New Gold: A Perfect Storm For Growth

As the gold correction has almost run its course, it's time to once again benefit from the rise of gold by buying into gold mining stocks. One nice growth story is New Gold (NGD).

New Gold has 3 operating properties: Mesquite, Peak Mines and Cerro San Pedro Mine with altogether approximately $US 200 million net cash flow. The market cap of New Gold is $US 5.54 billion with a price to book value of 2.5. This corresponds with a P/E of 24.78. Cash costs of the projects are coming down, while production is steadily increasing. You could think this is very pricey, but the secret lies in its development projects of which the cash flow will grow at an exponential pace.

New Gold has 3 development projects: New Afton, El Morro and Blackwater.

1) New Afton

New Afton is going in production in June 2012 with commercial production in August 2012. It will produce 75 million pounds of copper, 214 thousand ounces of silver and 85000 ounces of gold at a cash flow of approximately $US 200 million/year, which will essentially double the cash flow of the company to $US 400 million/year. Its NPV is approximately $US 1.5 billion at current gold prices. This makes the P/E ratio 12,4. Does this get you excited or not? This price is certainly good value compared to other gold mines today. But the good news is not over yet.

2) El Morro

El Morro will commence construction in September 2012 (30% interest). With targeted production in 2018. It will produce 90000 ounces of gold, 100 million pounds of copper at a net cash flow for the company of $US 400 million/year (due to low cash costs) according to Pierre Lassonde. It will become the biggest cash flow generator for New Gold at a NPV of $US 1.3 billion. Which means the company doubles its net cash flow once again! But the good news is still not over yet.

3) Blackwater

Blackwater will deliver a pre-feasibility study end 2012 and will give a resource update in February 2012. Production is set for 2018 and beyond. This is by far the biggest asset in hands of New Gold and could generate in the $US 800 million/year net cash flow. Which essentially again doubles the company by 2020.

If you can wait this long, you could see a stock price going from $12 to $70! Which is a sixfold increase.

And I didn't even count in the possible 5 fold increase in gold prices by that time...

Disclosure: I am long NGD.