Stockman's Forum Bulletin September 29b, 1996
Subject: Terry Swift - BEMA
LeRoy,
It is my pleasure to introduce a new guest gold analyst, Mr. Terry Swift, to you. He is a certified public accountant(CPA) by profession and has analyzed annual stockholder reports and financial data for clients. He will help us by analyzing gold stocks considering their fundamental financial strength and assets (mine production, properties, strength of balance sheet, etc.).
Here is his first contribution to this forum. Let us welcome him.
Wade
Reply: Welcome aboard Terry. I look forward to your comments...LS
LeRoy,
Bema Gold Corporation
Bema Gold Corporation is a Vancouver based gold production and exploration company. It trades under the symbol BGO on the American Stock Exchange in the US and on the Vancouver and Toronto exchanges in Canada. Bema has 89.5 million shares outstanding; 106.5 fully diluted. Bema can be reached via phone at 1-800-316-8855 and via fax at 604-681-6209. The person that handles investor relations for Bema is John Anderson.
Bema has 5 subsidiaries in which it has varying degrees of ownership. They are:
Arizona Star Resource Corp. (31.5%)
El Callao Mining Corp. (39.5%)
Puma Minerals Corp. (37.9%)
Victoria Resource Corp. (39.5%)
Westview Resource, Inc. (28.5%)
Bema Production:
Bema owns 50% (Amax 50%) of the Refugio mine in the Maricunga District of Chile. The mine made its first pour in April, 1996 and production is estimated to increase to 233,000 ozs/yr in 1997. There are 2 gold reserves (Pancho & Verde) which feed this mine and total 8. 6 million ozs, however, additional mineralization under the Verde deposit would add another 2 million ozs to the minable reserves and several years to the mine life.
Bema also is making plans to construct a small mine at Yarnell, Arizona where it owns 270,000 ozs of reserves. This mine will produce 30,000 ozs/yr.
Bema does not engage in forward sales of its gold production. It does buy put options as insurance against a dramatic decline in the price of gold in order to protect its creditors and investors.
Bema Exploration:
The news that has moved Bema from a $3 stock to its current level is its discovery of an estimated 20+ million ozs of gold at Cerro Casale (CC). This estimate is based on drill results released in August. CC is one of several sites Bema owns with Arizona Star (Star). Bema currently owns 49% of CC and Star 51%, however, Bema has the right to acquire an additional 2% which it intends to exercise in the near future, giving it 51%. Bema also owns 31.5% of Star and manages all of
Star's affairs.
The total ozs of reserves at CC are only an estimate at this time. In my conversations with Bema I have been advised that, based on the data it has now, Bema estimates it has 750 million tonnes of gold mineralization at CC averaging 1 gram of gold and .4% copper per tonne. If my metric math is correct that calculates to 25.5 million ozs of gold. The amount of copper is estimated at 4 billion pounds. However, this is all likely to grow as all drill holes are open at depth and Bema still has a very aggressive drill program underway to define the size of the CC deposit. The outer limits of the deposit have yet to be determined and all holes drilled (30 and counting) have ended in mineralization so Bema doesn't yet know how deep the mineralization goes. It has had 2 drills operating full time at CC
and has just added 2 more drills capable of drilling to depths of 1. 5km. More than one analyst has suggested that the CC deposit will take time to fully define and is likely to grow a'la Bre-X did over a period of a year or more. Even though this deposit is likely to grow, I would hasten to add it can never reach the stock valuations of Bre- X given its and Star's market caps.
The CC site is one of several sites that are part of a larger property named Aldebaran in the Maricunga district of Chile. There are at least 6 other sites on the Aldebaran property which Bema has identified as having geological anomalies containing porphyry deposits and, in fact, has done trenching on a couple of them and which showed such good results that Bema is moving 2 more drills onto these sites by mid-October. The Aldebaran property is owned entirely by Bema and Star, 49% and 51% respectively with Bema soon to exercise its option to acquire another 2% of the property.
Another property adjacent to Aldebaran is Quebrada. There are several sites on the Quebrada property which also show geological anomalies it believes are porphyry deposits. Preliminary trenching on this property have also produced results good enough that Bema is moving 2 drills onto this property by mid-October. That will be a total of 8 drills Bema will have operating on the CC and Quebrada properties by mid-October. Bema owns 100% of the Quebrada property.
Aldebaran and Quebrada are about 18 km from the Refugio mine. Bema has 120 square miles of property in the Maricunga district of Chile. It has identified 19 porphyry deposits. 14 have never been drilled by anyone. None, other than CC,have been tested at depth.
Arizona Star:
Star is a gold exploration company. Bema manages all of its affairs and an investor package for Star can be obtained by calling the phone number for Bema.
Star has 36.4 million shares outstanding; 38.9 fully diluted. Star's only holdings are its 51% ownership of the Aldebaran property in Chile. See the narrative under Bema Exploration above for details regarding this property.
El Callao Mining Corp (ECM):
ECM is a gold exploration company. Bema manages all of its affairs and an investor package for ECM can be obtained by calling the Bema phone number.
ECM has 32.5 million shares outstanding; 36 million fully diluted. ECM's exploration activity is located exclusively in Venezuela. ECM's drilling activity are focused on 2 deposits (La Cruz & La Victoria) located on its Lo Increible property.
