Northgate Reports Third Quarter 2008 Financial and Operating Results
Record Quarterly Production Forecast for Q4-2008
VANCOUVER, Nov. 4 /CNW/ - (All figures in US dollars except where noted)
- Northgate Minerals Corporation (TSX: NGX; NYSE ALTERNEXT US/AMEX: NXG) today
reported the financial and operating results for the third quarter ended
September 30, 2008. The net loss for the quarter was $29,438,000 or $0.12 per
diluted common share, which includes a charge of $16,912,000 to recognize an
other than temporary decline in the value of the Corporation's auction rate
securities investments and a mark-to-market hedging gain of $22,984,000 on the
Corporation's copper forward contracts.
2008 Third Quarter Highlights and Fourth Quarter Outlook
- Total gold production of 64,588 ounces at Northgate's three operating
mines.
- Gold production in the fourth quarter of 2008 is projected to be
130,000 ounces, which will make it the strongest production quarter
in Northgate's history.
- Released positive exploration results at Young-Davidson, confirming
the continuity of mineralization in the deposit and bringing the
project closer to its total resource goal of 3 million ounces of
gold.
- Announced delineation of an additional 140,000 ounces of gold
reserves at Stawell, extending the current mine life by 1.5 years
until the fourth quarter of 2011.
- Discovered significant extensions to three north striking areas of
gold mineralization at the Fosterville Gold mine: the Osprey; Raptor;
and, Harrier Base Fault zones, located in the Harrier Underground
zone within the current mining lease.
- Successfully completed pilot plant testing at Fosterville and
approved $4.75 million to install a heated leach circuit, which will
increase overall gold recovery to 90%. The new circuit will be
operational by Q2-2009.
- Ratified a new three-year collective labour agreement with the
employees at Stawell.
Ken Stowe, President and CEO, stated, "Although production during the
third quarter was lower than the previous two quarters, we are pleased to
report that we have now set the stage for the highest quarterly gold
production in Northgate's history. At Kemess, production was unusually low
mainly due to remedial work on the west wall of the pit, which necessitated
the processing of lower grade stockpiles. In addition, a 10-day stoppage
occurred in August when a buried line feeding process water to the
concentrator suddenly and unexpectedly collapsed. The remedial work in the pit
was completed on schedule and Kemess is expected to process much higher grade
ores for the next several months, which will result in by far the strongest
production of the year. In Australia, we made excellent progress at both of
our operating mines. At Stawell, initial expenditures on exploration yielded a
quick payback in a 140,000-ounce increase in ore reserves. In addition, major
investments in new haulage trucks and underground ventilation and cooling
systems are largely complete and are expected to result in significant
improvements in working conditions and productivity underground. Production in
the quarter was lower than forecast due to lower than plan feed grades from
underground; however, as at Kemess, production in the fourth quarter is
expected to be by far the strongest of the year. At Fosterville, the
accelerated underground development program has now started to bear fruit and
for the first time, we have an adequate number of working areas available in
the mine to meet our ramp-up plan. Equally as important was the successful
testing of the on-line pilot plant, which demonstrated that we can increase
gold recovery to approximately 90% by investing $4.75 million. On the
exploration front, the positive drill results recently released at the Harrier
Underground zone confirm the highly prospective nature of the area around the
Fosterville mine. Finally, at Young-Davidson, exploration drilling confirmed
the continuity of mineralization in the deposit and has brought the project
closer to our total resource goal of 3 million ounces of gold."
Executive Overview
Financial Performance
Northgate Minerals Corporation recorded consolidated revenue of
$99,267,000 in the third quarter of 2008, compared with consolidated revenue
of $86,756,000 in the same period last year. The net loss for the quarter was
$29,438,000 or $0.12 per diluted common share, which includes a charge of
$16,912,000 to recognize an other than temporary decline in the value of the
Corporation's auction rate securities ("ARS") investments and a mark-to-market
hedging gain of $22,984,000 on the Corporation's copper forward contracts. Net
loss of $11,937,000 or $0.05 per diluted common share was recorded during the
corresponding quarter of 2007. Revenue was also lower than expected as a
result of unusual disruption events occurring at Kemess and low gold output
from the Australian operations. Fourth quarter production is expected to
increase to 130,000 ounces. Cash flow from operations after changes in working
capital was $638,000 or $0.00 per diluted common share compared with
$29,445,000 or $0.12 per diluted common share during the third quarter of
2007. Per share data is based on the weighted average diluted number of shares
outstanding of 255,467,109 in the third quarter of 2008 and 254,210,079 in the
corresponding period of 2007. As of November 3, 2008, the Corporation had
255,601,854 issued and outstanding common shares and 5,792,700 outstanding
stock options.
Health, Safety and Environment
Northgate continues to promote a strong culture of safety and is striving
to ensure that the highest health and safety standards are maintained at its
mine sites. While the Kemess mine recorded a total of three lost time
incidents during the third quarter of 2008, other measures of safety continue
to improve, and the mine is on track to record the fewest number of total
safety incidents in a year since Northgate acquired the Kemess mine in 2000.
In Australia, in the third quarter, Stawell had zero lost time injuries while
Fosterville recorded one lost time injury. In addition, audits of the safety
management systems at both sites were conducted during the quarter, which will
provide a basis for future improvements. Young-Davidson had no lost time
injuries in the quarter and continues to perform without any lost time
injuries for the year.
Human Resources
On September 26, 2008, a new three-year collective agreement was ratified
by the Employee Collective, comprised of the 155 production and maintenance
employees at Stawell. This agreement replaces the previous three-year
agreement that expired on September 26, 2008.
Commodity Price and Exchange Rates
The worldwide financial crisis has had, and will continue to have, a
profound effect on mining companies with dramatic movements in prices and
exchange rate resulting in severe market volatility. As a miner of gold,
copper and silver in Canada and Australia, Northgate has seen the US dollar
prices it receives for the metals it produces decline dramatically over the
past few months, but has also seen a dramatic decline in its operating costs
in US dollar terms over the same period. In Canada, the precipitous decline in
the price of copper has reduced Northgate's estimates of future profitability
of the Kemess South mine. However, the decline in the Australian currency has
actually resulted in a higher Australian dollar gold price, which has
significantly improved future profitability of the Stawell and Fosterville
Gold mines.
Copper - After averaging over $3.30 per pound for the past two and a half
years and hitting an all-time high of $4.07 per pound on July 3 of this year,
the price of copper declined dramatically in the third quarter, ending at
$2.91 per pound. In October, the copper price fell further to under
$2.00 per pound as the financial crisis worsened. In isolation, this change
has had a significant adverse impact on the copper mining industry. However,
there has also been a dramatic decline of local currencies in major copper
producing regions of the world such as Chile, Russia, Peru, Australia and
Canada, relative to the US dollar. The decline in local currencies ranging
between 20% - 30% has reduced operating expenses in these jurisdictions in
US dollar terms, mitigating the impact of the falling copper price to a
significant extent.
This being said, there will be certain higher-cost copper mines in the
United States and other areas of the world that will be forced to close if the
current price environment persists, which should reduce near-term copper
supply. In addition to these expected closures of producing mines, most, if
not all, expansion and greenfield copper projects have been delayed or
cancelled as a result of credit market conditions and the falling copper
price.
While these developments on the supply side of the copper market are very
supportive of prices in the medium and long term, the demand side of the
market is clearly in doubt in light of a potential worldwide recession, which
will weigh heavily on the near-term price for copper.
Gold - The price of gold in US dollars has declined substantially as the
worldwide financial crisis has worsened and commodity prices in general have
plummeted. After having averaged $911 per ounce during the first six months of
2008, the price of gold dropped to $730 per ounce at the end of October. While
the recent trend in the US dollar price of gold has been disappointing from a
gold producer point of view and the volatility of the price has made planning
exceptionally difficult, profit margins for non-US gold producers with
operating costs primarily denominated in other currencies have remained
relatively stable and, in some cases, have actually increased.
Production Forecast
In the fourth quarter of 2008, Northgate is projecting to produce
approximately 130,000 ounces of gold and 18.5 million pounds of copper from
its global mining operations at a net cash cost of $268 per ounce. The fourth
quarter will be the strongest production quarter of the year due to the higher
grade ore, which is scheduled for processing at Kemess South and Stawell and
improving mill throughput and gold output at Fosterville, as a result of the
improvements made at that operation since acquiring it in February.
The annual budgeting exercise for the 2009 year is underway and the
preliminary forecast for production in 2009 is 390,000 ounces of gold at a net
cash cost of $395 per ounce. In addition, copper production from Kemess is
forecast to be 54.0 million pounds. Northgate will provide final plan
projections for next year's production in January 2009, along with estimates
of planned exploration spending and capital expenditures for the year.
