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As a value-oriented investor, navigating selectively through the daunting array of investment options among the miners of gold and silver, I am naturally drawn to a great turnaround story in the making.
As a matter of fact, four of the top five gold or silver stocks that I recommended for 2011 were chosen because I perceived an overblown or over-extended market reaction to operational hiccups that either had been -- or were about to be -- resolved. Just one spot back from Gammon Gold's (NYSE: GRS ) well-deserved pole position, industry veteran Northgate Minerals (AMEX: NXG ) earned this Fool's nod by virtue of a deep value disconnect visible in the shares even as a fresh source of mammoth profitability looms large on the horizon.
Northgate may have splashed water in the face of dozing investors and analysts this week when the company delivered $19.8 million of first-quarter profit during the final period of production from the company's former flagship Kemess South mine. Kemess South went out with a bang, delivering a better-than-expected 14,572 ounces for its final quarter at a terrific net cost of just $85 per ounce. Overall mining costs are expected to remain quite elevated for 2011 at the company's two producing mines in Australia, but I maintain that a near-sighted equity market has focused excessively upon this brief lag in the company's production pipeline -- and therefore failed to adequately consider the miner's 2012 earnings outlook. In any event, Northgate's reiterated 2011 guidance for about 200,000 ounces of gold at a cost between $805 and $845 per ounce is nothing to sneeze at in this high gold price environment.
But the market has not merely sneezed at Northgate's shares; it has coughed and wheezed its way to a sub-$700-million enterprise value for a miner with more than $5.2 billion worth of gold reserves in the ground. Zooming out to consider measured and indicated resources in addition to those reserves, Northgate stares Fools squarely in the face with more than $10.5 billion worth of gold at current market value! I know of many junior exploration companies that command a greater premium to their identified gold resources, whereas Northgate is a proven gold producer with 92 years of operations under its belt and a brand new mine set to access its foremost buried treasure at Young-Davidson beginning early in 2012.
Northgate achieved timely first-quarter cash flow of $40.1 million to help offset remaining construction costs for the Young-Davidson mine of just over $200 million. With $308.1 million in cash on hand at the end of the quarter, and construction proceeding apace and on-budget, this old-timer miner is about to look young again once Young-Davidson starts churning out 180,000 ounces of low-cost gold per year.
It may seem counterintuitive to expect to find deep bargains among the miners of gold or silver at this advanced stage of a secular bull market, but I have repeatedly suggested that bargains still abound in the sector. I maintain that Silver Wheaton (NYSE: SLW ) is a shoe-in to reach $100 per share, Hecla Mining (NYSE: HL ) has been excessively spurned, and that long-forsaken Yamana Gold (NYSE: AUY ) will ultimately prove its mettle. Even among those standout precious-metal bargains, however, Northgate Minerals shines with an under-appreciated light all its own.