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It's not too late to diversify your portfolio with gold mining equities, and I'm excited to recommend and open a position in Northgate Minerals (AMEX: NXG), an accomplished mining company headquartered in Vancouver, Canada.

The business
Northgate Minerals is a gold and copper miner with three operating mines and one under construction located in politically safe jurisdictions of Canada and Australia.

Mining companies have two advantages over physical gold. As gold rises, their value rises even faster because fixed costs enable profits margins to expand substantially. Also, unlike physical gold, mining stocks are typically eligible for lower tax rates on long-term capital gains, which max out at 15%. Gold is actually deemed a "collectible" by the IRS, and long term gains are taxed at rates as high as 28%. This makes miners a good option if you see little downside risk and a lot of upside in gold, as I do.

Gold mining companies run from tiny, hype-laden explorers to large producers with functioning mines and cash flow. Exploration has the biggest rewards, but also the most risk. As you move up into established gold producers, risk is lower but so is reward because size makes growth difficult. The key is to find Goldilocks miners -- not too small but not too large. Northgate fits the bill with upside from exploration and development and solid cash flow from existing projects.

Why I'm buying
I'm buying $1,000 of Northgate shares because the company is well run, has lots of growth potential, and trades at an attractive price relative to peers. A catalyst for the stock will be when it opens its new flagship Canadian mine, Young-Davidson, in 2012. And as a wildcard, Northgate owns an intriguing hidden asset that could be worth much more.

1) Savvy, proven operators. Northgate bought its flagship Young-Davidson mine back in 2005 for $18 million. It now has a present value of $600 million and while much of this increase is due to gold tripling in price, management cannily built out its reserves, as it has done with other properties. This commitment to extending the life of mines pays huge dividends to shareholders.

2) Sizable growth potential. Northgate is investing heavily in exploration and development and has $21 million earmarked for 2010. This might not sound like a lot, but it is around a fifth of the newly expanded $110 million exploration budget of industry giant Agnico-Eagle Mines (NYSE: AEM), and Northgate has just 1/18th the enterprise value of Agnico-Eagle. The bottom line: Northgate is spending in the big leagues and it is beginning to pay off with new discoveries at existing mines, which could be catalysts for the stock.

3) Compelling valuation. Northgate is compelling value in relation to peers. To name just two, I estimate Aurizon Mines (AMEX: AZK) trades for over $500 enterprise value/reserve ounce, and New Gold (AMEX: NGD) goes for around $475 EV/oz. At $350 EV/oz, Northgate looks attractive, especially given its growth prospects and cash flow generation once Young-Davidson comes on line.

This is a reason the company trades at a discount. Its workhorse Kemess South mine is closing next year after a great 10-year production run, and with Young-Davidson not beginning production until 2012, 2011 will be light for gold production. Northgate's other two mines in Australia are high cost, so 2011 won't be a banner year. However, once Young-Davidson opens, its low cost base will counterbalance the other two mines and these issues should fade away.

4) Hidden asset wildcard. In addition to its 3.8 million ounces of proven gold reserves, Northgate owns the Kemess North property. It was denied a permit to build an open pit mine in this area in 2007 and wrote the investment down to zero, but a new underground approach is under consideration which could be more palatable environmentally and still open access to 1.4 million gold ounces and 500 million pounds of copper. I'm not banking on this, but I ballpark the worth of a new mine at Kemess at $500 million. Northgate's market cap is $870 million, so this hidden asset could really have an impact if it were to come to light.

The main risk is that Young-Davidson is delayed, experiences significant cost growth, or doesn't produce as management forecasts. Other risks include higher costs for the Australia properties as they grow older and the many standard risks associated with mining investments including falling commodity prices; rising energy, material, and labor costs; dependence on capital markets for growth; and departure of key personnel. Mining shares can also be volatile.

Northgate Minerals shares trade where they were a year ago despite the gold rally as investors worry about the transition to Young-Davidson. But as construction progresses next year and investors gain confidence in its ability to gush cash, I expect the shares to rally and the valuation gap between it and peers to close. Along the way we have a clever management team investing large sums to increase the company's gold reserves which should increase overall value. Northgate is being overlooked at the moment, but I don't expect that to last.

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