Summarized Consolidated Results
(Thousands of US dollars,
except where noted) Q3 2008 Q3 2007 YTD 2008(1) YTD 2007
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Operating Data
Gold
Production (ounces) 64,588 70,055 236,535(2) 204,164
Sales (ounces)(3) 64,685 73,545 210,505 210,245
Average spot price -
London Bullion Market
($/ounce) 870 681 897 666
Copper
Production
(thousands pounds) 9,195 18,822 37,515 51,363
Sales (thousands pounds) 8,633 18,916 38,089 52,948
Average spot price -
London Metal Exchange
Cash ($/pound) 3.48 3.50 3.62 3.22
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Financial Data
Revenue $ 99,267 $ 86,756 $ 324,240 $ 241,947
Net earnings (29,438) (11,937) (7,926) 6,116
Earnings per share
Basic (0.12) (0.05) (0.03) 0.02
Diluted (0.12) (0.05) (0.03) 0.02
Cash flow from operations 638 29,445 56,947 92,371
Cash and cash equivalents 71,700 269,191 71,700 269,191
Total assets $ 609,589 $ 587,679 $ 609,589 $ 587,679
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(1) Nine month financial data and gold sales (ounces) include the results
of Northgate's Australian operations from February 19 to
September 30, 2008. Other figures are for the nine month period
ending September 30, 2008.
(2) Nine month production for Fosterville excludes the change in
gold-in-circuit inventory previously recorded in production for the
first quarter.
(3) Prior period comparatives reflect gold sales (ounces) for Kemess
only.
Results of Operation - Kemess South Mine
(Thousands of US dollars,
except where noted) Q3 2008 Q3 2007 YTD 2008 YTD 2007
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Operating Data
Ore plus waste mined
(tonnes) 5,936,198 11,282,000 20,872,646 33,983,404
Ore mined (tonnes) 2,597,905 4,799,000 10,040,210 13,854,785
Stripping ratio
(waste/ore) 1.29 1.35 1.08 1.45
Ore stockpile rehandle
(tonnes) 1,712,424 258,025 4,762,457 1,644,861
Ore milled (tonnes) 3,958,406 4,786,712 12,753,244 13,666,645
Ore milled per day
(tonnes) 43,026 52,029 46,557 49,684
Gold
Grade (g/t) 0.368 0.642 0.453 0.680
Recovery (%) 60 71 66 69
Production (ounces) 28,141 70,055 123,848 204,164
Sales (ounces) 27,452 73,545 122,303 210,245
Copper
Grade (%) 0.153 0.207 0.167 0.207
Recovery (%) 69 86 79 83
Production
(thousands pounds) 9,195 18,822 37,515 51,363
Sales (thousands pounds) 8,633 18,916 38,089 52,948
Net cash cost ($/ounce) 597 (233) 212 (59)
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Financial Data
Revenue $ 43,212 $ 117,357 $ 259,538 $ 320,910
Cost of sales 54,640 59,241 178,099 166,611
Earnings (loss) from
operations before income
taxes (20,227) 35,234 57,888 106,192
Cash flow from operations (535) 50,526 91,366 108,693
Capital expenditures 1,409 4,926 6,219 11,241
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Operational Performance
The Kemess South mine posted gold and copper production of 28,141 ounces
and 9.2 million pounds, respectively, in the third quarter of 2008. Gold
production was lower than forecast due to a combination of unusual events
experienced early in the third quarter. The main incident was the collapse of
a buried section of the process water line connecting the process water pond
to the mill, which resulted in ten days of lost production while a by-pass
line around the pond was installed. An insurance claim to recover costs
related to the outage and costs of the repair has been submitted. The mine
also experienced shorter, but still significant, unplanned production
stoppages due to power outages from a lightning strike to the power line and a
cracked pinion tooth on one of the two SAG mills.
Both gold and copper grades and recoveries were lower than forecast as
mill feed was sourced mainly from various low grade stockpiles, rather than
the open pit, due to the continued remediation of the west wall where some
localized sloughing occurred in the second and third quarters of the year. Now
that the cleanup of the west wall is complete, high-grade ore from the
west- end of the open pit is being treated at the mill, resulting in
forecasted gold and copper production in the fourth quarter of 2008 of 74,000
ounces and 18.5 million pounds, respectively.
During the third quarter of 2008, approximately 5.9 million tonnes of ore
and waste were removed from the open pit compared to 11.3 million tonnes
during the corresponding quarter of 2007. Total tonnes moved (mined tonnes
plus stockpile ore rehandle) were 15% lower in the third quarter of 2008 than
they were in the corresponding period last year due to resloping efforts in
the western area of the open pit. Unit mining costs were Cdn$1.99 per tonne
moved compared with Cdn$1.56 per tonne moved in the third quarter of 2007. The
unit mining costs in the most recent quarter were higher than they were in the
same period last year due to the lower volume of material moved, higher prices
for diesel fuel and maintenance charges, which were only partially offset by
lower drilling costs as a result of the completion of the north wall push
back.
Mill availability and mill throughput during the third quarter of 2008
were 77% and 43,026 tonnes per day (tpd), respectively, compared with 93%
availability and throughput of 52,029 tpd in the third quarter of 2007. While
processing weathered stockpile hypogene ore and supergene/leachcap ore had a
positive impact on mill throughput in the quarter, any gains were more than
offset by the mill outages from the failed water pipeline and outages from the
lightning strikes. The ore milled in the third quarter of 2008 had a grade of
0.368 grams per tonne (g/t) gold and 0.153% copper compared to a grade of
0.642 g/t gold and 0.207% copper realized in the third quarter of 2007. The
lower grades reflect the higher quantity of stockpile material that was
processed during the quarter.
Gold and copper recoveries averaged 60% and 69%, respectively, compared
with 71% and 86% in the third quarter of 2007. In the most recent quarter,
Kemess milled almost 2 million tonnes of very low grade stockpile hypogene
ore, and supergene/leachcap ore, both of which have inherently lower metal
recoveries than the hypogene ore that represented the bulk of the original
Kemess South resource.
Metal concentrate inventory decreased by 1,500 wet tonnes (wt) in the
third quarter of 2008 to approximately 2,100 wt, as road conditions were good
and the availability of railcars remained steady.
During the third quarter of 2008, the average unit cost of production per
tonne milled was Cdn$12.88, including Cdn$2.48 for concentrate marketing
costs, which consist of concentrate treatment and refining charges and
transportation fees. The average unit cost in the same quarter in 2007 was
Cdn$12.31 per tonne milled, which included Cdn$3.68 for marketing costs. The
increase in the unit cost of production is primarily due to the lower
throughput in the current quarter, which was mitigated by the decline in 2008
Benchmark settlement terms for treatment and refining charges. Although total
tonnes moved and mill throughput in the third quarter of 2008 were
approximately 25% and 18% lower than they were in the same period last year,
site operating costs remained constant at Cdn$41.4 million in both periods due
to higher costs for consumables such as diesel fuel, mill steel, equipment
maintenance and labour costs. The net cash cost of production in the third
quarter of 2008 was $597 per ounce of gold compared to the negative
$233 per ounce cash cost reported in the third quarter of 2007. The higher net
cash cost in the current quarter is due to the combined effects of lower gold
and copper production.
Financial Performance
Revenue from the Kemess South mine in the third quarter of 2008 was
$43,212,000 compared with $117,357,000 in the corresponding period of 2007,
excluding the effects of mark-to-market adjustments on Northgate's copper
hedge book. Metal sales in the third quarter of 2008 consisted of
27,452 ounces of gold and 8.6 million pounds of copper, compared with
73,545 ounces of gold and 18.9 million pounds of copper in the same period
last year. During the third quarter of 2008, the price of gold on the London
Bullion Market averaged $870 per ounce and the price of copper on the London
Metal Exchange (LME) averaged $3.48 per pound. Net realized prices for sales
in the quarter were approximately $857 per ounce of gold and $2.04 per pound
of copper. Since the Corporation's metal pricing quotational period is three
months after the month of arrival (MAMA) for copper and one MAMA for gold at
the smelting facility, the realized price calculation incorporates the actual
settlement price for prior quarter sales, as well as the forward price
profiles of both metals. The average market prices for gold and copper in the
same quarter of 2007 were $681 per ounce and $3.50 per pound, respectively,
while realized prices were $608 per ounce and $2.94 per pound. All of the
Corporation's gold and copper sales during the most recent quarter were sold
at market prices compared to 2007, when a significant portion of the
Corporation's sales were hedged at lower than prevailing prices.
The cost of sales in the third quarter of 2008, excluding depreciation
and depletion, was $54,640,000, which has declined from the corresponding 2007
period cost of sales of $59,241,000. The cost of sales in the current quarter
reflects the lower sales volume quarter over quarter, but also reflects the
impact of increases in the cost of consumables such as diesel fuel, mill
steel, equipment maintenance and labour costs.
Depreciation and depletion expense in the third quarter was $9,108,000
compared to $8,050,000 during the corresponding period of 2007. The higher
depreciation and depletion expense for the most recent quarter reflects the
recognition of depreciation capitalized in ore stockpiles, as well as an
increase in the amortization rate for 2008 as a result of capital expenditures
in the prior year.
Cash invested in capital expenditures during the third quarter of 2008
totalled $1,409,000 compared to $4,926,000 in the corresponding period of
2007. Capital expenditures in the most recent quarter were primarily devoted
to the ongoing construction of the tailings dam and road infrastructure.
Capital investments in 2009 and 2010 will continue to decline as construction
of the tailings dam draws to a close, but closure related capital expenses,
which are credited against the outstanding closure liability shown on the
Corporation's balance sheet, will increase as the Kemess mine moves towards
the end of its reserve life.
