From Canaccord today:
* Placer Dome (PDG : TSE : $20.50 : Issued 248.6M)
ÿ Bema Gold (BGO : TSE : $4.55 : Issued 91.2M)
ÿ Arizona Star (AZS : VSE : $3.75 : Issued 37.5M)
Placer Dome Inc. has acquired a 51% interest in the Aldebaran
property, Chile, from Bema Gold and Arizona Star, which previously had
interests of 49% and 51%, respectively.ÿ Once the agreement is
finalized, which Placer believes should occur near year end, Placer
would own 51%, Arizona Star 25%, and Bema 24% of the Aldebaran
property.ÿ Note, Bema continues to own 33% of Arizona Star.ÿ The
Aldebaran property includes the Cerro Casale gold-copper porphyry
deposit, which contains an estimated 19.5M ozs. of gold grading 0.72
g/t and 5.0B lbs. of copper grading 0.29%, and other exploration
targets including Cerro Roman, Romancito, and Eve. Cerro Casale gold
and copper recovery rates are expected to be 74% and 89%, respectively.
Placer has indicated that it has completed sufficient due diligence on
Cerro Casale, including the drilling of one hole, to go forward with
this agreement.ÿ In order to acquire its 51% interest, Placer Dome has
agreed to the following:
* pay US$10.0M to Bema (US$4.9M) and Arizona Star (US$5.1M);
* purchase US$10.0M worth of Bema (900,000 BGO shares at C$7.50/share)
and Arizona Star (1.14M AZS shares at C$6.20/share) common shares
through a private placement.ÿ This is subject to regulatory approvals;
* spend US$15.0M in exploration on the Aldebaran property, not
including Cerro Casale.ÿ In addition, Placer has the option, not the
obligation, to spend a further US$25.0M in exploration on Aldebaran;
* complete a feasibility study on Cerro Casale, which may incorporate
other targets on Aldebaran, for approximately US$25.0M. This study may
take over two years to complete.
* If a construction decision is made following the completion of the
feasibility study, Placer has agreed to arrange up to US$1.3B of
financing for mine construction, including the following:
a) investment of US$200M of equity in the project on behalf of all
partners.ÿ Neither Bema nor Arizona Star would be required to pay
their share of this capital expense;
b) arranging senior project financing for at least 50% of the capital
cost and providing a completion guarantee of up to US$1.1B in respect
thereof;
c) providing subordinated debt to the extent that the senior project
financing is less than US$1.1B;
d) construct and operate the mine.
In summary, Placer Dome has agreed to spend approximately US$60.0M
over the next two-plus years to acquire its 51% interest in the
Aldebaran property.ÿ Note, Placer will earn its 51% interest only if
it goes forward with mine development of Cerro Casale.ÿ Otherwise, 100%
of the Aldebaran property reverts back to Bema and Arizona Star.ÿ The
breakdown of all costs for the next two-plus years is a US$10.0M
acquisition fee, US$10.0M worth of Bema and Arizona Star shares,
US$15.0M in exploration, and approximately US$25.0M to complete a
feasibility study.
While this seems like a reasonable price for Placer to pay for
participation in the large, low-grade Cerro Casale deposit, especially
since it has the upside potential of the surrounding 30 km x 15 km
Aldebaran property, current weak gold and copper prices of about
US$310/oz. and US$0.90/lb., respectively, and low deposit grades leave
the economic viability of Cerro Casale open for question.ÿ Higher
metal prices and/or improved mining economics following exploration
success on the Aldebaran property will be necessary for Cerro Casale
to have a strong positive impact on Placer's earnings and cash flow.
In other words, much of Placer's decision to participate in this
project appears to be a commodity play with a low-risk entry fee.ÿ If
a go-ahead decision is reached, Placer Dome will have the financial,
operational, and managerial capacity to develop Cerro Casale into a
world-class mine.ÿ Canaccord's long-term price target for PDG shares
is C$32.00/share.ÿ Note, however, that investors are well advised to
wait for the global equity markets to stabilize following the recent
sharp declines before buying PDG shares.
Placer Dome will make a decision on whether to construct a mine on the
property after completion of the feasibility study in late 1999 or
2000.ÿ If it proceeds with construction, PDG will arrange the capital
financing of US$1.3B, which could be done using debt and/or the equity
markets.ÿ Placer Dome will be the operator of the mine.ÿ According to
the prefeasibility study completed by Mineral Resources Development
Inc. (MRDI), Cerro Casale could produce an average of about 900,000
ozs. of gold and 275-300M lbs. of copper annually for 16 years.ÿ Note,
Cerro Casale has 56.0M metric tons of oxides grading 0.84 g/t gold and
791M t of sulphides grading 0.71 g/t gold and 0.29% copper.ÿ Current
processing methods suggested by MRDI include a flotation circuit for
primary recovery of gold/copper concentrates from sulphides and a
carbon-in-leach (CIL) circuit for secondary recovery of the tailings.
These methods would recover 14.4M ozs. of gold, and would suggest a
recovery rate of about 74%.ÿ This is in line with recoveries seen at
other large, gold/copper, porphyry deposits.ÿ Placer's 7.2M oz. share
of this gold would equate to an increase of about 25% over current
reserves totaling 28.0M ozs.
Cerro Casale would be a massive project, both to finance and operate.
It is in the best interest of Bema Gold and Arizona Star to assume a
minority share of the property.ÿ Bema has had serial discoveries in
South America.ÿ Management can now focus time and money on new
grassroots projects.
The pre-feasibility study released October 9, 1997 stated the net
present value of the Cerro Casale project was US$2.75B at 0% and
US$1.16B at 5%.ÿ The hidden value of the property is the additional
targets on the Aldebaran property.ÿ With the future infrastructure at
Cerro Casale, costs to develop neighbouring deposits will be lower.
Items such as the water pipeline and the slurry pipeline for Cerro
Casale are expected to cost US$105.0M and US$45.7M, respectively.ÿ The
NPV of Bema and Arizona Star shares from a mine at Cerro Casale, using
an 8% discount rate on cash flow and $325/oz. gold, would be about
6.00 and $5.44, respectively.ÿ These values are very sensitive to the
price of gold.ÿ In the current market, we consider both stocks as
HOLDs.ÿ Investors interested in a conservative gold investment with a
geologic upside should consider Meridian Gold (MNG : TSE : $5.50).
Larry Strauss, (416) 869-3092
Glenn Brown, Ph.D. (416) 869-3073
Richard Gray (416) 869-3260 |
