Placer Dome: North American favorite

What North American gold stock do institutional investors favor? Placer Dome Inc. (TSE). According to analysts Rick Cohen, Brian Flower and Elaine Howell of James Capel & Co., shares of Placer Dome represent “possibly the best proxy for North American gold companies.”

This bullish assessment is based on several compelling facts. The first is a growing earnings profile moving from 81 per share in 1989 to $1.10 per share by 1993, the Capel analysts forecast. This is based on a gold price of $400(US) per oz. This growth in earnings will come from new gold mining projects coming on stream over the next several years, principally from the Pacific Rim.

New projects will boost gold production from 833,000 oz this year to more than 1.2 million oz by 1991. The average cash cost per oz next year is estimated at $208(US).

The bulk of this production will come from the Misima and Porgera deposits in Papua New Guinea. Construction at Misima began in early 1988 with mine commissioning scheduled for the first quarter of 1989. With a capital cost of $261 million(C), Misima will produce 200,000 oz of gold and 1.3 million oz of silver per year during its 10-year operating life. Cash costs are estimated at $133(US) per oz of gold.

At Porgera, a production decision is expected during the second half of 1989. The $700-million mine will initially exploit a 5-million tonne zone grading 26.5 g per tonne (0.77 oz per ton). Thereafter, average grades will drop to 3.5 g per tonne (0.1 oz per ton) in the remaining 78.6 million tonnes. Total contained gold in this massive deposit is 13.1 million oz with 28.6 million oz of silver. Over the first six years, gold output will be an impressive 800,000 oz per year, of which Placer Dome’s share will be about 240,000 oz.

Other important sources of gold from non-Canadian mines are the Kidston operation in Australia at 110,000 oz this year and Big Bell, which enters production next year at an annual rate of 60,000 oz. North American gold prod uction is led by a group of six Canadian mines; the largest being the Campbell Red Lake in Ontario. Campbell produced 236,000 oz this year. Three smaller mines in the United States turn out a total of 155,000 oz per year.

An analysis of the company completed by Capel concludes that Placer Dome has a net asset value of $23(C) per share based on 234.4 million issued shares. However, the shares trade at a price of $16.25 which represents a discount of 29%.

With more than $850 million in cash and long-term debt of $111 million, Placer is capable of making a sizeable acquisition. Failing that, the James Capel analysts feel that the company may decide to reduce its cash pile via a special dividend of up to $3 per share.