I recently interviewed New Guinea Gold (NGG.V) CEO, Bob McNeil (click here) about their Imwauna project. New Guinea Gold's strategy has been, for some time, to use cash flow from its smaller, short mine-life Sinivit low-cash cost open pit mine to provide the financing to complete their exploration of the larger Imwauna project. Getting Sinivit cash-flow positive has taken way longer than expected (major frustation and annoyance for investors). At the time of this writing it still may not be meeting guidance. It has been 2 1/2 months since the latest production was reported and the share price is not far from 52 week lows.
To make up for this lack of cash, New Guinea Gold had to resort to a pretty darn expensive (in terms of interest rate and terms) convertible debenture dilution. Although the terms were pretty harsh, only a 10% dilution of the company was required.
The Imwauna project seems like a dandy. It currently has an inferred resource of 700 K oz of gold at over 12 g/tonne at depths that are open-pittable. This is, for example, 24 times richer ore than one of my favorite Jr producers, Castle Gold (CSG.V). That kind of grade will clearly support a very low cash-cost mine. The project is still, after 180 drill holes, largely undrilled and open at depth and along the strike. McNeil expects Imwauna to be a 2 to 4 million oz project.
This article provides a tabular valuation of New Guinea Gold by assuming that Imwauna dominates the company's valuation and assuming a range of ounces are proved up and a range of dollar per oz valuations for those ounces. Two sets of tables are provided:
- One assuming New Guinea Gold proceeds according to plan and requires no further dilution prior to proving up Imwauna's resource.
- Another assuming that Sinivit continues to disappoint and that a further two dilutions (totaling 20%) are required along the way to proving up Imwauna's oz.
With these tables, the reader can then choose his own estimates of number of ounces, value of an ounce and whether further dilution will be needed to evaluate New Guinea Gold's outlook.
On the issue of how much an Imwauna oz might be worth, McNeil offered the following: "in all the M&A activity of 2008, exploration ounces (depending on location and “quality”) were valued at between $35 and $125 per ounce and production ounces at between $150 and 300. On the basis of those stats, since the Imwauna ounces are high-grade, if there were a million exploration ounces next year at this time, the mine would be worth $80 to $120mm. After development, which might cost $40-50mm, a million ounce mine would be worth approximately another 50 to 100%.". So, his (biased, no doubt) view is that Imwauna is worth between $80 and $240 / oz.
A company with a similarly sized project, Orezone, was recently sold for 45$ /oz. I believe it offers a realistic lower bound for valuing Imwauna as its project was much lower grade and Orezone was desperate for either a financing or a takeover and the deal was done at the depths of last fall's credit freeze up. New Guinea Gold should be able to do better as it is higher grade and Sinivit cash-flow should keep them from becoming desperate for financing.
The recent acquisitions of Western Goldfields and Capital Gold provide a possible independent upper bound on Imwauna's valuation as these companies are profitable producers with little exploration upside. They are (while awaiting their acquisitions to close) currently valued at 88$ and $160 per proven and proven oz respectively.
The table below provides Imwauna's valuation (in millions of US dollars) for a range of total oz and value per oz. Bold print (in each of the tables) provides my own "conservative, most likely and better than expected" estimates of the results of Imwauna's exploration and valuation. The math in this table is pretty simple.
Given New Guinea Gold's current fully diluted market capitalization of 34 million US$ and assuming no further dilution, the table below gives the amount that New Guinea Gold's current stock price would have to increase (or decrease) to match Imwauna's valuation. As such the table provides the takeover premium for New Guinea Gold (relative to its current price) if it were acquired after Imwauna's exploration completes.
The last table provides a similar valuation only assuming another 20% dilution prior to its being acquired.
So, to summarize, if New Guinea Gold proceeds according to plan it looks like a 6-bagger (485% increase) in a couple of years when Imwauna is proved up. If they do better than expected and find 4 million oz and get $125 /oz New Guinea Gold is more than a 14-bagger. And, if things do not go well and they find only 1 million oz, have to dilute 20% and get only 50$/oz New Guinea Gold should still be able to sell itself for a 17% premium. There appears to be a lot of upside in these outcomes and a "go to zero" downside doesn't really look very likely.
Now, let's look a little more closely at the short-term situation. What can we make of the Sinivit situation? Here's some thoughts:
- Positive: Sinivit has very high-grade ore for an open pit mine and so should be generating a lot of cash.
- Positive: Sinivit has been having problems, fixing problems and ramping up production for a year.
- Positive: Sinivit's latest reported production, at 2865 oz/in 2.5 months, was getting close to the upcoming guidance for Q1 of 4500 oz.
- Positive: The plan to ramp up Sinivit's production further is pretty simple: increase the amount of ore being heap leached and leach it longer. It seems like it should work.
- Positive: There are numerous recent cases of heap-leach miners having startup problems, but eventually getting it right (e.g. Gammon Gold).
- Positive: Management is confident enough in Sinivit's turn-around to restart and even ramp up the Imwauna exploration activity after shutting it down to conserve cash.
- Negative: There have been no production announcements so far this year. Given New Guinea Gold's track record of waiting as long as possible to release bad news, this bodes for yet another disappointment.
Because of that last negative, I've been biting my nails quite a bit as far as my New Guinea Gold investment is concerned. This article analysis has clarified the situation and reduced my anxiety and whet my greed. New Guinea Gold was able to get financing and only had to dilute 10%. There is still margin for error if Sinivit continues to disappoint. Even with a 20% dilution, Imwauna is so good there is still a good likelihood of a 5-bagger if Imwauna achieves 2 million high-grade ounces.
As I say, this analysis leaves me feeling good about my investment in New Guinea Gold, feeling tempted to buy more but recognizing that it is still a real speculation.
Leave me a comment.
P.S. There is a significant short term issue I failed to address. MacMin Silver, a bankrupt sister company of New Guinea Gold, holds 10 million shares that it will have to somehow liquidate as part of settling with its creditors. Nobody knows how this will be done, but if it is done on the open market New Guinea Gold's share price will be pushed down hard.