MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMENTARY — Mining analysts seek sure bets in tough market

Mining companies are being battered left and right by low commodity prices and investor apathy, with junior companies bearing the brunt of the frontal assault. That might explain why only two companies with stellar projects made the list of Canaccord’s “best mix of recommendations,” included in a recent research report. The bulk of the dozen companies that are expected to be solid performers over the next six months are in the high-technology and communications sectors.

Canaccord analyst Larry Strauss gives a thumps-up to Barrick Gold (ABX-T), while colleague David James recommends Aber Resources (ABZ-T).

Barrick is everyone’s darling these days, and for good reason: production is up and cash costs are down. The major’s balance sheet is by far the strongest in the gold mining industry, with US$389 million in cash and a total capitalization of US$4.5 billion. The company has an additional US$1.5 billion available in lines of credit.

Strauss set a $40 target for Barrick in a 52-week price range of $34.90 to $20.10. Like most analysts, he believes the company is well-positioned to take advantage of acquisition opportunities in the years ahead.

Aber, meanwhile, is attracting attention for the potential cash flow and earnings that are expected to be generated from its 40% share of the Diavik diamond mine in Canada’s Northwest Territories. James expects Diavik could begin production in 2001 or 2002.

“Two years of production from A-154 South [one of several pipes in the mine plan] at 5.2 carats per tonne and US$63 [per carat] would generate revenue of US$1 billion and an operating profit [pre-tax] of US$850-900 million,” James noted earlier this summer.

Teck also gets nod

In the same report, Strauss issues a buy recommendation for Teck (TEK-T). The diversified producer, which has traded in a 52-week range of $28.75 to $8.50, was given a target valuation per share of $24.

The report focused on the major’s development projects, which include the huge Antamina copper-zinc project in Peru, in which Teck holds a 25% interest. Along with partners Rio Algom and Noranda, Teck is forging ahead with plans to develop the US$2.2-billion project, which hosts one of the world’s largest, undeveloped copper-zinc deposits. Over its 200-year mine life, Antamina is expected to produce 600 million lbs. copper and 360 million lbs. zinc at average cash costs (net of byproduct credits) of about US40 cents per lb. Financing talks are under way.

Also highlighted is the recent resource boost at Teck’s 40%-held Pogo gold property in Alaska. Based on results from this year’s drilling, which consisted of 97 holes exceeding 91,000 ft., the project hosts 9.98 million tons grading 0.52 oz. gold per ton, or 5.21 million contained ounces. This represents a 17% increase from 1997, when resources totalled 10.97 million tons grading 0.41 oz., or 4.49 million contained ounces.

The latest calculation is based on an updated model of the deposit, which drops some minor veins and stockwork mineralization included in the previous estimate, resulting in lower tonnage but higher grade. The next phase of work will include more drilling, metallurgical testing and environmental and engineering work. Underground development is expected to begin this winter.

The report cites Teck’s 75% holding in Pacific Mining (a public company listed in Australia), whose principal asset is the Tarmoola gold mine, near Perth. This mine is expected to produce 180,000 oz. gold this year, with total cash costs projected at US$220 per oz. An expansion program is under way, along with exploration aimed at boosting reserves and resources.

“The Antamina, Pogo and San Nicolas projects are all top-tier development endeavors that the company shows no sign of dropping,” Strauss notes. “The Antamina project will require the largest capital commitment of the three but should double Teck’s base metal production. The Pogo gold project appears to be financially robust and would increase the company’s gold production by 25%, while the San Nicolas project provides Teck with exposure to the excellent exploration potential of the Zacatecas region.

“We continue to view Teck as a growth story and recommend the shares as a buy,” Strauss concludes.