Analysts question Hemlo’s ability to benefit from deal

Hemlo Gold (TSE) President John Harvey says Noranda’s (TSE) recent offer to sell its gold assets to Hemlo in exchange for $80 million worth of shares is geared to providing a springboard for future growth.

But the timing and size of that growth depends on the outcome of feasibility studies under way at Noranda’s Harker-Holloway, Ont., and Brewery Creek, Yukon, projects and on successful permitting at the New World property in Montana, says Harvey.

As Harvey is bullish on the joint venture east of Timmins, Ont., of Noranda with 60% and Glimmer Resources (VSE) with 40%, it too could figure in the Hemlo expansion picture even though it hasn’t reached the feasibility stage.

While Noranda’s 55% stake in the marginal (at current prices) Silidor gold mine in Quebec should add about 30,000 oz. annually to Hemlo’s short-term output, that increase will come at the expense of higher production costs.

This year, output at the Golden Giant mine, Hemlo Gold’s only producing asset, will drop slightly to 424,000 oz. from 442,300 oz. in 1990, while production costs will rise slightly to US$126 per oz. from US$124 last year.

Harvey says he is unable to predict how much Hemlo Gold’s output will increase over the next 2-3 years even though the offer includes about 300 gold exploration properties in North America, Australia and South America.

As a result, analysts are looking very closely at the assets Hemlo is acquiring before passing judgment on the company’s growth potential.

“My gut feeling is that the offer isn’t the salvation that Hemlo Gold needs,” said Ron Coll, an analyst at McLean McCarthy in Toronto. “We don’t know yet that Harker-Holloway is commercially viable and production costs will be higher than at Golden Giant.”

Having outlined 4.7 million tons of 0.24 oz. gold per ton at Harker-Holloway, the 60% Noranda and 40% Freewest Resources (TSE) joint venture is attempting to build up enough reserves to justify going underground. As reported (T.N.M., April 1/91), feasibility results are expected this summer.

Cyanide leach tests on bulk samples extracted from the Brewery Creek project showed encouraging recoveries ranging from 76.3% to 90.7%, according to figures released by operator Noranda.

But as preliminary reserves totalling 11.1 million tons of 0.052 oz. would support only a small heap leach operation, partners Noranda 25.5%, Hemlo Gold 25.5% and Loki Gold (TSE) (earning 49%) are spending $3.5 million this year in a bid to find enough ore to generate a minimum of 50,000 oz. annually.

Crown Butte Resources’ (TSE) New World gold-silver-copper project in Montana could produce about 30,000 oz. more than that annually, according to a feasibility report tabled recently by Noranda. But as the scarn project is close to the eastern boundary of Yellowstone National Park, analysts are concerned that it may become a target for environmentalists.

Hemlo Vice-President Joe Baylis believes it will be 1994 before permitting is complete and work crews can begin construction of a 1,000-ton-per-day mine that is expected to cost around $80 million.

But Harvey says the Mineral Hill gold mine, owned jointly by Inco (TSE) and Homestake Mining (TSE), is also in the vicinity of Yellowstone so there is no reason why New World can’t eventually be brought into production.

By completing a feasibility study on 8.38 million tons of grade 0.18 oz. gold (uncut), 0.75 oz. silver and 0.69% copper, Noranda has earned a 60% stake in Crown Butte.

Since the offer was announced May 1, Hemlo’s 87.5 million issued shares, 50.4% of which are already owned by Noranda, have risen to $9.13 from $7.88.