Kenora bets not to overlook

Since the beginning of January, second-tier Canadian gold stocks — companies on stream to production or clearly prospective new producers in advanced stages of exploration — have by and large come to life and delivered handsome market returns. Cases in point are Hycroft Resources, Aur Resources and Granges Exploration.

While Richardson Greenshields of Canada mining analyst David R. James continues to emphasize these recommendations, he notes that companies with projects whose economics would materially be enhanced by say $500(US) gold should not be overlooked.

Two such companies are Consolidated Professor Mines and Nuinsco Resources. Both are in advanced stages of exploration on two gold deposits in the Kenora area of northwestern Ontario. These projects are not yet committed to production but the current underground programs will lead to production decisions probably within the year, he says. Both companies are funding their projects from the sale of flow-through shares. Duport project

Cons. Professor Mines’ Duport gold project is located at Shoal Lake, about 28 miles west of Kenora. The property has a long history dating back to 1897 when shaft sinking on Cameron Island was initiated by the Duport Mining Company.

In 1973 Cons. Professor optioned the property and subsequently acquired the company itself. Through expenditures of its own and by joint-venture partners, including T.R.V. Minerals, Selco and Union Carbide, Cons. Professor has seen some $9.5 million in exploration spent on the property.

A final $4-million phase of underground exploration should bring the project to the decision stage by mid-year.

It is not an easy project, says Mr James, as the deposit lies below Shoal Lake with ramp access from nearby Steven Island and the gold is associated with arsenopyrite, requiring roasting for liberation.

However, the amount and quality of work done sets the Duport project at an advanced stage and the mining economics look much brighter if a $500 gold price is assumed.

Reserves in the proven, probable, possible and inferred categories total 1.5 million tons of 0.34 oz gold per ton.

The current underground program is funded by $4.5 million raised via agreements to place flow- through and ordinary common shares with Conwest Exploration and other investors.

Work includes driving the decline a further 1,000 ft to the 660 ft level, drifting to the new north extension, interlevel raising and extensive underground diamond drilling. The program should be complete by June and a production decision could then be addressed. 400 tpd mill rate

Startup could be seen some 18 months later. Current planning is for a 400-ton-per-day milling rate (higher mining rate due to break- up and freeze-up period) with the capital cost including a sulphide roaster, projected in the $30-to-$32 million range.

Assuming an 0.3 oz per ton diluted grade and 85% recovery rate, annual gold production could be in the 35,000 oz range.

Demonstrably the Duport project is highly leveraged to gold prices. Assuming operating costs of $90 per ton and interest on $30 million at 5%, payback at $400 gold looks like about six to seven years, but only three and a half years at $500 gold.

An earnings projection can be made but is highly dependent on what capital base is attributable to the project. Total exploration expenditures by Cons. Professor and past partners may total $13.5 million up to the production decision point and adding a further $30-$32 million in capital costs could lead to a figure in the $45-million range to be written off over some 10 years.

At $400 gold, earnings are about nil but going to $500 gold, earnings rise to the $2.5 million or 20 cents per share region. Such projects must be viewed as very preliminary at this stage, cautions Mr James.

If all of the recent financing of flow-through shares, straight treasury shares and warrants are exercised, Cons. Professor should have about 13 million shares issued, some 21% owned by Conwest and 15.4% owned by T.R.V. On a fully diluted basis, Cons. Professor has a market capitalization of under $20 million.

The company trades on the TSE at about the $1.75 level with a 52-week high and low of $1.85 and 85 cents respectively. At the time of Mr James’ report, the company was trading at $1.40. Nuinsco/Echo Bay

Nuinsco’s Cameron Lake gold deposit is located about 50 miles southeast of Kenora and is now accessible by road. Since February, 1985, Nuinsco has been funding both the Cameron Lake and nearby Monte Cristo gold projects by flow- through share financing with Echo Bay Mines. Lockwood Petroleum is being diluted to a 10% net profits interest.

Reserves in the Main deposit stand at 1.6 million tons grading 0.16 oz per ton of which one million tons grades 0.l2 oz including a higher grade component of 516,000 tons averaging 0.258 oz.

Last September Echo Bay said yes to a $3.6-million underground exploration program on the project including the driving of a 2,700 ft ramp to the 425-ft level, drifting, crosscutting and underground drilling to prove grade and reserves to this level.

If successful a second phase will involve extending the ramp to the 825-ft level. This phase would take about four months and should bring the project to the decision stage late this year.

Assuming a positive decision, startup could be seen in less than 24 months. At this time, modelling on the basis of a 750-ton-per-day operation would imply a minimum 6-year mine life with the initial year’s production in the order of 58,000 oz of gold and tailing off thereafter.

The capital cost of this scale of operation is projected at $35 million and payback at $400 gold should be in the order of two and a half years to three years or about two years at $500 gold.

Assuming operating costs of $60 per ton, interest expense of $35 million at 5%, an 8-year depreciation base and a full provision for deferred taxes, Nuinsco’s earnings in the first year of operation can be projected at $5 million or 40 cents per share (fully diluted) at $400 gold and $9 million or 70 cents per share at $500 gold.

Following the completion of the phase one and two programs, Echo Bay will have earned a 49.27% equity interest in Nuinsco which will then have 12.9 million shares issued on a fully diluted basis.

In today’s market, a fully-diluted Nuinsco is capitalized at only about $25 million. The equity participation by Echo Bay is a most encouraging endorsement, says Mr James.

Nuinsco trades on the TSE at the $2.55 level with a 52-week high and low of $2.60 and $1.08, respectively. At the time of Mr James’ report the shares were at the $2.20 level.