Northgate’s Australian mines lag

Analysts remain mixed over AuRico Gold‘s (AUQ-N) $1.46-billion, all-share takeover bid for gold miner Northgate Minerals (NGX-T, NXG-X), with some believing the 60% price AuRico agreed to pay is too rich for Northgate and its prized Young-Davidson gold mine being built in northern Ontario. Others see the deal as an opportunity to create the next intermediate gold producer, with annual production slated to reach 730,000 oz. by 2013 from six gold mines.

Unfortunately, many shareholders of AuRico seem to agree with the first group. They have driven down the price of AuRico’s shares 28% since the Aug. 29 takeover announcement from $13.72 to $9.88 on Sept. 23 – helped, to be fair, by a falling gold price and panicky equity markets.

While the deal mainly focuses on Northgate’s new 180,000-oz.-per-year Young-Davidson gold mine scheduled to begin production in early 2012, AuRico stands to acquire Northgate’s two operating gold mines in Australia as well. Northgate bought the mines at a decent price in early 2008 by taking over ailing Australian miner Perseverance Corporation, valuing it at just 18¢ a share. Northgate forked over $257 million in cash but received two 100,000-oz.-per-year gold mines in return, Stawell and Fosterville, which had average operating cash costs at the time of A$560 per oz., or US$465 per oz., using an average 2007 conversion rate of 0.83 of an Australian dollar per US$1. 

Today, both mines are still producing 180,000 oz. gold combined, but operating costs have increased sharply, owing in part to a much higher Australian dollar. Cash costs this year are expected in the US$900 an oz. range for Fosterville and US$850 an oz. for Stawell. With the price of gold peaking at just over US$1,900 in early September, the increase in operating costs matters only a little for now.

But the mines will significantly add to AuRico’s average cash costs, which were around US$460 per oz. gold equivalent in the second quarter, should the takeover go ahead. In comparison, life-of-mine net cash costs at Young-Davidson are expected to be around US$400 per oz.

The Australian mines are also aging. Fosterville has five years left in its mine plan but that could be extended if gold prices remain high. The project held 475,000 oz. gold in proven and probable reserves as of Dec. 31, 2010, as well as 665,000 oz. measured and indicated, and 597,000 oz. inferred. The Stawell underground mine, meanwhile, produced its two-millionth ounce from the property last year and already has a 27-year history of mine-life extension. It has just 234,000 oz. gold left in proven and probable reserves, 276,000 oz. in measured and indicated resources and 111,000 oz. in inferred resources. A spokesperson for the company says the two mines are expected to generate A$40 million in free cash flow before 2012.

Northgate also shut down its Kemess South gold-copper mine in northern B.C. this year, which it had operated since 2000. The company has since placed the Kemess mill and related infrastructure facilities on care and maintenance while it completes a feasibility study for an adjoining underground mining project called Kemess Underground. 

Northgate had previously tried to develop the gold-copper deposit in 2008 as an open-pit mine, but First Nation opposition shut it down because of concern over lake destruction. 

A preliminary economic assessment estimated the underground project would yield a 10% pre-tax internal rate of return using base-case metal prices, including a US$115 million pre-tax net present value and US$723 million in total capital costs.

Shares of Northgate closed at $3.65 on Sept. 27, down from a high of $4.34 following the AuRico bid, but still up from their year-low of $2.42 in June.