(February 25, 1999)
SOUTHWESTERN GOLD CORPORATION-
A mining powerhouse in the making !

Southwestern Gold Corporation (SWG.T, C$5.60, US$3.75) is an International  company based in Canada that is aggressively exploring for gold-silver and base metals (copper, lead, zinc) in Peru, Chile and China and together with its public subsidiary, Canabrava Diamond Corporation, for diamonds in Brazil and Canada. The Company has an interest, on an exclusive or joint venture basis, in more than 150 properties in Peru (2,200,000 acres), 50 properties in Brazil (2,757, 600 acres), 25 properties in Chile (247,100 acres), 6 properties in Canada (370,600 acres) and two projects in China covering more than 2,700 square miles of exploration concessions.

What makes Southwestern special in the mining world is the fact it has a unique successful philosophy which is:

  • to identify and acquire mineral properties with the potential to host world class deposits;
  • to joint venture its properties to major mining companies with devlopment and production expertise;
  • to retain a significant carried equity so that shareholders benefit in a substantial way from future mining revenues with a minimum amount of investment and risk;
  • to limit debt and preserve cash.
In line with this philosophy, Southwestern Gold has acquired over 230 properties and negotiated 27 joint ventures in the last few years. Joint venture partners include RTZ Mining, Teck Corporation, Cominco Limited, Newmont Mining, Pan American Silver, Phelps Dodge, Cambior Inc., Cedimin S.A.,  Southern Peru Copper, Pasminco/Savage Resources, Global-Pacific,  CNNC and MGMR in China, Paramount Ventures and Finance Inc. Most joint ventures are structured requiring Southwestern's partners to spend 100% of the costs through to production in a project to earn a 70% interest giving Southwestern a 30% carried interest in each project. Cash payments to Southwestern at the completion of bankable feasibility or the commencement of production usually range from $7.5 to $20 million.

These joint ventures are at different exploration stages with several being drilled.

ACCHA - PERU

As an example, one of the most advance JV is the Accha agreement with Pasminco/Savage Resources, where Southwestern's partners  recently initiated a pre-feasibility on this zinc project located in Peru, 149km south of Cusco. More than 31 drill holes in 6780 metres were completed last year. Indicated and inferred resources now total 9 million  tonnes  at  9% zinc  containing  810,000  tonnes (1.8 billion pounds) of zinc metal (in $ value, this is equivalent to a 3 millions ounces of gold deposit). Recent drilling  results  confirm  the  prospectivity  of  the surrounding district  and  indicate  potential  to  add  to these resources.  Drilling with four rigs is continuing.

Savage reported that the Accha project promises to be a low  cost  open  pit operation  which would have great synergies with the company's Clarksville, Tennessee   zinc   operation.   Preliminary   mining,   metallurgical   and infrastructure   studies   indicate  potential  for  low  cost  zinc  metal production at rates of around 75,000 tonnes (165 million  pounds)  of  zinc cathode per year.  Infrastructure studies foresee no significant problems for land access, power and water supply, waste disposal, transport access or on-site construction. Metallurgical testwork is well advanced with zinc recoveries of 90% using conventional processing.

Reserves are not yet proven and more studies must be done, so it is too early to confirm costs. Still,  lets speculate a bit. The project look robust enough to sustain a production cost as low as US$600-$700 per ton. When I compare Accha to other similar projects, I can see strong cash flows in future years, possibly as much as US$30-$40 millions to the JV partners per year, assuming zinc prices of only US$0.50-$0.55 per pound. Southwestern's share of these possible cash flows, based on a minimum 30% interest, would come at US$9-12 millions ($C13-$18 millions or C$0.90-$1.20 per share) or enough to justify much more than the current stock price. The company would get all these nice dollars without having to take on any debt. And keep in mind that this project is only one out of a few dozens projects SWG and partners are working on.

OTHER JOINT VENTURES

Many other joint ventures also have some sort of resources already established. Also, Southwestern Gold, with more than 230 properties, is signing new JVs on a regular basis and should continue to do so for quite a long time. The company recently signed the followings:

Well, I guess you get the point. It makes no sense to go on like that as there are more than 20 other solid JV's that would deserve to be mentioned here as well. What you must understand is that Southwestern has built an engine that almost garantees large cash flows to the company early in the next century. And this will happen without the company having to borrow or issue more shares on the market. The company's partners are spending millions each year on exploration in South America. Expect many more successes like the Accha JV.

DIRECT EXPLORATION

Now that it has established a strong base that will insure long term prosperity, Southwestern is getting more aggressive on the exploration front.  The company recently announced a new venture where it will be the operator. And SWG has selected China as its next target for the discovery of valuable mineral resources.

China is most certainly one of the richest country in the world when it comes to highly prospective mineral properties. SWG recently signed an agreement with Brigade 217 of the Northwest Geological Bureau, China Nuclear Industry, and Global Pacific, a canadian junior mining company. Southwestern will retain 56% in the project. All government approvals have now been recieved. A major trenching program is starting in March and should be followed by a drilling program in early April to define mineralization down to 300 metres vertical on a 200 metre by 50 metre grid (approximately 40 holes).

A major gold system is within the Brigade 217 concession and has been defined by 65 trenches, a decline and a shaft/crosscut. Surface gold mineralization has been traced in trenches over a continuous strike length of 4,800 metres. Over 2,000 channel rock samples have been collected defining true widths of mineralization varying between 50 and 140 metres assaying between 1.5 grams per tonne to 2.0 grams per tonne gold. These initial results are supportive of a potentially large open pittable gold deposit on the Haoya project with a possible resource of several millions ounces of gold. This could be a lot bigger than the Accha zinc project. Time will tell if Southwestern Gold can develop an economic resource there.

OTHER ASSETS

Not only Southwestern Gold has the above mineral assets and more, but the company has also $C30 millions in the bank (C$2.05/share) and no debt.  Can you say Solid as a rock!

But that is not all. SWG also hold shares in 3 junior companies, including:

VALUATION BY THE MARKET

With only 15 millions shares outstanding, Southwestern Gold has a market capitalization of US$58 millions (C$84 millions). Frankly, the Accha joint venture alone is worth almost that figure. With the cash in the bank, 230 properties, 27 joint ventures and its holdings in 3 junior mining companies, it is easy to understand why the company is buying its own stock. And it is for the same reasons that, last summer when the stock was C$2.50, I suggested to my subscribers that they should buy some shares for their portfolio.

Well all I can do is to say it again: Buy Southwestern Gold for the long term!
  

 
Look at the chart above. SWG's stock 3 year price range is $C2.25-C$28.45. The high was obviously reached at the peak of the last commodity cycle in 1996. I don't know when and at what price the next peak will be, but, assuming we stay away from a global economic depression, I am betting that we will see much higher prices very soon. Will the stock go lower from here ? Possibly. Who knows what the economy has in store? That is why you should have the long term in mind with Southwestern Gold Corporation.
 
               CLAUDE CORMIER, the Goldbug
 

THE GOLDBUG is president of Ormetal Inc. and editor of THE GOLDBUG'S COMMENT newsletter. He can be reached for comments at   goldbug@ormetal.com    The informations herein are obtained from sources deemed reliable, but their accuracy cannot be guaranteed. The reader is well advised to do his due diligence on the companies mentioned above, or consult with his financial advisor before purchasing its securities. Mining is a very risky business and investments in this market sector rank from speculative to extremely speculative.

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