Potential gains overshadow risks in Hemlo lawsuit play

In Wallaceburg, a farming community of about 11,500 in southwestern Ontario where soybean futures are a favored investment, the stock market high rollers are playing the Lac Minerals and International Corona Resources lawsuit.

“Since this summer we’ve bought Lac for our clients at $20- $25,” says John McCallum, a Wallaceburg-based broker with Dominion Securities Pitfield.

“Lac’s a good quality mining stock. The upside is $75, the downside is $20-$25.”

It’s those thoughts of possibly tripling their money — and on good quality investments regardless of the courtroom results — that has some brokers and investors fairly salivating. Lac has traded over 687,400 shares in the week ended Nov 11 and moved up almost $2.50 to $29.62 while Corona was almost as active and moved up $5 to $31.38.

The potential for losses, such as those suffered by thousands of investors on the same play just nine months ago, seem to be forgotten.

After the initial decision was handed down Mar 7 by Ontario Supreme Court Justice R. E. Holland awarding the largest of the three big Hemlo gold mines to Corona, Lac’s stock tumbled from $42 to $17. Lac has taken that decision to the Ontario Court of Appeal where two weeks of hearings were due to begin Nov 17.

Just prior to the Mar 7 decision Lac stock had been pumped up to an all-time high on speculation that the big mining company couldn’t lose. When it did, millions of dollars were lost.

“Some portfolio managers who bought Lac unhedged got their behinds whipped,” says David James, a gold analyst at Richardson Greenshields’ head office in Winnipeg. Some lost their jobs.

Since then, however, Lac has climbed back to as high as $31, and Mr McCallum’s strategy of going long on Lac has done well.

Mr McCallum has also been buying Lac call options “deep in the money and near to expiry” as a more aggressive, leveraged play on the lawsuit. Buying those options gives him the right to buy Lac stock at a lower price than the current market value. Although he pays a substantial premium for that right, the option value increases in step with the rise in Lac stock but translates into a higher percentage gain.

“There’s lots of players,” says Mr James. “There are option strategies, short positions, buying Corona through Royex — every possibility you can imagine.”

Mr James himself has suggested buying Campbell Red Lake. Just before the Mar 7 decision, Campbell bought a 4.6% interest in Lac for $44.7 million, then took an $18.6-million writedown in the first quarter of 1986 as a provision for the decline in Lac’s market value when the decision went against it.

The market seems to have forgiven Campbell for that, so the downside of buying Campbell is small, says Mr James. It could, however, gain considerably should Lac be able to salvage something from that original decision.

Although Lac is seeking to have the trial decision overturned completely, there is some speculation among brokers and analysts that the court could uphold the original decision but alter the award so that Lac ends up with a percentage of the mine.

There have also been many rumors about an out-of-court settlement, fuelled by news that the property vendor has dropped her intervention in the appeal saying she does not object to the transfer of the mine to Corona as directed by the trial judge.

Company officials on both sides say no such settlement has been discussed and analysts say the personalities of the key people involved — the patrician Peter Allen, president of Lac, and street- smart Ned Goodman, a director and guiding force behind Corona — lessen that possibility.

But interest in the case doesn’t automatically translate into investment. Several brokers tell The Northern Miner they’re advising against it because of the high risk involved.

“Never buy or sell a lawsuit,” says Gordon Fancy at Richardson Greenshields in Toronto. Most of his clients have been standing aside on this one, he says.

Paul Piazza at Merit Investment says he has had lots of inquiries,but he’s advising against playing the situation.

“There are so many other interesting situations where they can do better,” he says.

While Lac and Corona are the principle companies involved in the lawsuit, Teck Corp. has an agreement with Corona to split all Hemlo interests on a 50-50 basis. Royex Gold Mining is also affected through its 38% interest in Corona.