Investment Comment Sulphurets makes Newhawk a buy

While fears of rising inflation and interest rates means that investment opportunities among Canadian gold stocks have been few and far between, the outlook for the price of gold appears to be good.

At least two prominent metals analysts are convinced that private sector buying in the Far East will prevent gold from falling below the $420(US)-per-oz level, at least in the near term.

“It is felt that the $422-per-oz level seen on Feb 29 was indeed a low, and that $450 per oz provides a good support level from which prices can appreciate back towards $500 per oz in late 1988,” writes David James in Richardson Greenshields’ April-May newsletter.

Even though Merrill Lynch metals specialist Ted Arnold is more cautious in a monthly review of global gold shares, he tends to support James’ moderately bullish view.

With the emergence of Taiwan and Japan as strong gold buyers (the Taiwan Central Bank is expected to buy between 300 to 400 tonnes of gold this year), we could easily see an average price in 1988 of $445-450 an oz, said Arnold.

As a result of this comforting scenario and what James calls “the excellent relative value in second- tier/evolving producer gold stock group,” the Richardson Greenshields analyst is advising investors to take a fully-weighted position in senior Canadian and second tier stock combinations. Second tier

Using a package approach to optimize marketability, James’ top picks from the second tier group include Newhawk Gold Mines (TSE) and Granduc Mines (TSE) which are currently bringing their high grade Sulphurets gold discovery to production.

With the first gold pour expected next spring and the projected earnings flow to the joint venture partners of well over $1 per share, James has issued a strong buy recommendation on both Newhawk and Granduc.

Located near Stewart, B.C., the Sulphurets property was until recently an exploration project involving three players — Newhawk, Granduc and Lacana Mining (TSE). But a reverse acquisition deal concluded by Newhawk and Lacana has reduced the number of Sulphurets players to two.

Held 60% by Newhawk and 40% by Granduc, the project encompasses about 33 sq miles and 15 mineralized zones. But most of the attention has focused on the Brucejack area (West, Shore and Gossan Hill Zones).

In preparation for the expected production decision, operator Newhawk recently finished work on 1,690-ft West zone decline and road access is currently in the permitting stage. West zone

About this time last year, a mineable reserve of 500,000 tons in the West zone was considered sufficient to justify a production decision. But with 1987 exploration data now in and a 16,500-ft underground drilling program not yet included, the partners have easily surpassed that figure.

Calculated in all categories, West zone reserves now stand at 1.5 million tons grading 0.506 oz gold and 20.17 oz silver per ton with 300,151 tons grading 0.516 oz gold and 28.28 oz silver in the proven category.

As reported (N.M., May 2/88), a number of intersections encountered during the 16,500-ft West zone program should increase confidence in existing reserves and even expand them. Of 18 holes reported, the lowest gold value occurred in U88-137 which returned 35.6 ft grading 0.2 oz gold and 10.9 oz silver per ton.

The best results include Hole U88-136 which intersected 33.6 ft of 1.0 oz gold and 104.6 oz silver. Hole U88-126 returned 87.3 ft of 0.33 oz gold and 36.5 oz silver.

“If one bases projections on the revised West zone reserve and assumes a 500 ton-per-day operating rate (175,000 tons annually) and 90% recoveries for both metals, annual average production would be approximately 75,000 oz gold and 3.1 million oz silver,” said James. Capital cost

Assuming a project capital cost of $45 million — debt financed at 10% and depreciated over 10 years, operating costs of $100 per ton and a provision for a 50% (deferred) tax rate — the project could have net earnings of $17-$18 million.

As a result Newhawk’s 60% share of net earnings would be equivalent to $10.5 million or 90 cents per share at a gold price of $450 per oz and $12 million or $1.05 per share at $500 gold.

Granduc’s 40% interest would be equivalent to about $7 million or $1.25 per share at $450 gold and $8 million or $1.40 per share at $500 gold, James says.

The Newhawk issue traded recently on The Toronto Stock Exchange at $6.13 in a 52-week range of $7.50 and $3.25. Granduc was also trading in Toronto at $5.38 in a 12-month range of $7.63 and $3.10.