In the Klondike, dreams are still paved with gold

Benj Gallander and Ben Stadelmann
Saturday, June 2, 2001

One Contra rule is to take periodic breaks from the market. This does not mean that we ignore our investments; rather, it means we step out for a period of time and reduce our involvement.

For example, Benj has disappeared into the heart of the Yukon Territory’s Dawson City, where he is on a writer’s retreat at Berton House — named for its instigator, the writer, broadcaster and raconteur Pierre Berton. This does not mean that Benj has shunned the market. Instead it means that it isn’t necessary to focus on every market nuance — the current portfolio is in fine shape, thank you.

Instead of checking the market five times a day, once will suffice — unless a position is encroaching upon its sell target. Discussions with corporate bigwigs will be kept to a minimum, and the review of financial statements and corporate ratios is replaced by watching the ice break up and the workers migrate to the north for their summer employment in the can-can lines.

Effectively, this respite offers the opportunity to refresh by staying away from the heart of the activity. A pause helps maintain objectivity and prevents becoming completely engulfed in the continuing minutiae of the negligible.

In Dawson’s Klondike, dreams remain paved with gold, and the recent pop in price, short-lived though it was, is getting some people excited. While it is unlikely that the shiny metal will ever be the psychological insurance it once was, a combination of the US Federal Reserve Board’s flood of liquidity, the sniff of inflationary pressures, and the belief in many corners that the US greenback is overvalued means that the metal is regaining stature.

Many mom-and-pop operators in the north still earn a piece of their livelihood mining, although lots have given up the chase. On a larger scale, Viceroy Resource Corp. (VOY-TSE) is contemplating closing its Brewery Creek Mine, another symbol of the demise of this sector. Viceroy is just hanging in, as its deficient working capital means it is out of compliance with hedge covenants. The stock price that flirted with $8 in 1996 has now careened to blackjack status at about 25 cents.

Losses last year were $14.4 million before writedowns and inventory adjustments, $45 million after. The outfit has projects throughout North and South America and Australia. The key is the Bounty Mine Down Under that just finished its first full year under Viceroy’s operation.

This month, Calgary-based Proprietary Industries Inc. (PPI-TSE), a firm that manages various investments in the financial, natural resource and real estate sectors, ponied up $8.4 million to obtain up to a 49 percent stake in Viceroy if all the associated warrants are exercised. Proprietary will likely invest more if need be, making this a potentially timely investment, but only for aggressive investors with a very high risk tolerance. With a bit of help from the gold price, Viceroy Resource shares could triple.

A more stable representative in this sector is Richmont Mines Inc. (RIC-TSE). We purchased this outfit a year ago as a defensive investment at $1.81, with a target price of $4.45. Currently it trades at about what we paid for it.

While Richmont has been losing money, it has a keen eye to restore the bottom line. Critical to upcoming success is the Hammerdown property in Newfoundland, with expectations of 55,000 troy ounces of gold annually, at a cash cost of $140 (US). A recent deal also saw Richmont purchase Aurizon Mines’ (ARZ-TSE) interest in the Beaufor Mine. Beaufor will be put on a care-and-maintenance basis while the best scenario under which to reopen the mine is evaluated. Since reserves approach 250,000 ounces, this asset should pad the bottom line for years.

Richmont has dandy numbers with negligible debt, about $11 million (Canadian) in cash flow last year, and a stockpile of more than $14 million in cash. As well, their hedging program is limited, separating them from many organizations in this sector and offering them the opportunity to benefit from gold’s recent jump. If you believe that gold has a future, this firm is a screaming buy.