INDEPENDENT BUY RECOMMENDATION
J. Taylor's ... Gold Resource and Environmental Stocks
Please note the credits at the end of the newsletter.
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I would like to point out that you are encouraged to call the undersigned for an update on EMGOLD.
There has been an emphasis on the risks of this company in this newsletter which seemed to have been too strong a message as a negative impact. In reality, all the risks listed at the end of the newsletter are for all small cap resource stocks and not just Emgold. This extra emphasis on risks is to satisfy the exchanges and are all known to the experienced stock market players. The highest risk mentioned was on financing. The company has been offered the millions required for dewatering, refurbishing, etc. but is hesitant at the moment since they only have about 14,000,000 shares fully diluted and at .25 to .30 cents would drastically hurt present and possible new shareholders should the financing be exercised at these low levels. Once gold goes up and/or the market wakes up and sees the potential herein, the financing at much higher levels would be more suitable.
In summary, and to be detailed in the J. Taylor's report that follows:
* .25 - .30 per share
* few million ounces of gold
* infrastructure in place, a mine, a mining town, miners
* government support and local support
* all permits in place, mining, ecological/environmental, land title/option
* 14,000,000 shares
* private placement in the works, (small one to avoid dilution)
* trade shows last month
* In essence, unlike many resource companies on the VSE, this company does not live by hype- claiming it is near a big mine, or the land looks good, or the geologists like the area, etc. It has a mine, the land is good, and they have a very reasonable number of shares.
* like the newsletter states, timing to buy is perfect !
and now for the story ...
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Emgold Mining Corp.
Traded Vancouver: (EMR)
Price November 10, 1998: US$0.15, Cdn $0.25
Shares Outstanding: 11,561,903
Shares Fully Diluted: 14,347,953
Insider Holdings: 30%
Gold Resources/Share: 0.26 oz.
Quality Rating: “B” (Approaching Pre-feasibility Stage)
(All amounts in US Dollars unless otherwise noted)
During the 1930's, Bernard Baruch made millions of dollars as most everyone else was loosing their shirts. When asked how he made so much money during the Great Depression, he suggested it was because he bought stocks when no one else wanted them and sold them when everyone, including the shoe shine boy fought to buy them. If Bernard Baruch were with us today, no doubt he would be buying junior resource stocks with both hands because seldom have mining shares been so out of favor and as undervalued as they are now. Emgold Mining Corp. (Emgold) is an excellent example. A preliminary estimate of between 976,000 and 2,968,400 oz. of gold has been outlined from the Company's Idaho-Maryland project in California. Yet, the market cap of this company is a mere $1.7 million. Should this estimate prove correct, this would be comparable to purchasing ounces of gold in the ground as low as $0.57/oz. During more normal times, a valuation in the $10/oz. to $20/oz. range might be expected. And nearing gold market peaks, when “everyone wanted gold” like 1980 or more recently during the 1996-97 time frame investors have been known to pay well in excess of $100/oz. for gold reserves. Clearly now is one of those rare moments in history when junior mining companies with substantial potential can be purchased for little more than a song and a prayer. Applying Bernard Baruch's investment strategy, now is the time to consider buying, not selling a company like Emgold.
The Idaho-Maryland Mine
Grass Valley, Nevada Co., Ca
The Idaho Maryland Mine traces its production history back to 1862. From that time until 1956 approximately 2.4 million ounces of gold were produced from 5.5 million
tons of ore. With gold being artificially fixed at $35/oz. and given a shortage of skilled miners, operating this project became a non-economic proposition by 1956 so the mine was shut down at that time. Mining took place from surface to a maximum depth of 3,280 ft. during the mine's 94 years of operation. During that time some 71 miles of underground workings were hollowed out. These workings are accessible today on 15 levels, by way of the three compartment New Brunswick Shaft that extends to a depth of 3,460 ft. In addition to the extensive underground workings, infrastructure on this project includes land for processing facilities.
