MINING MARKETS AND INVESTMENT NEWS — Investment Commentary — First Marathon analyst gives nod to River Gold Mines

Kerry Smith, mining analyst for First Marathon Securities, has recommended River Gold Mines (RIV-T) as a “solid, long-term holding” for all small-cap and resource accounts.

The junior has 30.8 million shares outstanding (31.5 million fully diluted); about 40% of the company’s equity is held by Western Quebec Mines (WGM-T).

River currently trades at about $3.60 and has had a 52-week range of $4.70 to $2.70.

River Gold operates two small gold mines — Eagle River and Edwards — and a central milling complex near Wawa, Ont. Smith notes that after only two years of operation at Eagle River, the company is profitable, pays a dividend and delivers one of the highest levels of cash flow per ounce in the small producer group.

“The company operates prudently and carefully, and is able to generate earnings and cash flow even without the benefit of hedging,” Smith writes.

“With no plans to hedge any production, the company remains fully exposed to any rally in the gold price.”

River Gold’s production totalled 75,484 oz. gold at a cash cost of US$211 per oz. last year. Production this year is expected to remain at similar levels.

At Edwards, ore is stockpiled; processing is anticipated for only two months this year, producing about 15,000 oz. gold. As operator, River Gold receives all cash flow until payback of costs. Thereafter, profits are shared equally with the mine’s owner, VenCan Gold (VCG-T).

Reserves at Edwards are pegged at 156,000 tonnes grading 12.09 grams gold per tonne. The much larger Eagle River mine has reserves of 1.16 million tonnes grading 10.91 grams gold.

At Eagle River, River Gold plans to spend $2.5 million this year for the first phase of a shaft-sinking to the 220-metre level; the final depth of 700 metres should be reached by late 1999. Access is currently by a decline ramp.

Smith says this development will greatly increase the reserve potential, as current production is from above the 240-metre level. He notes that previous drilling has identified ore grades over minable widths up to 550 metres below surface.

Smith tempers his rosy outlook for River Gold with the caveat that the company has a negative working capital of about $3.5 million, which puts the company technically in default of certain loan covenants. However, no action by the lender is expected as a result of this breach, and Smith says management “recognizes the need to improve balance-sheet strength in 1998.”