MENU

Norseman Gold: High return and high risk

There are risky stocks, very risky stocks and then there are small resource companies. Perhaps no company illustrates this better than Norseman Gold (ASX: NGX), which owns what is claimed to be Australia’s longest continually running gold mining operation.

Like many small miners, it often seems to live from hand to mouth, constantly raising fresh funds as it builds up its latest project. Often such companies just have one mine, creating a huge amount of operational risk compared to larger miners such as the S&P / ASX 100‘s (Index: ^AXTO) (ASX: XTO) BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO). But when everything looks bleakest, these shares can offer great buying opportunities for brave investors.

For example, in June 2009, Norseman shares were trading around 52 cents. They finished the year north of $1 and peaked soon after at around $1.15. But after various production issues, the shares have slumped. This morning a fundraising of around $20m was announced at just 4 cents a share.

The money comes from Tulla Resources, a well-regarded family-run private outfit, which already has a sizable stake in Norseman Gold and now effectively runs the company. It will increase the number of shares in issue from 492m to around 1 billion, valuing it at just under $40m. There are also various warrants and convertible notes in issue (mostly at 6 British pence and 12 pense), which could potentially take the share count to 1.5 billion and would value the company at around $50m, where they all to be exercised.

Norseman’s near-term aim is to get production back up to 100,000 ounces a year, and cost per ounce down below $1,000. Two parts of the mine have been mothballed for the time being, leading to the workforce being more than halved.

The specific production target for the year to June 2013 is 80,000 ounces, and 17,000 in the September quarter. With gold at $1,600 an ounce, this should create significant cash flow, although — as seasoned mining investors will often warn — it’s likely to be eaten into by ongoing and exploration-related capital expenditure.

Norseman hopes to develop other prospects in its tenements, and even get production up to 300-400,000 ounces a year. This tends to be the level that makes small gold miners more attractive takeover targets, so it makes sense as a longer-term goal.

Due to the fundraising, the shares are suspended at the moment, but they are due to start trading again before the end of this week. Given the history of this operation, it still looks extremely high risk.

If you’re in the market for some high yielding ASX shares, look no further than our ”Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool ‘s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Stuart Watson, originally appeared on fool.co.uk. It has been updated by Mike King.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!