Stawell Gold Mine
(Thousands of US dollars,
except where noted) Q3 2008 Q3 2007 YTD 2008(1) YTD 2007
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Operating Data
Ore mined (tonnes) 158,195 172,019 452,104 499,581
Ore milled (tonnes) 177,381 181,971 514,981 551,169
Ore milled per day
(tonnes) 1,928 1,978 1,879 2,019
Gold
Grade (g/t) 4.18 4.56 5.00 5.19
Recovery (%) 88 88 87 89
Production (ounces) 20,956 23,410 72,126 82,423
Sales (ounces) 22,367 n/a 55,651 n/a
Net cash cost ($/ounce) 668 n/a 623 n/a
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Financial Data
Revenue $ 20,022 n/a $ 50,745 n/a
Cost of sales 14,121 n/a 35,026 n/a
Loss from operations (2,839) n/a (5,545) n/a
Cash flow from
operations 5,880 n/a 15,386 n/a
Capital expenditures 11,588(2) n/a 21,852(2) n/a
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(1) Nine month financial data and gold sales (ounces) include the results
of Northgate's Australian operations from February 19 to
September 30, 2008. Other figures are for the nine month period
ending September 30, 2008.
(2) Capital expenditures include mineral property, plant and equipment
acquired through assumption of capital leases.
Operational Performance
The Stawell gold mine produced a total of 20,956 ounces of gold during
the three months ended September 30, 2008. Production was 8,000 ounces lower
than forecast and is attributable to negative grade variations and a revision
in the mine plan. This revision in the mine plan has resulted in a higher
fourth quarter gold production forecast of 33,000 ounces.
The new fleet of three 60-tonne haulage trucks arrived on site during the
quarter. These larger trucks will reduce unit hauling costs and enhance the
profitability of the Stawell mine. Approximately 177,381 tonnes of ore at a
grade of 4.18 g/t were milled in the third quarter of 2008. Gold recoveries in
the mill were 88%, which were on target with plan and consistent with levels
in the third quarter of 2007. Total operating costs during the period were
A$15,813,000 equating to an overall unit operating cost of A$89 per tonne of
ore milled. Mining costs were A$61 per tonne of ore mined and milling costs
were A$26 per tonne of ore milled.
The net cash cost of gold for the third quarter was $668 per ounce, which
was significantly higher than plan. The cash cost was negatively impacted
primarily by lower than normal gold production, higher costs for consumables,
and an unusually high amount of definition drilling to delineate future ore
stopes. Cash cost per ounce of gold in the fourth quarter is expected to be
much lower, as a result of higher forecasted gold production and the
significant decline of the Australian dollar relative to the US dollar.
Underground mine development continued in the Golden Gift (GG) production
zones during the quarter and the development advance totalled
1,355 metres (m), which was consistent with plan.
Financial Performance
Stawell's revenue in the third quarter was $20,022,000 based on gold
sales of 22,367 ounces. The cost of sales for this period was $14,121,000 and
the loss from operations before income taxes recorded for the period was
$2,839,000. The mine generated $5,880,000 in cash flow from operations during
the quarter.
Total investment in capital expenditures at Stawell during the quarter
was $11,588,000, which includes $5,779,000 for mine development and $4,395,000
for capital leases related to the new fleet of haulage trucks. Depreciation
and depletion expense for the three month period ending September 30, 2008 was
$8,069,000.
Mine-Life Extension
In September 2008, after only five months of drilling at Stawell,
Northgate announced the delineation of an additional 140,000 ounces of gold
reserves at a finding cost of approximately $20 per ounce, extending the
current mine life by a further 18 months until the fourth quarter of 2011
(refer to press release dated September 8, 2008). Reserves were increased in
all areas of the mine, through a combination of exploration drilling, resource
definition drilling and grade control drilling.
The most significant addition to the mineral reserves and resources
originated from the GG6 zone, where 61,000 ounces of reserves and
24,000 ounces of inferred resources have thus far been delineated. Development
towards GG6 is scheduled to begin in March 2009.
A NI 43-101 compliant Technical Report, outlining in detail these reserve
additions, was filed on SEDAR on October 22, 2008.
Exploration Update
Underground and surface-based exploration continued at Stawell, with over
4,400m drilled during the quarter. Exploration in the main GG6 reserve zone
indicates that the zone remains open along strike to the north, where there is
excellent potential to add additional high-grade resources. Results from
exploration have also indicated that grades in the new GG6 reserve zone are
15% higher than the average reserve grade in other areas of the mine. Drill
holes 5281 and 5282 below GG6 returned multiple intersections such as
24 g/t gold over 6.3m and 13.6 g/t gold over 3.5m. Follow up on these holes
will take place in the first quarter of 2009 as mine development allows for
adequate drill platforms.
Exploration work with mixed results continued on the Magdala North target
area close to existing mine workings. Surface follow-up on hole SD 622
(8.4 g/t gold over 9.4m) was delayed due to lack of drill rig availability.
The drill rig is now scheduled to arrive in the fourth quarter.
Fosterville Gold Mine
(Thousands of US dollars,
except where noted) Q3 2008 Q3 2007 YTD 2008(1) YTD 2007
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Operating Data
Ore mined (tonnes) 116,747 205,394 344,360 644,301
Ore milled (tonnes) 125,592 220,397 375,071 718,343
Ore milled per day
(tonnes) 1,365 2,396 1,369 2,632
Gold
Grade (g/t) 5.84 3.67 5.18 3.03
Recovery (%) 66 77 65 79
Production (ounces) 15,491 19,981 40,561(2) 54,180
Sales (ounces) 14,866 n/a 32,551 n/a
Net cash cost ($/ounce) 940 n/a 1,086 n/a
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Financial Data
Revenue $ 13,050 n/a $ 29,114 n/a
Cost of sales 14,959 n/a 35,962 n/a
Loss from operations (6,381) n/a (16,812) n/a
Cash used in operations (2,464) n/a (9,025) n/a
Capital expenditures 8,132(3) n/a 30,770(3) n/a
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(1) Nine month financial data and gold sales (ounces) include the results
of Northgate's Australian operations from February 19 to
September 30, 2008. Other figures are for the nine month period
ending September 30, 2008.
(2) Nine month production for Fosterville excludes the change in
gold-in-circuit inventory previously recorded in production for the
first quarter.
(3) Capital expenditures include mineral property, plant and equipment
acquired through assumption of capital leases.
Operational Performance
The Fosterville Gold mine produced 15,491 ounces of gold during the three
months ended September 30, 2008, which was 4,500 ounces lower than plan, but
an improvement from the first and second quarter production. Production at the
mine was negatively impacted by slower than expected development rates, due to
significant unplanned manpower turnover. In addition, recoveries in the mill
were adversely impacted by the higher proportion of carbonaceous ore that was
processed. Grades continued to improve and averaged 5.84 g/t gold during the
third quarter, which was only slightly below forecast. The key initiatives to
ensure the long-term success of the mine progressed during the quarter.
Development infrastructure was established in the Ellesmere zone, which will
provide another mining front. Production is forecast to increase in the fourth
quarter to 23,000 ounces of gold and development is progressing to facilitate
this ramp up. Ore production commenced from the thicker, higher grade sections
of the Phoenix orebody in the third quarter, which will continue in the fourth
quarter and be combined with increased production from the Ellesmere zone.
During the third quarter of 2008, 125,592 tonnes of ore at a grade of
5.84 g/t were milled. Gold recoveries in the milling circuit of 66% were
significantly lower than the 77% achieved in the third quarter of 2007.
Recoveries were affected by the higher proportion of black shale ore that was
processed during the quarter.
Total operating costs for the third quarter were A$16,787,000, equating
to an overall unit operating cost of A$130 per tonne of ore milled. Mining
costs were A$84 per tonne of ore mined and milling costs were A$40 per tonne
of ore milled. Unit costs during the quarter were higher than planned due to
low ore production from the mine resulting from the lack of accessible mining
areas. Mine development rates continued to improve during the third quarter of
2008 and an advance of 1,868m was recorded. By the fourth quarter of 2008,
development in the mine will have progressed to the point where ore production
will no longer be constrained and unit operating costs are expected to drop
significantly due to higher ore production and cost reductions associated with
the conversion to owner mining.
Net cash cost for the third quarter was $940 per ounce of gold, which was
negatively impacted by lower than forecast gold production and one-time
charges related to the owner mining conversion and the gold recovery
enhancement initiatives currently underway. In the fourth quarter of 2008,
cash costs per ounce are expected to be significantly lower due to
improvements to gold recoveries, higher gold production and the decline of the
Australian dollar relative to the US dollar.
The gold recovery enhancement project progressed during the quarter with
lab work, pilot plant work and some plant trial work. Carbon-in-leach (CIL)
pilot plant test work has confirmed that introducing a heated leach process to
the CIL tails dramatically improves gold recovery. Pilot plant operation on
the CIL tailings has demonstrated that an overall gold recovery of 90% at the
Fosterville mine is achievable. The construction of a full scale tailings
leach plant at a cost of approximately $4.75 million has been approved and
detailed engineering and design studies have already commenced. Commissioning
of the new plant is scheduled for March 2009 and when fully operational, gold
recoveries are expected to improve dramatically even for the black-shale ore
that was processed in the third quarter.
