Silver Stock Report
by Jason Hommel, April 18, 2006
Northgate Minerals Update (Amex: NXG. Toronto: NGX)
I love the free market; and especially the rapid exchange of information on the internet. Since my email last night, the message board for Northgate at Yahoo! Finance has lit up with discussion of my brief, sophomoric analysis, and pointed out a mistake I made. (One of the more encouraging messages is Msg: 38673 of 38689, where the writer concludes, "I've followed this industry for over 20 years, and there is not a single, better opportunity than NXG to increase in value 10 times.")
I quoted a recent news release showing earnings of $.18/share for 4th Q., 2005. What I failed to note what that some of those earnings were due to a tax issue, so the real earnings were $.11/share. Thus, I was wrong to extrapolate forward for a whole year, the earnings for that quarter. However, that's not the full story.
Northgate is hedged. Hedges are when a company pre-sells copper and gold at set prices, generally to finance mine construction. Since gold and copper have moved up, Northgate is currently receiving less than current prices for the sale of their hedged copper and gold, and this is hurting earnings per share! How much less, who knows?! When these hedges are paid off, hopefully soon, Northgate will start to receive the full value for their gold production.
To further add to the confusion about the P/E ratio, some of my readers looked at Yahoo! Finance, and noted that it says Northgate has a P/E ratio of 16.8, and so, they wonder how I get a P/E ratio of about 3.6, and why there is a difference.
There are many ways to calculate a P/E ratio. You can use the profits of a single quarter, or the prior year, or you can estimate the next year's profits. I assume Yahoo! Finance is using the prior year's earnings, which are understandably low, because Northgate just recently started producing. Last quarter, I think Yahoo! Finance was saying that Northgate's P/E ratio was about 65, which, of course, is not even close.
Now, there is no way that I now of, to determine the current status of a company's hedge book, since the law does not require them to disclose these things. There is a big political argument about this, some calling for "transparency", and others saying that companies need privacy about their trades. The companies who want privacy are generally the companies who have sold short gold, such as J.P. Morgan, and Goldman Sachs. So, there is no way to know how Northgate's hedges are hurting earnings, as of the moment, unless the company voluntarily discloses such information, as not required by law. Sometimes you can find clues in a company's annual report.
So, let's assume that soon, Northgate eliminates their hedges (as I assume, and hope, they will be able to do, and actually follow through with doing). Another way to calculate earnings is to guess their cash costs for mining gold. They previously said that cash costs for gold in the 4th quarter of 2005 were $59/oz., and that they expect to produce 320,000 oz. of gold in 2006! The reason their cash costs are so low for gold is that they are earning "credits" against the gold cost for producing copper. The cash cost includes the copper profits, and the copper costs, and the gold costs.
Cash costs do not include things such as the cost of administration, marketing, exploration, permitting, mine construction, debt financing, and hedge book losses. Besides not disclosing hedges, "cash costs" are another very misleading thing reported by the mining industry (almost worse than telling us how many ounces of metal they think they have in the ground).
But since Northgate is a producer, let's assume there will be little new mine construction (the big cost) and no other major costs. Then, let's assume that cash costs will drop towards zero, or below, since we have higher gold and copper prices now. We can then guess at profits, as follows: 320,000 oz. of gold. produced x $600/oz. gold = $192 million dollars!
Then, we can get a new, projected, estimated, forward-looking P/E ratio as follows: $550 million Market Cap / $190 million profit = 2.9 P/E ratio. That presents a better picture, with a better value, than what I presented when I wrongly used one quarter's results (which included a temporary gain of a tax write off, and included a temporary loss of hedging losses). Again, the size of the hedge book losses, are unknown and unknowable to analysts looking on the outside.
Yes, my math is juvenile, but so are the reporting standards and reporting requirements of the mining industry. Let the miners disclose everything like real adults should, and we can then have more adult-type analysis.
The other problem with most analysts in the mining industry is that they mostly underestimate the prices for copper and gold in their analysis, when they estimate future P/E ratios. They project forward, and assume such prices such as $450/oz. for gold, and $1.30/lb. for copper!
But gold is at $600, and heading towards $1000 in my opinion, and copper is at $2.60, and headed towards $3-$4 in my opinion. I'm more bullish than even the GATA story, (at gata.org, lemetropolecafe.com and goldrush21.com), which is that Central banks have fraudulently leased out most of their gold in a non-transparent way, to suppress the price for the past ten years (and are now failing to cap the price). The fraud bigger than gold leasing, is paper money! I'm bullish on copper, because the world has only a two day supply of physical copper inventory, and China is booming. Further, I understand that too many futures contracts that are not backed by real metal is price-suppressive, and fraudulent in nature, and will lead to a price explosion with either short covering, or defaults.
Another problem is that the law prevents mining companies from doing their own forward projections based on higher gold and copper prices, and requires them to use trailing, historical prices. This prevents companies from advertising themselves as effectively as they should be able to do.
Until the analysts, laws, and news media, deal with all of these frauds, (cash costs not including all costs, undisclosed hedges, fraudulent central bank gold leasing, paper money, fraudulent unbacked paper futures contracts) it will be difficult to find good investment advice like I'm able to present to you. Their lies, compounded upon more lies, give truth tellers the edge.
Speaking of reliable truth tellers, Adam Hamilton, yesterday, wrote a great article, saying that the average P/E ratio of the major gold producers is about 80. And 7 out of 15 of the stocks on the HUI are losing money!
So, in comparison to that, you can see what a great, low priced stock, Northgate really is, with a forward P/E ratio of just under 3.
A few more points: Northgate is now a copper/gold mine, earning more now from copper, than gold!
Northgate is cheap, I believe, primarily because the company acquired the project from another company who drilled out the resources and went bankrupt in the late 1990's. Northgate also may be cheap due to poor promotion, which is exactly what I like to hear, as an "activist shareholder" or investor/promoter.
Northgate has the highest market cap, and the most liquid trading volume, of any stock I have ever promoted (I typically invest in, and promote, companies with market caps under $100 million), so it will be interesting to see if it even moves up on this promotion. For full disclosure, this email is now going out to nearly 19,000 email addresses, and the emails typically opened by about 6500, over about a week's time. Since yesterday's email, 3800 people opened my email, and only about 586 clicked on the links (showing they are reading at least some of it.)
My biggest promotions in the past have resulted in about $1 million in daily trading volume. But Northgate, on the AMEX, has a typical trading volume of nearly 2 million shares, at about $2.50/share, or about $5 million, daily trading volume. So, this email promotion may have little effect, and may mean that you can get into this stock quite easily on Monday. On the other hand, many of my readers in the past may have been more restrained in buying my stock picks due to the small size of those other stocks, and the risky nature of explorers I typically promote. So, it's hard for me to tell what will happen to the stock price on Monday.
Note, there are two ticker symbols, one for each exchange for U.S. or Canadian investors.
(Amex: NXG. Toronto: NGX)
Disclaimer: I own shares of NXG, and NXG has not paid me to send out this email.