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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Tuesday, April 1, 2008

New Gold, Metallica, and Peak Gold Merger

CURRENT PRICE: $7.03 per share.
TARGET PRICE RANGE: $12.34 to $12.88 per share.

The “new” New Gold Inc. was announced yesterday, March 31, 2008. My interest was “Peaked” in this combination of New Gold (Inc. AMEX: NGD), Metallica Resources (AMEX: MRB), and Peak Gold Ltd. (OTC: PIKGF) having invested in the “old” New Gold and Metallica Resources in the past.

The combined company will be one of the top (#3 in market cap; #5 in measured and indicated reserves) mid-tier gold mining companies in the world.

The three companies expect to close the merger in July 2008 and operate under the New Gold Inc. name. They may seek a different exchange listing and possibly receive a new symbol.

The common shares of New Gold Inc. are currently listed on the Toronto Stock Exchange under the symbol NGD and the American Stock Exchange under the symbol NGD.

NEW GOLD SUMMARY

TSX: NGD

AMEX: NGD

Shares Outstanding: 208.2 Million (234.6 million fully diluted)

Market Capitalization: ~$1,600 million

Telephone: (604) 687-6263

New Gold Web Site

Presentation

There is a lot to like with this new company. The “new” New Gold Inc. will be a globally diversified mid-tier gold producer and exploration company with 3 cash generating gold mines: Cerro San Pedro (Mexico), Amapari (Brazil) and Peak Mines (Australia). There are very few mid-tier gold producers.

New Gold will also have a strong reserve position including near-term new production in New Afton (British Columbia, Canada), and El Morro (Chile). These are all mining friendly jurisdictions.

They also have a strong balance sheet with $500 million in cash, $292 million in debt, with a growing operating cash flow over the next couple of years.

The overall measured and indicated reserves are diversified by country as follows: Chile (32%), Mexico (25%), Canada (20%), Brazil (13%), and Australia (10%), Exploration is also underway in Alaska, British Columbia, and Chile.

Open pit mining represents 70% of NGD assets and 30% is underground mining. Open pit mining has lower cost of production than underground mining.

There resources are unhedged and they enjoy considerable production cost offsets from silver and copper byproducts.

Production, according to the company, is projected to be 297,000 oz. in 2008; 335,000 oz. in 2009; my projection is 400,000 oz. in 2010.

The “old” New Gold got caught up in Canada’s non-bank sponsored Asset Backed Commercial Paper ("ABCP") crisis to the tune of $51 million, the lion’s share of their $2.00 per share loss in 2007.

If gold stays under $900 an ounce (currently $883), the “new” New Gold is not a buy in my opinion. Another issue is the large number of shares represented by the combined company. New Gold has a lot of nice reserves and the production growth is strong, but the share value based on reserves isn’t as robust as other emerging junior gold miners. They need to prove up a lot more reserves to boost the long-run share value. In essence, they are worth more as a producer than they are based on reserves in the ground at this point based on my analysis.

Robert Gallagher of Peak Gold will be the CEO of the new company, though Metallica Resources shareholders represent over 40% of the merged company shares. According to press reports, Pierre Lassonde, a large investor in all three companies, was the architect of the deal. All three companies CEOs and Mr. Lassonde will be on the Board of Directors.

New Gold makes it's case for higher valuation based on Price to Net Asset Value ratios among mid-tiers, showing in their presentation that the new company will have a 0.94 P/NAV compared to the average mid-tier company with a 1.23 P/NAV ratio. This analysis implies the new company is undervalued by over 30% in the mid-tier gold producer space. They may be right.

The following methods are what I use to value New Gold for my investment research purposes and to provide a range of short-run and potential long-run value.

SHORT-RUN CASH FLOW SHARE VALUE

$12.88 per share in 2009 (2009 reflects a 13x cash flow valuation multiple more commonly used for mid-tier gold miners) using a cash flow model valuation and assuming the following:

-- 13x cash flow

-- $340 per ounce cash costs in 2008; $300 per ounce in 2009 (note that company projections for 2009 are decreasing — under $300 per ounce — due to economies of scale, elimination of duplication, supply chain management and other efficiencies).

-- 335,000 ounces of production in 2009 (~297,000 oz. projected in 2008)

-- $2 million G&A

-- 234,600,000 shares outstanding (fully diluted)

POTENTIAL LONG-RUN RESERVE SHARE VALUE

$12.34 per share based on current resource base.. The majors are paying about $280 an ounce for buyouts at $950 an ounce POG. New Gold will have about 8.1 million ounces in measured and indicated reservere along with 2.9 million inferred reserves (this projection assumes half of the inferred reserves) times $280 an ounce equals $3.188 million. $3,188 million divided by 234.6 million shares equals $12.34 per share.

”New” NEW GOLD DIRECTORS

Robert Gallagher, CEO and Director
Clifford Davis, Director
Pierre Lassonde, Director
Craig Nelson, Director
Paul Sweeney, Director
Ian Telfer, Director

2 comments:

Dan Tyrant said...

I was just about to pick up a bunch of shares of PIK when I heard the news... New Gold now looks very interesting to me. I'd also point out that there's warrants trading which expire in 2017(!) at an exercise price of $15ish(!!) The warrant trades for $1.75ish!

Now, I don't know when this bull market is going to be over, but I do know that we're still early yet, and so I'm very excited by this news and the potential return that this warrant offers.

PaulHunt said...

All I hear is that Gold is the way to go. And I am genuinely believing what I am reading but, I am also always genuinely confused where to invest in order to capitalize off these trends. But I did catch wind of this article that explains the price of Gold what expert analysts expect the peak price to be and where to invest to boot. The article is called Peak Gold… $1,000 Gold… $2,000 Gold and was interesting and gives you the main points you need to know. Its like cliff notes for investors. Thanks ya'll I hope this post helps some people out.

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