It can earn up to 70% of this property. It had previously proved up reserves of 835,000 ozs of gold, however, recent drilling has shown the La Cruz deposit to extend deeper than ECM had initially anticipated. It has an ongoing drill program to define the size of this deposit. ECM will also start a new drill program on the La Victoria deposit later this year to fully define that deposit. In May ECM began a scoping study to determine whether it is feasible to construct its own mine. The study is due to be completed shortly. In the meantime ECM has been shipping ore to a nearby mill for processing.
Puma Mineral Corp:
Puma is a gold exploration company. Bema manages all of its affairs and an investor package for Puma can be obtained by calling the Bema phone number.
Puma has 20.7 million shares outstanding; 25.5 fully diluted. Puma's drilling activity is focused on its 50% owned Uspallata project located in the Mendoza and San Juan provinces of western Argentina. Drilling results released in May indicate significant gold and copper mineralization on this property and the drilling program is ongoing to define the size of the deposit.
Victoria Resource Corp and Westview Resources:
These are both exploration companies which are currently only shell companies with no properties owned or being explored. Bema manages all of their affairs and both companies are currently reviewing properties for acquisition.
Recent Financial Events:
On September 17 Bema completed a private placement of 8 million shares at C$11.00 per share. Bema initially offered 7 million shares in the private placement, however, the institutional demand was so great that the private placement was oversubscribed by 5-6 times what Bema offered. Bema then added an additional million shares for a total of 8 million. C$14 million of the funds were used to purchase a 1 million share private placement from Arizona Star at C$14.00 per share to fund Star's share of the ongoing drill program at CC. Bema's announced
plans for the balance of the proceeds are to use C$20 million to finance further drilling of the CC project, C$15 million to fund the drilling of the 18 other porphyry deposits it owns in the Maricunga district, and C$30 million as the estimated equity portion it will need to build the heap leach mine to extract the 2 million ozs
of gold from the upper oxide portion of the CC deposit.
On Tuesday, September 24, I took part in a conference call with Bema, several other Bema stockholders, and various institutions. The conference call/meeting was chaired by Clive Johnson, Bema's CEO and president. The following were the main comments made by Mr. Johnson. Although, there were questions from some of the conferees, this was the essence of the conference.
1. The rock crushing facility that was down has been fixed by the contractor, Flour Daniel, and is now back on line.
2. Some results are expected on the CC drilling in 3-4 weeks.
3. The company estimates the strip ratios at the CC deposit will be 2.5:1 and they think they can get them down to 1.3:1.
4. There are 18 porphyry zones on Aldebaran and Quebrada they have identified they believe contain gold.
5. Trenching results from the Quebrada property indicate higher ore grades than are at CC.
6. The Bema private placement closed and Bema has $100 million cash in the bank.
Personal Commentary:
Bema is my largest stock holding so, obviously, I have a vested interest in this company. To determine the fundamental value of Bema or Star any investor must make some assumptions regarding the value of the gold at Cerro Casale. I have done so for my own purposes in determining the risk/reward inherent in these stocks. I offer a valuation scenario that I believe is reasonable with the caveat that I
am a stockholder in Bema and Arizona Star and am biased in favor of these stocks.
Some analysts have compared CC to a gold/copper porphyry deposit in Argentina called Bajo de la Alumbrera. Alumbrera is also a high volume/low grade deposit. What I don't know is whether the mine economics of CC can be expected to be similar to those of Alumbrera. At any rate, Alumbrera has 563 million tons of mineralization averaging .66 grams per ton for a total of 11.9 million ozs plus 6.44
billion lbs of copper. In May, 1995 50% of Alumbrera was sold for $372 million.
That is a price of $62.50 per oz of gold. A like -kind sale is probably as good a guide as you're likely to get so I have used Alumbrera as a model. With the caveat that we can never know how much the CC deposit is worth until an actual market transaction occurs I offer this valuation using the Alumbrera value as a guide.
With Bema's direct ownership of CC plus its 31.5% ownership of Star it owns 66% of the CC deposit. That is 16.83 million ozs of gold (25. 5 million ozs times 66%). At $62.50/oz the value of Bema's 66% is $1, 051,875,000. Given this value of Bema's share of CC I have calculated Bema's value per share as follows:
All values are in US dollars.
Value of gold at CC deposit $1,051,875,000
Bema's share of gold at Refugio 430,000,000
(4.3 million ozs @ $100/oz)
Market value of El Callao 17,500,000
Market value of Puma 3,700,000
Balance sheet book value @ 6/30/96 103,341,000
Private placement cash 64,000,000
Total Value $1,670,416,000
$1,670,416,000/106.5 million shares = $15.68 per share
Considerations in analyzing my calculations:
1. Value of gold at CC too high?
2. CC gold calculated at 25.5 million ozs, very conservative. Clive Johnson, Bema CEO has stated at Las Vegas gold show Bema expects to have 30 million ozs at CC when drilling finished.
3. Good possibility of gold at other sites on Aldebaran property as well as 100% owned Quebrada property.
4. No values assigned to goodwill (blue sky) for Refugio mine and other balance sheet assets. I used balance sheet book values which would be depreciated values and very conservative.
My analysis leads me to believe that Bema Gold is currently way undervalued, has large upside potential, and little downside risk.
Terry Swift (Our Newest Gold Bug Member)
Reply: Terry, you enter a very prestigeous club. This is an excellent
analysis....Nice job...LS |
