Scotia $16 TargetAuRico Gold Inc. (AUQ-N US$9.82)(AUQ-T C$10.19)Trevor Turnbull, MBA, MSc - 416-863-7427(Scotia Capital Inc. - Canada)trevor_turnbull@scotiacapital.comAli Khan - 416-860-1429(Scotia Capital Inc. - Canada)Craig Johnston, CA - 416-860-1659(Scotia Capital Inc. - Canada)Est. NTM Div. US.00Div. (Current) US.00Yield 0.0%Rating: 1-Sector Outperform Target 1-Yr: US$16.00 ROR 1-Yr: 62.9%Risk Ranking: High 2-Yr: US$16.00 2-Yr: 62.9%Valuation: 1.42x NAVKey Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risksNorthgate Tour - Got to Have YD and YD WestEvent¦ We attended Northgate's tour of its Young-Davidson underground mineproject and examined drill core from the recent YD West discovery.Implications¦ As expected, completion of surface facilities and the mill are advancingrapidly and on schedule. Shaft and lateral development is also well inhandand we were able to see the ore body in working face conditions.¦ We were most impressed by the continuity of the brick-coloured syenitehosted ore. It is often quite wide and easily identifiable against the graygreenvolcanic waste rock that should minimize dilution.¦ Encouragingly, the YD West core holes that we examined displayed thesame continuous style of wide mineralization. The geologists explainedthe assays typically all run between 2 - 8 g/t and ore is open to the westand at depth down plunge.¦ Our combined AUQ-NXG NAV3% would increase 3% if we factoredin 1.0 Moz from YD West with a $30 mm raise bored shaft.Recommendation¦ We reiterate our 1-Sector Outperform rating based on AuRico trading atan 8% discount to our NAV3% of $10.31/sh and the implied purchaseprice of Northgate at an 18% discount to our NAV3% of $4.25/sh.CapitalizationShares O/S (M) 279.4Total Value ($M) 2,744Float O/S (M) 279.4Float Value ($M) 2,744TSX Weight 0.13%Next Reporting Date Oct-11Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E2008A.06 A.06 A $-0.09 A.06 A.25 21.882009A.03 A.00 A.05 A.17 A.24 45.882010A.04 A.08 A.10 A.17 A.39 21.002011E.10 A.15 A.25.23.74 13.27(FY-Dec.) 2008A 2009A 2010A 2011E 2012EEarnings/Share.25.24.39.74 $1.58Price/Earnings 22.0 45.0 21.0 13.3 6.2Cash Flow/Share.39.57.81 $1.12 $2.16Price/Cash Flow 14.2 19.4 10.1 8.8 4.5EBITDA $54 $70 $116 $317 $799Gold Equiv. Production (oz) (000) 0.3 0.2 0.2 0.3 0.7Tot. Cash Cost ($/oz) $539 $462 $479 $517 $555IBES Estimates BVPS11E $4.12EPS 2011E: $1.01 NAV $10.31EPS 2012E: $1.45 P/NAV 0.92xHistorical price multiple calculations use FYE prices. Source: Reuters; Company reports; Scotia Capital estimates.All values in US$.Pertinent RevisionsNew OldEPS11E.74.75New Valuation:1.42x NAVOld Valuation:1.48x NAVSC Online Analyst LinkTable of ContentsIntraday FlashThis Daily Edge comment is a reprint of our Intraday Flash publishedThursday, October 6, 2011. Pricing has been updated as at the marketclose Thursday, October 6, 2011.36Company CommentFriday, October 7, 2011Very Flexible Underground Mine Design Proceeding Well¦ We were not surprised to see the Young-Davidson project moving along very wellunder Project Manager Andrew Cormier and General Manager Luc Guimond. Thissuccessful trend has been demonstrated by Osisko, Detour and Goldcorp whereby Canadianmining projects advance very rapidly with the availability of skilled professionals, strongsupply chains and an inherent culture of safety and best practices.¦ The Young-Davidson underground development is benefiting from ramp access and therecently reconditioned MCM shaft. It will benefit further once the new 6,000 tonne per day(tpd) Northgate production shaft is completed following raise boring. Fortuitously, the minehas a massive open stope, the MCM workings, that are being refilled with development wastethereby avoiding the need to use the shafts or the ramp for haulage. The three undergroundaccess points are:? Ramp from surface – this allows immediate access to the underground andprovides a means of raise boring the new Northgate shaft