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THOM CALANDRA'S STOCKWATCH

Bema project has geologists buzzing
Hard-rock crowd ecstatic about Russia site's high grades

By Thom Calandra, CBS.MarketWatch.com
Last Update: 1:22 PM ET Aug. 15, 2003


SAN FRANCISCO (CBS.MW) -- Bema Gold has managed to impress the kinds of hard-core geologists who aren't satisfied with a miner's gold discoveries unless they see it with their own eyes.

This week, most of the handful of analysts who visited the Canadian company's burgeoning Kupol project in far-eastern Russia raised their price targets on Bema (CA:BGO: news, chart, profile) and its American Stock Exchange-listed shares (BGO: news, chart, profile).

The outpouring of support, from the likes of Griffiths, Orion Securities, BMO Nesbitt and Canaccord Capital, comes after Bema unveiled a set of drill-hole results that even the most hardened of industry observers brands as spectacular.

"This latest drilling only confirms our belief that this is one of the

most exciting discoveries to hit the global gold stage in decades," gushed Brian Christie at Canaccord in Toronto. "This latest drilling looks like it supports at least 5 million ounces of resource, and further work will likely advance the project towards 7 million to 10 million ounces."

Bema's discovery at Kupol is a rarity: a vast gold deposit occurring during a span of decreasing gold production in nearly all regions, including Africa, North America and South America. The gold reserves of major producers, from Newmont Mining (NEM: news, chart, profile) on down, are rotting away, to borrow an industry term, as environmental challenges and political turmoil take their toll.

"We are, of course, discovering ore bodies, but the chances of bringing them online in the next five years is unlikely," says Ian MacDonald, who runs the Global Precious Metals Department in New York for Commerzbank Securities. "Even Bema's find is small in terms of what you need to replace lost production from the past five years."

MacDonald, who spoke to me Friday morning from energy-deprived New York, has been following the bullion markets for 30 years. The British-born bullion trader says you can count the number of significant deposits on the fingers of one hand, and even those are years away from being developed.

Bema's Kupol project is a joint venture with the provincial government of Chukotka. The company, which already mines substantial amounts of gold and silver in far eastern Russian, basically would control three-quarters of the interest in the property.

George Albino, a geologist, took a July visit to Kupol, along with a handful of other Wall Street and Toronto analysts. Albino has worked for precious metals miners and exploration outfits for much of the past 18 years. He's now an analyst with the Toronto investment firm of Orion Securities.

"Listening to a description of a deposit is one thing, but actually seeing the rocks is another," Albino tells me. "Seeing the features of the mineralized ore and what that might have to do with continuity, the uniformity of the deposit, is important."

Albino just raised his price target on Bema's shares, which since being highlighted here and in The Calandra Report two months ago, have almost doubled in value, giving the miner a $700 market value, not including any debt. He sees the shares reaching at least $3.75 Canadian from their current $3.

The analyst estimates Bema could be producing gold from the project by late 2006. He says the deposit likely will produce 9 million ounces of gold, given the results already in from about 555 drill holes. Albino's estimates do not include silver ounces, which appear to be abundant in the high-grade deposit.

So far, Bema is playing this deposit by the book, using what Albino calls a 100-meter-by-100-meter spacing to determine where the highest grades of gold and silver lie. The company, using diamond drill bits, has completed 116 holes, and this week released results that now total 56 holes.

As forecast in this column in June, the Kupol grades are proving to be off the charts. One hole had 43 grams of gold per ton of ore and 330 grams of silver. More than 90 percent of Bema's test holes crossed a mineralized system of gold or silver.

One high-profile bullion analyst, not wanting to be quoted by name, said the only looming deposit he's ever seen that exceeds these rich levels is the operation under way at Nevsun Resource's (CA:NSU: news, chart, profile) 90 percent-owned Bisha deposit in Eritrea, Africa. Nevsun, traded in Canada, appears to be attracting enormous interest among North American and European asset managers this summer, but that's another story.

Albino said he has little concern about political risk for Bema, mostly because Bema's relationship is with the provincial government and not mother Russia in Moscow.

He concedes, "It is a remote area and you are constrained by shipping windows, so you have to time your shipments of bulk goods to the site. I have it going up to two thirds of a million ounces a year, starting as an open pit mine and somewhere down the line going underground."

The big benefit will be low cash costs for pulling the gold (and silver) out of the ground. "If you take silver as a by-product, it could be $75 or $80 an ounce cash costs. There are lower cost mines out there, but not many of them," he says.

The stock market at present is valuing the deposit at about $50 an ounce, "and with a $360 gold price, that may be on the high side," he says. But any small move higher in the gold price, coupled with the next round of Kupol test results in the autumn, likely will show Bema's shares are still greatly undervalued at current levels, he says.

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