NOVAGOLD RESOURCES (TSX/AMEX:NG): FOLLOW-UP NO 17 / NOVEMBER 17, 2010
|NOVAGOLD RESOURCES: RETURN ON CAD 10,000 INVESTMENT|
|Purchase Date||No. of Shares||Purchase Price||Cost (CAD)||Price Today||Value Today|
|February 4, 2002||3'000||3.16||9'480.00|
|Profit (in %)||336%|
|SHARES ISSUED / FULLY DILUTED||MARKET CAP|
|225.5 Million / 286.8 Million||CAD 3.0 Billion|
|52 WEEK LOW / HIGH||TSX/AMEX|
|CAD 5.32 to 13.48||524,110 (200-day) / 2,820,343 (200-day)|
IN PARTNERSHIP WITH THE WORLD'S LARGEST GOLD MINING COMPANY AND CANADA'S LARGEST DIVERSIFIED MINING COMPANY
NovaGold has a reserve/resource base comparable to many of the world's most prominent producers, with
- a 50% interest in two of the world's largest undeveloped gold and copper-gold deposits,
- experienced senior operating partners at projects in low-risk mining-friendly jurisdictions, and
- a constructed mine at the commissioning stage.
Even through the share price has doubled since our last follow-up, market conditions may still provide a compelling buying opportunity for investors.
The Donlin Creek mine, if constructed, is expected to be one of only a handful of gold mines worldwide that is capable of producing more than one million ounces of gold annually, making it a true world-class asset.
Under lease from two Native Alaskan Corporations, Calista Corporation (subsurface rights) and The Kuskokwim Corporation (surface rights), the 10,900 hectare (27,000 acre) property is located in the historic Kuskokwim Gold Belt of southwest Alaska. Donlin Creek is operated by the Donlin Creek LLC, a limited-liability company that is jointly owned by NovaGold Resources Alaska, Inc. and Barrick Gold U.S. Inc. on a 50/50 basis.
- Completed feasibility study
- Converted measured and indicated resources to reserves
- Initiate permitting process, continue community engagement
- Continue with community engagement and permitting activities
- Complete optimization studies to consider alternate power sources, including natural gas
NovaGold released the results of a feasibility study in April 2009, outlining the production and economic estimates for development of the Donlin Creek asset. The Donlin Creek mine has been designed as a year-round, open-pit operation. With the current 33.6 million ounce reserve base, the anticipated mine life is approximately 25 years with a mill throughput of 53,500 tonnes per day. Gold production for the first 12 full years is expected to average nearly 1.5 million ounces annually. Life of mine production is estimated at 1.3 million ounces of gold annually, for total production of 26.2 million ounces of gold over 20 years. These production levels would make Donlin Creek one of the major gold producing mines in the world. A construction decision will be made following receipt of permits.
Industry wide capital costs spiked over the last two years and peaked in the latter half of 2008, which is when Donlin Creek LLC was estimating costs for the project. Recognizing the recent decrease in costs for construction inputs such as steel, concrete, diesel and labor, Donlin Creek LLC will continue to review the capital cost estimates for the project. The feasibility study was completed based on a gold price of US$825/oz for reserves and will act as the basis to begin the permitting process.
On a 100% basis, the project currently has a reserve base of 33.6 million ounces of gold, with an additional 4.3 million ounces of measured and indicated resources and 4.2 million ounces of inferred resources. The resource is grouped into two main areas: ACMA and Lewis. It is anticipated that mining would initially start with the ACMA mineralization which is slightly higher grade at an average of 2.53 g/t, compared with the Lewis deposit average grade of 2.22 g/t.
Advancing Toward Production
Work at the Donlin Creek project will now focus on obtaining required permits. The Donlin Creek mine is a large-scale project and will require a considerable number of permits and authorizations from both federal and state agencies. Subject to advancement of the permitting process, Donlin Creek LLC will make a construction decision.
