Beaconsfield Gold N.L. Brokers Recommendations 1997

Comment

Australia Gold Mining

20 August 1997 Peter Bird (P.) (61) 3 9659-2502 Adrian Redlich (61) 3 9659-2511

Beaconsfield Gold NL Trading at a 34% Discount to Valuation. Should be Australia's Lowest Cost Producer. Reason for Report: Initiation of Coverage

BUY* Long Term BUY

Merrill Lynch & Co.
Global Securities Research & Economics Group
Global Fundamental Equity Research Department

*Intermediate term opinion last changed on 20-Aug-97.
For full investment opinion definitions, see footnotes.
All figures are in local currency (Australian dollar) except where otherwise noted.

Investment Highlights:

• Forecast earnings are anticipated to increase from -0.6cps in FY98 to 5.7cps in FY99 and then to 20.2cps in FY00.
• The stock is currently trading at a 34% discount to our valuation of A$1.60/share.
• Extremely strong cashflow per share of 7.3cps in FY99, rising to 25.0cps in FY00.
• Approximately A$60.0m of tax losses attributable to the Beaconsfield Mine JV, should enhance earnings in the early years.
• Stock liquidity remains a concern

Fundamental Highlights:

• Commissioning in March 1999 with total equity production of 19,900oz at a cash cost of A$231/oz for FY99. Average lilfe of mine equity production is expected to be approximately 70,000oz at A$195/oz.
• Continued underground exploration should see further reserve upgrades in the coming 12 months.
• We expect the company to exercise it's pre-emptive right over a further 10.66% of the Beaconsfield JV, taking it's direct interest in the JV to 48.49%. (Indirect interest 68.3%)

Company Structure

Beaconsfield Gold NL is a gold explorer/project developer in the state of Tasmania. Beaconsfield Gold currently holds a 37.82% direct interest in the Beaconsfield Gold Joint Venture which has as its main asset the Beaconsfield Gold Mine north-west of Launceston. It also holds a further 23.94% indirect interest in the mine through its shareholding in Allstate Explorations NL. Directly and indirectly Beaconsfield Gold accordingly holds a 61.76% economic interest in the mine. The company also holds pre-emptive rights to acquire a further 10.66% interest from Allstate. If (as Beaconsfield Gold intends) these rights are exercised, direct interest will increase to 48.49% while its indirect interest through Allstate will dilute to 19.84%, giving total direct and indirect interests held by Beaconsfield Gold of 68.33%.

The Beaconsfield Mine

The Beaconsfield gold project is centred on the old Tasmania Mine which is located 40 kilometres by road north-west of Launceston, Tasmania. The Tasmania Reef is a gold-bearing quartz-carbonate-sulphide vein occupying an old fault structure which transgresses a series of sedimentary beds. The reef is bounded by a conglomerate to the west and a limestone to the east. The reef has an average strike length of 350 - 400 metres, an average horizontal thickness of approximately 4 metres and an average dip of around 60 degrees.

The underground mine was operated from 1877 for 37 years, during which time approximately 840,000 ounces of gold were produced from 1,070,000 tonnes of ore at an average mill recovered grade of 24.3 g/t. Mining ceased with the outbreak of World War I in 1914 and the subsequent flooding of the shafts and workings left the mine untouched until 1965. Diamond core drilling from the surface was carried out intermittently by various groups between 1965 and 1983. The results were encouraging and between 1980 and 1991 various extensive work programs rehabilitated the shaft with a ladderway, ventilation, guides and cables to 160 metres depth.

Prior to the formation of the joint venture, approximately $20 million was spent in refurbishing the mine. This money was mainly spent on recovering the top of the Hart Shaft and de-watering the mine. Since the formation of the joint venture a further $25 million has been spent on the mine. Expenditure has been on refurbishment of the existing facilities, underground development to access the resource and further outlining of the resource.

Reserves/Resources

The company announced an updated reserve/resource estimate in the June Quarterly report in late July. The new estimate is based on a complete remodelling of all the previous Tasmania Reef drilling and the additional 18 intercepts from the current drilling program. The resource now extends 450m below the historical mine workings. Underground exploration drilling continues on the 375m level. We expect to see the above reserve/resource numbers to be augmented in the coming 12 months.

