Toronto Stock Exchange (January 06, 1992)

Analysts were scratching their heads during the week ended Dec. 30 as lower interest rates pushed U.S. stocks to record levels and sparked a pre-New Year rally in Toronto.

“It’s ironic that stocks in New York have hit a record high when so many people are losing their jobs,” said David James, an analyst at Richardson Greenshields of Canada’s Winnipeg office. Even though New York’s Dow Jones Industrial Average hit a record 3,163.91 during the report period, James is advising investors to be very cautious going into 1992.

He and other market watchers say the rally is being fueled by the U.S Federal Reserve Board’s decision to drop the discount rate (the amount it charges on short-term loans) to the lowest level since 1964.

Toronto’s composite 300 index reacted to the advances in New York by posting its largest 1-day increase in four years. On Dec. 30, the index closed up 64.01 points at 3505.92 after 18.9 million shares worth $242.3 million had changed hands. Among the Toronto sub-indices, metals and golds posted impressive increases, and as institutions moved to buy up the blue chips, Noranda and Inco both shot ahead by $1.75.

But James claims that many issues, particularly in the gold sector, are over-priced at the moment. He predicts that shares of Placer Dome will move towards $10 from this week’s $11.88 level as investors realize that 88% of the company’s income is coming from interest on investments. Given the fact that $250 million has been invested in the Mt. Milligan copper project, he believes Placer President Tony Petrina will lose his job if the project doesn’t go ahead.

Although the gold price gave up US$6 in the report period to close at US$353.40, a number of precious metals issues finished on an upbeat note. Leading the way was American Barrick Resources, which closed up 75 cents at $31. Hemlo Gold added 25 cents, while Placer advanced by 38 cents. LAC Minerals, this week’s volume leader, was even at $8.50.

James remains negative on gold stocks because he believes that any increase above the US$370-per-oz. level will be “whacked off” by producer hedging. Meanwhile, as investors in Royal Oak Mines considered the company’s decision to acquire the Hope Brook gold mine in Newfoundland, the issue was unchanged at $1.50. Recently, 6.9 million Royal Oak warrants were listed for trading on the TSE. Trading at around 50 cents, the warrants entitle investors to purchase one common share at $1.65 until November, 1993.

Madeleine Mines managed to eke out a 13 cents gain this week after shareholders at an annual meeting in Montreal voted to reincorporate the company in the federal jurisdiction. As a result, Madeleine is free to hold its next annual meeting in Toronto. Described as “a ho-hum affair” by President Dale McDoulett, the meeting enabled him to outline plans for the Lac des Iles palladium-platinum project in northwestern Ontario which should be in production, on a limited basis, in 90 days.

In the base metal sector, Inco expects to report a $31 million tax credit in its fourth quarter results after transferring a 30% interest in a Guatemalan subsidiary to the government of Guatemala. Inco closed at $35.38. Westmin Resources was quiet even though exploration at the Gap-Battle zone area at Myra Falls mine in British Columbia is producing some encouraging results. The issue was unchanged this week at $3.50.

Despite selling its interest in Sherritt Gordon, Curragh Resources is facing a severe liquidity squeeze and further asset sales and writedowns are expected, according to John Lydall, metals analyst at First Marathon Securities Ltd. in Toronto. Unchanged at $3.38 this week, Curragh is trading just above its 52-week low of $3.

Once full production is reached at Viceroy Resources’ Castle Mountain mine in southeastern California, operating costs will be less than US$200 per oz., says Lydall, who is recommending the stock. “Providing that the startup goes smoothly, this company could be a real winner in 1992,” he says. Up 13 cents, this week to $4.40, Viceroy is not far from its 52-week high of $4.63.