Having dropped 40% from its high six months ago, it is an opportune time to pick up shares in this under followed Canadian gold stock.

 

I see Northern Star Mining as a potential 5-10 bagger exploration story embedded in a a near term production value case. Management see a production run rate of 140-150k ounces of gold  around year end 2008.  At cash costs of $350 oz and $600 gold, the project would throw off roughtly $US 35m of cash flow.  At its current fully diluted market cap of $US 84m, the stock is very cheap for a gold stock,  should this be accomplished.  With $C 10m of cash and near term cash flow from the mining of the old mine’s  crown pillar near surface, the production level should be achieved with very little dilution to existing shareholders.  The real upside comes if the company’s vision of a multi million ounce deposit is confirmed by drilling. The market has been willing to reward drilling success in the region. Osisko (OSK.V), another Abitibi junior, has seen its stock price increase nearly 9 fold to a half billion dollar market cap on the back of its drilling program.

 

Shares out   84.42m

 

                  104.65m FD

  

Trades on TSX Venture exchange

 

 

 

The Abitibi gold belt in Quebec has produced 60mm ounces of gold. NSM’s operations are located on the site of the Malartic GoldFields former mine that produced 2m ozs before mining stopped in 1964 at 2700 feet underground. Mines today in the area have reached 3 times the 2700 foot depth at which production ceased at the Malartic Mine. The propery lies in close proximity to roads, sources of labor and other significant mines. Neighbor  Agnico-Eagle operates Lap, Goldex and La Ronde, Canada’s deepest and formerly largest mine.

 

 

 

 

The substantial infrastructure already in place differentiates this story from the swarm of grass roots exploration companies. Exorbitant capital costs are the bugaboo of junior mining companies.  Typically, after spending millions of dollars doing the geological spadework and drilling expensive holes to find and prove up a deposit, the junior mining company is then faced with the prospect of raising hundreds of millions of dollars to put the mine into production. The limited number of senior mining companies will not often rush to pay top dollar to a junior without the financial and technical ability to put the deposit into production.

 

I think Northern Star is sitting on mining infrastructure and equipment with a replacement cost in excess of its current market cap. The existing shaft, from the old mine workings, alone would probably cost $100m US to sink to day.  The recently acquired mill was built for $C35m in ’87

The hoist and other equipment were acquired in 2004, before metals prices and demand for mining equipment skyrocketed.

 

 

Management has believed they are hosting a deposit on the order of 6mm ozs of gold.  The theory is that mining was halted in 1964 due, not to the absence of gold below 2700 feet, but because of  the low price of gold at that time and the lack of modern mining techniques.  Initial results from a recent deep drill hole indicate the mineralization on the property continues at depth at similar grades to that seen higher up.  There remain 40 sections that are being analyzed at the assay lab. We should see results shortly. Favorable results from the deep hole could expand the potential size of the deposit beyond the 6million ounces currently envisioned.

 

By comparison Osisko currently lists an unbooked resource of 6.5mm ozs of 1.1g/ton gold.     NSM’s have been running .4 OUNCES per ton, equal to xx grams.

 

 

Management

Michel David – CEO, geologist. 27 years of experience worldwide.  Well regarded in Quebec. Had the vision for this property and now putting it into reality.  Very tight with the $. You would appreciate this upon visiting their Spartan offices in a former doctor’s office in Val D’Or.  The company is planning to hire an operating officer to free up Michel’s time to refocus on exploration.

 

Resources-

Unlike most gold companies, Northern Star has not reported a regulator approved resource figure. I believe this is a function of the “bootstrap” approach to their ramp up. Because of the extensive infrastructure on site, NSM is not faced with the enormous upfront capital cost and meticulous feasibility studies required to obtain bank and other financing. The company believes that undertaking a resource study would give them 500k reserve ozs based on drilling to date.

A compliant resource estimate is planned for the end of 2007, when they will hopefully have many more ounces to report.

 

 

As with all exploration plays, Mother Nature could disappoint. The aspect of near term production should cushion the loss that would ensue should the company completely strike out in its exploration program.

 

The company has taken a somewhat unorthodox approach to its development. Because of the amount of infrastructure in place, the company has foregone the calculation of compliant reserves at this stage. 

           

 

On April 4, 2006 the Board of Directors approved a Shareholders Rights Plan (the

“Plan”). The Plan is designed to ensure that all shareholders are treated fairly and equitably in the

event of a take-over bid.  I view this move as a sign that management believes there is significant latent upside in the stock.    

 

 

 

In the shorter term, I have observed that junior mining companies tend to trade on news flow, rather than value. An extended period without exciting news chases away the trigger happy fellows who influence the short term price of these things.

 

Since NSM has spent most of this year gearing up to go into production, the news flow has lacked the sizzle needed to keep speculators interested. Even worse, the initial production date has been pushed out a few months due to a Quebec Government requirement to construct a retaining wall around the mine site. This work requires a certified engineering firm to sign off on the work plan.  Due to the frenzied activity in the sector, NSM has had trouble getting SNC Lavalin to focus on attending to their little retaining wall project. Economically, this delay doesn’t impact value significantly, (the work was already budgeted) but the issue has diverted attention from the company’s long term prospects.

 

Coincident with the delay, a tranche of 50c warrants expired in October and this overhang has likely contributed to the stock’s lethargic recent performance.

 

 

 

The retaining wall problem is solved and the issue should be eliminated shortly.

Production and cash flow should commence early in 2007

Active drilling campaign should remind people of the tremendous exploration potential

Recent success in the region should create a receptive audience:   Osisko has more than quadrupled in the last year, on the back of drilling success and a sexy French model on their website (http://www.osisko.com/index.php) .