Investors should give juniors more respect, analyst says

The following is the text of a presentation made recently at The Gold Show ’88 in New York City.

My recent major recommendations among Tier 1 gold stocks were Lac Minerals, Echo Bay Mines and American Barrick Resources. You might well ask what these companies have in common with emerging producers, but it might be interesting to consider where these companies were six or seven years ago.

If memory serves me correctly, Echo Bay was criticized for paying too much money for an out-of-the- way iron formation above the Arctic Circle; American Barrick’s predecessor company had negative shareholders’ equity, and Lac consisted of a group of companies, none of which generated much excitement at the time. The only respectable precious metal producers were Homestake, Dome Mines and Campbell Red Lake, and a good many investors weren’t too sure about them either.

The point of these examples is to demonstrate that some very large companies were emerging companies a relatively short period of time ago and that, in all likelihood, a few years from now at least some of the companies present at this convention will be major producers as well.

In the past, many companies have complained with some justification that analysts, particularly those with larger firms, have paid little attention to them. There were a number of reasons for this even though as analysts we are aware of the fame and fortune to be derived from identifying the next Echo Bay. Primarily, it was due to a very heavy workload that permitted little time to spend on anything but the largest companies.

Fortunately things are changing. It’s more respectable to be a precious metals analyst these days. Furthermore, these stocks make up a much greater percentage of the index (especially in Canada) and most of us now have far greater resources than before, including full-time assistants. On the other hand, I would point out that more analysts now come from an engineering or geological background and the amount of detailed information we require from companies is probably much greater than in the past.

Also keep in mind that our primary responsibility must always be to the investing public as opposed to individual companies. However, despite the fact that our longer- term objects are not always the same, I see no reason for the relationship between analysts and emerging companies to be an adversarial one. Senior producers

As analysts, most of our work is still directed towards comparative studies of the larger producers and it is probably a good idea to start by looking at some of the principal factors we use to evaluate them. Many of these same factors, of course, are applicable to smaller companies as well, but there are others that apply specifically to emerging producers which we will dwell upon a little later. Major factors * Management (operating and financial) * A foundation or “flagship” mine * A growing, low-cost gold production profile * Earnings/cash flow growth * Strong balance sheet * Genuine recovery or turnaround situations.

You will notice that I have not included two fairly popular measurement tools such as those relating to ounces of annual production per share and ounces of reserves per share. The first is certainly relevant and is really covered in the third point: the practice of using the second is not normally worthwhile as it is inherently subjective. Reserve calculations not only differ from company to company, but even from deposit to deposit. Emerging producers

Although some of the above factors are applicable to emerging companies, there are certainly differences as well. In general, we have to look at companies more in conceptual terms, as we simply do not have the numerical data to work with what is available from larger companies.

More specifically, we will begin by discussing two major points: * Management (operating and financial) * Location (North America vs Offshore)

It probably goes without saying that management is at least as important for an emerging company as a major one. Analysts must have someone, particularly on the technical side, whom they find reliable, has the necessary operating background and experience, and is readily available to talk to us.

Furthermore, it is probably advisable to start in the United States or Canada. The goal is to get analysts to start following your company on a regular basis and this includes regular property visits. In terms of time, money and the availability of supporting data, we tend to find that it is a lot easier to work with companies that, at least initially, have most of their prospects in North America. Also, whether justifiable or not, North American- based producers do command the highest earnings multiples.

Other considerations are as follows: * Holding companies vs operating companies * Heap leaching vs conventional mining * Multiple properties * Regular updates.

To begin with, we see nothing wrong with the practice of forming a partnership with a much larger company that normally would become the operator. It’s a good place to start as a smaller company often gets access to regional data, financing and operating expertise that would not otherwise be available.

In short, 50% of a successful mine is a whole lot better than 100% of one that loses money. However, at some point, an emerging company would be wise to manage a major share of its annual output. Companies that are perceived as holding companies usually command a significantly lower earnings multiple than other precious metal stocks.

Turning to the second point, I would not suggest for a moment giving up a promising prospect just because it requires conventional milling. Instead, I would just like to highlight two distinct advantages of heap leaching: the relative speed and ease with which they can be brought into production and secondly, their much lower capital requirements. Some analysts believe that heap leaching operations tend to command a lower multiple but, even if this is true, the advantages outweigh the disadvantages.

Concerning the third point, a good case could be made that a company should concentrate solely on bringing a prospect into production but I believe that having a second or third property adds another dimension to an emerging company.

And finally, I would like to conclude with a few remarks on the subject of regular updates. We as analysts are aware that mining is not an easy business and that the development of new deposits seldom, if ever, runs as smoothly as anticipated.

However, whether the news is good, bad or indifferent, I would stress that it is important to keep analysts and shareholders informed although I would be the first to admit that some companies go overboard in this respect.

Also, it is important that analysts have ready access to someone in the company who is knowledgeable about each operation or can quickly obtain the information we require. Michael Steeves is senior financial analyst at McLeod Young Weir Ltd.