Invest Comment Report studies effect of gold slide

As the mining industry wakes up to a sub-$445(US)-per-oz gold price, investors may be wondering what effect this will have on their favorite gold stocks.

Since many of Canada’s junior and senior gold producers have based their financial expectations on a minimum $450-per-oz, it’s a concern that a number of investment houses are attempting to address.

A mere two months after gold nudged past the $500-per-oz marker, the price of gold dropped below $440(US) as an unconfirmed rumor about a major nuclear disaster in the Soviet Union triggered panic selling in Europe.

With U.S. trade figures indicating that the U.S. dollar may have bottomed out, and with a mild recession on the way, gold’s current malaise is expected to continue at least for the near term.

Reports that Newmont Mining of New York is borrowing one million ounces of gold from The Bank of Nova Scotia to pay down its huge debt load, is another negative factor on the gold horizon.

With that in mind, Brown, Baldwin, Nisker, of Toronto has released a report designed to offer some defensive strategies for investors concerned about an uncertain gold market.

The report doesn’t attempt to outwit any of the star gazers who are attempting to predict what the price of gold will be this time next year. It simply looks at the likely performance of 12 leading gold producers in the event of a sustained decrease in the price of gold. Production costs

Household names like Hemlo Gold Mines, Placer Dome, American Barrick Resources and Lac Minerals are ranked under a number of different scenarios including cost of production and growth in production.

The calculations that follow are based on fully diluted shares, Baldwin says:

* Growth potential — Even if gold remains at $440-per-oz or below, American Barrick still ranks well ahead of the field. Due almost entirely to production increases at its Goldstrike mine near Elko, Nev., Barrick offers a 110% growth rate by 1990.

Boosted by production from subsidiary Mascot Gold’s Nickel Plate mine in British Columbia, Lacana Mining will experience similar growth (97.8%) to American Barrick, say analysts Rick Cohen, Jonathan Goodman and Bill Richardson.

With operating costs of about $185 per oz and a substantial amount of earnings from their oil and gas operations, Lacana appears inexpensive relative to the group, they say. Sudden drop

* Cost per oz of production: — With production costs at $110 per oz, Hemlo Gold Mines, appears to be insulated from a sudden drop in the price of gold. According to the report, International Corona Resources ($140), Teck Corp. ($140) and Royex Gold ($145) do not get a similar valuation due to the uncertainty involving the legal dispute with Lac Minerals over the Page Williams mine at Hemlo.

* Earnings estimates — “Although we originally anticipated significant earnings declines, the impact of lower gold prices upon earnings was less dram atic,” the Baldwin report says.

Many gold producers (including International Corona Resources, and Mascot Gold) have gold loans, forward sales and puts to cover their 1988 production. “Any way you look at it the gold companies will report a profit in 1988, but their cash flows may be lower,” say analysts Cohen, Goodman and Richardson.

For example if the gold price dropped to $360 per oz, Barrick’s 1988 per share earnings would experience a corresponding 7 cents decline, the report says. Hemlo Gold’s per share earnings would also drop by 18 cents from 87 cents . Since Lac Minerals has already sold 285,000 oz for 1988 at $485 per oz, the company’s earnings would remain at 38 cents .

With earnings support from a $409-per-oz gold loan Mascot Gold’s earnings would also decrease from 97 cents to 80 cents under the $360 scenario. Base metals

Teck and Placer Dome Inc. both have exposure to oil and gas as well as base metals which could be an advantage when the gold price is declining, according to the report. Earnings Estimates at $450 gold and $360 gold

1988 1988

($450(US) ($360(US)

gold) gold) Agnico-Eagle $1.20 77 cents American Barrick 63 cents 56 cents Battle Mountain 87 cents 50 cents Blackdome $1.15 82 cents Dickenson

Mines A 60 cents 30 cents Echo Bay 55 cents 37 cents Hemlo Gold 87 cents 69 cents International

Corona $2.80 $2.00 Kiena Gold 60 cents 35 cents Lac Minerals 38 cents 38 cents Lacana 96 cents 70 cents Mascot Gold 97 cents 80 cents Placer Dome 95 cents 65 cents Sigma 75 cents 25 cents

January’s 12.1% drop in the gold and silver index may have made a number of investors gold shy. But for those still willing to include a major gold producer in their portfolios, Brown, Baldwin has named American Barrick as its top pick with Lac and either Royex, Teck or Corona vying for second spot.