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15-Apr-2011
NORTON GOLD FIELDS,
Lehman legacy nobbles goldminer
ASX Code NGF
Update You probably haven't heard of one of the biggest gold producers in Australia, Norton Gold Fields, because it is also one of the many victims of Lehman Brothers' implosion in 2008.

The Kalgoorlie gold producer, which has 1050 square kilometres of exploration area, produced 140,000 ounces last year and is forecast to produce 160,000 ounces this year. The company has a resource of 5.8 million ounces and a reserve - or gold that it knows is there - of 1.2 million ounces.

In terms of Australian-focused gold production, this is second only to St Barbara, whose market cap is more than $700 million. Norton, however, is "unloved and uncovered", in the words of one fundie. At 15¢, its market cap is close to $100 million and the stock has fallen almost 45 per cent in the past six months.


The millstone around Norton's neck is $85 million of debt that it "inherited" from a $140 million hedge facility it had with the failed Lehman Brothers.

Managing director Willie "Andre" Labuschagne admits as much, but he is adamant Norton will not raise equity - at least for operations -  and cites the $30 million it has in the bank (and $20 million in environmental bonds) and the $60 million a year it generates from operations.

The company, though, contacted this columnist later to stress that a raising is an option in the near term to address the company's debt. Norton said the $60 million generated from operations each year is committed to capital development - not to settle the debt owed by the company.

Another problem the company has faced is high costs of production, operating two small open cut mines. Labuschagne says this problem has been solved by merging them into one big one.

There is no doubt there is value to be unlocked here. Based on its enterprise value (debt plus equity), Norton trades at $35 for every ounce of gold, in terms of resources on its books. This compares to the average for Australian gold producers of $135 an ounce.

For shareholders, the company cannot get rid of its Lehman legacy fast enough.

RAISINGS ON RISE

In the wake of the 10 per cent spike of the S&P/ASX Small Cap Index in the past month, it is clear that investment bankers are running around telling any small company that will listen to raise capital.

Even after a slight dip in the past few days the index is up almost 10 per cent in the past 12 months, compared with the S&P/ASX 100, which is slightly down over the period.

As you read this, high-profile capital raisings include the Macquarie-backed $40 million for printing-machine services company CSG, while UBS brokers are battling to secure $80 million for mining services contractor NRW. Companies that are listing for the first time include property services provider onthehouse.com.au, which will compete with REA's realestate.com.au. This company intends to raise $50 million. Another is West Australian-based GR Engineering Services, which has just completed a $30 million raising.

There are also myriad raisings for small mining companies, including $30 million for Alara Resources and $4 million for King Island Scheelite.

Ben Griffiths, of small cap fund manager Eley Griffiths, says investors must be careful not to get caught up in "momentum mania".

"There are so many right now, I can't remember them all,'' Griffiths says. ''It's very much a case of the supply of capital creating its own demand and the quality is variable, to say the least." He reckons the outlook for industrial companies is uncertain due to weakness in consumer spending but has no such concerns for resources companies, presumably because of the economic giants they supply.

Even in bull markets there are big risks. You only have to look at the 70 per cent fall last Tuesday in the shares in infrastructure services provider Hastie Group to see what can happen if a raising fails.

DIFFERING VIEWS

Speaking of capital raisings, CSG's $40 million request yesterday for equity at $1.10 has raised eyebrows.

At $1.40 before the trading halt, the Darwin-based company's shares have spiked almost 30 per cent in the past month or so, assisted by a confirmation that the company would hit its profit guidance in late March. But even after this spike, in the past 12 months the stock has fallen just over 30 per cent.

The company leases photocopiers to businesses and government departments. It hit hard times after Fuji Xerox terminated its dealer agreements and its subsequent move to Canon as a supplier. This has triggered an increase in inventories and receivables of more than $21 million.

CSG says its earnings have also suffered from the Queensland floods and the Christchurch earthquake.

What is annoying some, however, is the deferred consideration of $43.6 million for some of the businesses it has bought. This relates to the company's prolific acquisition activity. In the past three years CSG has made acquisitions in the region of $250 million.

The deferred consideration was buried in ''trade and other payables'' of $108.2 million in the interim report released on February 15. And it wasn't mentioned in its earnings update announced in late March.

CSG's institutional placement of $10 million is fully underwritten, and although it's not written on any of the announcements, the Herald understands it's Macquarie.

The remaining $30 million will be raised through a "non-renounceable accelerated pro-rata entitlement", which is investment banker speak for institutions getting another bite at the cherry after the initial placement.

One fundie described CSG as "a house of cards to some, while others are enthusiastic".

This capital raising will definitely sort out in which camp investors place themselves.

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