Northgate reduces debt, increases production, but posts loss

Vancouver Higher gold prices and increased production at its Kemess South mine in BC. allowed Northgate Exploration (NGX-T) to post earnings in the fourth quarter of 2002, but for the full year, the corporation posted a loss of US$4.1 million, (before extra charges), on revenues of US$110.9 million.

For the year, the company tabled a total loss of US$14.2 million, or $0.14 per share, after the one-time cost of closing US$9.8 million worth of gold forward contracts. This compares with a loss of US$9.9 million, or $0.58 per share, on revenues of US$98.3 million in 2001.

During the fourth quarter, Northgate recorded net earnings of US$356,000, or nil per share, on revenues of US$32.6 million. This compares with a loss of US$7.7 million, or $0.31 per share, on revenues of US$21.9 million during the comparable period last year.

The increased revenues for the fourth quarter as well as for the year were the result of higher gold and copper production combined with improvements in gold prices. The average metals price received on sales during the fourth quarter, before hedging, was US$322 per oz. of gold and US$0.70 per lb. of copper. This compares with US$279 per oz. and US$0.65 per lb. during the fourth quarter last year.

At the end of 2002, Kemess Mines had forward sales commitments to deliver 350,000 oz. gold at an average accumulated price of US$302 per oz. These commitments are in the form of short dated spot deferred contracts. The company reports that a portion of this position may be brought and settled into income during 2003 and a portion will eventually be rolled into future years as part of the company’s commitments under its project loan.

"Northgate has not changed its commitment to hedge only as much future production as we are required to under the terms of our project loan and to make maximum use of puts instead of outright forward sales in order to preserve price upside for our shareholders," said Jon Douglas, Senior Vice President and Chief Financial Officer for Northgate.

The company produced a record 282,300 ounces of gold and 73 million pounds of copper at cash from the Kemess South mine during 2002 compared with 277,000 ounces and 66 million pounds in 2001. Cash costs for the quarter were pegged at US$194 per oz, substantially lower than US$215 per oz., recorded in the comparable quarter last year. In addition new records of 74% and 86% for quarterly gold and copper recoveries, respectively, were set during the fourth quarter.

"Operations at the Kemess mine exceeded the targets we had established when we purchased the mine three years ago," said Ken Stowe, President and CEO of Northgate. "Gross throughput of 50,000 tonnes per day and hypogene metallurgical recoveries of 86% for copper and 73% for gold will now be the benchmark for future performance gains. As a result of this strong performance we now expect the Kemess South mine to produce an average of 290,000 oz. of gold per year over its remaining 6 year mine life at cash costs averaging US$150 per oz."

Cash flow from operations during the fourth quarter (before changes in working capital and various one time costs) tallied to US$9.5 million, or $0.05 per fully diluted share. For the year, cash costs were US$21.9 million, or $0.18 per share. This compares with a cash flow of US$84,000 during the comparable quarter last year and US$12.3 million during 2001.

Northgate reports that it managed to eliminate its working capital deficiency, an issue that has been plaguing its balance sheet over the past two years. To achieve this the company performed an US$8 million sale/lease-back transaction involving some of the mobile equipment at the mine. The other transaction was a US$15 million redraw on the company’s current loan facility.

"As a result of these transactions as well as strong fourth quarter cash flow from operations we have eliminated our working capital deficiency and had US$4.4 million in cash on our balance sheet at year-end," said Douglas.

Northgate’s interest expenses declined to US$955,000 for the quarter and US$5.3 million over the entire year, down from US$1.7 million and US$9.3 million during the year earlier periods in 2001. Proceeds from two equity issues allowed the company to reduce its total debt by over US$135 million and increased its working capital by US$19 million.

"Our long term debt and our long term capital lease obligations were US$55.5 million and about US$10 million, respectively, at year end," said Douglas.

Moving to the exploration front, Northgate spent US$3.5 million drilling 42 holes at the Kemess North deposit and moved 5.4 million ounces from the inferred to the indicated category. The indicated resource at Kemess North is now pegged at 407 million tonnes averaging 0.409 gram gold and 0.224% copper, based on a 0.6 gram gold-equivalent per tonne cutoff grade. The indicated resource also includes a higher grade core of 185 million tonnes averaging 0.511 gram gold and 0.275% copper, using a 0.8 gram gold-equivalent cutoff grade. The inferred portion of the deposit is estimated to contain 107 million tonnes averaging 0.36 gram gold and 0.18% copper, based on a 0.6 gram gold-equivalent cutoff grade.

The Nugget zone, situated 1.3 km west of the Kemess North deposit, is estimated to host 87 million tonnes averaging 0.38 gram gold and 0.16% copper, based on a 0.6 grams gold-equivalent cut-off grade using a copper price of US$0.95 per pound. The deposit remains open in all directions. This year, Northgate will continue to drill the Nugget Zone with the goal of identifying a high-grade core similar to the one found at Kemess North.

Kemess North is expected to be brought on line once resources at Kemess South are depleted. The development plan envisions utilizing the Kemess South Pit to impound mill tailings from Kemess North.

"This will virtually eliminate the US$0.45 per tonne burden we currently bear to pump tailings to our present tailings facility," said Stowe. "We expect to substantially lower our unit milling costs and increase metal production by adding a secondary crushing stage, which, in combination with the softer Kemess North ore should allow us to process ore at a rate approaching 75,000 tonnes per day. Production at Kemess North would commence in 2009 at an estimated rate of 250,000 oz. per year of gold and 50,000 tonnes per year of copper and last for over 10 years. Capital costs are estimated at US$150 million, half of which would be devoted to pre stripping the deposit. The balance of the capital would be allocated to the construction of satellite infrastructure at Kemess North and the construction of a tunnel conveyer system to bring ore to our existing mill facility."

This year Northgate states that its first priority will be to move a significant part of the resource at Kemess North into the reserve category. As a second priority, the company plans to continue to make incremental metallurgical improvements at Kemess South. Its third priority will be to further explore its land package in the Nugget zone and other adjacent areas.

"In addition to exploration in the Kemess camp, we are also committing exploration dollars to the Highland Gold and Brenda properties," said Stowe. "Our fourth priority is to list on the American Stock Exchange and further expand our investor relations activities in conjunction with this new listing. We expect to obtain our listing in the second quarter of 2003."

In February, Northgate inked a deal StrataGold, a subsidiary of Expatriate Resources (EXR-V) for a 51% interest in the Hyland gold property situated in the Quartz lake area of southeast Yukon.

According to the deal, Northgate must spend $5 million on exploration over four years, with a minimum of $700,000 in 2003. In addition, Northgate is required to make property payments totalling $210,000. Once vested, Northgate can increase its interest to 60% by completing a feasibility study.

Percussion drilling in 1990 defined an oxidized gold resource in the Ma
in zone which was estimated to host 3.2 million tonnes grading 1.1 grams gold. The Main zone resource is situated immediately south of a large aeromagnetic anomaly. Northgate believes that the property has the potential to host a large sediment-hosted gold deposit similar to those in the Carlin District in Nevada.