Investment Comment Battle Mountain lacks gold reserves

Battle Mountain Gold (TSE), the subject of a report by Barclays de Zoete Wedd of London, is short on reserves in comparison to other companies of its size and even though the Houston, Tex.-based outfit is setting aside $20 million to address the problem, analysts Alan Richards, Jane MacKelvie and Jeff King are advising investors to speculate elsewhere.

“We believe Battle Mountain to be fairly valued at the current price — $23 recently on the Toronto Stock Exchange — and would therefore switch into a stock with better growth prospects,” they said. Similar-sized competitors like Newmont Gold, Echo Bay Mines (TSE) and American Barrick Resources (TSE) are suggested as alternatives.

While Battle Mountain’s first quarter earnings increased to $15.8 million as a result of higher gold prices and increased output from three mines, Newmont Gold and Barrick were announcing 30 million oz of new reserves at the Goldstrike and Post claims in Carlin, Nev.

Echo Bay was also spending $50 million for a significant stake in the Muscocho Group of companies which expect to produce some 100,000 oz gold next year from the Magnacon and Magino projects near Wawa, Ont. Noramco venture

By comparison, Battle Mountain recently pulled out of a proposed $40-million deal which would have given it a 40% joint venture interest in three Ontario properties controlled by Normanco Mining (TSE) and affiliate Zahavy Mines (ASE).

They were to include the Golden Rose mine, Pickle Crow and Favourable Lake projects in Ontario which are expected to produce 180,000 oz gold, two million oz silver, 42 million lb zinc and five million lb copper by 1990.

Under the proposed agreement, Battle Mountain was scheduled to take a 10% interest in Noramco, including an option to acquire newly issued shares to gain a 20% stake in Noramco’s exploration company Golden Day Mining (ME).

No reason was given for the decision not to go ahead with the deal but it is significant in light of available reserves at the company’s operations.

For example, the Fortitude mine in Nevada, which produced 255,000 oz gold last year, can be sustained for only six more years based on current reserves. Battle Mountains’ new Pajingo mine in Australia is expected to produce 60,000 oz this year, but reserves are only sufficient for an 8-year mine life, the Barclays report says. Exploration strategy

In fairness to Battle Mountain, the company is attempting to deal with the reserve situation via an aggressive exploration strategy outlined in the 1987 annual report.

“Reserve replacement is obviously vital to the company,” said Douglas Bourne. “Ideally, the company would like to maintain a reserve life of seven to 10 years on a perpetual basis, while at th same time increasing production steadily,” he said.

While Battle Mountain’s relatively short reserve life has been of primary concern to investors, according to the Barclays report, the Houston company can still boast some considerable operating successes.

With two new U.S. projects — the Canyon Placer and San Luis — waiting in the wings, the Houston company is expected to increase its output by 30% from 1987 levels to 348,000 oz next year.

Located about three miles from the Fortitude mine, the Canyon Placer is expected to produce about 10,000 oz this year rising to 18,000 oz in 1989. At a cost of $4.5 million, Battle Mountain will build a gravity separation plant this year and cash operating costs are estimated at $194 per oz. San Luis

The San Luis project in Costilla Cty., Colo., was acquired last September for $6 million in cash and securities. After completing 243 drill holes by November the company estimates that in-situ geologic reserves in the east and west zones are 20 million tons grading 0.034 oz or about 680,000 oz.

Production at San Luis will begin next year at a rate of about 40,000 oz gold annually after Battle Mountain spends $18.5 million on production facilities.

Meanwhile, the Fortitude mine is one of North America’s lowest cost producers ($121 per oz) and operating costs have fallen as the pit stripping ratio has decreased to 6:1 this year from 10:1 in 1987. At the nearby Surprise deposit, one of a series of four satellite lower grade deposits under development in the Battle Mountain area, ore is being treated at the Fortitude mill to ensure 90% recovery levels.

Production costs at the Pajingo deposit where the plant is capable of producing 60,000 oz gold and 210,000 oz silver annually, are estimated at $149 per oz. Current reserves at Pajingo are also estimated at 360,000 oz averaging 0.289 oz gold per ton but the orebody is open at depth and Battle Mountain will look for extensions when open- pit development is well under way.

Based on a gold price of $450(US), Richards, MacKelvie and King are forecasting $54 million or 83} per share this year, rising to $62 million or 96} per share in 1989.