Norseman Gold: High return and high risk

Norseman Gold shores up its finances as it aims to return to profitable production.

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.

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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.

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