*** Gold related post (NXG) ***
Here's an "analyst comment" from the Yahoo board, FWIW. I would also add that their assumptions on the C$ could be aggressive.
I personally will not be able to resist buying if it goes any lower.
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Where is the Feasibility Study?
We had been expecting Northgate to release a Feasibility Study on the large, low grade Kemess North deposit, but instead a revised pre-feasibility study was released. The reasons for the delay in the feasibility study stem from new geotechnical studies on pit design and detailed engineering work on the tunnel/conveyor system which was picked as the preferred method of moving ore after the crushed ore pipeline was discovered to be much to costly as it would have required SAG and Ball mills at the Kemess North sight. A final feasibility study is now slated for completion in the summer of 2004. The final feasibility study will also contain analysis of the potential for additional mill throughput increases, and any additional reserves created at Kemess South as a result of 2004 drilling programs.
Permitting of the Kemess North project will become a more important issue once the feasibility study is complete and articles in the news papers over the winter regarding the
potential tailings disposal site have shown the project may be contentious to some individuals, however in the end I believe it will get permitted.
What's new in the Revised Pre-Feasibility Study?
· Upgraded 414 million tonnes grading 0.31 gpt gold and 0.16 % copper for 4.1 million ounces of gold and 1.5 billion pounds of copper to probable reserves from indicated resources and from the Sept. 2003 mineable resource of 369 million tonnes grading 0.34 gpt gold and 0.18% copper for 4 million ounces of gold. Tonnage increase but grade falls.
· Northgate has assumed long term gold price of $375/ounce and long term copper price of $1.00 to arrive at their forecasts, we assume $375/ounce of gold and $0.90 per pound of copper for our forecasts.
· Strip ratio now estimated to be 0.81:1 compared to 0.6:1 in the Sept 2003 study.
· Total Capital cost at $160 million compared to $157 million in Sept. 2003 study.
· Peak production rate of 88,000 tonnes per day down from 93,000 tonnes per day.
· Years 2006-2009 are still years of simultaneous Kemess North and South production where 288,000 ounces of gold and 98 million pounds of copper will be produced at costs of $141
per ounce as forecasted by Northgate however using our metal price assumptions we assume 305,000 ounces of gold at $155/ounce on average.
· After Kemess South closes and Kemess North is the only production Northgate estimates production at 208,000 ounces per year at a cash cost of $181 per ounce, whereas we forecast 209,000 ounces at $200/ounce.
· Although at higher metals prices of $450/ounce of gold and $1.10 per pound of copper the Kemess North project has a respectable rate of return at 16% but at our current long term
assumptions of $375/ounce of gold and $0.90 per pound of copper the project is reported to only return 5.2%.
· The lower grade and higher strip ratio are to blame for the lower rate of return and have negatively affected our NAV by $0.27 per share bringing our NAVPS to $2.25/share from $2.52.
Conclusions
We believe that 2004 will be a record profit year for Northgate as they benefit from the still lofty metal prices. We believe thier cash costs of $108 per ounce will put them in the lowest quartile in the industry. However, due to changes in the pre-feasibility study on Kemess South, with the three key items being 1) higher capex in pre-production years, 2) higher strip ratio, and 3) lower grade of assumed ore body our NAV has
fallen to $2.25 from $2.52 and therefore using our 1.45x NAV multiple we have lowered our target to $3.30 from $3.65. The delay in the feasibility study is a disappointing and further positive or negative changes may occur when the feasibility study is released. We do believe that at the current valuation Northgate is attractive and we therefore maintain our BUY rating with our new $3.30 target.
Commodity Markets Recent Drastic Corrections
As with most metal company share prices, Northgate has fallen from favour in recent weeks with fears of interest rates rising in the US driving the US dollar higher and commodity prices lower. Northgate is down 21% since my last note on April 28th describing their operating results and the shortfall for Q1/04. Although we believe gold will continue to be volatile over the short-term (3-4 months) we believe stability and perhaps higher prices will prevail over the longer term. Copper however should still be strong as the Chinese economy, although even if it is slowing slightly is still the most robust economy on the planet from a growth point of view and copper is an integral ingredient to a growing economy such as China's. Investors should be opportunistic with respect to gold shares in the coming weeks and we would stick with companies with low costs or high levels of base metal by-products, such as Northgate.
AI
