A Cheap Gold Play?

03/12/2008 12:00 am EST

Focus: STOCKS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, finds a smaller gold miner that has been left behind in the current precious metals frenzy.

The only reason to buy gold or silver at this point is emotional. You can buy high and sell higher, but I think the same emotions that force one into buying strength will tear them up during the next inevitable correction. 

With that said, Nova Gold Resources (Amex: NG) has some interesting projects, one [of which] is in Galore Creek. It contains as much as 13 billion pounds of copper; and at today’s price of $3.90, that is not a small deal.

Galore Creek sits just south of the Yukon Territory in northern British Columbia, and there is virtually no infrastructure, power, or anything else. The original development cost was estimated at $2.2 billion, but it has since jumped to over $5.0 billion.

This prompted Nova [and its partner] to announce that they were halting construction and were delaying development. Nova’s stock plummeted below $6.00 in December. With the price of copper pushing toward $4.00 and inevitable new highs, this asset will eventually come back to the front burner.

Nova has several [other] projects in the works, including one at Donlin Creek, in a 50-50 partnership with Barrick Gold (NYSE:ABX), [which] tried to buy them out in 2006. It appears that Donlin Creek is one of the largest unexploited gold bodies in the world with an estimated 29.4 million of gold reserves (and that estimate may be on the low side). With the Galore Creek project on hold, they have the resources to exploit Donlin Creek.

Nova has a decent cash flow from their stone and gravel business, and they expect to produce 100,000 ounces of gold at their Nome property (Rock Creek) this year. They have money in the bank, and they are well managed. There would seem to be more value here than the recent $10 price would indicate.

Remember, Barrick was willing to pay $16.00 for Nova in 2006 when gold was only $650 an ounce, and back then, Donlin Creek looked like it held only seven million ounces rather than the 29 million plus ounces it appears to have today. To me, Nova looks like it is worth much more than the $16.00 offered by Barrick two years ago.

As Nova’s properties continue to develop, it is a likely buyout candidate again in the future. When copper breaks over $4.00 and moves toward $5.00, the Galore Creek property will come back into the limelight. There is some risk, but the potential is for at least a double.

If the stock market dives further or if the metals correct, Nova is going to pull back. The Street is not favoring Nova these days. I don’t expect to see Nova back at $6.00, but it could come off to $9.50. The way to approach this is to buy a pilot position at $12.00 or less, and then keep some of your powder dry and buy again under $10.00 if given the chance.

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