A Multi Million Oz. Inferred Gold Resource
The Idaho-Maryland Mine has had a colorful past. But the significance of its history to present day investors is not to be found in its colorful past but from the fact that information gathered from past production and exploration, suggest future gold production may well exceed the 2.2 million ounces of past production. For example, based on old milling and mining records, 3,100 linen maps and 42 miles of underground diamond drilling, the mine engineering firm of James Askew & Associates (Askew) calculated a base case inferred resource estimate of 4.3 million tons of ore grading 0.228 oz. gold/ton. It also calculated and an optimistic case inferred resource estimate of 9.1 million tons of ore grading 0.326 oz. gold/ton, or nearly 3 million ounces.
Not factored into this resource estimate is the probable extension of gold mineralization to a depth below 3,280 ft., which represented the deepest point from which past production took place. The Empire Mine, located adjacent to the Idaho-Maryland property, and operated by Newmont until 1956, produced from a maximum depth of 5,200 ft. at which level the mine remained in ore. Production from that mine, which occurred from narrower mining widths than the Idaho-Maryland, was also discontinued at that time due to the artificially low $35/oz. gold price. Geologists who have studied both properties believe the same hydrothermal system that mineralized the Empire Mine was also responsible for depositing gold in the mostly quartz veins on the Idaho-Maryland. They also believe it likely that gold mineralization on the Idaho-Maryland also extends to below the 5,200 ft. level.
Also not factored into the above noted 3 million-ounce resource calculation was additional mineralization that probably extends laterally within known veins. Until its closure in 1956, the Idaho-Maryland Mine only partly developed and mined some 160 veins. Another 55 veins, some flat lying and some sharply dipping, have not yet been exploited nor fully explored.
The resource study did account for the fact that actual recoveries exceeded reserve estimates calculated on the basis of drill results. Given the nugget effect on the Idaho-Maryland property, large amounts of data accumulated in the past have established the fact that a 5/8” drill core can be expected to understate actual gold reserves by approximately 44%. Hence, a “Mine Call Factor” of 1.44 has been applied to drill data used to calculate an inferred resource on this property. Even based on this historical knowledge, Askew has taken a cautious approach of labeling such calculations as “optimistic”.
Ultimately, reserves two or three times greater than the inferred resource suggested to date may be proven to exist on the Idaho-Maryland property, given the depth and lateral potential. However, any such estimates are highly speculative and are not based on hard data. As such investors should not attach too much significance to larger reserve prospects at this time. However, the 3 million-oz. inferred resource estimate is based on a large body of data and as such provides a preliminary basis upon which to carry out feasibility work. Based on information now available to management, it is not unreasonable to expect feasibility work may outline a project capable of producing in excess of 140,000 ounces of gold annually and that the economics of the project, even with gold selling at $300, may be quite robust.
Mine Economics & Possible Valuation
The geological system that hosts gold on the Idaho-Maryland Mine is a large, high-grade shear system. Approximately 85% of the gold mineralization on the property is hosted in quartz with most of the remaining host rock being of various sulfides. Based on historical experience, the recovery process is expected to be uncomplicated. Approximately 80% of past production was by way of gravity, with flotation and cyanide vat leaching boosting overall recoveries to 96%. In addition to the project's straightforward metallurgy, sizeable mining widths are also expected to boost the economics of this project. Gold bearing structures have ranged between 3 ft. and 122 ft., but the weighted average has been on the order of 20 ft. That means that on average, mining dilution should not be greater than 10%. Based on extensive data gathered from the past and more recent work carried out by Emgold, it seems reasonable to expect an average mill head grade approaching 0.30 oz. gold/ton or higher.
We want to emphasize the fact that a considerable amount of work remains to be done before the above noted numbers are “bankable”. Assuming work progresses towards a bankable feasibility study, a level of confidence related to the economics of the Idaho-Maryland Mine will increase. Still, for the sake of gaining some perspective on what economic future the Idaho-Maryland Mine might hold, sufficient data exists to outline a range of possible outcomes. It is suggested that cash operating cost on the order of $215 or less per ounce may be possible, assuming a 1,500 ton per day operation is put in place and that the optimistic grades and recoveries outlined above hold true.
