February 21, 2010 06:32 pm
New Gold Inc. (NGD) is certainly lookinggood these days.
The company has been around forever but its present daystructure stems from a more recent three-way merger with Peak Gold andMetallica Resources. Today it has a market capitalization of $2 billionwith 389 million shares outstanding and a 52 wk hi/lo $1.85/$5.19. Thecompany is focused on growth and aims to be a +1 million ounce goldproducer by 2012.
Boy, that happened fast.
A few yearsearlier I recommended Peak Gold, thinking it was a spin off that wouldbe folded back into Goldcorp Inc. (GG). Obviously, I was wrong.
Hey, are thesethree-way company mergers auspicious or what? Kinross Gold (KGC) was incorporated in a similar way over 15years ago, and I’ve noted a few other deals with similar structures thathave done extremely well. If you’re looking for the next fast moverwith a stock price destined for double digits, that may offer a clue.
I’m going to sidestep that for a minute and talk about Goldcorp Inc.(TSX:G. C$40.42/NYSE:GG US$38.65). What’s great about these guys andtheir proxies is they grow at the speed of light. Some mining companiesget stodgy and boring and cautious when they grow big, but Goldcorp hasremained mercurial and aggressive. They think like juniors, only inTechnicolor, and they make very few mistakes. Some companies that growfast in the good times are destined to crash and burn but you just knowthat’s not going to happen to these guys.
I wouldn’t exactly callNew Gold a proxy for Goldcorp. But they have some of their directors onthe board, plus some from Franco Nevada (FNNVF.PK), and there are some unmistakablesimilarities.
For one thing, New Gold follows the samemethodology: Start with a bullish share structure, grab inventories,make astonishing leaps in gold production, grow big and fast throughM&A.
For another, they have a super big copper-gold system inLatin America. It’s worth noting that Goldcorp’s growth path reallyaccelerated after 2003, when it picked up a 37% interest in the Bajo deAlumbera copper-gold porphyry project in Argentina, owned in part byXstrata (XSRAF.PK) and Yamana (AUY). Thereafter, it quickly grew from intermediateproducer to a top senior gold producer.
For its part, New Gold –which is now an intermediate producer - has recently carved up the ElMorro project, another porphyry system, this time in northern Chile. ElMorro too is a company-maker, with mineable reserves of 6.7 millionounces gold and 5.7 billion pounds copper, plus substantial gold andcopper inventories in the resource category.
Last month New Goldacquired 70% of the project from Xstrata plc for $463 million, which itpassed to Goldcorp Inc. for development costs and a friendly loan to paydown the purchase. It retains a 30% indirect interest, which is allgravy once Goldcorp is paid off. Nice.
So the million dollarquestion now is whether the will actually exists – or will exist in thefuture - to shape New Gold into the next Goldcorp. I certainly hope itdoes.
The chart for NGD suggests a short-term price target ofjust over $6 Cdn per share, a 15% or so premium over the recent close of$5.11. Looking further out, I expect a much higher price based on itscash position, rapidly escalating gold production, and the simple factthat it is extremely well positioned to capitalize on any consolidationphase in the industry and particularly in Latin America.