MINING MARKETS AND INVESTMENT NEWS — Investment Commentary — Analyst sees upside for Quebec-based McWatters Mining

Operating narrow-vein, underground gold mines in Canada requires technical skill and financial staying power, particularly in times of low gold prices.

Though relatively new to the game, McWatters Mining (MCW-T) is attracting attention from mining analysts looking for undervalued companies with potential for growth, as well as potential for higher earnings once prices for the yellow metal improve.

Mark Smith, analyst for C.M. Oliver, rates the intermediate gold producer a buy and sets a 12-month target of $3.35. The shares are currently trading at $1.85, which Smith says is “just above our [current] target, based on a long-term gold price of US$300 [per oz.].”

He points out that when Placer Dome announced plans to sell the Kiena and Sigma mines in late 1996, few could have imagined that the winning bid would come from the small junior. In the fall of 1997, after months of negotiations to reduce its original US$70-million offer, the company completed the US$55-million purchase of the two producing mines, both of which are in the Val d’Or camp, and 16 exploration properties.

“This single transaction has vaulted McWatters from an unknown junior explorer to the second-largest gold producer in Quebec,” Smith notes in a research report. “Together, these two mines should produce approximately 183,000 oz. gold in 1998 at an average cash operating cost of US$257 per oz.” Smith gives the nod to McWatters’ proven assets and experienced mine management. “The transition of mine ownership has been smooth,” he says.

“All of the key members of Placer Dome’s Kiena and Sigma mine management and operations team confirmed their confidence in the mines when they elected to leave Placer Dome and join McWatters.”

The analyst says the company is undervalued because “the market is not giving fair value for future production.” Specifically, he cites the total resource base of 3.1 million oz. at Kiena and Sigma — compared with minable reserves of 1.1 million oz. — and notes that the mines have an established record of bringing resources into the minable category. Both began production in

the 1930s.

“We anticipate that more than 30% of the possible resources will be transferred to the proven and probable reserve category,” Smith writes.

“This is sufficient for more than nine years of production at Kiena and 10 years at Sigma.”

On the exploration front, Smith points out that underground mines in the Val d’Or camp typically extend to depths of 2,000 metres. “Both Sigma and Kiena have excellent downdip potential to add to the resource base, as do satellite deposits at Kiena. The key to the future is the downdip, unexploited resource on the 100%-owned Lamaque property, which is adjacent to Sigma. McWatters has already identified oreshoots on the Lamaque property and is developing those resources.”

Smith does not ignore the fact that Sigma and Kiena are aging mines with relatively high costs. His report includes details of McWatters’ $23-million development and exploration program, which is aimed at expanding reserves, developing more production stopes, increasing production rates and lowering mining costs.

He also describes the company’s liquidity as “a problem,” in that the issue doesn’t trade some days. And he says there still remains “the question of Minorca’s 31% ownership, and that company’s intent to increase its holdings.

“We feel it is Minorca’s intention to increase its current ownership, and that there is a likelihood they will have to pay a premium to market,” Smith writes. However, he cautions that Minorca would require additional financing to execute this plan, as the company has less than $11 million in its till after having bought minority interests in five other resource companies.

“Minorca’s other option is to merge with McWatters,” he notes. “While we are not certain how this story will unfold, we feel that some marriage between the two entities is a strong possibility.”

McWatters has 41.6 million shares outstanding (49.4 million fully diluted), with more than 50% of the issue held by three major shareholders: Minorca, with 31%; Placer Dome, with 18%; and Caisse de Dpt, with 12.6%.