The Northgate Minerals Corporation Conundrum

Posted on November 16, 2006 , filed under Stocks | Print This Post

I’ve been asking myself what’s wrong with Northgate Minerals Corporation (NXG). The majority of the gold mining stocks that I watch closely follow the movements of the spot price of gold. NXG, on the other hand, has traded independent of whether the spot price of gold was up or down. NXG has roughly traded between $2.90 and $3.50 in the last month. NXG closed at $3 and dipped as low as $2.89 in yesterdays trading. The last time NXG hit an exact low of $2.89 was on October 13th, 2006. At that time gold was trading in the $580 range. I see that while other gold mining stocks are playing catchup to their 52-week highs, NXG has languished in comparative performance.

Here is a quote from a recent article I wrote about NXG.

Today I will be using Joel Greenblatt’s investing formula for uncovering potential gold mining gems. For those of you unfamiliar with Joel’s formula, he uses only two main criteria for determining the attractiveness of a stock investment. These two criteria are Return on Capital and Earnings Yield.

Using Joel’s two criteria I screened for companies with a minimum market capitalization of $500 Million, a high ROC and a high Earnings Yield. Looking at the top 100 companies that met this criteria, I found one lone gold mining stock, Northgate Minerals Corporation (NGX). Northgate’s ROC is in the 25-50% range and the Earnings Yield is 17%. Northgate appears to be worth serious consideration and may be the next gold mining gem using Joel’s criteria.

Joel Greenblatt is the author of The Little Book that Beats the Market. In the book he discusses in detail, the advantages and strategies of using ROC and Earnings Yield to evaluate a stock investment.

I believe that NXG is a high quality company and expect that NXG will eventually normalize along with the pattern followed by most other gold mining stocks. NXG currently has more room to play catch-up to the percentage gains of my other top gold mining picks such as Yamana Gold, Inc. (AUY) or Tanzanian Royalty Exploration Corp. (TRE).

The lag in NXG’s performance may be attributed to the strong but weaker that analysts expected third quarter earnings. NXG also appears to be a day traders darling with a low price and heavy volume causing large daily percentage swings in the stock price.

My job as an investor is to uncover underexposed undervalued investments. I believe NXG is a prime example of a stock with enormous upside once other investors catch wind of this highly profitable company.

*Disclaimer: The author currently owns 10,000 shares of NXG purchased at an average price of $2.99.

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