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rd80 (99.11)

Northgate Minerals - very speculative gold miner

Recs

3

September 26, 2007 – Comments (5)

I decided to work over the pitch I just entered for an old pick and pretend I know something about gold mining.

Northgate was/is in the process of trying to get approval to expand their Kemess South mine in British Columbia to a nearby location, Kemess North, to extend the mine life. Current projections show KS being tapped out about mid 2010 and NXG doesn't have much in the way of new locations.

On 17 Sep, a review panel recommended not approving the KN plan. That recommendation now goes to the federal and provincial Ministers of the Environment. They could either concur and not recommend the mine go forward or overturn the review panel and allow NXG to proceed.

The CEO gave a presentation at the Denver Gold Forum on 25 Sep and one of the slides included this statement, "Kemess North reserves will be reclassified as resources, since there is no longer a reasonable expectation of receiving permits to proceed with the Project." He also indicated they will proceed by focusing on another project, Young Davidson.  Therefore, it looks like NXG isn't willing to spend much more time and money pursuing KN, or they could be bluffing to try and worry the gov't over the lost jobs.

The 25 Sep presentation indicates the YD mine can be brought on line in 2010 as KS production is winding down. It also indicates they think the production cost at YD will be $325 per oz. (hey, I don't have to worry if that's Canadian or US)

However, the presentation shows ore grades in the range of 2 - 3 grams per ton. Based on a 26 Jul 07 blog by fellow Fool dwot, I doubt that gold can be produced from that ore grade for anywhere near $325 per oz, it'll take around 10 tonnes of ore to produce an ounce of gold and I don't see how you can mine and process ore at $32 per tonne.  They don't mention copper or some other mineral production being used to lower the net cost of the gold, but that's a possibility. Perhaps dwot or another wise Fool can weigh in.

The company does have quite a bit of cash on the books, has a book value of $1.80 per share and two to three more years of solid earnings from KS.

At this point, this is a very speculative play. IF the Canadian government overturns the panel recommendation and grants approval for KN, NXG could trade up to near the multiple for other gold miners, an easy double, maybe a triple. If they can produce at YD for $325, there's also quite a bit of upside - but we won't know the answer to that for some time. If the gov't concurs with the panel, there shouldn't be more than a dollar of downside.

I don't see any point in closing my CAPS pick until this plays out. I've already taken the accuracy hit and another couple points isn't going to kill me. 

I'm not recommending anyone try this gamble. But, if you're considering it please do a lot more homework (including reading everything dwot's posted on mining) and don't use money you can't afford to lose.

5 Comments – Post Your Own

#1) On September 27, 2007 at 1:16 PM, gopirque (52.86) wrote:

rd80,

As an investor in Northgate, I am very concerned about Kemess Mine and their future in 3 years.  If you look at their history, Northgate was not posting good quarters until their new CFO came into town and turned things around.  Here is what I just pulled off of their website as goals for 2007:

"Deliver forecast metal production at Kemess

Advance Young-Davidson on schedule and on budget

Extend mine-life within Kemess camp

Continue to generate strong free cash flow position

Grow through acquisition, development and exploration

Build Northgate into a leading multi-mine gold company"

 When researching this company many moons ago, I was impressed with what the "new blood" did to both turn the books around and provide vision for this company.

I read the report that the study group did, and it was very confusing...one minute saying that the mine looks great and there will be little impact on the environment, the next minute saying that Northgate can't proceed. 

Excerpt from the 1st paragraph of the report, bold for emphasis :)

"The Panel is satisfied, taking into account Northgate’s commitments and proposed mitigation and compensation
measures, that the Project would not likely result in significant adverse environmental effects. The Panel also
concludes that Duncan (Amazay) Lake is the only waste disposal alternative which is environmentally effective, and
technically and economically feasible. In spite of these conclusions, the Panel has recommended to the federal and
provincial Ministers of the Environment that the Project not be approved as proposed, but also acknowledges that the
Ministers could disagree with the Panel’s advice and approve the Project"

Perhaps someone else can shed more light onto that report, but it looks to me like the group just doesn't want Northgate mining there no matter what.

All this to say that if Northgate does continue to keep plenty of cash free, then perhaps they will aquire another company to helpl keep the gold coming in while they either find another reserve that they can tap into, or jump through more hoops for Kemess.

I'm not planning to bail out yet...but I would agree with not jumping in with both feet either.

 

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#2) On September 27, 2007 at 7:42 PM, rd80 (99.11) wrote:

Thanks for the reply.  The panel report did seem to straddle the fence.  No significant adverse environmental impact, but we don't think you should go ahead, but if you do go ahead here's a list of additional environmental mitigations.

Almost like they're leaving the door open for the next review level to overturn their rec.

Hope NXG goes your way. 

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#3) On September 27, 2007 at 8:42 PM, floridabuilder2 (99.65) wrote:

i actually bought this crap in my portfolio... i am bailing if we get over 3 again... a small loss at that point

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#4) On September 28, 2007 at 5:51 PM, ikkyu2 (99.51) wrote:

After reading dwot's blog, I became convinced that the first thing I want to know about a gold mining company is how they've hedged against spot gold price moves.  Since you mention NXG, any thoughts about its hedges?

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#5) On September 28, 2007 at 11:11 PM, rd80 (99.11) wrote:

I haven't done enough research to know how much of their production is hedged, so can't help there.

With their future past 2010 unclear, I believe Northgate will trade on how they're going to continue operations once KS is depleted.  Until that's clearer, hedging strategies and even the price of gold are secondary considerations. Not unimportant, just less critical than what happens after KS.  

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