fat prophets say buy

STATE OF PLAY

Norton has a market capitalisation of A$112.65 million. The market is valuing the company?s gold resources of 6.1 million ounces at only A$18 or US$15 per ounce. This is clearly reflecting the uncertainty over the court case involving the gold hedge and the high cash cost at the Paddington mine. These negative influences today might very well be the reasons for the market to re-rate the company.

The current market valuation across 68 companies with 769 million ounces in resources (gold equivalent ounces) is US$103 per ounce. The company has a serious challenge ahead of it to try and build shareholder value again.

Norton has been spending on developing the Homestead underground mine at Paddington. VN01 is the main orebody and the feasibility study was based on 428,000 tonnes grading 7.4 g/t gold. In addition to the main orebody there is also high grade gold in veins. The Phantom EW Vein has a small resource of 28,337 tonnes grading 10.3 g/t gold.

Exploration at Homestead is continuing but recent drill results are supportive of a source of higher grade ore to lift the average feed grade to the mill. Needless to say, increasing the head grade at Paddington would be very positive for that operation.

The Quarterly Report for March 2010 shows that the Paddington Gold Mine produced 33,811 ounces at a cash operating cost of A$1,024 per ounce. The total operating cost was A$1,232 per ounce and lowering the total cost is the key challenge facing management.

The waste to ore stripping ratio is sometimes high at over 10:1, but the main culprit for high costs is the low grade which has fallen from 1.4 g/t to nearly 1.2 g/t gold. It takes a much larger scale operation than Paddington to make money at less than 1.5 g/t gold.

Underground development ore from Homestead improved the mill feed to nearly 1.4 g/t. Underground development has been scaled back so that additional drilling can be undertaken to better define the VN01 orebody and the veins carrying high grade mineralisation.

Another option being examined to help lower the costs at Paddington is development of a sub-level caving operation at the Enterprise Project. Enterprise is 35 kilometres from Paddington and consists of 15 million tonnes at an average grade of 2.1 g/t gold. Sub-level caving is a relatively low cost underground mining method. The concept is an 8 year mine producing 650,000 tonnes per annum at an average grade of 2.8 g/t gold. The release of the final feasibility is due soon and if it is favourable will be another catalyst for a re-rating.

Norton also has a gold project at Mount Morgan in Queensland. The feasibility has been completed and the Kundana plant has been refurbished and is ready to be relocated to Queensland. The plan is to produce 30,000 to 35,000 ounces of gold per annum from mine tailings. The project has two stages over a 12-year life that will also produce pyrite for acid and copper in concentrate. The operating team has been assembled and full production is expected within 12 months of starting construction.

It is interesting to note that during 1Q10 the company placed shares with China Precious Metal Resources Holdings Co. Ltd (CPM) at 25 cents to raise just under A$20 million. The placement was done at a 34% premium to the 15-day VWAP. The Chinese company was invited to nominate a representative to Norton?s Board.

After the placement to CPM the company has the working capital and funding to implement the current plans for growth.

At this point in time we see much more upside for Norton than downside. The potential uplift on the valuation of the company to the sector average is around 7 times based on resources of 6.1 million ounces.

Management is determined to move to a lower cost base at Paddington and is investing A$30 million to achieve that outcome. The company is also assessing nearby satellite projects that would also sweeten the head grade at Paddington. The current mine life of 10 years will surely be extended through exploration expenditure of A$15 million over the next 15-16 months. We think the company will be successful in that the head grade at Paddington will be increased and the unit cash cost will fall.

In addition to the company?s primary focus on gold, Norton also has a coal project in Queensland?s Bowen Basin. In the southern area of the leases there is an inferred resource of 57 million tonnes of Thermal/PCI coal. The aggregate seam thickness is up to 10 metres but the stripping ratio is high. The northern area is prospective for high quality hard coking coal that is confirmed by a single drill hole at 600 metres depth. Drilling is continuing and Norton is looking at the options for extracting value from the asset.

We like the company?s high leverage to the gold price, the long mine life at Paddington and the steps that have been taken to improve the fundamentals at Paddington that will return the project to positive cash flow.

Norton Gold Fields Limited is a speculative investment but with the gold price expected to make further gains we are recommending the stock as a BUY for all Members.