Galore Creek is one of the world's largest and highest-grade undeveloped porphyry-related copper-gold-silver deposits. GCMC currently holds 118,912 hectares (293,838 acres) of British Columbia provincial mineral claims in 264 tenures. Included in this total are the five Grace claims that were acquired by GCMC from Pioneer Metals Corporation on December 3, 2007. At the adjoining Copper Canyon property the NovaGold/Copper Canyon joint venture holds 12 claims totaling 11,344 hectares (28,032 acres).
Galore Creek lies approximately 70 kilometers (43 miles) west of Highway 37 and 150 kilometers (93 miles) northeast of Stewart, a year-round concentrate shipping port. NovaGold and Teck Resources each hold a 50% interest in the project, with the Galore Creek Mining Corporation ("GCMC") directing all aspects of project development.
Since acquiring Galore Creek in 2003, NovaGold's exploration team has more than tripled the size of the project's resource base. With 1,300 million tonnes of high-grade copper-gold-silver porphyry resources and a number of untested targets, there remains considerable potential to increase the resource base at Galore Creek.
- Maintain and improve project infrastructure and investment
- Release updated mine plan in early 2010 that includes updated economics using higher copper and gold prices and an optimized project design
Since NovaGold initiated work on the Galore Creek project in 2003, the project has received a high level of support from local communities, First Nation groups and the British Columbia and Alaska Governments. In February 2006, NovaGold entered into a comprehensive Participation Agreement with the Tahltan Nation, ensuring collaboration between both parties for mine planning, mine operation and environmental protection.
Following receipt of the Environmental Assessment Certificate in February 2007, the permitting process for Galore Creek progressed smoothly. NovaGold's Board of Directors approved the start of construction in June 2007 after receiving federal and provincial authorizations, and construction proceeded well through the first season. The construction team completed six camps and other support infrastructure, and made significant progress on the access road, bridges and tunnel. In November 2007, NovaGold and Teck suspended construction activities at Galore Creek during a period of increasing capital costs, and initiated engineering and optimization studies to identify alternative development strategies for the project.
Given the continued strength of the copper and gold markets, NovaGold and Teck are considering a more aggressive program for 2010 to advance the project toward a construction decision. The results of the optimization studies have identified a number of modified approaches to the project that show the potential for significant expansion of project throughput, a shorter construction schedule, re-location of the process facilities along the project access road to allow for easier construction and future expansion, and fewer risks associated with construction and operations.
In January 2010, NovaGold purchased 100% of the Ambler project from Kennecott. Under the purchase agreement, NovaGold issued 931,098 common shares valued at US$5 million and agreed to make cash payments of US$12 million each in January 2011 and January 2012, respectively. Kennecott retained a 1% net smelter return royalty that NovaGold can purchase at any time for a one-time payment of US$10 million.
The Ambler property comprises 14,000 hectares (35,000 acres) of patented and State of Alaska mining claims, covering a major portion of the precious-metal-rich Ambler volcanogenic massive sulfide ("VMS") belt. Arctic is the most advanced deposit, located approximately 290 kilometers (180 miles) southeast of Red Dog mine, the world's largest zinc mine.
"The Arctic deposit ranks among the largest and richest known VMS deposits in the world, based on both total contained metal and value per tonne. And considerable opportunity exists to identify similar deposits in the region," said Rick Van Nieuwenhuyse, President & CEO of NovaGold.
"NovaGold is really going back to its roots by acquiring Ambler. We have a solid record in identifying opportunities, expanding resources and advancing those resources to reserves. NovaGold's exploration team tripled the size of both the Donlin Creek and Galore Creek deposits through focused exploration campaigns. With those projects now at a more advanced stage, we can focus our exploration efforts on Ambler with the goal of adding another world-class property to NovaGold's portfolio."
A resource estimate for the Arctic deposit confirmed it as one of the world's largest undeveloped copper-zinc VMS deposits, with very high grades and significant precious metal credits. On an equivalent metal basis, the average metal content exceeds 8% copper equivalent.
