NEW YORK (ResourceInvestor.com) -- In the ongoing slide being suffered by gold stocks, Northgate Minerals [|TSX:NGX] has suffered more than many of its peers. Since hitting a high of $2.20 in early October 2004, Northgate's shares have more than halved, recently carving new multi-year lows under $1 a share.
But while a deluge of poor short-term results and a major analyst downgrade have kept returns for new Northgate shareholders in the red, President and chief executive Ken Stowe has painted the first half of this year as a major buying opportunity - and one on which the window is closing.
In an exclusive Resource Investor interview from this week's New York Institutional Gold Show, Stowe laid out his company's plans for growth, explained why the development of Kemess North is non-issue to Northgate's current valuation, and labeled his management team major value creators.
"You're going to put a dollar into our company, and get two dollars of value of Kemess South [alone]," said Stowe.
A Perfect Storm
As a single mine company, Northgate currently derives all of its cash flow and earnings from its Kemess South project, currently producing some 300,000 ounces of gold and 75 million pounds of copper per year. But ever since projected development costs at its prospective 4.1 million Kemess North project came in at $190 million last fall, some $30 million over expectations, Northgate's shares have been under fire. When factored with poor first quarter production results, a multi-day union strike, declining metals prices, and a series of downgrades from highly-respected (and one-time Northgate bull) CIBC analyst Barry Cooper, the confluence of events has put incredible pressure on the company's stock.
Kemess North Is A 'Red Herring'
Kemess North is probably the biggest issue weighing down Northgate. The project has been viewed as an ideal way to extend the life of the company's Kemess operations while taking advantage of the existing infrastructure already in place at Kemess South. But with costs coming in high and drooping metals prices affecting sentiment, uncertainty has abounded surrounding the deposit.
But according to Stowe, Kemess North is all but irrelevant to the company's valuation - and shouldn't be factored in as a negative until management has even decided if the mine will be built. At $425 per ounce gold and $1.20 copper, Stowe ascribes a C$2 net asset value to Kemess South alone - currently a 60% premium to the company's share price.
"I don't waste a lot of time on Kemess North - it's no use worrying about it until you have a permit in your hand," Stowe noted. "But when I said no value it certainly doesn't have a negative value. Some analysts have put a negative value on Kemess North.....[they're] saying that I'm stupid enough that I'm going to build this project in order to decrease my shareholder's value. I'm patently not going to do that, I have no interest in doing that."
Dwindling Cash Flow A "Short-Term" Problem
Beyond the uncertainty surrounding Kemess North, analysts and investors have also taken note of Northgate's sinking profits in 2005. The company's cash flow came in flat for the first quarter, while the company recorded a $0.05 per share loss. But this is a widely expected and largely short-term event that Stowe rightly attributes to the mine's transition.
Or, as the always upfront Stowe said, "we delivered exactly the numbers that we said...we weren't smoking dope, we knew exactly what we were doing."
So far this year cash costs have skyrocketed to the $360 per ounce range, while production has slumped, as mine workers spent the first half of the year finishing off the low-grade deposits remaining in the east end of Kemess South. However, production is set to begin in the mine's newest high-grade region this summer - with annual gold production climbing to 330,000 ounces by next year. Final 2005 cash costs should come in at a respectable $211 per ounce, net of copper credits.
For his part, Stowe said he understood why "short-term mentality" investors would sell off the company's stock during a short-term period of lower cash flow. What Stowe finds funny, he added, is the idea of precious metals investors suddenly starting to care about cash flow at all.
"It's interesting because most people in the gold industry don't buy companies for cash flow or earnings - if they did, they wouldn't own any of these stocks, there's very few that have either of those in any amount."
To Stowe, Northgate is an obvious exception. The company earned $31 million in 2004, a whopping $0.16 per share - for a trailing P/E that would be the envy of any blue-chip stock. While the transition year of 2005 has analyst consensus earnings estimates coming in at only US$0.04 per share, management is still targeting cash flow of about $0.18 per share - giving the stock a rock-bottom Price/Cash Flow ratio of around 5.
Developing the Future
And while Stowe thinks Northgate represents great value without Kemess North, he doesn't think investors should disregard that project's upside potential. While the project is simply too large and too expensive for his company to exploit on its own, he notes that management has already engaged in talks with Japanese and East Asian investors who have expressed an interest in financing the property in order to gain valuable new sources of copper production.
"Even if it doesn't get built by next year, I think sometime, considering the infrastructure is already in place, it will get built," Stowe added. "It's very low cost - somebody's already invested most of the money required to exploit it. It's a $200 million investment instead of a $2 billion investment."
Still, with Kemess North uncertain, a main investor concern is the company's declining resource base. With reserves at Kemess South set to run out in 2009, investors are looking for Northgate to pull the trigger on a plan to extend the company's viable operations.
On that note, Stowe is quick to point out that Northgate is actively looking for a 100,000 ounce per year acquisition in a politically stable section of the Americas. It's a move that he expects to happen before the end of the year - and could have happened sooner, he said, if not for the fact that management simply refused to overpay on several near misses.
Northgate's also recently made tactical decisions to increase its exposure to upswings in bullion - always a friendly move to goldbug investors. Since April 1, the company has accelerated the de-hedging program already in place - spending $10 million to reduce its forward sales by nearly 100,000 ounces. Northgate's stated goal is to become completely hedge-free and debt-free by early 2006. (The company was required to take on certain hedging requirements as part of its initial mine development financing).
Don't Count Management Out
Stowe's biggest beef by far is personal - the fact that analysts and investors have failed to give Northgate's management credit for its operational skills.
To date, Northgate has proven itself to be a strong mine developer. Since making an aggressive acquisition of the property from insolvent Royal Oak Mines in 2000, the management team - coupled with rising metals prices, of course - has been able to so far execute a brilliant operational turnaround.
"This mine was designed and built and sold as a 250,000 ounces producer," Stowe noted. "We're now at 300,000 ounces and its going to go up to 330,000 for two-and-a-half years. That's an organic growth of 80,000 ounces...and that's because we created the value."
With a strong team on board, Stowe obviously believes his company is capable of more success going forward.
Not A Bad Position
To Northgate President and CEO Ken Stowe, the bottom line is simple. Investors can choose to discount a strong management team with as much potential as anyone to create organic growth. But at current metals prices, Stowe believes his company is significantly undervalued based solely on its proven extractable reserves.
For resource investors everywhere, that's a valuable opportunity.
"I don't think we're in a bad position. We have at least another four years [at Kemess South], we'll generate several hundred million dollars is cash. If we don't find something that we think is good value for our shareholders, we'll give that back to them. That's my job, right?