Black Hawk is recommended in this article published in current Investor's Digest of Canada
Accumulation taking place in junior golds
Growing interest in the metal hasn't been reflected yet in the companies producing it
It's my belief the major issue of 1999 will become the Year 2000 computer problem. As a result, we're seeing a growing interest in gold as a financial hedge against potential malfunctions in the banking system.
Keep in mind that because of the link up in the payment systems between financial institutions, problems in only five to 10 per cent of global banks could cause problems in Canada as well.
On top of that, the global monetary situation is becoming increasingly unstable, despite attempts by the Federal Reserve, other central banks, and the International Monetary Fund to shore up the system because of the Asian meltdown, the Russian collapse and more recently, the Brazilian collapse.
U.S. money supply has been soaring recently at 20 per cent plus annual growth. Money inflation can potentially be far more debilitating to the global monetary system than price inflation.
At the same time, the consumer-led American economy could hit the wall, as the consumer has negative savings while at the same time consumer debt is at record levels.
As seen from numerous sources, sales of gold (and silver) coins are escalating, causing a two-tier market in the U.S. as their mint has begun to ration supply.
Premium spreads over the spot price are also rising. In the futures markets, there is a growing accumulation of out-of-the-money strikes on gold options that mature in December, 1999, and beyond.
Despite this very apparent growing demand, gold prices remain moribund. Central bank sales have abated, although there have been suggestions the IMF sell some of their gold holdings to raise cash for lending to problem countries.
More importantly, some producers have worked hard to lower their cost of production, and as a result, hedging to protect themselves against downward price movements may be larger than realized.
As a result of the additional interest in gold, we are also seeing a growing interest in gold mining stocks once again.
Not that this has translated into any significant price gains, but the recent successes of Argentina Gold and Nuinsco Resources have brought interest into other junior miners, as well as the more senior miners. Senior producers have enjoyed some revival, as they are well off the lows of last year, despite the ongoing weakness in gold prices.
From seniors on down
While American Barrick and Placer Dome always remain at the top of investors' lists, my favorites remain Euro Nevada and Franco Nevada .
Euro Nevada (EN-TSE, $22.90, 416-480-6480) in particular has remained quite strong despite gold's price weakness.
Its sister company, Franco Nevada (FN-TSE, $24.60, 416-480-6480) recently suffered a pull back related to an announcement that royalties would be down from 1999, but the stock appears to be on its way to recovery.
Personal favorites amongst the intermediate producers remain Kinross Gold (K-TSE, $3.40, 416-365-5123) and TVX Gold (TVX-TSE, $2, 416-366-8160).
Studies have shown that a jump in gold prices from current levels near US$290, to just US$310 would add 20-190 per cent to these stocks.
TVX in particular is trading at a huge NPV discount to current gold prices.
But any rise in gold prices will benefit the small junior producers even more than the seniors and intermediates. It's in this sector we are seeing accumulation of the stocks.
Some of my old favorites reviewed previously have fallen on hard times.
Two stocks in this category are Greenstone Resources (GRE-TSE, $0.60, 416-862-7300) and Metallica Resources (MR-TSE, $0.53, 303-796-0229).
Greenstone has fallen from highs of $10.50 seen in April, 1998. Writedowns on two major properties ranging from US$30 to US$40 million each, some short-term negative impact from Hurricane Mitch, dilution of the stock related to issuing more shares to raise financing to shore up working capital, plus delays in the start up of projects have all conspired to drop Greenstone to recent lows of $0.60.
At these levels, Greenstone is clearly undervalued. Nonetheless, in the mining industry, things can change very fast.
With considerable reserves, a low production price, and production growth that should triple over the next two years, Greenstone has been quietly attracting takeover interest.
A breakout over $1.10 would be very positive for Greenstone. The downside is very limited from here. At US$310/oz. for gold, Greenstone could very well triple from current levels.
Metallica Resources has also fallen hard from highs of $3.45 in 1998 to current levels around $0.60.
Lower than expected profit results caused by increased termination costs related to reductions in Latin America have been hurting the stock.
But, with some expectations that their Cerro San Pedro should come on stream in late 1999, producing upwards of 100,000 ounces of gold and 2.3 million ounces of silver, this stock is an excellent buy at current levels.
The technical picture is showing positive divergences, although we do need to break out over $0.75 to project a move to at least $1.10.
Metallica could double from current levels if gold were to jump to US$310/oz.
Two mining stocks we believe investors should add to their lists are Black Hawk Mining Inc. (BHK-TSE, $0.14, 416-363-2911) and Eldorado Gold Corp. (ELD-TSE, $0.57, 604-687-4018).
Black Hawk is a junior producer with production of about 65,000 ounces of gold to September 30, 1998, from their Keystone mine in Northern Manitoba, and also from their share of production in the El Limon mine in Nicaragua.
Production is estimated at 116,000 ounces for 1999, for the two mines.
Black Hawk is also involved in exploration projects in Argentina, Maine, Ontario, and Northern British Columbia.
The company earned $0.01 per share through the first nine months of 1998.
Production costs are about $209/oz. for Keystone, and $244/oz. for El Limon.
Current market capitalization is about $21 million, with over 117 million shares outstanding.
Black Hawk is well leveraged to gold prices, and could easily triple if gold were to rise to US$310/oz.
Eldorado Gold is a larger company with a market cap of about $40 million, and about 73 million shares outstanding.
The company lost $1.58 per share for the first nine months of 1998, largely due to writedowns and reorganization charges.
They are expected to produce about 200,000 ounces of gold for 1998 and the same for 1999. Eldorado has two key mines, one in Mexico and one in Brazil.
With Brazilian currency devaluations, production costs are estimated to drop down to about US$200/oz. for 1999.
Production is hedged for 1999 at US$325/oz., and partially hedged for 2000, and 2001, at US$335/oz.
With built in hedges and a high leverage to gold prices, Eldorado would more than triple from current levels if gold were to rise to US$310/oz.
--------------------------------------------------------------------------------
'' Despite... growing
demand, gold prices
remain moribund.''
--------------------------------------------------------------------------------
The chart shows the positive aspects for the two stocks, which include consolidation taking place at higher levels following lows of $0.12 for Black Hawk and $0.25 for Eldorado in August, 1998.
Volume has increased on both stocks over the past few months, indicating ongoing accumulation. Both stocks have recently challenged their long term moving averages, but thus far they have failed to break over these key points.
Black Hawk would be breaking out over $0.25, while Eldorado's breakout point is above $0.70.
I view both stocks as speculative buys as long as they stay within current ranges of $0.16 to $0.20 on Black Hawk, and $0.40 to $0.60 on Eldorado.
Black Hawk peaked at over $1 in late 1995, while Eldorado's highs were seen at over $10 in late 1996.
David Chapman is an investment advisor at Gorinsen Capital Inc., Toronto.
|
