Investment Comment Golden Giant a boon to Hemlo Gold

When it was revealed recently that stock promoter Charles Stuart will test Ontario’s Mining Act after restaking 148 claims in the Hemlo, Ont., gold belt, the reponse from the mining industry was mixed.

Some say Stuart has l ittle chance of winning an expensive courtroom battle for the claim block which is currently under lease from the Province of Ontario to Noranda Inc. (TSE).

Others maintain that the existence of the Golden Giant mine on 12 of those claims makes the huge legal costs worth the risk. But whatever the outcome, a recent research report by Merrill Lynch Canada, offers an interesting insight into the effect that the Golden Giant could have on the shares of operator Hemlo Gold Mines (TSE).

They were trading recently on the Toronto Stock Exchange at $15.13 in a 52-week range of $29.13 and $13.50.

While Hemlo Gold has a number of interesting properties in its portfolio of exploration plays, the Golden Giant mine is the company’s principle asset. It’s (the mine’s) current and future performance is the main reason why Hemlo Gold has emerged on Merrill Lynch’s recommended list. Regarded as one of the largest and lowest cost producers in North America, the Golden Giant produced over 369,000 oz gold last year at an average operating cost of only $95(US) per oz. Golden Giant

Held by Noranda through a 50% stake in Hemlo Gold, the Golden Giant is expected to maintain a level of 350,000 oz during its 18-year lifespan, said analyst Catherine Gignac who regards the mine as an excellent source of cash.

On Dec 31, Hemlo Gold was in a strong financial position, with $47.5 million in net working capital including approximately $100 million in cash and short-term liquid investments.

Operating income during the first three months of 1988 was $31.8 million compared to $12.3 million in the first two months of 1987. (Hemlo Gold’s operating subsidiary was encorporated on Feb 2, 1987 through the amalgamation of Noranda Hemlo Inc. with Golden Sceptre Resources and Goliath Gold Mines).

As a result, Gignac rates the shares above average for intermediate and long-term appreciation.

In 1987, 975,536 tons were mined from Golden Giant at an average grade of 0.39 oz gold per ton. Recovered metal totalled 369,300 oz gold and 12,800 oz silver. According to Gignac, production levels were higher than anticipated and higher grade and mill recoveries contributed to the increased total output. Additional growth

Strengthened by the quality and longevity of the Golden Giant mine, Hemlo Gold is expected to continue to demonstrate additional growth through exploration and property development as well as through future acquisitions, Gignac says.

They include the Eagle River gold claims near Wawa, Ont., where joint venture partner Central Crude Ltd. (TSE) recently announced 15 separate zones at a 5,300-ft stretch at the centre of the property.

As operator on Hemlo Gold’s behalf, Noranda Exploration has two drills on site and is preparing to move a third deeper drill to probe the No 8 zone, where most of the action has centred below 500 ft.

Noranda is acting in an operating role because of an exclusivity clause agreed to when Hemlo Gold was incorporated. (It prohibits the former company from acquiring ground within a defined area of the Golden Giant which includes Mishibishu.) Hemlo currently holds a 14.1% interest in Central Crude.

Among its other assets, Hemlo Gold holds a 12% interest in Viceroy Resources (TSE) which is bringing the Castle Mountain deposit in southern California to a production mode. Geological reserves

Outlined mineable reserves at the heap leach project stand at 25.9 million tons grading 0.055 oz gold. In addition, drilling has encountered three new mineralized zones with a combined geological reserve inventory of 13.4 million tons grading 0.046 oz.

As reported (N.M., May 2/88), Hemlo Gold is financing Windarra Minerals’ (VSE) 25% participation in the Magnacon gold project near Wawa through a $7.5-million gold loan.

Windarra and partners Flanagan McAdam Resources (TSE) and Muscocho Explorations (TSE) are spending $29 million this year at Magnacon to bring the mine into production at a rate of 600 tons per day.

Under an agreement in which Hemlo winds up with a 24.3% interest in Windarra and a 25% stake in the latter company’s Eastern property at Mishibishu Lake, the gold loan is repayable out of 80% of Windarra’s cash flow from Magnacon.

Hemlo Gold’s first quarter revenues increased to $51.5 million from $23.2 million at the same time last year.

With the Golden Giant mine continuing to perform at its current rate, Gignac sees year-end earnings of 69 cents per share (based on a $450(US) per oz gold price rising to 74 cents in fiscal 1989 if the price of gold goes up to $475(US) per oz.

Promoter Charles Stuart may want to keep that in mind as he prepares to test both Noranda and the Ontario Mining Act.