Gold Miners Not Necessarily Golden: The Case of Northgate Minerals

by: Gary Tanashian August 03, 2008 | about stocks: NXG    
Gary Tanashian

Gary Tanashian

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Not that it needs repeating but trading or investing in gold miners means you are buying and selling companies - companies with human beings running things for all the good and often times bad that this entails. While looking at Northgate Minerals (NXG) Friday morning, which I am considering buying at some point (I'm a Bottom Feeder), and studying the Q2 release, I came across this bit of scariness (see below).

The stock has been breaking down even though the company has taken very positive steps in increasing future gold resources and production (Aussie acquisition). Since it is and has been known and accounted for, I am sure the following is not the main reason for the decline, which is more likely due to operational non-performance to date. But here is a gold company, run by flawed human beings (aren't we all?) that invested in tens of millions of dollars worth of supposed AAA rated securities on the advice of major US investment bank Lehman Brothers (LEH).

This is and has been the moral hazard for corporations and individuals alike for years now. I personally began panicking about this stuff years ago with the aid of Robert Prechter and a personal friend or two who helped me see just what was in store. Most people did not prepare properly nor did most corporations. Gold miners are corporations; make sure you research them well before treating them as investments. 

Investments: Northgate continues to maintain a portion of its investments in auction rate securities [ARS], which are floating rate securities that are marketed by financial institutions with auction reset dates at 7, 28, or 35 day intervals to provide short-term liquidity. All ARS were rated AAA when purchased, pursuant to Northgate's investment policy. Beginning in August 2007, a number of auctions began to fail and the Corporation is currently holding ARS with a par value of $72,600,000, which currently lack liquidity. Northgate's ARS investments were originally structured and marketed by Lehman Brothers, Inc. ("Lehman"), a major US investment bank.

The estimated fair value of the Corporation's ARS holdings at June 30, 2008 was $61,987,000, which reflects a $7,410,000 adjustment to the December 31, 2007 estimated fair value of $69,397,000. In estimating the fair value of ARS, the Corporation considered various variables, including trading levels of comparable securities markets, the Corporation's rank within the capital structure of the individual ARS issuers, the credit circumstances of financial guarantors, and the investments and reserves held by the issuers. This adjustment was recorded into other comprehensive income as Northgate believes this decline in value to be temporary. All of the ARS investments have continued to make regular interest payments. If uncertainties in the credit and capital markets persist or Northgate experiences further downgrades on its ARS holdings, the Corporation may incur additional impairments, which may be judged to be other than temporary. Northgate believes that based on its cash and cash equivalents balance of $76,876,000 at June 30, 2008 and expected operating cash flows, the current illiquidity of its ARS investments will not have a material impact on Northgate's ability to carry on its business.

Further, approximately 57% of the ARS investments are insured by bond insurer institutions (monoline insurers). Rating agencies such as S&P, Moody's and Fitch continue to monitor the credit rating of monoline insurers and ARS investments including those held by Northgate. During the quarter, a number of bond insurers were downgraded by certain rating agencies, which in some cases resulted in a downgrade of the AAA securities insured by those institutions. All of the Corporation's uninsured ARS continue to be rated AAA and Aaa, as applicable.

Related Articles

This article has 3 comments:

  •  
    Aug 04 08:03 AM
    One thing that needs to be pointed out is that if ARS securities fail to produce a bid thay normally reset the interest rate to some much higher value. There are many uses for the ARS-hospital bonds, state bonds, ect. If they do not have an immediate need for the funds this may not be so terrible after all.
    Reply | Link to Comment
  •  
    Aug 04 03:53 PM
    It may be an oximoron to call this investment AAA and 57% insured , and yet :

    "the Corporation is currently holding ARS with a par value of $72,600,000, which currently lack liquidity.

    The estimated fair value of the Corporation's ARS holdings at June 30, 2008 was $61,987,000, "

    No liquidity and a 10.6mil. drop in "estimated value" , if it did have any value?

    Then again , maybe that's the definition of AAA these days?
    Reply | Link to Comment
  •  
    Aug 04 04:02 PM
    I don't think a gold miner should ever have invested in ARS or other investments subject to credit/market risk as a matter of principle. Northgate earned a few pips above T-Bill rates and paid dearly for it. This management has made other poor decisions in retrospect, such as hedging copper production until 2010 at $2.50/lb. Buying another gold miner seems like an okay decision, but why did they need to pay all cash in a market where liquidity is at a premium? I know, it is much easier that way when buying an Australian company, but why did it need to be Australian? Even then, could they have obtained an Australian listing for Northgate shares and used those to buy the company? It's not like they didn't have plenty of time. Now, it looks like they are preparing to go back to the banks or the market for more money. And it's partly because most of their cash is locked up in the ARS. There is value in this stock but first investors need to know that the trend of questionable decisions has been broken. When that happens, the stock may do extremely well and it is worthwhile to keep our eyes on it--but eyes only at this point, not hands.
    Reply | Link to Comment
More Comments on NXG ยป
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Gary Tanashian

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Metal Miners
Gold Price
Precious Metals Funds
Silver