Northgate Minerals Plays Right Into Our Hands

Personify your favorite evil villain, hunch your shoulders, rub your hands together, and repeat after me in a strangely slow drone: "Excellent!"

I will explain myself, but that, in a nutshell, is my reaction to Northgate Minerals' (AMEX: NXG  ) fourth-quarter earnings results. You see, I have hatched a not-so-evil plot to accumulate shares of Northgate over the course of a challenging transitional year in which I expect the market to overlook the company's long-term growth prospects. So far, everything is proceeding according to plan.

Northgate recorded a $72 million loss for the period, after taking a non-cash impairment charge of $76.9 million on a reassessment of the company's Fosterville gold mine in Australia. With costs at that operation trending quite high at an average of $738 per ounce during 2010, and a strong Australian dollar dialing up the pressure, a downward revision to life-of-mine expectations became appropriate.

For an investor like me -- whose primary incentive for owning the stock revolves around looming production from the exciting Young-Davidson mine in Ontario, Canada -- a fresh sprinkling of negative market sentiment from a non-cash charge like this one simply enhances the opportunity to acquire long exposure in advance of commercial production from the mine (slated for early 2012). Representing nearly 80% of the company's 3.55 million ounces of gold in reserves, I believe that Young-Davidson marks the appropriate focal point for prospective long-term investors.

Despite the company's stagnant production volume and lofty costs of production, Northgate still managed to eek an adjusted profit of $17.2 million for the fourth quarter. Healthy cash flow of $56.5 million expanded Northgate's already-noteworthy cash balance to a whopping $334.8 million. Fools take notice: that cash balance equates to 41% of Northgate's market capitalization!

Some of the gold industry's singular disappointments -- like mid-tier train wreck Kinross Gold (NYSE: KGC  ) , and feline femme fatale Jaguar Mining (AMEX: JAG  ) -- appear to wallow in weakness with very good cause. However, along with clearly underrated stocks like Gammon Gold (AMEX: GRS  ) and Yamana Gold (NYSE: AUY  ) , Northgate Minerals represents one of those rare opportunities for investors to ease into a red-hot sector like gold without the sense of intimidation that can come with chasing a charging outperformer like IAMGOLD (NYSE: IAG  ) .

Whatever sort of villainous plot you may be hatching to accumulate exposure to tomorrow's golden outperformers, be sure to add these and other mining stocks to your personalized watchlist, and track all of our Foolish coverage.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Gammon Gold, IAMGOLD, Kinross Gold, Northgate Minerals, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (3) | Recommend This Article (24)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2011, at 3:23 PM, catoismymotor wrote:

    It's that dogooder Barker. Release the hounds, Smithers!

  • Report this Comment On March 12, 2011, at 10:34 AM, jrwoodworking wrote:

    What this article fails to really inform you about is what they are not saying.

    The 334 mil. that NXG has is all slated to be spent by next year to open the new Young Davidson mine. Meaning that other then the revenues earned over the remainder of this year NXG in essence has next to no cash.

    The new Young Davidson mine is a direct replacement for the closed Kemess South mine.

    The new mine has lower grades and no Copper offset that allowed the former mine to produce Gold for many years at a negative cash cost.

    The current value reflects the loss of a third of its total production for a year between the time the old mine closes and the new mine opens.

    Get the straight facts and do your own DD.

  • Report this Comment On March 14, 2011, at 10:37 AM, silverminer wrote:

    jrwoodworking,

    With due respect, your assessment is inaccurate. The entire pre-production capital budget for Young-Davidson is $339 million, much of which has already been mobilized in the period since construction began in August 2010. You will note that cash flow remains positive despite the operating challenges of this transitional period. Assuming construction continues to stay on budget as it has thus far, the company will enter production retaining a positive net cash balance that will still be greater than many of its best-positioned peers.

    It is, furthermore, a noteworthy achievement for a junior miner to have procured full construction and commissioning capital -- without incurring a major debt burden -- for an imminent mining operation that is slated to yield 180,000 ounces of low-cost gold for a fifteen year mine life (already showing signs of extending further from recent discoveries, and subject to further exploration upside).

    Even at a remarkably conservative gold price assumption of $825 per ounce, Young-Davidson's high-grade ore body would yield a life-of-mine average cost of $351 per ounce per the mine's feasibility study. With a winning cost structure like that, copper byproducts are not needed to make this a hugely profitable venture. At an excellent average grade of 2.92 g/t, it is among the most attractive gold-only deposits presently under development. Sustained gold prices well above that mark would likely yield a positive reformulation of that mine plan. At $1,100 gold, the project carries an NPV of $425 million.

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