To: Claude Cormier (106 )
From: THC Monday, Oct 5 1998 2:15AM ET
Reply # of 110
Speculating on a Gold Bull & Picking Juniors:
Thank you very much for the review of the companies I mentioned. I really appreciate your consideration!
Now, a quick response:
1. Timing
While there is still the possibility that we are not yet in a gold uptrend, I personally am willing to gamble that we are. However, as you mentioned the major cos have already appreciated to reflect the POG increase. I really have enough exposure to this group (I own a gold mutual fund, SA cos, & FN), and now I want to buy juniors that are still at rockbottom.
I agree it would be prudent to wait more, but by the time we "are definitely in a gold bull market", it may become difficult to find quality juniors with real properties at 1/20 to 1/40 of their highs, as is possible right now. I think that if we choose a basket of good cos, the risk/reward ratio is reasonable at this point.
I've been lucky to get dips early this year and this month, so I am in the black in all of my mining shares with the exception of PAASF (bought after Buffet!!).
2. Companies
A. PAASF
I don't think Russia will work out, but if they leave it alone or find a way to pawn it off to someone it shouldn't hurt us too much. In my personal view of the company I discount Dukat 100%.
B. SSRIF
Already through with the Russia risk....picked it up at $1, and feeling good about it.
C. GRERF
I don't know of any major problems, although I could be wrong. They are working to aggressively ramp up production on their properties.
D. GSR
Recently bought at $1.25, and saw $2 on Friday. This one looks like it will be hot for a while....you may note a lot of people are talking about it on Kitco.....Bill Murphy published an upbeat intro at Le Metropole Cafe & Gold Eagle..........
I am attaching more info.
Thank you again for your help. I look forward to any ideas you might have about Golden Knight & Trillion.
Best regards,
THC
Gold Watch
A Special Report
Veneroso Associates
Golden Star Resources (GSR) Update
Executive Summary
· Many exploration companies with tangible economic deposits are
now extremely undervalued relative to the gold price and
historical valuations, whereas the majors are overvalued.
· When the gold price breaks out its 6 month base above $315, the
junior exploration sector will finally attract buying. Once these
junior shares begin to move, one or more majors will use their
richly valued stock to buy a junior that several other majors are
targeting. Once this happens, other majors will move to make
acquisitions. Then, the theme in the market place will suddenly
change: it will be recognized that the junior exploration
companies are undervalued. In today's momentum driven markets the
entire junior exploration sector will be quickly bid up in price
relative to the majors.
· GSR has roughly 3.5 million reserve and resource ounces to its
account. With a market cap of $80 million, this comes to a little
more than $20 an ounce. By historical standards this is cheap. By
today's standards it is not unusually cheap for an exploration
company.
· What is unique about GSR is its proven track record of finding
economic deposits and the large portfolio of properties that have
palpable indications that they host such deposits.
· On the recovery in the gold price we expect the company will
advance its many promising projects and the market will recognize
the pervasive success to date.
The Junior Gold Sector
Last year Veneroso Associates Precious Metals Service initiated a
series of company reviews. Reports were written on Golden Star
Resources (GSR), Canarc Resource Corp., and Greenstone Resources.
We were targeting a company study a month. This schedule has been
delayed due to the special effort to launch the first issue of
the Gold Book Annual. With that document now out of our hands and
at the printers, we will try to meet our original target for
company studies.
Golden Star shares have retraced all of their early 1998 gains.
This has been the pattern for most of the junior companies,
particularly the exploration companies. From this perspective, it
would appear that the fundamentals for these companies are
deteriorating. In fact, for some of them, just the opposite is
the case. This is true of GSR. It is time to review these
companies.
Why have these junior shares sold off as the gold price has
rallied? Speculators in gold shares have been shifting funds to
an increasing degree from junior exploration companies with
negative cash flows to producers with positive cash flows. The
reason for this shift is obvious: at current depressed share
prices, equity financing is too dilutive for junior exploration
companies; only companies with a positive cash flow can make any
exploration progress. However, in keeping with today's momentum
dominated markets, speculators are bidding up the shares of the
producers relative to junior exploration companies to a
ridiculous degree. Today more than ever before the junior
exploration companies have excellent properties with tangible
economic deposits. At the same time, many of today's producers
lack such deposits which they need to replace their depleting
reserves. Many exploration companies with tangible economic
deposits are now extremely undervalued relative to the gold price
and historical valuations, whereas the majors are overvalued.
At the present time, the majors are preparing to acquire juniors
or to joint venture projects with the juniors. However, they are
expecting the negative cash flows of the junior exploration
companies to further undermine their share price. When the gold
price breaks out its 6 month base above $315, the junior
exploration sector will finally attract buying. Once these junior
shares begin to move, one or more majors will use their richly
valued stock to buy a junior that several other majors are
targeting. Once this happens, other majors will move to make
acquisitions. Then, the theme in the market place will suddenly
change: it will be recognized that the junior exploration
companies are undervalued. In today's momentum driven markets the
entire junior exploration sector will be quickly bid up in price
relative to the majors.