that is faster and cheaperthan conventional shaft sinking. The ramp also frees up the existing MCM shaftthat was undergoing reconditioning.? MCM shaft – this is primarily designated as a men and materials shaft, but itwill also have 2,000 tpd of hoisting capacity that could be utilized. CementationInc. is also extending this shaft to about 1,100 m depth that will allow access forraise boring of the final phase of the Northgate shaft. The upper levels of bothshafts will not be impeded by construction of the deeper portions.? New Northgate 5.5 m shaft – is being raise bored in three phases with thefirst phase complete to 440 m depth. Phase 2 includes construction of a mid-shaftloading pocket and crusher that will allow production hoisting while the Phase 3deepening takes place.¦ We found the surface construction and mill are on track for a March 2012 gold pour.Except for a refurbished ball mill from Northgate’s Kemess mine, the mill is 100% newcomponents. The construction team is using pre-assembled sections to speed up the process.For example, we saw racks of piping already fitted and ready to be tied in that were done offsite as were sections of the mill building itself.¦ The mill has significantly greater crushing capacity than is needed for 6,000 tpd. Therefore,minor tankage and pumping increases could expand its potential throughput if Young-Davidson or YD West were to need it. AuRico President and CEO Rene Marion has beenquoted saying he could envision between 7,500 tonnes and 10,000 tonnes per day ifexploration continues to be successful.Mineralization Has Porphyry-like Continuity¦ Our biggest takeaway was the consistency of the ore body and the even distribution ofgold grades. This was a revelation to us and inspires confidence that there should be lowerdilution, better predictability and fewer surprises all resulting in lower costs. The oremineralization consists of a competent brick-red potassically altered syenite that stands insharp contrast to the gray-green volcanic wall rocks. Typically, the ore body is wide andshould be amenable to bulk mining in most places.¦ A paste backfill trade off study is expected to be conducted by AuRico. A decision is notneeded right away with the open pit starting production first and paste backfill likely to bemore useful in deeper portions of the mine. For these reasons, Northgate has been focusedmore on completing construction and getting into production on schedule.YD West – The Real Deal with Growing Resources¦ The consistent style of mineralization bodes very well for the new YD West discovery.The ore appears to be the same as that found at Young-Davidson although it has been comingin slightly higher grade. YD West current has an indicated resource of 536,000 ounces37Company CommentFriday, October 7, 2011Exhibit 1 - Long Section of Young-Davidson and YD West (on lower left)Source: Northgate Minerals Corporation.grading 3.7 g/t compared to the Young-Davidson diluted reserve of 2.5 million ouncesgrading 3.0 g/t. The last two holes subsequent to the YD West resource returned an averageof 3.75 g/t over 70.4 m.¦ YD West is open at depth down plunge and to the west. It is located at a depth of 500 m– 1,000 m about a kilometre from shaft access as shown in Exhibit 1. We could easilyenvision drift access for exploration from the main operating mine. Further out, this accesscould facilitate raise boring of a shaft to create additional throughput for the mill asmentioned previously.Northgate is Very Attractive at Current Trading Levels¦ We calculate AuRico is getting Northgate at an 18% discount to our net asset value of$4.25 per share. We believe there is a high likelihood of success at Young-Davidson from astart-up perspective and also from exploration upside at YD West. AuRico itself is alsotrading at an 8% discount to our valuation of $10.31 per share. Therefore, we predict a reratingof AuRico shares over the next several