Table 1: Reserves and Resources

Class	tonnes	grade(g/t)	ounces
Probable Reserve	1,534,000	22.32	1,101,000
Total Reserve	1,534,000	22.32	1,101,000
Indicated Resource	1,442,000	24.64	1,143,000
Inferred Resource	653,000	9.61	202,000
Total Resource	2,095,000	19.96	1,345,000

Source: June Quarterly Report

In-fill drilling is expected to be completed by November 1997. A bankable feasibility study will be completed by December 1997 and then formal state government approval should follow soon after.

On a relative Australian market cap per ounce of reserves basis (see chart below) the company appears to be undervalued at current levels. On-going underground exploration is expected to continue augmenting their relative position.

We believe Beaconsfiled Gold should be trading at a premium to average market cap per ounce due to the low cost nature of the operation.

Expected Mining Plan

During the first two years of production it is estimated that 125,000 - 140,000 tpa will be treated, with treatment increasing to 150,000 tpa in year three. Total production in the second year is expected to be approximately 88,000 ounces p.a., with production subsequently increasing to approximately 105,000 ounces p.a.

Metallurgical testwork has shown conventional gravity/flotation/carbon-in-leach will recover approx. 82% of the gold. A further 14% may be recovered by bacterial leaching of the flotation concentrate. The expectation is to start with a conventional plant with the remaining sulphide flotation concentrate (after cyanidation) being stockpiled for later treatment by bacterial leaching. Construction is expected to begin in May, 1998. The mill is expected to be completed by late 1998 at a capital cost of approximately A$33m.

Underground development on the 375 metre level is well advanced with development of the decline from this level to access the ore body underway. Ore production will commence in the second half of 1998 ahead of mill commissioning in March 1999.

Table 2: Production and Cash Costs

Production ('000)	97F	98F	99F	00F	01F
Beaconsfield Gold NL	0.0	0.0	14.1	42.8	50.1
BG NL - indirect	0.0	0.0	5.8	17.5	20.5
Total Ounces (incl indirect)	0.0	0.0	19.9	60.3	70.6
Cash Cost (A$/oz)	97F	98F	99F	00F	01F
Total Attributable	0	0	231	228	195

Financial Summary

Positive earnings are not expected until the first year of production in FY99. We forecast strong earnings growth in the first three years of operations.

Table 3: Forecast Profit and Loss

A$	97F	98F	99F	00F	01F
Sales	0.0	0.0	7.5	22.9	27.0
Allstate Income *	0.0	0.0	0.0	0.6	1.3
Total Revenue	0.0	0.0	7.5	23.6	28.3
Depreciation	0.1	0.0	0.7	2.1	3.0
Operating costs	0.6	0.6	3.5	10.5	10.5
Exploration	0.0	0.0	0.0	0.0	0.0
EBIT	-0.7	-0.6	3.3	11.0	14.8
Net Interest	0.1	0.2	-0.4	-0.4	0.2
Pretax Profit	-0.6	-0.3	2.9	10.6	15.0
Tax	0.0	0.0	-0.1	-0.7	-1.2
Net profit attributable	-0.6	-0.3	2.8	10.0	13.8

Source: Merrill Lynch Estimates *Assumes Allstate dividend payment recieved

The Beaconsfield JV will have approximately A$60m of accumulated tax losses, which are expected to improve profits in the first three years. The mine produces a very strong cashflow, allowing the company to repay debt and provide suitable capital returns to shareholders soon after full production is reached.

