Toronto Stock Exchange (December 26, 1988)

A year-end rally continued to gain strength as the composite index rolled to a 23.88-pt gain to close at 3354.88 pts on volume of 33.5 million shares. Once again, the major driving force has been the metals sector which was buoyed today by another major advance in the price of nickel. Metals and minerals advanced sharply by 59.02 pts to 3205.86 pts — that represents a 1.88% gain on the day. The healthy gains were driven by news that a tranformer at Inco Ltd.’s big Indonesian nickel plant has been damaged. The result is that a production shortfall of up to one million lbs of nickel per month will be realized until the transformer is repaired — a process that will take at least five months. Spot nickel rocketed to $9.16 (US) per lb this morning.

What this all boils down to is a return to glory days at Inco. The world’s largest producer of the metal (35% of world output), closed at $31.88 on volume of 1.3 million shares. For the very short term at least, management’s $10 (US) dividend and restructuring policy appears brilliant.

Falconbridge was also up sharply, closing at $26.13. The company is also a major producer of nickel from its operations in Sudbury, Ont. and in the Dominican Republic.

The gold and silver index was also up, adding 30.97 pts to 5387.99 pts. The gains appeared to be across the board with both majors and some mid-sized companies receiving investor attention. The second fix in London was $414.60 (US) per oz of gold.

Belmoral Mines, with a penchant for going after troubled gold mining operations, has taken over the Ketza River gold mine in the Yukon. Investors clearly don’t like the deal and dumped Belmoral stock, sending the issue to a new low of $1.25. The company is buying the 50% interest held by Canamax Resources and is merging with Pacific Trans-Ocean, which held the other 50%.

Canamax advanced to $4.90 from $4.75 whereas Pacific dived to another new low of 27 . Give Canamax the credit for biting the bullet early in the game. As for Pacific Trans-Ocean, yet another 1988 victim of the rough and tumble world of junior gold mining. No one ever said it would be easy.

Despite the setback for those two companies, most golds responded to improved buying. Placer Dome Inc. was up to $16 whereas LAC Minerals remained unchanged at $12. American Barrick Resources was also marginally better closing at 19.38; up 13 for the day.

Echo Bay Mines appears to have halted its slide which took it to a new low of $16.75 before recovering to $16.88 today. The company plans to triple its gold output at the Cove facility in Nevada.

One time highflyer Granges Exploration slipped to $3.15 this week before managing a recovery to $3.35. Galactic Resources added a nickel to $4.70.

News that the Willa gold-copper deposit in B.C. is uneconomic put more downward pressure ln Northair Mines. The issue slipped to a new low of 53 . Three years of surface and underground work failed to come up with a threshold reserve needed to place the property into production. At one time, Northair said it hoped to have the mine pouring gold in 1988.

Another junior with high hopes is Augmitto Explorations. Augmitto’s plans were radically altered after its financing prospectus was pulled. That leaves the company in deep trouble. The equity deal was a requirement of a gold bullion loan arranged with an Australian bank. The bullion loan is now in jeopardy. Augmitto is trying to build a gold mine near Rouyn, Que. The issue tumbled to 65 .

Zinc miner Cominco Ltd. made strong gains, closing at a new high of $24.38. Another winner was Cassiar which was also in new high territory of $5.38. Cassiar operates a very profitable copper mine in B.C. Minnova was also firm, advancing to $21.13.

Although many of the base metal miners are trading at or near 1988 highs, most are characterized by historically low price-earnings multiples. Major companies are still around six times. From 1964 to the late 1970s, Inco averaged well over 15 times. What this all means is that the majority (or as investment guru Jim Dines calls them, `the Herd’) still think the commodities bull market is short-lived and will evaporate sooner rather than later. The low P/E multiples are discounting future lower prices.

If the reverse is true however, and commodity prices fail to crumble in 1989, then the upside potential of the base metals sector could be enormous.