NG worth C$25 Back-of-EnvelopeHere is an excerpt from a post of Steve Saville on www.321gold.com dated August 12 that some of you may not have seen due to the summer siesta. This calculation was done prior to the impressive drill results just released. If the golds continue their recovery NG may be heading towards $10 soon. Best wishes to all the longs!!
"If things go roughly to plan then NG will have annual gold production of around 700,000 ounces by 2008. Currently, the average market cap per ounce of gold production across the entire gold sector is around US$2000, so the aforementioned production would be valued at around US$1.4B if the gold price were near current levels (a higher gold price would increase the value of gold production). Now, assuming that NG has to issue another 10M shares over the next 4 years in order to finance project development -- a reasonable assumption given the company's current cash reserves and the likelihood that earlier projects will provide the cash to finance later projects -- then a US$1.4B market cap in four years time would be equivalent to a stock price of US$19 (C$25).
The above-calculated price of C$25/share for NG is 280% higher than yesterday's closing price of C$6.44 and, as mentioned, assumes ZERO increase in the gold price. However, we expect that the gold price will be trading well north of US$1,000 by 2008 so the actual stock price could be MUCH higher than our calculated value.
So, that's the potential upside over the next few years for one of our stocks and against this we must balance the risk of a drop back to around C$5.00 at some point over the next few months.
Most gold stocks don't have NovaGold's growth prospects so the above example is not representative of the sector as a whole. As far as the overall gold sector is concerned, though, a similar argument can be made in that the upside potential over the next few years can be shown to dwarf any short- or intermediate-term downside risk. In particular, with current sentiment towards the gold sector ranging from disinterest to pessimism (refer to the below discussion on gold market sentiment) the probability of another large down-swing in the prices of gold shares is low. What would, instead, be more likely is a drop back to near the May lows or, perhaps, to a few percent below the May lows; and against this downside risk we must balance the potential for another multi-year advance of similar magnitude to the one that unfolded during 2001-2003."