Friday, April 1, 2011

New Guinea Gold: A Producer With An Exploration Market Cap

New Guinea Gold is a small producer with less than $20 million in market cap: that's smaller than many gold exploration companies. Its mine is the Sinvit, located 50 kilometres south-southwest of Rabaul in the Baining Mountains of the Gazelle Peninsula, East New Britain Province, Papua New Guinea.

Given its low market cap, I'm sure you're on the lookout for a catch. There is one: the Simvit's resource is only 132,000 oz. gold indicated and 35,000 oz. inferred. Production for the first two months of this year was only 1,379 oz of gold in fairly impure dore bars. [.pdf file.] The revenue generated is above the cash costs, but it isn't enough to make the company profitable. Essentially, it sells at an exploration market cap because it is an exploration company with a little revenue coming in.

That said, its Kavursuki project is coming up with some values that may make it a rival to the presently-producing if small Sinvit. Although most of the work has been trenching, there have been some drill holes sunk into the Kavurski. The best hole shows 20.3 m at 3.28 g/t gold. One drawback of the deposit is its gold values vary a fair bit along the mineralized zone.

This company, despite its Kavurski prospect, is pretty much a curiosity. As evidence of its dullness, it's actually selling below book value. Total equity, as of Sept. 30th 2010, was $22.542 million. Its current market cap is $18.644 million. This figure is less impressive than it seems, admittedly, because some of its assets are in deferred mining costs. It would be difficult to recover them should the company go into liquidation. However, New Guinea Gold also has 6,219,455 shares of Vangold Resources Ltd, 25,473,684 shares of Coppermoly Ltd and 9,568,422 options of Coppermoly, again as at Sept. 30th of last year. Both of them, sad to say, are lower than they were as at Sept. 30th. So, the book value now should be smaller than Sept. 30th's. If present figures are used, including losses since then the book value would be at or even below the company's market cap.

New Guinea Gold is a small. as-yet unprofitable producer that's likely to stay small. Although it has value, the value isn't big enough to justify an investment on that basis. Its prospects are also small, and it can't turn a profit on its operations even though its cash costs are lower than its revenue. Moreover, Sinvit might run out this year.

Its one-year chart, from, shows a pretty dull stock that's consistent with its lack of prospects:

The Moral Of The Story: Some companies are destined to remain small, and this company is one of them. In order to make sense as an investment, the market cap should be below book value and book value should be increasing through earnings. New Guines Gold may qualify on the first count, but it doesn't on the second count. As of last September, its twelve-month trailing loss was 5 cents/share. Thus, its book value is deteriorating. The shares it holds haven't increased in value to make up for the losses, either; in fact, they haven't increased at all. A quick look at its balance sheet and income statement suggests it isn't worth much of a look beyond. Unless the exploration arm gets extraordinarily lucky, this company is going nowhere.

Disclosure: None.

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