Nome Operations comprises three projects located near the town of Nome, Alaska: Rock Creek, Big Hurrah and Nome Gold. NovaGold holds title to mining claims covering approximately 5,700 hectares (14,000 acres), with additional land holdings bringing NovaGold's total property to more than 36,000 hectares (89,000 acres). With an original acquisition price of just over US$5 million, Nome Operations has consistently contributed $1 to $3 million in annual cash flow from its sand-and-gravel and land business.
- Maintained project infrastructure and investment
- Completed significant improvements to water management systems and plant design
The Rock Creek and Big Hurrah projects will be the first modern, open-pit "hardrock" mines on the Seward Peninsula, an area with significant historical production in excess of 10 million ounces from alluvial gold deposits. Rock Creek sits along the Bering Sea on the southern shore of the Seward Peninsula. Located only 12 kilometers (7 miles) from the town of Nome, Alaska, the project has brought significant benefits to Nome and surrounding communities through direct employment and training opportunities as well as service-related businesses. Nome has a relatively dry climate, easily accessible terrain and some of the best infrastructure in the State of Alaska, with roads providing year-round access to the Rock Creek property.
The Rock Creek mine has been designed as a 7,000 tonnes-per-day conventional open-pit year-round operation, expected to produce approximately 100,000 ounces of gold per year once in operation. Construction at Rock Creek commenced in the summer of 2006. Testing of the crushing circuit was initiated in October 2007. Commissioning start-up and systems testing began in September 2008 but was subsequently suspended in November in light of market conditions at the time, with rising costs, falling gold prices, extreme market volatility and a seize up of the equity and debt financing markets. Those factors combined with unanticipated mechanical issues with the crusher resulted in NovaGold placing the project on care and maintenance to protect the infrastructure and investment at the property while a comprehensive assessment is completed.
A small team of mining professionals remains at site to complete the project assessment and ensure the project remains in compliance with all environmental regulations. As a result of unusually high winter precipitation during 2007/2008, the project experienced difficulties with storm water discharges during spring runoff. NovaGold worked closely with regulators to resolve these issues and has collaborated with engineers and regulators to complete a revised water management plan for the project.
NovaGold believes that the Rock Creek mine and surrounding properties continue to hold significant value. While NovaGold does not plan to recommence the start-up process at Rock Creek in the near term, the Rock Creek mine is largely constructed and will likely require minimal investment to restart commissioning and commence production. With an identified reserve base to support four years of production and the expectation that additional resources will extend the mine life, Rock Creek has the potential to produce significant cash flow at current gold prices. Whether NovaGold decides to sell the project, recommence start-up activities on its own or bring in a partner, Rock Creek has the potential to bring significant value to NovaGold shareholders.
In 2008, the exploration program at Rock Creek focused on expanding the known mineralization to expand the overall resource and potentially extend the project's mine life. NovaGold successfully expanded the Rock Creek deposit by 24%, bringing total Nome Operations project resources to nearly 3 million ounces, inclusive of reserves. An updated feasibility study is being completed as part of the project review, and NovaGold anticipates that a majority of the new resources will convert to reserves.
Recent News: Projects Update
At August 31, 2010, the Company had consolidated cash and cash equivalents of $172.8 million and working capital of $150.0 million. Of this cash amount, $3.8 million was held by GCMC for Galore Creek related activities.
The Company's material projects are Donlin Creek and Galore Creek. The Company's share of the Donlin Creek 2010 budget is approximately US$14.0 million, part of which will be incurred for permitting activities at the project.
During the second quarter of 2010, Donlin Creek approved a supplemental budget of US$18.7 million (the Company's share: US$9.4 million) to complete the majority of the environmental and engineering studies required to review the natural gas pipeline option. As at August 31, 2010, US$17.2 million of the budget remains to be spent to the end of the year. The gas pipeline studies have advanced as planned. The majority of the field work is complete and data are being collected and analyzed by Barrick Energy on behalf of Donlin Creek LLC. Donlin Creek LLC plans to incorporate the gas pipeline study into a revised feasibility study replacing diesel with natural gas as the main source of power. The feasibility revision is scheduled for completion by mid-2011, preparing the project to file permit applications by the end of 2011.
