how fortunes are made ..., page-30

Saintly, it may be debatable but I certainly don't think its ridiculous to consider that NST may be overvalued here. I mean two thirds of your 350k oz they just bought on the open market for $100m. That would value the group at $150m!

The question is why are the assets so cheap. The answer in my view is not that Barrick is pulling out of oz, or that they don't know enough about the assets or that no one else can understand the value. The reason in my view is that the sustaining costs numbers don't reflect the actual cash costs of running these mines. The acquired assets are worse than NST and even leaving aside the $30m development capex, cash flow at NST runs well below what is implied by the sustainable costs numbers.

Although NST don't talk about short term cash flow, it is certainly implied by the actual numbers that its not going to be positive in the short term. Why not raise more than $50m in debt if you have all these hard assets and $143m a year of sustainable profit? Why put $93m cash on the balance sheet, by selling stock at 86cents ?! ($20m min cash required, $58m working cap, plus $15m rights issue). As is often the case with NST, the story that is being told and the numbers don't match up. Really they should be explaining what they need the cash for. Instead the story is just its all great, we can spend just a little and make big gains, blah, blah.

Looking at value versus peers, well before these deals NST traded at a small discount based on EBITDA multiples. Again though I believe that discount was justified for cash flow reasons.

There have been a number of ASX stocks over the years that I call creatures of the capital markets. They tell a good story and constantly raise money until eventually the business case breaks down. The underlying story is always that this particular small company can do it better than the large companies that are pulling out of the the country or sub sector. Unusually, NST is in a way pretty open about their focus on capital markets. Their stated objective is not to build a cash generative business with synergistic acquisitions but to reach a certain size to attract larger investors. I can see what they are saying, if you can attract those larger investors you can trade on higher multiples and therefore continue to acquire assets with strong currency.

It may all work out. Certainly it would if gold rebounded from here, which I think is the base case of many NST investors. I do believe though with a very well marketed stock like this, you need to keep a close eye on the actual accounting numbers. Ignore any adjusted numbers and guidance given like sustaining costs, free cash etc. Sure make your own adjustments but do it with a healthy dose of skepticism.

Of course, you could come to a similar conclusion to me on cash flow but still buy because that is just not the way that market is valuing gold companies at the moment.