The Next Big Story in Gold?

Aug 3rd, 2006 | By Penny Sleuth Contributor | Category: Commodities, Investing Strategies

You won’t read about this story in the Wall Street Journal, IBD or any other mainstream news outlet. But this is, without a doubt, the biggest story in the gold world today — that no one knows a thing about.

The potential gains could easily measure in the triple-digits. But the potential losses could as well. So if you are weak in the knees, have a soft stomach or can’t sleep at night, this ain’t for you!

But if you want to know about an unfolding story that could, one day in the near future, be front-page news, keep reading…

Cumberland Resources Ltd. (CLG:AMEX), market capitalization $244 million, is a highly speculative gold exploration company based in Canada’s Nunavut Territory. It has 2.89 million ounces of proven and probable gold reserves in its 100%-owned Meadowbank gold project.

If all goes as planned, Meadowbank will become Canada’s largest new gold mine by late 2008 or early 2009. It will be one of Canada’s lowest-cost gold miners (with an average cost of just $201 per ounce). And it will immediately become an attractive takeover candidate for someone like Newmont Mining — the world’s second largest gold producer.

Of course, the key words in that last paragraph are “if all goes as planned.”

Although Cumberland is sitting on a literal gold mine, it can’t start production just yet. It needs approval from the Nunavut Impact Review Board (NIRB), the region’s governing body, with responsibilities for the environmental assessment of projects in the Nunavut area. Until the NIRB grants Cumberland approval to proceed with production, the company is forbidden by law to mine a single ounce in Nunavut.

Ultimately, the NIRB holds Cumberland’s future in its hands.

If Cumberland is permitted to move ahead with production at Meadowbank, the company is one of the best bargains in the gold sector at its current price of $4.37 a share. Based on my calculations, the company is trading for 129% less than its true value. And it could easily rise more than that if a larger company (like Newmont) swoops in to buy it outright.

Cumberland is currently in final stages of the NIRB approval process right now. It submitted the last of its environmental impact statements to Nunavut’s governing body in November 2005. And despite the NIRB coming back to the company in April with a few more follow-up questions, Cumberland expects to receive a final verdict by Q3 06. In other words, sometime by this September.

Why I Am Betting Cumberland Will Get the Go-Ahead From the NIRB

While it is impossible to guess whether the NIRB will give Cumberland the thumbs-up or thumbs-down, I would bet my new PING putter the news will be good.

In early 2004, the NIRB rejected an application by Miramar Mining to develop its Doris gold project, 375 miles from Cumberland’s Meadowbank site. It said the company did not adequately discuss the impact its mining operations would have on wildlife, water supplies and the Inuit people (the native people in the Nunavut region). But it encouraged the company to file another application when it could concretely address these concerns. Miramar did. And in March 2006, the NIRB granted approval for Miramar to develop its Doris mine.

This was a major step forward for all miners who wish to do business in Nunavut — including Cumberland. Based on its recent ruling on Miramar, it is obvious that the NIRB is not opposed to mining companies setting up shop in Nunavut, as once previously thought.

In addition to the NIRB granting Miramar approval this spring, there is more good news that suggests Cumberland will be allowed to proceed with its Meadowbank mine. The company signed an agreement with the Inuit people ensuring that local employment, training and business opportunities will be accessible to them when Meadowbank opens up. Clearly, the Inuit people are betting the Meadowbank mine will be given the go-ahead.

Finally, the government of Nunavut announced a fuel tax rebate to the mining sector — a move that encourages mining companies like Cumberland to set up shop in this region of Canada.

At the end of the day, we’ll have to wait and see if the NIRB gives Cumberland the thumbs-up or the thumbs-down. My guess is Cumberland will be allowed to proceed with construction and production of its Meadowbank mine — even if it has to jump through a few more hoops along the way. The key here is to be patient.

Set to Rise 129%

If Cumberland’s Meadowbank mine were to open today, it would be Canada’s largest pure gold open pit reserve, with proven and probable reserves that total 2.89 million ounces. It would also be one of the lowest-cost gold producers in the country — with a cost per ounce of just $201. And it would have a mine life of at least eight years.

To try to figure out what Cumberland might be worth if its Meadowbank mine were approved for production today, I ran some numbers. The spot price of an ounce of gold is $640. And if you assume it will cost Cumberland $250 to get a single ounce of gold out of the ground (that’s a conservative estimate, compared with the company’s target of $201 an ounce), its net profit per ounce is $390. So to get a very rough estimate of what the company’s reserves are worth, you multiply 2.89 million by $390. That number works out to be $1.13 billion.

But there are some other costs you need to consider that aren’t reflected in that $1.13 billion. Namely, Cumberland will have to spend about $300 million to build roads and fully develop its Meadowbank mine once it receives the go-ahead from the NIRB. To finance that deal, the company has agreed to pay a consortium of banks 420,000 ounces of gold — or 15% of its total — reserves. With those numbers in mind, Cumberland is worth roughly $558 million. That’s 129% greater than the company’s market cap today.

Of course, Cumberland is only undervalued if its Meadowbank mine is allowed to proceed with construction and production.

Because of the inherit risk associated with Cumberland, I am not recommending you buy shares at this time. Keep Cumberland Resources Ltd. on your radar screen. It could be the next big story in the gold world.

Regards,

James
August 03, 2006

Penny Sleuth Contributor

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