Iamgold recently announced the purchase of Orezone (OZN.TO) at a price of $26/ reserve, measured, indicated and inferred oz. I discussed earlier this week how this becomes a basis for evaluating some exploration gold mining Jrs (click here for more detail).
New Guinea Gold (NGG.V) is a gold exploration company with a short-mine life, high-grade, open pit mine (Sinivit) entering production which is intended to produce the cash flow necessary to allow New Guinea Gold to complete the exploration of its flagship property (Imwauna).
New Guinea Gold's story is cluttered by various other properties and holdings in spun off companies which, in my view, don't have much value at this point. If they were of significant value it would have made sense for New Guinea Gold to have monetized these assets rather than doing another dilutive financing. So, my valuation of New Guinea Gold is focused on the plan of using Sinivit to finance the advancement of Imwauna, the flagship property and I award zero valuation to the other properties and holdings.
Imwauna seems roughly comparable to Orezone's Essakane project only it is not as fully advanced. It is targeted to have between 3 and 5 million oz of high-grade (e.g. 12 g/tonne), open-pittable gold.
New Guinea Gold (NGG.V) will have, when its latest offering closes, 186 million shares outstanding fully diluted. If we assume Imwauna will achieve 4 million oz of reserve, measured, indicated and inferred oz of gold then New Guinea Gold is worth, using the Orezone valuation, $.56/share (or 0.70 CAD$ / share). That's more than a three bagger from its current 0.20 CAD$ price.
Here are a couple of reasons to think that Imwauna will, when further advanced, receive a higher valuation than Orezone:
- Orezone was a distress sale. Orezone did not have the assets to satisfy a short term bridge loan payable in full in less than a month. New Guinea Gold, flush with cash-flow from Sinivit, should not be in such a condition.
- Imwauna is 6 to 8 times higher-grade (and thus lower cash-cost) project than Orezone at 12 g/tonne compared to to roughly 1.6 g/tonne. I think this is somewhat offset by the fact that Orezone's deposit is heap-leachable, while I think Imwauna will require a mill.
Of course, Orezone's deposit is advanced enough to have actual, fully quantified reserves, measured and indicated and inferred resources, while Imwauna currently has roughly one quarter of its targeted ounces and then only in the inferred category. Historical drilling and drill results not included in the current NI43-101 is the basis for expecting the targeted 3 to 5 million oz being realized. There is significant price of gold risk as well as execution risk for Imwauna actually achieving its expected valuation in that the price of gold could fall between now and when Imwauna's drilling completes and its final NI43-101 report is issued. This gold price risk is somewhat limited by Imwauna's gold is high-grade ore which should leave it economical even at much lower than current gold prices.
So, once again, it appears that New Guinea Gold is a multibagger if it can just execute its plan. Overall, I expect an Imwauna oz will be worth about twice an Orezone oz's when it has had more drilling and an NI43-101 report. This makes New Guinea Gold approximately a seven-bagger at current gold prices, IF THEY CAN execute their plan. New Guinea Gold expects to come out with one NI43-101 report doubling Imwauna's ounces in the next month or so. The drilling and NI43-101 for the full targeted gold may take another 18 to 24 months.
About a month ago, at rather a low point, I wrote down my thoughts on New Guinea Gold's prospects for executing on their plan (click here). Since that article appeared, New Guinea Gold announced production of over 2,000 oz / month for November 2008. This is a very significant step forward. They will have lower production in December 2008 because their gold refiner is closed from mid December until after New Year's day and so they will not do any gold pours because of the security concerns about holding gold on premises. So, its not clear when the next production results will be announced. After the new year when the pending gold pours have completed would be a good time.
From a technical standpoint, New Guinea Gold seems to have bottomed and is about to break out of its downtrend trend. Not terrible, but not great either.
At this point I'm feeling a lot more confident about New Guinea Gold executing their plan and it being a good investment going forward. Its more risky than most of my holdings, but has more upside as well.
Of course, everyone should do their own due diligence and take responsibility for their own investing decisions.