Financial Performance
Fosterville's revenue for the three months ended September 30, 2008 was
$13,050,000 based on gold sales of 14,866 ounces. The cost of sales excluding
depreciation and depletion for this period was $14,959,000 and the loss from
operations was $6,381,000. The mine utilized $2,464,000 in cash from
operations during the third quarter of 2008.
Total investment in capital expenditures at Fosterville was $8,132,000,
which includes $4,884,000 for mine development and $2,638,000 for capital
leases related to the acquisition of plant and equipment. Depreciation and
depletion expense for the three month period ending September 30, 2008 was
$2,929,000.
Exploration Update
The 2008 surface diamond drilling program at Fosterville was designed to
test the characteristics and extend resources of the main Wirrawilla resource
area. To date, 24 holes totalling 11,900m of diamond drilling have been
completed in this program with 21 holes reaching the target depth and results
returned for 14 holes. Two planned holes in the 2008 program have yet to be
completed.
Drilling into the northern portion of the existing Wirrawilla area has
confirmed its structural complexity. The results from five drill holes were
modest with only one hole, SPD490, returning a significant result
(greater than 20 gram-metre). This area requires close-spaced drilling to
define the gold mineralization, which can be completed much more cost
effectively from underground in the future, if a ramp decline is within the
vicinity.
Subsequent drilling into the southern portion of the project area was
highly encouraging with the discovery of significant extensions to three
mineralized zones within the Harrier Underground. The continuity of these
zones, along with their broad widths and good grades, shifted exploration
focus to this area, which can be cost effectively explored from surface. To
date, results have been returned for nine holes, of which eight have
significant assay results.
The Harrier Underground zone is situated 1.7 kilometres south of the
current Phoenix ore body (Figure 1) and is interpreted to be at a slightly
higher stratigraphic level down plunge of the Harrier open-pit ore body, which
was mined in 2007. The zone comprises of three distinct westerly dipping
mineralized structures, from west to east: the Osprey; Raptor; and Harrier
Base Fault zones.
The current depth extents of the mineralization for the Harrier
Underground zone are: Osprey - 310m to 560m depth; Raptor - 200m to 450m
depth; and, Harrier Base - 460m to 620m depth.
Recent drilling confirms that grades and widths of the Harrier
Underground zones are comparable to the majority of the Phoenix reserves. From
a development perspective, the presence of the two zones, Osprey and Harrier
Base, which are separated by only 80 metres, will reduce the amount of
development required to access each zone and thus reduce overall mining and
development costs.
Further scoping drilling is planned for early 2009 to test for extensions
to mineralization in the Harrier Underground zone. This drilling will focus on
extending the most significant zones of Osprey and Harrier Base down dip and
along strike and Raptor down dip.
To view Figure 1: Fosterville Mine Lease Long Projection (North-South) of
Harrier Underground Location (in relation to resources, underground
development and mining), please click on the following link:
www.northgateminerals.com/Theme/Northgate/files/Releases/FGM_HUG_Fig1.jpg
Project Update - Young-Davidson
Engineering, procurement and permitting activities required to support
the project progressed during the quarter. In early August, Northgate filed
its NI 43-101 compliant Preliminary Assessment Report ("Preliminary
Assessment"), which outlines the basis for the development of a combined
underground and open-pit mine producing an average of 158,000 ounces of gold
per year at a cash cost of $405 per ounce over a 12 year mine-life. The
initial capital cost of the mine is projected to be $306 million and can be
brought into commercial production in 2011. The Preliminary Assessment was
based on the underground mineral resources contained in a Technical Report
filed on SEDAR on March 26, 2008, which included diamond drilling results up
to December 20, 2007.
The Preliminary Assessment identified areas of the project to be further
optimized in order to enhance the rate of return of the project. During the
third quarter, geotechnical holes were initiated to support feasibility level
design for the pit wall angles and the mining method including the required
mine design (i.e. backfill requirements). The decision was also made to start
the Feasibility Study upon completion of the 2008 drilling program and mine
engineering design optimization. Northgate now expects to complete the
Feasibility Study in the second quarter of 2009.
Underground ramp development at Young-Davidson also continued during the
third quarter with an additional 570m of linear advance. The ramp is currently
at a vertical depth of 438m from surface and a total length of 3,858m.
Dewatering of the existing shaft continued during the quarter and has
progressed to a depth of 535m.
Year-to-date drilling as of September 30, 2008 totalled 34,400m, of which
8,500m were drilled in the third quarter. As part of the resource conversion
drilling program, Northgate released positive assay results for 34 surface and
59 underground diamond drill holes, which confirmed that the four previously
established resources zones (the Upper Boundary, Lower Boundary, Lucky and
Lower YD zones) form a near continuous gold system of overlapping lenses cut
by numerous post mineral dykes. Underground definition drilling also confirmed
the continuity and geometry of the upper portion of the Upper Boundary zone
and a new area of mineralization was discovered adjacent to the historic
Young-Davidson workings. Based on these results, a significant increase to the
measured and indicated resource base is anticipated and an updated resource
estimate is scheduled for release in December 2008.
In the fourth quarter, geotechnical drilling will be completed in support
of the Feasibility Study design and exploration drilling will focus on targets
that are not within the current resource area.
Exploration Update - Boulevard Property
Northgate and Rimfire Minerals Corporation, a junior mineral exploration
company recently completed a seven hole 525m diamond drilling program at the
Boulevard property, located in the Yukon Territory. Northgate funded this
program on the heels of a successful summer trenching program that yielded
gold mineralization in two of three trenches, including 7.04 g/t gold over 6m
and 6.43 g/t over 2m in a second trench. All drill samples have been recently
submitted for assay and results are pending.
-------------------------------------------------------------------------
Corporate Administration
As at September 30, 2008, 16,200 tonnes of copper forward contracts
remained outstanding at an average price of $2.52 per pound, representing
approximately 100% of Kemess South's copper production for the 12-month period
ending June 2010. The change in fair value of the forward contracts during the
quarter was a gain of $22,984,000. A related liability of $11,119,000 is
included in other long-term liabilities. Northgate had no forward gold
contracts outstanding at September 30, 2008.
Corporate administration costs in the third quarter of 2008 were
$2,963,000 compared with $2,019,000 in the same quarter last year. This
increase is due primarily to administrative expenditures in Australia of
$504,000. Canadian corporate expenditures of $2,459,000 were slightly higher
than they were in the comparative quarter of 2007 due primarily to the timing
of expenses.
Exploration costs in the third quarter of 2008 were $10,247,000 compared
to $10,773,000 in the corresponding quarter of 2007. In Canada, exploration
costs of $7,833,000 were incurred primarily at the Young-Davidson property
where the advanced underground exploration program continues. A total of
$2,414,000 was expensed in Australia during the third quarter with $1,526,000
incurred at Fosterville and $888,000 incurred at Stawell, as both sites
continue to identify additional zones to extend mine life.
Northgate granted a total of 125,000 options to employees in the third
quarter of 2008, compared to nil in the corresponding quarter in 2007. At
September 30, 2008, there were 5,792,700 options outstanding, of which
3,011,400 were exercisable.
The Corporation recognized an income tax recovery of $4,671,000 in the
third quarter of 2008 compared to a recovery of $9,209,000 in the
corresponding quarter of 2007. The recovery is related primarily to
Northgate's Canadian operations and reflects the loss noted in the quarter.
Cash paid during the period for income taxes was $682,000 while no cash taxes
were paid in the corresponding quarter of 2007. Cash payments are related
entirely to Northgate's Canadian operations and are required as the
Corporation is now cash taxable in Canada.
-------------------------------------------------------------------------
Liquidity and Capital Resources
Working Capital: At September 30, 2008, Northgate had working capital of
$12,768,000 compared with working capital of $235,739,000 at December 31,
2007. The decrease in working capital was primarily the result of the
acquisition of Perseverance Corporation Pty Ltd ("Perseverance"). Northgate
purchased all outstanding ordinary shares, warrants, options and convertible
securities of Perseverance for cash. Cash and cash equivalents at
September 30, 2008 amounted to $71,700,000 compared with $266,045,000 at
December 31, 2007.
The Corporation's investment management policy permits short-term excess
cash to be invested in R1/P1/A1 rated investments including money market
funds, direct obligation commercial paper, bankers' acceptances and other
highly rated short-term investment instruments, which are presented as cash
and cash equivalents. In view of the current worldwide financial crisis, all
cash and cash equivalents are currently being held in cash with chartered
banks in Canada and major banks in Australia.
During the quarter, Northgate generated cash flow from operations of
$638,000 compared to $29,445,000 for the corresponding quarter in 2007. Cash
flow from operations was negatively impacted by low gold production at the
Kemess and Fosterville mines and the dramatic decline in copper prices. Based
on the forecasted gold and copper prices and the foreign exchange rates at the
date of this MD&A used in the current production forecasts, the Corporation
believes that its working capital at September 30, 2008, together with future
cash flow from operations, is more than sufficient to meet Northgate's normal
operating requirements for the next year.
On June 6, 2008, Northgate filed a short form universal base shelf
prospectus (the "Prospectus") with the Securities Commissions in each of the
provinces and territories of Canada and a corresponding registration statement
was filed with the United States Securities and Exchange Commission. The
Prospectus will facilitate offerings of Northgate's debt securities, common
shares, warrants, share purchase contracts and share purchase or equity units
or any combination thereof up to an aggregate offering size of Cdn$250,000,000
over a 25-month period.