Under these assumptions, production could be expected to rise to over 140,000 oz. per year. Given a $300 gold price and factoring out a 4% NSR, the project might generate cash flows from operations (EBITDA) in the neighborhood of $10 million per year with gold selling at $300/oz. Given a rise to $350/oz., EBITDA would, under the same set of assumptions, rise toward the $20 million level. With a 3 million oz. gold reserve within the realm of the possible and with additional reserves from depth and/or lateral extensions, a mine life of upward to 20 or more years appears quite possible. Assuming a rather modest market multiple of 10 times EBITDA, under these two gold price assumptions, the market cap of this company would rise to a range of $100 million to $200 million compared to the current market value of the company of just $1.7 million. Of course, not factored into our analysis so far has been dilution resulting from additional funding needs.
Financing
In the immediate future, management is considering carrying out some surface drilling at a cost of just over $100,000. It has proposed a private placement to raise Cdn $250,000. It is hoped that this drill program will reveal some positive results as known near surface mineralized zones are tested. It is also hoped that good drill results combined with a higher gold price might boost Emgold's share price to levels that would allow equity financing of a $10 million pre-feasibility study followed by the conclusion of a bankable feasibility study, also at a cost of approximately $10 million. With a more reasonable gold price (i.e. $325/oz. to $350/oz.) I would not be surprised to see the price of Emgold rising into the $1 to $2 range, in which event equity dilution of between 5 million and 10 million shares might be tolerable. Hopefully as the feasibility stage of development unfolds, a still higher share price would allow still more efficient pre-production equity financing.
With the conclusion of feasibility work, capital expenditures should be well defined. At this juncture, an educated guess places capital costs (excluding feasibility work) at around $40 million. Once Emgold's project is bankable, one would expect debt funding, perhaps in the form of a gold loan, should become available to this company, especially if the economics of the project are as robust as they appear to be at this juncture.
Management
The management of Emgold appears quite adequate to handle the immediate tasks of developing the company's Idaho-Maryland Mine. Following are key management members and the Company's Board of Directors.
Frank A. Lang, is Chairman and President. He is one of the better known mine finders in Canada, having had a great deal of success in the past. His greatest claim to fame was his role-played in the discovery of the Golden Giant Mine at Hemlo Ontario. This mine now produces 310,000 oz./year and as such is Canada's 4th largest gold producer. Ross Guenther, is project manager at the Idaho-Maryland Mine. Mr. Guenther is a geologist with in excess of 30 years of experience. Sargent H. Berner is a partner with a well known Vancouver law firm. He is also a director of several other companies, and was formerly a Professor of law at the University of British Columbia. Ronald M. Lang is a self-employed businessman who received a business-of-the-year award in recognition of his success. Steven W. Banning has been President of Golden Queen Mining Co. since 1995. Prior to that he had been Vice President Operations at Pegasus Gold Inc.
Risks
Although the price of Emgold may appear quite undervalued compared to historical valuations for mining companies with similar assets, investors should be aware that a host of hurdles need to be cleared before the Idaho-Maryland Mine can generate healthy cash flows for Emgold's shareholders. Following are some of the more obvious risks Emgold investors face at this time.
Financing Risks – At this stage of its development, equity financing is about the only avenue of funding now available to the Company. But with the price of its stock at only $0.15, the cost to shareholders resulting from dilution is prohibitive. Thus, until the price of gold or some other positive factor results in a higher share price for Emgold, significant progress toward placing the Company's Idaho-Maryland Mine into production is not likely to take place. Financing risk is, in my opinion, the greatest risk currently faced by shareholders.
Timing Risk - Investors who purchase shares of Emgold should be prepared to tie up their capital for a protracted period of time because it is impossible to predict when market conditions will result in higher equity prices and/or a liquid market for the company's shares may exist. The ability to invest in this Company's shares for a protracted period of time will significantly reduce your risk of loss.
Gold Price Risk - Although important in the immediate future, over the longer term, and especially if the company becomes a producer, the value of the shares of Emgold will depend greatly on the price of gold.
