operations.

In 1994, the source of Eden Roc’s cash flow was the 24,000 oz. gold yielded from oxide reserves at the Aniuri and Adiopan open pits, at a cash cost of US$175 per oz. Deeper drilling, however, suggests there is potential for a new style of gold mineralization associated with sulphide ores. The investment firm forecasts that the junior will increase production to about 28,000 oz. in 1995 at a cost of US$206 per oz. By 1996, production is expected to reach 51,000 oz. at US$154 per oz.. This added production will come from the oxide reserves within the Grid X area, and from the new sulphide ores found at depth below the open pits.

Eden Roc, seeing the potential of sulphide ores, intends to cap oxide production at 50,000 oz. and focus on producing gold from sulphide ores, unless a major oxide discovery is made.

This shift in focus towards greater sulphide production is pivotal to the company’s growth plans. ScotiaMcLeod says Eden Roc has the potential to become a 150,000-oz.-per-year producer, with two thirds of this derived from open-pit sulphide ores.

Eden Roc is using five machines to prove up reserves on the property and, to date, has outlined 1.4 million oz. of reserves and resources. Four drills are testing for the deeper sulphide ore. Two rigs are drilling below the Anuiri pit, one is aimed at finding sulphide reserves under the Brahima pit, and another is searching for sulphide ore in the Grid X area. Below the Aniuri pit, sulphide reserves have been drilled off at 50-metre centres to a depth of 150 metres and along a strike length of 800 metres. This block contains a calculated reserve of 1.4 million tonnes averaging 4.66 grams per tonne.

Before sulphide mineralization can actually be mined, ScotiaMcLeod suggests that Eden Roc will need to develop at least 1 million oz. in sulphide reserves. This could then support a 100,000-oz.-per-year, open-pit operation which would eventually become an underground mine with ramp access and mechanized open stoping.

Capital costs for this type of operation would likely be between US$70 and US$90 million. Other capital costs estimated by ScotiaMcLeod for the next 3-year period include US$18.75 million for oxide mining and US$9 million for exploration.

The firm’s analysts believe Eden Roc is rendered speculative by the risks associated with finding sulphide reserves, as well as by lower-than-expected production from heap leaching (due to high rainfall) and the fact that the company’s portfolio consists of only one major property.

Nevertheless, there is an upside potential. ScotiaMcLeod estimates a net present value of $3.45 for Eden Roc shares. By adding an additional 500,000 oz. to the reserve figure, the net present value increases to $4.90 per share. In addition, every 100,000-oz. increase in reserves is estimated to increase the target price by 38 cents.

Should the price of gold hit ScotiaMcLeod’s forecast price of US$400 per oz., another 75 cents could be tacked on to Eden Roc’s net present value. Finally, by adding a normal 30% premium to the net present value, ScotiaMcLeod arrives at a target price for Eden Roc of $7.35 per share.

At present, there are almost 41 million shares issued, (41.4 million on a fully diluted basis). Shares ended the 1994 trading year at $4, closer to their 52-week low of $3.20 than to the 52-week high of $9.25.