Financial Instruments: Northgate has exposure to credit risk, liquidity
risk and market risk from its use of financial instruments.
Credit Risk - Credit risk is the risk of potential loss to the
Corporation if a customer or counterparty to a financial instrument fails to
meet its contractual obligations. The Corporation is exposed to credit risk
from its receivables and investment securities. This risk may also arise on
the copper forward contracts to which the Corporation is a party.
In general, the Corporation manages its credit exposure with respect to
operational matters by transacting only with reputable, highly-rated
counterparties. The Corporation monitors the financial condition of its
customers and counterparties to contracts.
Gold doré produced in Australia is sold exclusively to AGR Matthey, a
reputable precious metal refiner that has been in business for many years. The
Corporation believes there are other buyers in the marketplace that would buy
such production under approximately the same financial terms. Concentrate
produced at Kemess is sold under a long-term contract to Xstrata Canada
Corporation ("Xstrata"), a wholly-owned subsidiary of the publicly traded
international mining company, Xstrata plc. Kemess gold-copper concentrate is
of a quality that is readily saleable to a number of smelters under current
market conditions. In the event that Xstrata is unable to purchase the Kemess
concentrate, it could be sold to other smelters once appropriate logistical
arrangements were put in place.
Northgate may also be exposed to credit risk on its copper forward
contracts to the extent that the counterparty, Mitsui Bussan Commodities Ltd.
("Mitsui"), a reputable international commodities trading group, fails to meet
its contractual obligations. Northgate has mitigated this risk by obtaining a
parental guarantee from Mitsui's parent company, Mitsui and Co., Ltd. of
Japan. At September 30, 2008, there is no credit risk as the forward contracts
have an unrealized loss, which has been recognized as a liability. However,
the significant decline in the price of copper subsequent to quarter-end has
resulted in an unrealized gain to Northgate.
The Corporation limits its exposure to credit risk on investments by
investing only in securities rated AAA by credit rating agencies such as S&P
and Moody's. Management continuously monitors the fair value of its
investments, including ARS (refer to ARS discussion below) to determine
potential credit exposures. Any credit risk exposure on cash and cash
equivalents is considered negligible as the Corporation places deposits only
with major established banks in the countries in which it operates.
The carrying amount of financial assets represents the maximum credit
exposure. As at September 30, 2008, the Corporation's gross credit exposure is
as follows:
-------------------------------------------------------------------------
Cash and cash equivalents $ 71,700
Concentrate settlements and other receivables 8,985
Restricted cash (included in Other Assets) 25,491
Auction rate securities 46,799
-------------------------------------------------------------------------
$ 152,975
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity Risk - Liquidity risk is the risk that the Corporation will not
be able to meet its financial obligations as they fall due. The Corporation
manages this risk such that it will have the ability to discharge its
liabilities when due, both under normal and stressed conditions, without
incurring significant losses or risking damage to the Corporation's
reputation.
The Corporation uses detailed cash forecasts to ensure cash is available
to discharge its obligations when they come due. Cash needed for this purpose
is invested in highly liquid investments.
Market Risk - Market risk is the risk that changes in market prices, such
as commodity prices, foreign exchange rates and interest rates, will affect
the Corporation's income or the value of its financial instruments. Northgate
manages this risk such that it controls this exposure within acceptable
parameters while optimizing the return on risk.
Commodity Price Risk - Northgate is exposed to commodity price risk
through the price of gold and copper and also through various input prices
such as fuel and electricity. The Board of Directors has established a Hedging
Committee, which assists management in the identification and analysis of
price risks and potential strategies to mitigate these risks.
The Corporation reviews major input prices on a regular basis and may
enter into long-term contracts to mitigate the price volatility.
The Corporation monitors the price of commodities continuously and
considers the risk exposure to fluctuating prices. In managing that risk, the
Corporation is cognizant that investors generally seek exposure to the
underlying commodities, particularly gold, through their investment.
All of the Corporation's future gold production is unhedged and is fully
exposed to future price movements.
Gold and copper sales agreements include provisions where final prices
are determined by quoted market prices in a period subsequent to the date of
sale. Revenue and the related receivables are based on forward prices for the
expected date of final settlement. These financial assets are therefore
exposed to movements in the commodity price.
Foreign Exchange Rate Risk - The Corporation is exposed to foreign
exchange risk on its financial assets and liabilities denominated in other
than US dollars. The Corporation incurs a significant amount of its operating
costs in Canadian and Australian dollars and movements in these currencies
relative to the US dollar will have significant effect on future earnings.
Interest Rate Risk - The Corporation is exposed to interest rate risk on
its short-term loan and its capital leases. The short-term loan bears interest
at LIBOR plus 100 basis points. The capital leases bear interest at a fixed
rate.
Capital Lease Financing: The Corporation continues to invest in plant and
equipment at the Fosterville and Stawell gold mines. The conversion to owner
mining at Fosterville has been completed; the required investment in mobile
equipment fleet and other infrastructure of approximately $23,000,000 was
partially financed by capital leases totaling $9,062,000. During the quarter,
Stawell also acquired assets by way of capital leases of $4,395,000 to finance
its new fleet of 60-tonne haulage trucks. Total capital lease financing at
Fosterville and Stawell for the nine months ending September 30, 2008 was
$14,590,000.
Investments: Northgate continues to maintain a portion of its investments
in ARS. The par value of the ARS held by the Corporation is $72,600,000.
Auction rate securities are typically bonds or preferred shares whose
interest or dividend rate is reset periodically. They often have a long-term
maturity, in the case of bonds, or in the case of preferred shares, no
maturity. The interest or dividend rate on ARS is reset periodically
(typically at 7, 28, or 35-day intervals) to the rate produced in an auction
that is governed by a set of auction procedures established by the issuer.
These securities had been marketed primarily by US financial institutions as
highly liquid investments, which holders could easily convert to cash through
re-sale at regularly scheduled auctions. Beginning in the summer of 2007
however, as sub-prime mortgage exposure and other credit concerns in the US
financial markets broadened, the auctions at which these securities were to be
remarketed began to fail. Several bond insurer institutions (monoline
insurers) had their credit ratings downgraded, resulting in reduced credit
ratings for the ARS which they insured, and the widening crisis in the global
credit markets brought further public attention to the highly complex nature
of these structured products. Increasing difficulty in selling these
securities and worsening credit markets ultimately resulted in the failure of
the entire ARS market in the first quarter of 2008. As of the date hereof,
markets for these securities remain frozen and, in many cases, attempts to
conduct auctions have been discontinued.
All ARS currently held by the Corporation were purchased on its behalf by
Lehman Brothers Inc. ("Lehman"), acting in its capacity as broker agent of
Northgate using the discretion conferred on it. Based on the information
provided by Lehman, Northgate believed that the securities conformed to
Northgate's internal investment management policy. While, for the reasons
discussed above, these securities cannot be readily converted to cash for use
by the Corporation to make capital investments or for other business purposes,
the underlying payment and other obligations of the original issuers of these
securities remain intact, and these issuers have continued to make regular
interest payments to the Corporation despite cessation of the auction process.
Subsequent to the ARS investments of Northgate becoming illiquid,
management of the Corporation managed to secure from Lehman a short-term loan
collateralized by the securities held in the Corporation's investment account
managed by Lehman, pursuant to a Client Agreement between Lehman and Northgate
dated October 18, 2007 (the "Short-Term Loan"). The amount of funds available
to borrow under the Short-Term Loan facility was to be an amount equal to 70%
of the value (according to Lehman, to be estimated monthly by Lehman) of the
securities held in Northgate's investment account with Lehman. On December 7,
2007, Northgate drew down $48,716,000 from Lehman based on the market value of
investments within Northgate's portfolio. As the estimated value of the
collateral decreased, Lehman demanded payments from Northgate in order to
maintain the requisite 70% collateral-to-principal ratio.
In early 2008, further information was obtained by Northgate management
regarding the manner in which Lehman and its employees had invested the
Corporation's funds, including through purchase of ARS, often in direct
contravention of the Corporation's stated investment objectives, as well as
Lehman's contractual obligations and fiduciary duties to the Corporation.
Northgate management, together with the Corporation's Board of Directors, then
considered initiating litigation against Lehman, and retained US legal counsel
to advise in this regard. Northgate proceeded to initiate discussions with
Lehman regarding the basis for its potential claim, including in connection
with Lehman's material misconduct in relation to the Corporation's investment
account. Lehman initially expressed interest in discussing terms of
settlement, so as to avoid litigation, and indicated that the Short-Term Loan
would likely remain outstanding until a mutually-acceptable resolution was
achieved. To date, no demand for repayment of the principal outstanding under
the Short-Term Loan has been made.
On July 3, 2008, Northgate filed a Statement of Claim (the "FINRA Claim")
with the Financial Industry Regulatory Authority ("FINRA") in New York, a
self-regulatory organization with jurisdiction over customer-broker disputes.
