Investment Comment Prudential-Bache clarifies values for Lac,

A complicated legal dispute over the ownership of a valuable gold mine can make valuation judgments on the companies concerned a difficult business.

But when the legal battle is inadvertantly combined with the largest 1-day collapse in equity market history, the financial aftermath can sometimes make nonsense of any previous earnings predictions.

That’s largely why Toronto based Prudential-Bache Securities has produced a valuation update on the share prices of International Corona Resources, Lac Minerals and Teck Corp.

For investors who were vacationing on the moon lately, it is important to note that the three companies are key players in a bitter legal fight for control of the Page-Williams gold mine at Hemlo, Ont.

Brought to production in 1986 by Lac, it is expected to reach an annual production level of 500,000 oz gold by 1991. As reported (N.M., Dec 28/87), the Page Williams was awarded to Corona in March, 1986, by a Supreme Court of Ontario judge, who also ordered Corona to pay $154 million to Lac.

In a ruling which was later supported by the Ontario court of Appeal, the judge said Lac had breached a fiduciary relationship and used confidential information. Supreme Court

Since the Supreme Court of Ontario recently gave Lac Minerals permission to appeal the decision of the Ontario Court of Appeal awarding the mine to International Corona, resolution may be delayed for up to two years.

That was bad news for Corona and Teck Corp. which has a 50% stake in all of Corona’s Hemlo interests including the Page-Williams mine.

On Oct 4, just two days after the Ontario Court of Appeal released its

judgment dismissing the appeal by Lac Minerals from an earlier decision awarding the Page-Williams mine to International Corona, Prudential published a research report on the three companies.

Based on a value of 50% of Page- Williams and a net asset value of $36.01 per share, analyst Alan Ferry set a target price of $77.43 per share for International Corona and $54.13 per share for Teck

“Because of the growth potential in Lac’s other assets and its rich cash position, Lac shares represent good value below $14 and should be bought on weakness below this level,” said Ferry.

At that time, he predicted that Corona’s earnings would reach 75 cents per share in 1987 before rising to $2.60 per share in 1989. Under similar circumstances, he saw Teck’s 1987 earnings at 88 cents per share jumping to $3.09 per share in 1989. Market Crash

Lac earnings would be $3 per share in 1987 and $3.30 per share in 1989, he estimated.

However, the Oct 19 market crash has encouraged Prudential-Bache to revise its valuations to reflect current market conditions.

Assuming that Corona is successful in retaining the mine, Ferry has revised his target price to $66.45 per share for International Corona, $43.66 for Teck and $13.30 for Lac. In arriving at those prices Ferry says he is assuming 450,000 oz of annual production and $250 per oz of gold contained in 6.9 million oz of reported reserves.

“These parameters are based on the market capitalization rates for Hemlo Gold Mines which mines a higher grade portion of the same orebody,” he said.

According to Ferry, at a Dec 15 share price of $18.63 on the Toronto Stock Exchange, Hemlo is trading at $4,586 per oz of normal annual production (350,000 oz annually) at $264 per oz of gold contained in reserves totalling 6.1 million oz.

At a same-day price of $57 on the tse, International Corona was trading within 17% of Ferry’s upside target.

“This is a reasonable level, considering that it may take two years before Corona and Teck get control of the Page Williams mine,” says Ferry. Share Price

Meanwhile, he expects the Corona share price to drift — at press time, it had slipped back to $45.75 — and possibly under perform for an extended period. For that reason, he advises investors to switch into other gold vehicles.

Our concern is that Corona’s valuation is complicated by the inter locking shareholdings with Royex Gold which holds a 49% stake in the former company. Royex also holds a 44% stake in Lacana Mining.

While Ferry expects the Teck stock to react like Corona’s to any Hemlo developments, he notes that Teck has a much lower leverage to the Page-Williams mine. Through a 15% interest in Cominco Ltd. and a number of emerging gold producers including Golden Knight Resources, Ferry says Teck remains a long-term bet with excellent growth potential.

At press time Teck’s class B shares were trading at $33.88 in a 52-week range of $23.13 and $48.50.