Thursday, March 10, 2016

Newmarket Gold Is Deeply Undervalued

On March 4, 2016 Newmarket Gold published its 2015 results. In my opinion, keeping in mind that in 2015 gold was in its strong downturn, these results were excellent. Despite lower revenue, the company reported higher profit from mining operations than in 2014 ($60.6 million versus $41.3 million). This is a clear indication that Newmarket was very successful in cutting its costs of production. The chart below compares production costs for all three mines: Fosterville, Cosmo and Stawell, starting from 2013:

Apart from costs, the chart depicts gold prices realized by the company in 2013, 2014 and 2015 (black line). It is easily seen that Newmarket was able to cut production costs at each mine. For example, Stawell (in green color) was unprofitable in 2013 - it cost $1,641 to produce one ounce of gold at this mine but the company could get only $1,407 per ounce of gold sold; it means that Stawell was making a loss of $234 on each ounce of gold sold at market prices. However, in 2015 the cost of production at Stawell was only $1,018 per ounce of gold and the mine was able to deliver a profit of $138 on each ounce of gold sold.

Now, the best part of this story. The chart confirms that the best asset in Newmarket mineral portfolio is its Fosterville mine. This mine carries the lowest costs of production (they went down from $1,308 in 2013 to just $744 in 2015 per ounce of gold sold) and delivers the highest amount of gold (123 thousand ounces in 2015, which accounted for 55.3% of total production)).
The table below summarizes the basic operating measures reported by Fosterville:

 Well, there is no mystery in the Fosterville performance. Due to the high grading ore, the company is able to mill (process) less ore to produce big amounts of gold. Lower milling means lower costs - as a result, in 2015 the Fosterville mine made a profit of $49.4 million (Cosmo made $5.5 million and Stawell $5.7 million).

Now, the main question - what about the future? The company has provided the guidance for 2016. Generally, no spectacular growth is expected. All three mines should deliver more or less the same amounts of gold as in 2015. So the main catalyst, which could have  a positive impact on the company's valuation, is the price of gold.

The chart below presents the projected profits from mining operations, depending on the price of gold applied:

How to read this chart? For example, if the average price of gold in 2016 is $1,300 per ounce, Newmarket is going to make a profit from mining operations of $92.4 million (please, remember that in 2015, at the average gold price of $1,156 per ounce, the company made $60.6 million). Etc.

Now, it is easy to project the valuation of the company, applying these prices of gold.

As a main metric I am using a multiple of EV / EBITDA. Today the company's shares are trading at this multiple standing at 5.45 (I assume that Newmarket shares are trading at $1.67 a share).

However, if in 2016 the average price of gold is $1,300 per ounce and the trading price does not change, the multiple would be standing at just 2.7. Etc.
Please, look at the chart below:

In my opinion, Newmarket Gold is deeply undervalued today - today its peers are trading in the range of 6.5 (Newmont Mining) - 20.0 (Randgold). If gold prices start another leg up in its bull run, Newmarket shares should go much higher than its peers just to get closer to them.


  1. Thanks for the article. Do you have information on the life of the mines that Newmarket owns?

  2. Is Newmarket gold suitable to be held as a core holding or should we look to majors like Newmont or Randgold ?

    1. Well, I have this company in my portfolio:

      As for Newmont and Randgold - I prefer Randgold, which is one of the best managed miners in the world.