Table 4: Forecast Cashflow

A$	97F	98F	99F	00F	01F
Operating Cashflow	-1.0	-0.6	4.0	12.5	8.2
Tax paid	1.7	0.0	0.0	0.4	0.4
Equity raised	4.4	14.4	0.0	0.0	0.0
Asset sale proceeds	0.0	0.0	0.0	0.0	0.0
Capital Expenditure	0.0	14.5	7.5	0.5	3.9
Investments	-1.9	-3.0	0.0	0.0	0.0
Dividends	0.0	0.0	0.0	1.0	1.0
Exploration	1.3	1.0	1.5	1.5	0.3
Net Loan Payments	0.0	12.0	-4.0	-4.0	-2.0
Other	-0.2	0.2	-0.4	0.3	0.7
Cash Recieved/Paid	-1.96	7.51	-9.46	5.37	1.43

Source: Merrill Lynch Estimates

Debt and Equity Finance Allocation

Debt financing, together with the recent share placement will be used to fund the remaining capital expenditure, the exercise of options in Allstate Exploration and the pre-emptive rights over the 10.66% of the JV (discussed above). The companies debt level is expected to peak later in FY98 at approx. A$12.2m, when the gearing level will be approx. 24%. The projects strong cashflow will see debt comfortably repaid by FY01.

Table 5: Forecast Balance Sheet

	97F	98F	99F	00F	01F
Fixed assets	2.4	16.9	23.8	22.1	23.2
Investments	7.6	7.6	7.6	7.6	7.6
Intangibles	0.0	1.0	2.5	4.0	4.5
Other Non Curr Assets	0.0	0.0	0.0	0.0	0.0
Cash & STD's	2.1	9.6	0.1	5.5	11.0
Debtors	2.7	2.7	2.7	2.7	2.7
Stock & WIP	0.0	0.0	0.0	0.0	0.0
Other current assets	12.7	12.7	12.7	12.7	12.7
Total assets	27.4	50.5	49.3	54.6	61.7
Non Curr Borrowings	0.2	12.2	8.2	4.2	0.2
Other Non Curr Liab's	0.1	0.1	0.1	0.1	0.1
Current borrowings	0.0	0.0	0.0	0.0	0.0
Creditors	0.1	0.1	0.1	0.1	0.1
Provisions/other	0.0	0.0	0.1	1.4	2.6
Total liabilities	0.3	12.3	8.5	5.7	3.0
Net assets	27.1	38.1	40.9	48.9	58.7

Source: Merrill Lynch Estimates

Valuation Growth Strong

The valuation profile for the company appears very strong with a strong growth rate that has the potential to be improved upon with further exploration success. Our current valuation assumes a favourable hedge position will be implemented by the company prior to project commissioning. This would entail flat forwards over approximately 75% of annual production at A$540/oz. This appears acheivable in the current gold price environment. The current share price is underpinned by the mine site valuation of A$0.94/share. The companies 38.5% share holding in Allstate Exploration is valued at A$0.43/share based on current market prices.

Table 6: Estimated Valuation

NPV @ 10%	(A$m)	¢/share
Beaconsfield	46.5	0.94
Exploration	3.3	0.07
Net Cash/Debt	-2.6	-0.05
Investments	21.2	0.43
Hedging *	2.6	0.05
Tax Losses	8.1	0.16
Total NPV	79.0	$1.60

Source: Merrill Lynch Estimates * Assumed 75% annual prod'n at A$540/oz

On a comparitive Price/NPV with the other Australian gold producers, the stock appears to be good value.

Merrill Lynch Comment

The Beaconsfield mine is a great example of a very high grade and subsequently high margin project that is anticipated to generate significant positive cashflow. Both the lack of stock liquidity and size are negative factors, but we firmly believe that strong project fundamentals justify our aggressive recommendation stance.

Disclaimer

[BFGMF] The shares of the company are traded over the counter. Retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale.
MLPF&S usually makes a market in the shares of the company.

Opinion key [X-a-b-c] : Investment Risk Rating (X):A-Low, B-Average, C-Above Average, D-High.
Appreciation Potential Rating (a: Int. Term-0-12mo.; b: Long Term->1 yr.): 1-Buy, 2-Accumulate, 3-Neutral, 4-Reduce, 5-Sell, 6-No Rating. Income Rating (c): 7- Same/Higher, 8-Same/Lower, 9-No Cash Dividend.

Copyright 1997 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). Approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, an affiliated company and regulated by the Securities and Futures Authority Limited. The information herein was obtained from various sources; we do not guarantee its accuracy. Additional information available.

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