Monday, May 2, 2016

Newmarket Gold - Decent 1Q 2016 Results And One Problem

Newmarket Gold delivered quite decent results in 1Q 2016 (although, due to lower gold prices and higher production costs at two of its mines, Stawell and Cosmo, these results were worse than those reported in 1Q 2015). 

As usually, the Fosterville mine was a leader with gold production of 33,138 ounces (57.1% of total production). The excellency of Fosterville is demonstrated by the chart below:

                       source: Simple Digressions

Note that direct costs have been generally stable since 2013 (between $90 - $100 per ton of ore processed) but the value of gold, contained in one ton of ore (gold content), has been in a steady increase. As a result, Fosterville delivered gross margin of $135.7 per ton of ore in 1Q 2016, 93.6% up, compared to 2013. 
It means that this much higher 1Q 2016 gross margin was generated despite the fact that in the last quarter the company was selling its gold at much lower prices ($1,139 per ounce) than in 2013 ($1,407 per ounce). 
Simply put, apart from lower costs of production, the Fosterville mineral deposit is currently of much better quality (for example - higher grade) than in 2013. 


As I was writing in my previous articles on Newmarket, the Stawell mine is a laggard. The chart showing its economics looks totally different from Fosterville's one:

                                   source: Simple Digressions

Here the trend is unfavorable: costs are rising and gold content (value of gold contained in one ton of ore) is going down. As a result, in 1Q 2016 Stawell delivered negative gross margin (direct costs higher than metal value).

What is more, this mine has been delivering lower and lower amounts of gold since 2013 (for presentation reasons I have plotted the average gold production per quarter):

                                    source: Simple Digressions

Well, despite the fact that Stawell holds 166 thousand ounces of gold, classified as mineral reserves, it looks like this mine is a closed chapter. The last two quarters support this thesis - Stawell reported losses from mining operations: $146 thousand in 1Q 2016 and $400 thousand in 4Q 2015 so mining operations at this site were unprofitable.

However, the company is confident that things at Stawell should improve in the coming future. This assumptions is based on the last discovery of the Aurora B deposit:

source: the company's presentation (slide 19)

Let me cite the company (slide 29):

The Aurora targets are located on the East Flank of the Magdala Basalt, with the shallower Aurora B approximately 400-500 m below surface. The Magdala Basalt has approximate dimensions of 3km x 1km in plan view and previous mining at Stawell has almost exclusively been from mineralization on the West Basalt Flank. The West Flank at Stawell has produced over 2.3 million ounces of gold whereas the East Flank, where the Aurora B discovery is located, has no recorded production. Aurora A could extend north to sit immediately below Aurora B (~1,200mRL), representing a potentially continuous mineralised surface for potential mining activities.

Well, I would like to know the costs of production at the Aurora B deposit. As I noted above, the Stawell's problem lies rather in its production costs than in the size of a mineral deposit. Fortunately, ore grades reported at Aurora B, are much higher than those reported in the West Flank so who knows...maybe the company's management is right.

Financial and operating results

The table below summarizes the 1Q 2016 results:

Final note

In 1Q 2016 Newmarket redeemed all of its convertible debentures. As a result, now the company holds practically no debt. Additionally, at the end of 1Q 2016 it was holding $52.1 million in cash. What does it mean? Well, let me remind one of the four pillars of Newmarket strategy (slide 4):

With quite a large amount of cash, high creditworthiness and deep capital markets relationships Newmarket Gold is, in my opinion, ideally positioned to diversify into other mining activities, for example through an acquisition of another miner / junior company.


  1. Given these results, would you be a buyer at today's price. Thanks for all you work on this blog.

    1. Harry,
      I wouldn't be a buyer because I had bought these shares last year (however if I were to increase my stake I would wait for some correction). As for the other investors (those who did not buy these shares before) - I would definitely buy at lower prices than Mr. Sprott was buying (C$2.25 - C$2.80) because it is quite a safe strategy to follow a notable investor but at lower prices than his entry points. The problem is that Newmarket is currently trading at much higher prices...

      However, these shares are still cheap (I agree with Roger) so it definitely makes sense to initiate an initial buy at today's prices. What to do later? Well, it is another issue, worth a separate article...

  2. NMI evaluations are still not rich compared to peers and Eric Sprott had cast 2x votes of confidence with 2 separate acquisitions of shared making him one of the largest shareholders