The FINRA Claim alleges that the mishandling of Northgate's investment account
(including the unauthorized purchase of ARS) by Lehman and several of its
employees constituted, among other things, breach of contract, breach of
fiduciary duty, fraudulent misrepresentation and abuse of discretionary
authority. Among the relief sought by Northgate in the FINRA Claim is a ruling
of FINRA relieving Northgate of its obligation to repay the Short-Term Loan as
partial compensation for losses suffered as a result of the misconduct of
Lehman, effectively 'setting-off' the debt owing by the Corporation to Lehman
against the damages claimed by Northgate from Lehman and its employees.
Northgate management believes, based upon its discussions with the
Corporation's US legal counsel, that an adjudicator of this dispute would give
significant weight to this argument given Lehman's extensive misconduct in
managing Northgate's investments.
On September 15, 2008, Lehman Brothers Holdings Inc. ("Lehman Holdings"),
the parent corporation of Lehman, filed for Chapter 11 bankruptcy protection
in the United States. On September 17, 2008, Barclays Capital ("Barclays")
announced plans to buy certain assets from Lehman Holdings and its
subsidiaries pursuant to an Asset Purchase Agreement with Lehman Holdings,
Lehman and other Lehman affiliates (the "Barclays Purchase Agreement"). On
September 19, 2008, the New York Court administering the bankruptcy of Lehman
Holdings approved the Barclays Purchase Agreement, and ordered the liquidation
of Lehman. As part of this liquidation, the majority of the customer brokerage
accounts of Lehman, including that of Northgate, were transferred to Barclays.
From a legal perspective, Northgate's FINRA Claim survives the bankruptcy
of Lehman such that the Corporation now has a claim against a bankrupt estate.
The Corporation and its advisors are in the process of analyzing the merits of
continuing the FINRA Claim given the (i) anticipated legal costs associated
therewith; (ii) the possibility that the assets remaining in Lehman may not be
able to fully satisfy any damage award in the event Northgate is successful in
the FINRA Claim; and, (iii) the limited pro rata recovery it could potentially
receive as one of a large number of unsecured creditors with a claim against a
bankrupt entity. An informed assessment of the residual value of the bankrupt
estate cannot be made until a later stage in the bankruptcy process. The
Corporation is also considering investigation of potential alternative sources
of recovery, such as the insurance policies held by Lehman or its employees.
Under the terms of the Barclays Purchase Agreement, Barclays
(a) identified contractual obligations of Lehman that it would assume as of
the closing date of such purchase, September 22, 2008 (the "Closing Date"),
and (b) is entitled, for a period of 60 days following the Closing Date, to
identify (in its sole discretion) additional contracts for which it is willing
to assume the rights and obligations of Lehman on a going-forward basis.
Barclays has confirmed its assumption of responsibility for Northgate's
brokerage account, but has not provided a formal update regarding the status
of either the securities held in Northgate's account or the Short-Term Loan.
As of September 30, 2008, the principal outstanding on the Short-Term Loan was
$43,620,000. As of the date hereof, Barclays has not identified to the
Corporation the Short-Term Loan as a contract that it will assume, although
the Corporation recognizes that Barclays may exercise its right to assume such
contract at any time prior to November 21, 2008. At this point it is difficult
for Northgate management to make a complete assessment of the issues
associated with potential collection efforts relating to the Short-Term Loan,
but the Corporation is making efforts to collect information so as to conduct
an appropriate analysis.
Subsequent to Lehman's bankruptcy filing, several US regulatory
authorities have commenced formal investigations relating to possible fraud
and other criminal activity by, among others, Lehman and its executives and
employees. Few details regarding the investigations have been released at this
stage. The New York State Attorney General's Office has announced that it is
reviewing actions of a number of executives in connection with ARS
transactions.
As a consequence of the Lehman bankruptcy, the Corporation no longer
receives regular valuation reports from Lehman or Barclays on the ARS that it
holds. In order to estimate the fair value of its ARS holdings at
September 30, 2008, the Corporation has retained the services of a
professional valuation firm in the United States (the "Valuator") with
expertise in the valuation of the type of ARS that the Corporation holds in
its portfolio.
The estimated fair value of the Corporation's ARS holdings at
September 30, 2008 was $46,799,000, which reflects a $15,188,000 decline from
the June 30, 2008 estimated fair value of $61,987,000 (December 31, 2007 -
$69,397,000). In estimating the fair value of its ARS, the Valuator considered
several variables, including the probability of future defaults, the potential
impact of recent events in the global financial markets, the relative
seniority of each ARS within the capital structure of the issuer, the credit
circumstances of financial guarantors, and the value of investments and
reserves held by the issuers. While the Corporation continues to earn interest
on all its ARS investments, the estimated fair value of the ARS in Derivative
Product Companies (companies involved in the issuance of credit default swaps)
has fallen significantly below par value. Accordingly, the Corporation has
recognized an other than temporary impairment on its investments in these
securities of $16,912,000 into earnings for the three and nine months ended
September 30, 2008. The conclusion for an other than temporary impairment is
based on a variety of factors, including the bankruptcy of Lehman Holdings and
its affiliates, the very substantial decline in the estimated fair value of
individual investments for an extended period of time, recent downgrades in
credit ratings for many issuers and adverse market conditions, particularly in
the credit markets, which negatively impacted individual securities.
The Corporation concluded that the decline in estimated fair value for
the remainder of its ARS investments (Regulation XXX Insurance companies) is
temporary. In determining that the loss in value is temporary, management
considered the fact that these ARS have a much lower probability of future
default, continue to make interest payments, are insured by monoline insurance
companies and continue to maintain a credit rating above investment grade.
Management also considered the senior rank of its holdings in the issuers'
capital structures and the fiduciary obligation of the major insurance
companies who own the Regulation XXX entities as factors that improve the
likelihood that these ARS investments will eventually return to par value.
Short-Term Loan: The Short-Term Loan was originally obtained from Lehman,
which also structured and marketed the Corporation's ARS investments (refer to
previous discussion on Short-Term Loan in the Investments section). As of
September 30, 2008, the principal outstanding on the Short-Term Loan was
$43,620,000.
Taxes: In March 2005, the Corporation received correspondence from the
Canada Revenue Agency ("CRA") indicating that the CRA's initial estimate of
the Corporation's 95% royalty interest on the Kemess property (which had been
converted to an equity interest in December 2000) was significantly lower than
Northgate's initial valuation. The Corporation filed its response with the CRA
in June 2005. The CRA remained silent on the matter until July 2007.
Since then, the Corporation commissioned an independent valuation, which
supported Northgate's valuation and has continued to engage the CRA and the
valuation section within Natural Resources Canada ("NRC") in discussions. In
the third quarter of 2008, the Corporation received additional correspondence
from NRC, which may lead to a formal notice of re-assessment from the CRA.
The Corporation strongly believes, based on its internal review and its
consultation with external independent advisors, that its valuation is
accurate and correct and the Corporation remains firmly committed to
contesting any determination of the CRA to the contrary. Given the uncertainty
on this matter, any potential adjustment to the Corporation's income tax pools
and any impact to current or future income taxes cannot be estimated.
Acquisition of Perseverance: On February 18, 2008, Northgate completed
its acquisition of Perseverance and a total of A$230,552,000 (US$210,516,000)
was paid to Perseverance securityholders. The financial results of
Perseverance have been included in the interim consolidated financial
statements of the Corporation from February 19, 2008.
In connection with the acquisition of Perseverance, the Corporation was
required to pledge a cash amount of A$109,400,000 in the form of a stand-by
letter of credit ("SBLC") in favour of a major Australian financial
institution. A portion of the SBLC was released upon Northgate satisfying a
portion of the debt obligations assumed by the Corporation in connection with
the Perseverance acquisition. The funds remaining in the SBLC at December 31,
2007 were used to settle Perseverance's gold forward contracts for
A$49,317,000 ($45,550,000) and to pledge certain performance guarantees in
Australia for A$8,020,000 ($7,434,000). The SBLC was fully extinguished in the
second quarter of 2008.
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Non-GAAP Measures
Adjusted Net Earnings
The Corporation has prepared a calculation of adjusted net earnings which
has removed certain non-cash adjustments from its Canadian generally accepted
accounting principles (Canadian GAAP) calculation of net earnings as it
believes this may be a useful indicator to investors. Adjusted net earnings
may not be comparable to other similarly titled measures of other companies.
(Expressed in thousands
of US$, except share
amounts) Q3 2008 Q3 2007 YTD 2008 YTD 2007
-------------------------------------------------------------------------
Net earnings $ (29,438) $ (11,937) $ (7,926) $ 6,116
Adjustments
Write-down of ARS 16,912 - 16,912 -
Unrealized gain on
derivatives related
to the acquisition
of Perseverance
hedge book - - (9,836) -
Write-down of Kemess
North, net of tax - 18,551 - 18,551
Fair value adjustment
on copper forward
contracts, net
of tax (15,859) 11,388 10,721 35,811
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Adjusted net earnings (28,385) 18,002 9,871 60,478
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Diluted common shares
outstanding 255,467,109 254,210,079 255,157,746 255,329,229
-------------------------------------------------------------------------
Adjusted net earnings
per diluted common
share $ (0.11) $ 0.07 $ 0.04 $ 0.24
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Cash Cost
Northgate has included net cash costs of production per ounce of gold in
the discussion of its results from operations, because it believes that these
figures are a useful indicator to investors and management of a mine's
performance as they provide: (i) a measure of the mine's cash margin per
ounce, by comparison of the cash operating costs per ounce to the price of
gold; (ii) the trend in costs as the mine matures; and, (iii) an internal
benchmark of performance to allow for comparison against other mines. However,
cash costs of production should not be considered as an alternative to net
earnings or as an alternative to other Canadian GAAP measures and may not be
comparable to other similarly titled measures of other companies.
