New Guinea Gold (NGG.V) released their quarterly earnings yesterday.
I own a bunch of this stock and am biting my fingernails about its prospects. All NGG.V has to do is execute its plan and it should be a ten-bagger, but its disappointed often enough to make this a speculation rather than an investment.
In contrast, I'm feeling very confident about my other Jr gold producers (and near producers): Gold Resource Corp (GORO.OB), Semafo (SMF.TO), Capital Gold Corporation (CGC.TO) and Metanor (MTO.V).
When I bought it, about a year ago, New Guinea Gold's outlook was very positive:
- Going into production with Sinivit almost immediately. Sinivit is a high-grade, 3 year mine life, open-pit gold-leach mine with a forecast production rate of 30K oz/year with a cash cost under $200/ oz. This was expected to give NGG a very low price to operating cash-flow ratio.
- The resulting cash flow was to be used to prove up another high-grade, open-pittable project (Imwauna) which, based on historical results, was expected to contain from 2 to 5 million oz of gold.
- Executing anything close to the plan should have created a multibagger based either on cash flow or on exploration results.
Since I bought in, Sinivit has been late to get into production and then failed the produce at anywhere near the forecast rates. On the plus side, exploration has produced better than expected results. This has failed to make up for the operational problems as far as share price is concerned.
A related company, MacMin Silver, having the same CEO as NGG, recently went bankrupt having failed to get its silver leach operation to produce to plan. This is eerily similar to NGG which is having trouble with a gold leach operation. MacMin Silver has something like 10 million shares of NGG that will be sold to someone as part of MacMin Silver's liquidation. These shares could hit the market at any time (or be sold into any share strength) eliminating upside momentum for some time.
All of this is pretty disappointing. It shows up in the chart (see below) which has that "going to zero" look about it.
The third quarter results (released yesterday) were not very good. This was expected. Production was affected by having the mine shutdown for a month due to equipment failure (that will impact production :) and by slower than expected leaching from the ore in the vats. The remaining cash on hand appears to be at a critical level.
The hopeful signs that I found in the report were as follows:
- Production in October was improving (although still under 1000 oz).
- Guidance for November production (as of November 26) was increased to 1500 oz. I'm a little leery of this as the number could conceivably have been spun to the high-side to help the just announced financing to proceed.
- Exploration has been suspended pending an improved financial situation.
- Steady 1500 oz / month production (what is forecast for November) should be adequate to allow exploration to resume.
- A 3 million $ financing of debentures has been announced (see below) for December which would allow exploration to resume at that time. Its not clear to me whether a buyer of these debentures has been lined up, which is yet another risk factor, but at least there is a plan for getting enough cash to tide New Guinea Gold thru a couple more production hiccups.
- Increasing the capacity of the crushers and increasing the leach capacity should allow production to grow well beyond the 1500 oz / month needed to support the original exploration plan.
Here's where NGG stands at this point, from my perspective:
- Looks like Sinivit production is finally ramping up with estimated production for November at 1500 oz. The forecast is to ramp up to 7000 oz in Q2 2009.
- NGG needs 1500 oz/month to continue its planned exploration and remain cash-flow neutral.
- NGG has little cash available and is raising 3 million$ of financing in the form of a debenture that converts into 15 million shares.
- The result is that NGG will have roughly 187 million shares outstanding, fully diluted, after this financing. At the roughly $C.20 share price that is a market cap of roughly 30 million US$.
It seems likely to me, but not certain, that New Guinea Gold will get Sinivit working well enough to avoid bankrupcy and even further dilution beyond this latest announced financing. Looking forward and assuming reasonable success, I see New Guinea Gold as an advanced project gold explorer. It should be able to prove up Imwauna having 3 million high-grade oz and Sinivit having 1 million high-grade oz for a total of 4 million, high-grade, low-cash cost oz. The result is, given NGG market cap, is 7.5$/oz. With a target valuation of 75$ per high-grade oz, NGG is a potential 10-bagger.
NGG has even further exploration upside from Imwauna, Sinivit and other projects (and from the substantial holdings it has in two spun-out exploration companies). I don't give this any valuation (nor does anyone else, I imagine), given the current market environment and NGG's sensitive financial situation.
I'm uncomfortable with NGG's risk profile, but like its upside and plan on holding. Once NGG becomes cash-flow positive, which is forecast to occur in January, I would consider NGG a very undervalued, reasonably low-risk (compared to the upside) investment opportunity. When you consider this you should also consider that I seem to have a very high risk tolerance compared to most investors.
I believe the chart will probably be key to telling the story. It could move up before an official announcement of improved production or it could, because of MacMin Silver owned share liquidation, could lag production improvement. Of course, the production could fail to improve which would result in the stock trending further towards zero.
The potential for a ten-bagger (or better) that should come from executing according to plan might be enough to keep this on your watch list.