Golden Star Resources
Since our initial company review of late summer 1997, there have
been three very positive developments:
1) Very positive drill results at Paul Isnard (now 87% owned by
Guyanor) generated an early stage resource calculation indicating
more than 1.5 million ounces at 2.5 grams per tonne at a 6 to 1
strip ratio. Despite this positive development, Asarco walked
from the Paul Isnard and St. Elie joint ventures, thereby
increasing GSR's ownership position in these projects.
2) At Gros Rosebel, there is now a possibility of power from the
national grid. This would reduce capital costs and may reduce
cash operating costs. Projected cash costs have already been
reduced to $200-$210 and may get as low as $190. Capital costs
may fall to $150-$160 million for a 250,000 ounce per annum
project. This would move the project's economics from the 35th
percentile of the world's mines to roughly the 25h percentile.
Heap leaching rather than milling Gros Rosebel's ores might
improve the project's economics by lowering capital costs.
3) At Eagle Mountain, computer modeling of recent GSR exploration
results and old data from earlier Anaconda exploration suggests
the possibility of a large (20 million tonne plus) deposit with
grades higher than Omai and a strip ratio that is lower. The
deposit is near Omai and potential hydropower. Continuity to the
identified mineralized bodies, such grades and strip, access to
hydropower, and use of Omai facilities could result in project
economics in the top 10 percentile of the world's mines.
Paul Isnard/St. Elie
Asarco had cash obligations under its joint venture agreements
with Guyanor of $6 million through early 1999, some of which was
in arrears. Asarco is a copper producer. It has not had a strong
base metal exploration focus. It has no gold mining operations.
Gold exploration is even further afield from its traditional
focus. The company reported a $30 million loss in the first
quarter. In an effort to improve reported earnings, it has moved
across the board to curtail discretionary expenditures that
cannot be capitalized. With $6 million in obligated expenditures,
it relinquished its right to earn into these projects in exchange
for GSR absolving it of its obligations plus a $1 million cash
payment.
The drill results from Paul Isnard make it the most promising
project in GSR's history. A decision by Asarco to walk in no way
detracts from these results. We expect that Guyanor will
eventually own 100% of both Paul Isnard and St. Elie. In
retrospect, this will prove to be a stroke of luck. GSR will be
forced by the current unprecedented bear market in gold
exploration shares to engage in some degree of dilution by way of
share issues and joint ventures under adverse conditions.
Hopefully, they will keep this to a minimum while the gold price
is low. Because Asarco walked, they will pick up equity in two of
their most promising projects that will offset this dilution,
leaving the shareholders with a more or less equivalent claim on
the corporation's assets.
GSR will spend several hundred thousand dollars at St. Elie to
deep auger the high grade surficial material at the Dieu Merci
portion of this property. This will allow it to hold on to the
Dieu Merci concession. (Guyanor owns the basic St. Elie property
outright.) Earlier augering down to 5 meters of depth produced
3.9 grams over a 90,000 square meter area comprising 600,000
tonnes. This implies a resource of almost 75,000 ounces. The Dieu
Merci concession alone has a 1,000,000 square meter contour
grading almost 1 gram or higher and a 3,000,000 square meter
contour with anomalous surface grades of 200 ppb or more. Some of
this high grade surficial material has deep roots. The odds are
high that this surface resource plus the high grade material at
the Michel zone will provide St. Elie with a 1 million ounce open
pitable resource with a very high grade, a low strip ratio, and
low mining and milling costs. If the early work at Dieu Merci is
any guide, St. Elie may have a sweet spot that will have cash
operating and capital costs that are low enough to be economic at
$300 gold.
At Paul Isnard, GSR plans to spend a limited amount of money
drilling the high grade VMS material encountered in prior
drilling. This program will seek to verify their geological model
which posits a high degree of continuity to high grade VMS zones
averaging 1 ounce per tonne over 2 meters. It will also raise
Guyanor's ownership share to close to 100%. Again, GSR believes
there is a sweet spot in this surface resource which has a grade
that is considerably higher than 2.5 grams and a strip ratio that
is considerably less than six to one. GSR believes that selective
open pit mining of these high grade zones along 2500 meters of
strike will also involve capital and cash operating costs low
enough to make the project interesting at $300 gold.
Paul Isnard and, to a less certain degree, St. Elie have huge
potential. Gold is going back to $385. At that price level, much
larger deposits and projects will become economic. However, GSR
believes the grades at both deposits offer the potential to make
more selective mining (100,000 ounces per year of 1,000,000 ounce
deposits) economic even at $300 gold.
