Norseman Gold looks solid Australian gold mining play

An article in this week's Investor's Chronicle, "My top Gold picks by Jim Slater" caught my attention, in particular what Jim had to say about Norseman Gold plc. "A gold mining share that ticks all the boxes for me is Norseman Gold (NGL.). It is in Western Australia and has been mining gold for 70 years. Cash in hand is A$23m (£14m) and future production is unhedged. Chief Executive Barry Cahill is hard working, experienced and capable, and has a substantial stake in the company. There are 3 mines with narrow vein nuggety deposits that feed a mill with a present capacity of 140,000 ounces of gold a year. Another mine, North Royal, is coming on stream later this year and there is potential for more mines as and when the capacity of the mill is upgraded. This year's production has been disappointing, with the target recently reduced to 65,000 ounces. However, the company's guidance for the year commencing July 1st 2010 is unchanged at 110,000 ounces. In the following year an increase to 140,000 ounces is likely, at which level operating costs should be reduced to about A$600 per ounce. With gold at say $1100 per ounce (A$1200 £726) this would give an operating profit of A$600 per ounce - A$84 a year compared with a market capitalisation of only A$128 million. Further exploration, administration expenses and tax would reduce net profit to A$45-50m. The prospective cash flow is so strong that I would be keen to invest in the company if it made widgets."

Norseman Gold (NGL) is both a UK AIM and Australian ASX listed Australian gold production company. The Company was listed on AIM in April 2007 and on the ASX on 25 June 2009. It acquired the Norseman Gold Project in May 2007, Australia's longest continually running gold operation. The Norseman Gold Project is located in the Eastern Goldfields of Western Australia in the highly prospective Norseman-Wiluna greenstone belt, 725km east of Perth and 186km from Kalgoorlie. Gold was first found on the Norseman field in 1894 and over the last 65 years it has produced over 5.5 million oz of gold. The mine is currently producing from two high-grade narrow-vein underground mines - the Bullen and the Harlequin. Currently, it has a total resource inventory of 3.7 million oz of gold at an average grade of 5.5 g/t. The tenements cover a 1,614 sq km area centred on the Norseman Township. The landholding comprises 179 contiguous tenements consisting of 13 Exploration Licences, 106 Mining Licences, 45 Prospecting Licences, 15 Miscellaneous Licences and 29 Mining Lease Applications. Reserves from the Norseman Project were 0.4 mn oz of gold (1.4 mn tonnes at a grade of 8.9g/t of gold), an increase of 29% from a year earlier.

The company also has three development projects: OK Decline, North Royal and Crown Reef:

– OK Decline: The Group recently approved the development of OK Decline, adding a third mine to the Norseman Gold Project. The initial life of the mine is two years, based on OK Decline reserves of 57,000 oz of gold. The company initially expects to mine 5,000 ounces and 30,000 oz in 2009-10 and 2010-11, respectively, from the Star of Erin, which is one of the three mineralised structures of OK Decline.

– North Royal: The Group has initiated pit dewatering and surface diamond drilling at North Royal. . First round drilling on the southern end of the pit has returned promising results particularly around a footwall structure with follow-up extensional and infill drilling will commence this month. Mining is expected to commence by the last quarter of the 2010 calendar year.

– Crown Reef: Historically, the Crown Reef mine was a major producer within the field. However, it is currently inactive. Surface drilling operations that have recently commenced intersected a structure in the expected position in the initial drill holes with assay results currently pending.

The Company's strategy is focused on extending the mine life through the conversion of resources into reserves and identifying additional resources and obtaining additional ore for the operating mill through the development of a third and subsequent mines.

In early March the shares fell 17 percent to a six month low after the miner cuts its full-year production outlook for the year ending June 2010 to 65,000 ounces from 75,000 ounces prompting Investec Securities to reduce its price target on the stock to 52 pence from 80 pence citing increased cost per ounce on this reduced production.

This morning, the company announced that non-executive director David Steinepreis last week bought 56,750 shares in the company on the market for a total of A$39,965, and he now holds 4,313,857 shares in Norseman.

For the year ending June 2011, revenues are expected to be around £111 million with earnings per share (EPS) of £5.83.  Putting the company of a forward p/e of 0.1 based on the current share price of 49.5p. Today I initiated a position at 47p based on an expectation of signficantly increased production in 2010/2011, very strong cash flow increases based on a reduced cost per ounce and interesting development programmes. The fact that the company has a strong balance sheet also adds to the positive story with a cash balance of £14 million.