The budget for care and maintenance and optimization studies for 2010 at the Galore Creek project is $8.0 million, with a supplementary 2010 budget of $12.0 million for the pre-feasibility study. As at August 31, 2010 $8.7 million of the budget is forecasted to be spent to the end of the year. Qualified independent engineering firms are progressing through the final layout of the project's infrastructure. Work is well underway for a pre-feasibility study to be released by mid-2011. The pre-feasibility study will provide guidance on mining parameters, reserves, capital costs and operating costs. Under the partnership agreement, Teck is funding 100% of these costs and the Company is not required to fund any project costs until Teck has completed its financial earn-in at the project.
The Rock Creek project is in care and maintenance with a 2010 budget of approximately US$19.1 million. During the quarter ended August 31, 2010, management made a decision to not restart operations at this project. The Company is soliciting offers for the sale of this asset to provide additional information to the Board to maximize value and to allow the Company to focus its time and resources on its core projects.
THE ABOVE RESOURCE IS EQUIVALENT TO $25 PER $ 1 MARKET OR $ 360 PER OUTSTANDING SHARE.
THE ESTIMATED ANNUAL PRODUCTION OF 2.5 MILLION OUNCES OF GOLD EQUIVALENT (NET SHARE OF NOVA GOLD) COULD JUSTIFY A MARKET CAP OF 25 BILLION USD BASED ON THE VALUATION THAT MAJOR GOLD PRODUCERS ENJOY TODAY. THE MARKET CAP OF NOVAGOLD IS ONLY USD 3.3 BILLION AT PRESENT.
NOBODY CAN FORETELL WHAT THE PRICE OF GOLD OR THE PRICE OF COPPER WILL BE WHEN THE FOUR PROJECTS GO INTO PRODUCTION. BUT BASED ON TODAY'S PRICES, NOVAGOLD'S PRODUCTION WOULD BE 44% COPPER, 52% GOLD AND 4% SILVER, MAKING IT AS MUCH A SPECULATION ON THE COPPER PRICE AS ON THE GOLD OR SILVER PRICE.
ANALYSTS AT BROKERAGE HOUSES, HOWVER, ARE NOT CONVINCED THAT NOVAGOLD WILL EVER BE IN PRODUCTION, APPARENTLY BELIEVING THAT THE ENVIRONMENTAL CHALLENGES ARE SIMPLY TOO BIG TO OVERCOME. THREE ANALYSTS OUT OF THREE THAT FOLLOW THE COMPANY GIVE EITHER A HOLD OR EVEN SELL-RATING. IN SPITE OF THE FACT THAT THE SHARE PRICE HAS MORE THAN DOUBLED OVER THE RECENT MONTHS.
NEGATIVE BROKER RECOMMENDATIONS HAVE THE ADVANTAGE THAT, WHEN THEY CHANGE THEIR RECOMMENDATION, IT WILL ACTUALLY CREATE DEMAND WHILE "STRONG BUYS' CAN EASILY TURN INTO SELL RECOMMENDATIONS AS SOON AS SOME DISAPPOINTMENTS BECOME EVIDENT.
NOVAGOLD, HAVING STRONG PARTNERS, WILL LIKELY OVERCOME ANY CHALLENGES, EVEN THOUGH IT MAY TAKE TIME, AND AS THEY MAKE PROGRESS, IT WILL BE REFLECTED IN THE SHARE PRICE.
AS THE WORLD POPULATON GROWS, SO WILL THE DEMAND FOR COPPER.
Disclosure: The author has not been paid to write this article, nor has he received any other inducement to do so.
Disclaimer: The author's objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell this stock.
Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock - or to use their own brains.
In our opinion, the best approach is to buy a diversified portfolio of stocks as represented in THE TIMELESS PRECIOUS METAL FUND or THE SIERRA MADRE GOLD & SILVER VENTURE CAPITAL FUND instead of shares of only a small number of companies.