Asarco's departure is a gift to GSR. Hopefully, the company will
proceed carefully and slowly before doing a joint venture. Then
the gold price will recover and the far greater potential of
these projects---especially at Paul Isnard---will be the subject
of any joint venture negotiations.
Gros Rosebel
When I met David Fennell 3 years ago, Gros Rosebel was a 700,000
ounce resource according to Cambior. It was questionable it would
ever be a mine. A year later it was a 1.5 million ounce resource
that would become a small 100,000 ounce mine. A year later it was
a 2.0 million plus reserve at $400 gold with a 230,000 ounce life
of mine output and $225 cash costs. It is now a 2.0 million ounce
reserve at $350 with a 3.6 million ounce resource. Life of mine
output is projected at 250,000 ounces with the potential for $200
cash costs and capital costs of $70 a reserve ounce.
An outside consultant is testing Gros Rosebel for heap leaching.
Initial indications are that heap leaching will work. Earlier GSR
work points to +90% leach recoveries of free gold in saprolite
which constitutes 70% of the reserve. This material should
require only one stage crushing which points to low (sub $100
million) capital costs for a 250,000 ounce per annum project.
Heap leaching will require considerable cement for agglomeration,
so cash costs might not go down, but lower capital costs would
greatly improve the project's economics. With heap leaching and
further drilling, we may have a large (almost 10 tonne) mine with
economics in the top 20% of all mines.
Eagle Mountain
Two months ago I spent several hours with Declan Costelloe, GSR's
mining geologist, discussing the Eagle Mountain project. This
project is 35 miles from Omai and is currently accessible by a
barely serviceable road. Nearby on the river is a dam which
housed years ago a hydropower turbine which was used by an
alluvial mining operation at the site. Eagle mountain has been
mined for over a century. Historical records suggest that more
than 1 million ounces have been recovered. Anaconda drilled the
property in the early 1950's as did a team from the Guyana
Geology of Mines Commission (GCMC). Hilbert Shields put in 21
shallow drill holes in late 1977 looking for a steeply dipping
shear zone.
Declan Costelloe has taken all the available drill data from
GSR's work (21 holes) and the Anaconda (57 holes) and the GCMC
(12 holes) geological programs, combined it with some surface
auger and deep tunnel data, and has modeled it. Anaconda only
assayed those portions of the core which they thought might have
grades of more than one ounce. We understand that Anaconda was
the best company in the exploration business at the time and that
their assay procedures were first class. However, as they only
assayed the best looking portions of the core, the data is
fragmentary.
GSR's modeling suggests there are multiple stacked flat-lying
mineralized granitodiorite sills that run into Eagle mountain.
The mountain has roughly 500 meters of elevation and the
horizontal distance from the base to the peak is roughly 2000
meters. Each sill has some 20 meters of vertical extent and has
identifiable surface exposure across 400 to 800 meters of the
hillside. Anaconda's drilling illustrated that, at a minimum,
there are many identifiable pockets with very high gold grades.
GSR's work raises the possibility that the geology is more
complex, with more stacked mineralized bodies or some type of
mineralization between these sills.
By correlating the drill data in each sill, GSR has estimated the
volumes of the principal mineralized sills, indicating the clear
potential for more than 20 million tonnes of material. Given the
topography, the implied strip ratio would be very low. A mine at
Eagle Mountain could share facilities and spare parts with Omai,
thereby cutting capital costs significantly. The existence of a
now abandoned hydropower facility nearby that was used by earlier
mining operations suggests a possible cheap hydropower source.
Such a deposit could yield a mine with very low cash operating
and capital costs and unusually favorable economics.
GSR's work is based on scant drill data, much of it old Anaconda
data. Declan Costelloe's geological model could be wrong and the
deposit may lack continuity. The deposit he has sketched out may
not be there. On the other hand, the Anaconda drill data is
likely to be reliable; modeling from old Anaconda data at Omai
indicated a deposit which was very close to the actual reserve.
Historical recoveries of over a million ounces at surface suggest
a very large deposit. The base of the mountain is covered with a
large quantity of mineralized colluvium that is being mined
today. There was a mine on the other side of the mountain that
mined material that averaged an ounce per tonne early in this
century, raising the possibility that these flat lying
mineralized bodies run through the entire mountain. The flat
lying nature and thickness of the mineralized bodies make them
candidates for selective room and pillar mining deep into the
side of the mountain.
It is only a hunch on my part, but Eagle Mountain could be the
best project in the GSR portfolio. The large historical offtake,
abundant signs of high grade material, the topography, and the
proximity to Omai and possible hydropower are all very favorable.
