Northgate’s Australian mines underperform

Analysts remain mixed over AuRico Gold‘s (AUQ-T) $1.46-billion, all-share takeover bid for gold miner Northgate Minerals (NGX-T), with some believing the 60% premium AuRico has 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 announcement to $9.88 from $13.72, 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 Corp., 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 approximately A$560 per oz. (or roughly 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 around 180,000 oz. gold combined but operating costs have increased sharply, thanks in some part to a much higher Australian dollar. Cash costs for 2011 are expected to be around 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 gold-equivalent oz. in the second quarter, should the takeover go ahead. In comparison, net cash costs at Young-Davidson are expected to be around US$351 per oz.

The Australian mines are also aging. Fosterville has just 5 years left in its mine plan but that could be extended provided gold prices remain high. The project still held proven and probable reserves of around 475,000 oz. gold 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 oz. from the property last year and already has a 26-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.

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 over concerns about the partial destruction of a lake. A preliminary economic assessment estimated the underground project would yield a pretax internal rate of return of just 10% using base case metals prices, including a pretax NPV of US$115 million and total capital costs of around US$723 million.

Shares of Northgate closed at $3.41 on Sept. 23, down from a high of $4.34 following the AuRico bid but still up from their year-low of $2.42 in June.