Production Risk – Although there appears to be a significant amount of data available upon which to base a future performance from the Idaho-Maryland mine, prior to production, the possibility always exists that some unforeseen operating problems could arise that would negatively impact performance. Production risks should decrease as feasibility work is completed but will never be eliminated.
Mineable Reserves – At this juncture, an insufficient amount of data exists to be able to determine what portion of the resource noted above can be mined at a profit. The level of mineable reserves will be outlined assuming feasibility work progresses.
Environmental/Political Risks – California is known to be one of the more stringent environmental states in the U.S. In general the Clinton Administration is at least mildly hostile toward the mining industry. Mitigating this risk to a great extent so far as Emgold is concerned is a pro-mining sentiment from the Grass Valley District within California where Emgold's property exists.
Given the high levels of risk that exist for Emgold investors, the shares of this company are appropriate only for speculative investors. Even so, speculative investors are advised to allocate only a minor portion of a diverse portfolio to the purchase of this Company's shares.
Summary & Conclusion
As pointed out near the beginning of this report, the upside potential for investors who buy this stock at its current price is enormous. We have suggested that a share price in the $1 to $2 range may be possible with gold rising modestly to $350/oz., even as the Company moves through the feasibility stage of development.
Based on past production and exploration information gathered from the Idaho-Maryland project, operating costs for the Idaho-Maryland project might be $215/oz. or lower. Accordingly, it is suggested that given a $300 gold price, the project might have the potential to become significantly profitable. Based on the same set of assumptions, but with gold selling $350/oz. a highly profitable mining operation appears possible. Given a heftier price to EBITDA multiples enjoyed during better times, an eventual share price in the $5 to $10 for Emgold is not out of the question, though much of the company's future will depend in part on its ability to efficiently finance its way through feasibility.
Yet investors should be aware that risks related to purchase of Emgold at this time are considerable as noted above. Accordingly, investors who are strongly risk averse or whose lifestyle would be adversely affected by a loss of value in Emgold's shares, should opt instead to allocate the gold component of their portfolios to established gold mining companies, as frequently discussed in J Taylor's Gold Resource & Environmental Stocks newsletter. Assuming the risk/return tradeoff matches your financial and psychological profile, you are advised to consider purchase of this stock because of its enormous upside potential which at this juncture appears to be many times greater than an investment in this stock at its current price levels.
For additional information, Contact Andrew Hunter, Investor Relations at Suite 1610 – 777 Dunsmuir Street, Vancouver, B.C. Canada V7Y 1K4, Box 10435. Tel.: (604) 687-4622. Toll Free–1-888-267-1400. Website: www.lamgmining.com
J Taylor's Gold, Resource & Environmental Stocks (formerly J Taylor's Gold & Gold Stocks) is published monthly as a copyright publication of Taylor Hard Money Advisors, Inc. (THMA) , Box 770871, Woodside, N.Y. Tel.: (718) 457-1426. Visit our website: www.miningstocks.com. THMA provides investment advice on a paid subscription basis and also, from time to time receives payment from companies who's shares are recommended in this publication in exchange for the right to reprint articles published herein and/or provided in the THMA weekly telephone hotline message under the following two programs: 1) A Blanket Right to Reprint any comments therein in exchange for a fee of $2,500 annually or 2) $250/page. Under contract, companies acknowledge that reports appearing in this publication and/or provided in the weekly telephone messages are intended for the exclusive benefit of paid subscribers and that THMA retains full editorial authority over the content of material published in this letter or spoken in the weekly hotline messages. Information contained herein is obtained from sources believed to be reliable, but we do not guarantee its completeness or its accuracy. The management of Taylor Hard Money Advisors, Inc. may, from time to time, own shares of the companies recommended herein. However, no statement or expression of any opinion expressed herein constitutes an offer to buy or sell the securities mentioned herein. Subscription rates: Fax: US - $150; e-mail - US$120; Direct mail - US $99.
TAYLOR HARD MONEY ADVISORS, INC. Box 770871, Woodside, N.Y. 11377.
Tel.: (718) 457-1426 November 9, 1998
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