Unfortunately, the company does not have the funds to drill out
the deposit even though confirming the geologic model would not
be very expensive. The odds are that it will do a deal with
Cambior, since the logical outcome would be to clone the Omai
mine and share Omai facilities and spare parts, since this would
reduce capital costs and the chance of any early stage
operational problems.
Conclusion
What now becomes the composition of GSR? It has a 30% interest in
Omai, a large mine with somewhat above average economics. It has
a 50% interest in Gros Rosebel which is in full feasibility. With
grid power Gros Rosebel becomes a large scale mine with superior
economics. A heap leach application for part of the ore at Gros
Rosebel could lead to yet lower capex and a more economic mine.
GSR will have a 35% to 100% interest in seven exploration
projects with an average of roughly 100 drill holes per project.
In every case, there is ample evidence of economic
mineralization. Yaou has a 1 million ounce reserve with further
economic depth potential. Paul Isnard, even though it is at a
very early stage, already has a 2 million ounce resource. Both
these deposits might be economic with gold in the low $300 range.
Dorlin is a 5 kilometer mineralized ridge with possibly a 1
million ounce resource on one kilometer of one side. One cannot
justify the capital cost of building a mine at Dorlin at $300
gold but it could be a large mine a $385. St. Elie has a small
high grade resource; spectacular surface results suggest a
significant economic surficial resource that might make the whole
project economic at $300 gold.. Andorhinas has two small high
grade resources in the first several hundred meters of possibly a
significant underground deposit. The resource ounces needed to
justify a mine are not yet there, but the grade and geology is
promising. Antino has the potential for several hundred thousand
ounces of high grade saprolite and many drill targets; it awaits
results from Placer's planned exploration of adjacent North
Benzdorp. Eagle Mountain is in the earliest stage, but the
indications of tonnage and its location could result in very
superior economics.
On average, Golden Star's seven advanced explorations projects
look better than Gros Rosebel did three years ago. The course
Gros Rosebel has followed could be repeated on average for these
seven projects over the next three to five years if the financing
can be obtained. This is a tangible prospect. It is also a
realistic one, as a recovery in the gold price to $385 will allow
this to transpire at an acceptable cost.
GSR has found one large producing mine and has another that is in
full feasibility. It has seven other exploration projects that
have palpable promise of becoming mines at $385 gold. In the
mining industry, this is simply a staggering degree of success.
In the current environment, it is completely ignored. GSR has a
large portfolio of earlier exploration projects and a large land
position in the Guyana Shield which is emerging as a successful
regional play. In any other period their record of success to
date would confer value on this strategic early stage exploration
portfolio. Today it is regarded as worthless.
When the gold price recovers, the majors with their highly valued
shares will once again be looking to purchase deposits to replace
their depleting reserves. At that point the junior exploration
shares will rally. GSR will be able to raise funds on acceptable
terms. With so many promising advanced exploration projects, it
is highly probable that the next round of drilling could be
extremely productive. In particular, drilling at Paul Isnard and
Eagle Mountain could generate large deposits which may be
economic at recent low gold prices.
GSR still has over $11 million in cash, but it must now reduce
its burn rate further and to a significant degree in order to
husband its cash resources. Nonetheless, the company is planning
exploration campaigns at Paul Isnard and St. Elie aimed at
producing results and advancing the projects over the remainder
of 1998. In our opinion, the company should avoid joint ventures
on unfavorable terms and dilutive equity offerings at the current
very low stock price. Now that Asarco has walked, the company has
picked up equity in two of its most promising projects. That will
offset any unfortunate excess dilution in the current bear market
if dilutive JV's and equity offerings are kept to a minimum. The
company's wealth is in its land. It is now clear there is
considerable wealth there and it will not go away. At higher gold
prices, equity capital will be available on acceptable terms, and
the company will be able to carry forward exploration on a
multifaceted portfolio of projects with a high probability of
very considerable success.
Valuation
GSR has roughly 3.5 million reserve and resource ounces to its
account. Some of this resource is in a producing deposit; some is
in a full feasibility reserve; and some if it is in earlier stage
deposits. With a market cap of $80 million, this comes to a
little more than $20 an ounce. By historical standards this is
cheap. By today's standards it is not unusually cheap for an
exploration company.
What is unique about GSR is its proven track record of finding
economic deposits and the large portfolio of properties that have
palpable indications that they host such deposits. After the
commencement of operations at the Omai mine, GSR was able to
raise considerable cash resources. From 1994 onward, it spent
these resources on acquiring a large land package, identifying
promising deposits , and proceeding with exploration. Just as
this portfolio progressed toward multiple mining projects, it was
hit with the crash in the gold price and in the gold exploration
share market. What is unusual about GSR is the multifaceted
progress to date. On the recovery in the gold price we expect the
company will advance its many promising projects and the market
will recognize the pervasive success to date.
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