months.38Company CommentFriday, October 7, 2011Exhibit 2 - Operating and Financial Forecast for AuRico and Northgate CombinedRatio Analysis 2010A 2011E 2012E 2013E 2010A 2011E 2012E 2013ENet Income (US$mm) ($147) $154 $441 $585 Average Share Price $11.35 $11.35 $11.35 $11.35Net Income Adjusted (US$mm) $55 $156 $441 $585 S/O (mm) 138.5 176.5 279.4 279.4EPS (f.d.) (US$/sh).39.74 $1.58 $2.02 Realized Gold Price (US$/oz) $1,225 $1,588 $1,750 $1,750P/E (x) 27.2x 14.3x 6.7x 5.2x Spot Gold Price Forecast (US$/oz) $1,225 $1,588 $1,750 $1,750Operating CF bf. ch. in WC (US$mm) $113 $236 $626 $701CFPS bf. ch. in WC (US$/sh).81 $1.12 $2.16 $2.42 Mine Gold Equivalent Production and CostsP/CF (bf. ch. in WC) (x) 13.0x 9.5x 4.9x 4.4x Ocampo Production ('000 oz) 176 214 306 327Income Statement Items (US$mm) El Cubo Production ('000 oz) 19 25 67 87Total Revenue $238 $562 1$253 1$428 Young-Davidson Production ('000 oz) n.a - 68 122Operating Costs ($93) ($182) ($398) ($444) Fosterville Production ('000 oz) n.a 29 106 106Exploration ($2) ($20) ($20) ($20) Stawell Production ('000 oz) n.a 21 81 80SG&A ($28) ($43) ($36) ($36) Total Production ('000 oz) 196 288 628 722Depreciation ($47) ($76) ($185) ($116) Average cash costs (US$/oz gold) $479 $517 $555 $542Interest Expense ($3) ($3) ($2) -Other - gain (loss) ($236) ($12) ($1) ($1) Additional Ratio AnalysisEBITDA $116 $317 $799 $928 Net Interest Coverage (x) 22x 86x n.m. n.m.EBIT $69 $241 $614 $813 Profit Margin 1.4 1.3 1.3 1.3EBT ($170) $227 $612 $812 ROE n.m. 13% 28% 27%Taxes - recovery (expense) $21 ($74) ($171) ($228) ROA n.m. 11% 24% 24%Effective Tax Rate 0% 33% 28% 28% EV/EBITDA (x) 12.8x 5.9x 3.2x 2.1xEarnings bf. Minority Interests ($149) $152 $440 $584 Net Debt/Equity n.m. n.m. n.m. n.m.Minority Interest - - - - Book Value (US$/sh) $4.81 $6.53 $5.70 $7.80Reported Net Earnings ($147) $154 $441 $585 Free Cash Flow (US$/sh) (.07).45 $1.72 $2.23Reported EPS (f.d.) (US$/sh) ($1.03).50 $1.52 $2.02Adjusted EPS (f.d.) (US$/sh).39.74 $1.58 $2.09 NAV AnalysisCash Flow Statement Items (US$mm) Operating Mining Assets (US$mm) US$M US$/Sh %Net Earnings ($147) $154 $441 $585DD&A $47 $76 $185 $116 Ocampo $1,125 $3.70 36%Deferred Taxes ($19) ($4) - - Young-Davidson $745 $2.45 24%Other $233 $11 - - El Chanate $377 $1.24 12%Operating CF bf. ch. in WC $113 $236 $626 $701 El Cubo $350 $1.15 11%CF from Operating Activities $98 $256 $626 $701 Fosterville $181.60 6%CF from Financing Activities $2 $7 ($28) ($1) Stawell $157.52 5%CAPEX ($107) ($176) ($145) ($77) Guadalupe y Calvo $50.16 2%CF from Investing Activities ($118) ($231) ($145) ($77) YD West $25.08 1%Net Change in Cash ($18) $32 $453 $623 Kemess $75.25 2%CFPS bf. ch. in WC (f.d.) (US$/sh).79.77 $2.16 $2.42 Total Assets $3,084 $10.13 98%Balance Sheet Items (US$mm)Cash $113 $147 $600 1$224 Net Debt $286.94 9%Current Assets $213 $285 $738 1$362 Working Capital (Net of cash and short term debt) $35.12 1%Long-term Assets $607 $1,134 $1,094 $1,055 In-the-money Instruments $251.82 8%Total Assets $819 $1,418 $1,832 $2,416 G&A, Expl, Reclamation ($520) ($1.71) (17%)Short-term Debt $6 $28 $1 $1 Net Asset Value $3,137 $10.31 100%Current Liabilities $53 $102 $76 $76Long-term Debt $31 $2 $1Mine Reserves and ResourcesTotal Liabilities $153 $266 $239 $238 Gold Reserves (mm oz) 6.3Shareholders' Equity $667 $1,152 $1,593 $2,178 Gold Resources (mm oz) - Inclusive 10.6Total Liabilities & Shareholders' Equity $819 $1,418 $1,832 $2,416Working Capital $159 $182 $662 1$285Revenue By Metal (2011E)Gold, 75%Silver, 25%OcampoEl CuboEl ChanateYoung-DavidsonFostervilleStawell0150,000300,000450,000600,000750,000900,0002010A 2011E 2012E 2013E 2014E 2015EGold Eq. Production (ox)Source: Company reports; Scotia Capital estimates.SC Online Analyst LinkTable of Contents39Company CommentFriday, October 7, 2011For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.affiliates are not registered/qualified as research analysts with FINRA in the U.S