time to buy

The 2010/11 results for were by any standards poor. Production of 50,000oz was below even their reduced forecasts. It now looks as if they are on the rebound and their target of doubling production to 100k ounces seems realistic.

Gold production of over 25,000oz per quarter should now be achieved on the back of:
? increasing use of mechanised mining methods at the Bullen Decline
? the development of the Mako Reef and increasing use of mechanised stoping at the Harlequin Decline
? increase production at the OK Decline as the water level falls
? North Royal Open Pit coming on stream. As they did deeper the ore quantity and quality will improve
production is increasing at each of these mines. Its not all going to happen at once, and NGX may not meet meet maximum production levles in 2011, but the signs are definitely looking up.

Im not sure, 100k ounces will be produced in 2011/12 but 80k looks odds on. For the sake of simplicity, lets assume this conservative level of production, costs of $1000/oz and the average gold price of $1750/oz. This configuration results in operating cash flow of $60m. Given that the current market cap is only 50% above this figure ($90m), the undervaluation here seems clear.

The SP seems to be responding to this logic. After the SP peaked at $1.50 less than a year ago it fell to a pitiful $0.23 in July. Since then its doubled.

I still have a number of credibility issues with management, but this time the odds do seem stacked in their favour. If September production comes in over 20k then we will know that 100k ounces are well on the way. If they should reach their target of 100k ounces the operating cash flow would be $75m and if in addition the gold price continues its bull run they may even crack operating cash flow of $100m and whopping profit. Time will tell.

In the absence of any evidence to the contrary, it looks like its time to buy.

K