A reconciliation of net cash costs per ounce of production to amounts
reported in the Statement of Operations is shown in the following table:
Q3 2008
(Expressed in thousands
of US$, except per
ounce amounts) Kemess Stawell Fosterville Combined
-------------------------------------------------------------------------
Gold production
(ounces) 28,141 20,956 15,491 64,588
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Cost of sales $ 54,640 $ 14,121 $ 14,959 $ 83,720
Change in inventories
and other (5,597) (128) (402) (6,127)
Gross copper and
silver revenue (32,231) - - (32,231)
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Total cash cost $ 16,812 $ 13,993 $ 14,557 $ 45,362
-------------------------------------------------------------------------
Cash cost ($/ounce) $ 597 $ 668 $ 940 $ 702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Q3 2007
(Expressed in thousands
of US$, except per
ounce amounts) Kemess Stawell Fosterville Combined
-------------------------------------------------------------------------
Gold production
(ounces) 70,055 n/a n/a 70,055
-------------------------------------------------------------------------
Cost of sales $ 59,241 n/a n/a $ 59,241
Change in inventories
and other (2,854) n/a n/a (2,854)
Gross copper and
silver revenue (72,694) n/a n/a (72,694)
-------------------------------------------------------------------------
Total cash cost $ (16,307) n/a n/a $ (16,307)
-------------------------------------------------------------------------
Cash cost ($/ounce) $ (233) n/a n/a $ (233)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year-to-Date 2008
(Expressed in thousands
of US$, except per
ounce amounts) Kemess Stawell(1) Fosterville(1) Combined
-------------------------------------------------------------------------
Gold production
(ounces) 123,848 55,271 34,142 213,261
-------------------------------------------------------------------------
Cost of sales $ 178,099 $ 35,026 $ 35,962 $ 249,087
Change in inventories
and other (12,913) (567) 1,114 (12,366)
Gross copper and
silver revenue (138,947) - - (138,947)
-------------------------------------------------------------------------
Total cash cost $ 26,239 $ 34,459 $ 37,076 $ 97,774
-------------------------------------------------------------------------
Cash cost ($/ounce) $ 212 $ 624 $ 1,086 $ 458
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Financial and operational data include the results of Perseverance
from February 19 to September 30, 2008.
Year-to-Date 2007
(Expressed in thousands
of US$, except per
ounce amounts) Kemess Stawell Fosterville Combined
-------------------------------------------------------------------------
Gold production
(ounces) 204,164 n/a n/a 204,164
-------------------------------------------------------------------------
Cost of sales $ 166,611 n/a n/a $ 166,611
Change in inventories
and other (4,528) n/a n/a (4,528)
Gross copper and
silver revenue (174,119) n/a n/a (174,119)
-------------------------------------------------------------------------
Total cash cost $ (12,036) n/a n/a $ (12,036)
-------------------------------------------------------------------------
Cash cost ($/ounce) $ (59) n/a n/a $ (59)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Selected Quarterly Financial Data
(Thousands of US
dollars, except
per share, per 2008 Quarter Ended
ounce and per ----------------------------------
pound amounts) Sep 30 Jun 30 Mar 31
-------------------------------------------------------------------------
Revenue $ 99,267 $ 138,880 $ 86,093
Earnings (loss)
for the period (29,438) 1,085 20,427
Earnings (loss)
per share
Basic $ (0.12) $ 0.00 $ 0.08
Diluted $ (0.12) $ 0.00 $ 0.08
Metal production
Gold (ounces) 64,588 83,561 88,386(1)
Copper (thousands
pounds) 9,195 13,940 14,380
Metal Prices
Gold (London
Bullion Market -
$ per ounce) 870 896 927
Copper (LME Cash -
$ per pound) 3.48 3.83 3.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Thousands of US
dollars, except
per share, per 2007 Quarter Ended 2006
ounce and per ------------------------------------------------------
pound amounts) Dec 31 Sep 30 Jun 30 Mar 31 Dec 31
-------------------------------------------------------------------------
Revenue $ 95,599 $ 86,756 $ 80,878 $ 74,313 $ 118,239
Earnings (loss)
for the period 33,309 (11,937) 8,647 9,406 19,790
Earnings (loss)
per share
Basic $ 0.13 $ (0.05) $ 0.03 $ 0.04 $ 0.09
Diluted $ 0.13 $ (0.05) $ 0.03 $ 0.04 $ 0.09
Metal production
Gold (ounces) 41,467 70,055 65,999 68,110 81,746
Copper (thousands
pounds) 16,766 18,822 14,839 17,702 21,254
Metal Prices
Gold (London
Bullion Market -
$ per ounce) 788 681 667 650 614
Copper (LME Cash -
$ per pound) 3.26 3.50 3.47 2.69 3.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Gold production at Fosterville for the quarter ended March 31, 2008
excludes the change in gold-in-circuit inventory previously recorded.
This press release should be read in conjunction with the Corporation's
third quarter MD&A report, which can be found on www.northgateminerals.com, in
the "Investor Info" section, under "Financial Reports - Quarterly Reports".
Notification of Q3 Financial Results
November 4, 2008, 10:00 AM Toronto time
You are invited to participate in the Northgate Minerals Corporation live
conference call and webcast discussing our third quarter financial results on
Tuesday, November 4, 2008, at 10:00 a.m. Toronto time.
Conference Call
Please call 416-644-3415 or toll free in North America at 1-800-732-9303.
To ensure your participation, please call five minutes prior to the scheduled
start of the call.
Webcast
The webcast package, including the webcast link and management
presentation, will be available on the morning of November 4 and posted on
Northgate's website at www.northgateminerals.com under the Calendar of Events
section. You may also access the webcast at
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2432540.
Replay
A replay of the conference call will be made available beginning on
November 4 at 12:00 pm ET until November 18 at 11:59 pm ET.
Replay Access No. 416-640-1917 or 1-877-289-8525
Passcode: 212 852 74 followed by the number sign.
Interim Consolidated Balance Sheets
September 30 December 31
Thousands of US dollars 2008 2007
-------------------------------------------------------------------------
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 71,700 $ 266,045
Trade and other receivables 8,985 14,014
Inventories (note 6) 31,393 35,234
Prepaids 1,668 3,087
Future income tax asset 1,113 1,194
-------------------------------------------------------------------------
114,859 319,574
Other assets 25,741 80,181
Long-term receivables - 25,117
Deferred transaction costs (note 7) 775 1,799
Future income tax asset 15,941 16,507
Mineral property, plant and equipment 342,067 121,337
Investments (note 8) 47,183 70,074
Goodwill 62,023 -
-------------------------------------------------------------------------
$ 608,589 $ 634,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 49,950 $ 32,551
Taxes payable 1,503 3,310
Short-term loan (note 9) 43,620 44,835
Current portion of capital lease obligations 5,389 2,267
Future income tax liability 1,629 872
-------------------------------------------------------------------------
102,091 83,835
Capital lease obligations 7,845 282
Other long-term liabilities (note 10) 13,829 12,089
Provision for site closure and reclamation
obligations (note 11) 42,890 49,120
Future income tax liability 9,323 2,487
-------------------------------------------------------------------------
175,978 147,813
Shareholders' equity
Common shares 311,814 309,455
Contributed surplus 5,011 3,940
Accumulated other comprehensive income (53,332) (3,282)
Retained earnings 169,118 176,663
-------------------------------------------------------------------------
432,611 486,776
-------------------------------------------------------------------------
$ 608,589 $ 634,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and Contingencies (note 18)
The accompanying notes form an integral part of these interim
consolidated financial statements.
Interim Consolidated Statements of Operations and Comprehensive Income
Thousands of US dollars, Three Months Ended Nine Months Ended
except share and per Sep 30 Sep 30
share amounts, unaudited 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue $ 99,267 $ 86,756 $ 324,240 $ 241,947
-------------------------------------------------------------------------
Cost of sales 83,720 59,241 249,087 166,611
Administrative and
general 2,963 2,019 9,190 6,772
Depreciation and
depletion 20,172 8,050 49,005 28,009
Net interest income (1,157) (4,611) (6,320) (12,311)
Exploration 10,247 10,773 27,765 22,208
Currency translation gain (40) (2,796) (6,947) (7,960)
Accretion of site closure
and reclamation costs 665 964 1,619 1,869
Writedown of mineral
property - 32,347 - 32,347
Writedown of auction
rate securities (note 8) 16,912 - 16,912 -
Other (106) 1,915 (10,682) 2,826
-------------------------------------------------------------------------
133,376 107,902 329,629 240,371
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (34,109) (21,146) (5,389) 1,576
Income tax recovery
(expense)
Current 2,779 (1,040) (5,658) (6,258)
Future 1,892 10,249 3,121 10,798
-------------------------------------------------------------------------
4,671 9,209 (2,537) 4,540
-------------------------------------------------------------------------
Net earnings (loss)
for the period $ (29,438) $ (11,937) $ (7,926) $ 6,116
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other comprehensive income
Reclassification of
net realized gains on
available for sale
securities to net
earnings - - - (315)
Unrealized gain (loss)
on available for
sale securities (15,713) (276) (22,838) 190
Reclassification of
other than temporary
loss on available for
sale securities to
net earnings 16,912 - 16,912 -
Unrealized loss on
translation of
self-sustaining
operations (59,809) - (44,124) -
Reclassification of
deferred losses on
gold forward contracts
to net earnings, net
of tax - 4,900 - 14,048
-------------------------------------------------------------------------
(58,610) 4,624 (50,050) 13,923
-------------------------------------------------------------------------
Comprehensive income
(loss) $ (88,048) $ (7,313) $ (57,976) $ 20,039
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss)
per share
Basic $ (0.12) $ (0.05) $ (0.03) $ 0.02
Diluted $ (0.12) $ (0.05) $ (0.03) $ 0.02
Weighted average
shares outstanding
Basic 255,467,109 254,210,079 255,157,746 254,111,883
Diluted 255,467,109 254,210,079 255,157,746 255,329,229
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes form an integral part of these interim
consolidated financial statements.
Interim Consolidated Statement of Changes in Shareholders' Equity
Accumulated
Thousands of Other
US dollars, Compre-
except common Number of Common Contri- hensive
shares, Common Shares buted Income Retained
unaudited Shares Amount Surplus (loss) Earnings Total
-------------------------------------------------------------------------
Balance at
December
31, 2007 254,452,862 $309,455 $3,940 $(3,282) $176,663 $486,776
Transitional
adjustment
on adoption
of inventory
standard
(note 4) - - - - 381 381
Shares issued
under employee
share purchase
plan 199,789 327 - - - 327
Shares issued
on exercise
of options 881,300 1,867 (494) - - 1,373
Stock-based
compensation - 165 1,565 - - 1,730
Net earnings - - - - (7,926) (7,926)
Other comprehensive
income (loss) - - - (50,050) - (50,050)
-------------------------------------------------------------------------
Balance at
September 30,
2008 255,533,951 $311,814 $5,011 $(53,332) $169,118 $432,611
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
Thousands of Other
US dollars, Compre-
except common Number of Common Contri- hensive
shares, Common Shares buted Income Retained
unaudited Shares Amount Surplus (loss) Earnings Total
-------------------------------------------------------------------------
Balance at
December
31, 2006 253,700,033 $307,914 $2,596 $ - $137,238 $447,748
Transitional
adjustment
on adoption
of financial
instruments
standard - - - (18,676) - (18,676)
Shares issued
under employee
share purchase
plan 121,226 253 - - - 253
Shares issued
on exercise
of options 424,220 548 (160) - - 388
Stock-based
compensation - 126 1,358 - - 1,484
Net earnings - - - - 6,116 6,116
Other
comprehensive
income - - - 13,923 - 13,923
-------------------------------------------------------------------------
Balance at
September
30, 2007 254,245,479 $308,841 $3,794 $(4,753) $143,354 $451,236
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes form an integral part of these interim
consolidated financial statements.
Interim Consolidated Statements of Cash Flows
Three Months Ended Nine Months Ended
Thousands of US dollars, Sep 30 Sep 30
unaudited 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating activities:
Net earnings (loss)
for the period $ (29,438) $ (11,937) $ (7,926) $ 6,116
Non-cash items:
Depreciation and
depletion 20,172 8,050 49,005 28,009
Unrealized currency
translation losses
(gains) (42) 1,151 (4,311) 1,827
Unrealized gain on
derivatives - - (9,836) -
Accretion of site
closure and
reclamation costs 665 964 1,619 1,869
Loss on disposal
of assets 156 - 112 -
Amortization of
hedging losses - 7,438 - 21,325
Amortization of
deferred charges 54 81 161 229
Stock-based
compensation 417 313 1,730 1,484
Accrual of employee
severance costs 662 - 969 -
Future income tax
expense (recovery) (1,892) (10,249) (3,121) (10,798)
Change in fair value
of forward contracts (22,984) 17,255 15,537 54,259
Writedown of auction
rate securities 16,912 - 16,912 -
Writedown of mineral
property - 32,347 - 32,347
Gain on sale of
investments - - (1) (315)
Changes in operating
working capital and
other (note 17) 15,956 (15,968) (3,903) (43,981)
-------------------------------------------------------------------------
638 29,445 56,947 92,371
-------------------------------------------------------------------------
Investing activities:
Release of restricted
cash 14,340 - 67,496 -
Increase in restricted
cash (811) - (24,723) -
Purchase of mineral
property, plant and
equipment (14,109) (4,926) (44,483) (11,260)
Transaction costs paid (679) - (2,912) -
Acquisition of
Perseverance, net of
cash acquired - - (196,590) -
Repayment of
Perseverance hedge
portfolio - - (45,550) -
Proceeds from sale
of equipment 13 - 3,234 -
Purchase of short-term
investments - (72,600) - (72,600)
Purchase of investments - - - (322)
Proceeds from sale of
investments - - 1 -
-------------------------------------------------------------------------
(1,246) (77,526) (243,527) (84,182)
-------------------------------------------------------------------------
Financing activities:
Repayment of capital
lease obligations (1,508) (567) (4,916) (1,838)
Financing from credit
facility 389 - 8,745 -
Repayment of credit
facility (797) - (9,961) -
Repayment of other
long-term liabilities - - (746) -
Issuance of common
shares 173 78 1,700 641
-------------------------------------------------------------------------
(1,743) (489) (5,178) (1,197)
Effect of exchange rate
changes on cash and
cash equivalents (2,825) - (2,587) -
-------------------------------------------------------------------------
Increase (decrease) in
cash and cash equivalents (5,176) (48,570) (194,345) 6,992
Cash and cash equivalents,
beginning of period 76,876 317,761 266,045 262,199
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 71,700 $ 269,191 $ 71,700 $ 269,191
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information
Cash paid during the
period for:
Interest $ 813 $ 71 $ 2,743 $ 216
Income taxes 682 - 5,397 -
Purchase of mineral
property, plant and
equipment by assumption
of capital lease
obligations 7,033 - 14,590 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes form an integral part of these interim
consolidated financial statements.
To view the notes in PDF format, please click on the following link:
www.northgateminerals.com/Theme/Northgate/files/Releases/Q308_Notes.pdf
Northgate Minerals Corporation is a mid-tier gold and copper producer
with mining operations, development projects and exploration properties in
Canada and Australia. The company is forecasting approximately 365,000 ounces
of unhedged gold production in 2008 and is targeting growth through further
acquisitions in stable mining jurisdictions around the world. Northgate is
listed on the Toronto Stock Exchange under the symbol NGX and on the New York
Alternext US (formerly American Stock Exchange) under the symbol NXG.
FORWARD-LOOKING STATEMENTS:
This interim report contains certain "forward-looking statements" and
"forward-looking information" under applicable Canadian and US securities
laws. Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue" or the negative thereof or
variations thereon or similar terminology. Forward-looking statements are
necessarily based on a number of estimates and assumptions that are inherently
subject to significant business, economic and competitive uncertainties and
contingencies. Certain of the statements made herein, including any
information as to the future activities of and developments related to the
business activities of Northgate and its subsidiaries, the market position,
and future financial or operating performance of Northgate, are
forward-looking and subject to important risk factors and uncertainties, many
of which are beyond the Corporation's ability to control or predict. Known and
unknown factors could cause actual results to differ materially from those
projected in the forward-looking statements. Such factors include, among
others: gold price volatility; impact of any hedging activities, including
margin limits and margin calls; discrepancies between actual and estimated
production, between actual and estimated reserves and resources and between
actual and estimated metallurgical recoveries; costs of production, capital
expenditures, costs and timing of construction and the development of new
deposits, success of exploration activities and permitting time lines; changes
in national and local government legislation, taxation, controls, regulations
and political or economic developments in any of the countries in which the
Corporation does or may carry out business in the future; risks of sovereign
investment; the speculative nature of gold exploration, development and
mining, including the risks of obtaining necessary licenses and permits;
dilution; competition; loss of key employees; additional funding requirements;
and defective title to mineral claims or property. In addition, there are
risks and hazards associated with the business of gold exploration,
development and mining, including environmental hazards, industrial accidents,
unusual or unexpected formations, pressures, cave-ins, flooding and gold
bullion losses (and the risk of inadequate insurance or inability to obtain
insurance, to cover these risks), as well as the factors described or referred
to in the section entitled "Risk Factors" in Northgate's Annual Information
Form for the year ended December 31, 2007 or under the heading "Risks and
Uncertainties" in Northgate's 2007 Annual Report, both of which are available
on SEDAR at www.sedar.com, and which should be reviewed in conjunction with
this document. Accordingly, readers should not place undue reliance on
forward-looking statements. The Corporation does not undertake any obligation
to update publicly or release any revisions to forward-looking statements to
reflect events or circumstances after the date of this document or to reflect
the occurrence of unanticipated events, except in each case as required by
law.
For further information: Ms. Keren R. Yun, Director, Investor Relations,
Tel: (416) 216-2781, Email: ngx@northgateminerals.com, Website:
www.northgateminerals.com
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