NovaGold hits funding snag, halts mining

By Shane Lasley
For Mining News

NovaGold hits funding snag, halts mining

Projected cash flow from Rock Creek operation dries up; aggressive miner scrambles to salvage interest in Donlin, Galore projects

Last updated 11/30/2008 at Noon

Reeling from regulatory and operating problems at the Rock Creek Mine 12 kilometers, or 8 miles, from Nome and effects of the recent credit drought, Novagold Resources Inc. Nov. 24 said it has suspended production at the Rock Creek gold mine for at least six months. The move comes less than three months after production startup at the small gold mining project in September.

The Vancouver, B.C.-based fledgling producer blamed its financial troubles on huge unexpected cost overruns at Rock Creek and its inability to generate significant cash flow from assets.

In mid-October, NovaGold foresaw cash flow in 2009 from the Rock Creek Mine of more than C$25 million at then prevailing gold price and exchange rates. The company had planned to use the cash to fund its ongoing operations.

One month later, NovaGold said it expects the mine to generate little, if any, significant net cash flow over the next six months, based on a gold price of $750 per ounce and current exchange rates.

Taking that into account along with further capital requirements and increased operating costs combined with uncertainty regarding operation of the project, the company decided to suspend operations at Rock Creek.

Debt difficulties

The aggressive miner also said it had been unable to arrange bank financing to repay a $20 million bridge loan due Dec. 29.

Though it still had about C$10 million in cash on hand, NovaGold said it opted to not make a C$1.9 million payment due Nov. 24 to the Galore Creek Partnership, which operates the Galore Creek copper-gold-silver project in northern British Columbia for the miner and its 50-50 partner Teck Cominco Ltd.

Teck and NovaGold put that project on hold a year ago when its capital cost projections nearly doubled to about C$5 billion. The Galore Creek Partnership since has revisited its development plan for the project and come up with a more economical approach.

NovaGold said it would approach Teck Cominco to discuss other ways to meet its obligations at Galore Creek. If NovaGold does not reach alternative arrangements with its partner and does not make the payment within five business days of receiving notice of such nonpayment, its interest in the Galore Creek Partnership may be diluted by about two-tenths of a percentage point to 49.8 percent interest, the company said.

NovaGold also said it would make a $3.9 million payment due Nov. 27 to Donlin Creek LLC, operator of the Donlin Creek Project for the miner and its 50-50 partner in the project Barrick Gold Corp.

"Though this has been a difficult decision with Rock Creek, based on the current economic conditions, and the challenges associated with meeting environmental requirements compounded by working through the arctic winter we believe these actions are in the best interest of the company at this time," NovaGold President and CEO Rick Van Nieuwenhuyse said in a statement Nov. 24. "NovaGold will focus most of its resources and efforts on its Donlin Creek property while continuing to seek sources of cash and to take steps to reduce costs."

NovaGold also said it accepted the resignation of Vice President of Operations Carl Gagnier, effective Dec. 31.

Patrick Downey, president and CEO of Aura Minerals Inc., also resigned from NovaGold's board of directors on Nov. 25 to focus on his position at Aura Minerals.

NovaGold's stock plummeted $1.48 to close at 72 cents per share Nov. 24 after the company informed shareholders of its plans.

Rock Creek troubles

NovaGold said it spent about $30 million at Rock Creek since Aug. 31 and is about $20 million over its most recent budget for the venture. The unplanned spending exacerbated NovaGold's inability to arrange bank financing to repay the bridge loan and to realize additional cash from existing assets as well as delayed commissioning of the mill and achieving commercial production at Rock Creek.

The higher costs resulted from mechanical and regulatory difficulties that first surfaced last winter. Ongoing efforts to resolve the problems led to the additional spending.

The Rock Creek mine received regulatory authorizations and began commissioning startup in September 2008. Environmental and operational tasks to ensure compliance with regulatory requirements for the mine, plus more complications and recent notification from federal and state regulators that certain conditions in the previously granted permits had not been met have led to the escalating costs.

Resolution efforts will continue

Though the company continues to work with state and federal regulators to resolve the problems, Rock Creek operations could face financial penalties or have additional mitigation or monitoring requirements imposed, NovaGold said.

In addition, Rock Creek has experienced unanticipated mechanical problems including an electrical failure with the milling circuit and the company has ongoing concerns with the efficiency of the process and recovery circuit. These issues have been compounded by the effects of extreme arctic weather conditions.

NovaGold said regulatory consequences of a suspension are uncertain and existing environmental requirements will continue to be met during this suspension. As part of its requirements under Canadian (GAAP) accounting rules, the company will be reviewing impairment testing for the project.

The company also said it will continue to review strategic alternatives, seek additional equity and debt financing, and pursue the sale of assets and other restructuring alternatives. Under the terms of the secured bridge loan, any additional funds raised through debt or equity must first be used to repay such obligations.

"There can be no assurance that any strategic alternative or transaction will be successfully completed," the company said.

If NovaGold is not able to raise additional cash in December, it will not have sufficient cash to meet its obligations.

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NovaGold CEO warns of the risks of a zero-risk society

Rick Van Nieuwenhuyse, president and CEO of Novagold Resources Inc., said problems facing global markets today as well as his struggling company are the result of society's desire for zero risks.

"Today we have a world that is ruled by lawyers, accountants, politicians, and (securities and banking) regulators; and they have made a mess of things lately," Nieuwenhuyse told members of the Alaska Miners Association at their annual convention in Anchorage Nov. 7.

"We can't really blame them for it. In reality, as a society we have asked them for all this protection. It gets back to wanting to reduce risk in our lives. It seems like we want to create a zero-risk society. I say be careful what you wish for because you might just get it."

In a presentation titled, "Building a Mining Company in the New World Disorder," Van Nieuwenhuyse said NovaGold has experienced the effects of risk abating at its Galore Creek high-grade copper-gold-silver deposit in northern British Columbia and at the recently launched Rock Creek gold mine in Northwest Alaska.

Exchange rates hurt Galore

A year ago NovaGold and 50-50 partner Teck Cominco Ltd. had to suspend the development of Galore Creek because the estimated costs to bring the mine online had skyrocketed to about C$5 billion, around double the original estimates.

Nieuwenhuyse said a nearly 30 percent swing in the United States-Canadian dollar exchange rates from the time of the original feasibility study until the updated cost estimate was one of the biggest factors leading up to the decision to re-evaluate the plan for building the mine. Inflation of materials and labor were also big contributors to the escalating costs.

"We have seen the costs of building a new mine doubled, really, in the last couple of years. That's a staggering amount, but that is the reality. We certainly experienced this firsthand at both Galore Creek and Rock Creek. The costs didn't double because we forgot a whole bunch of things or didn't designate things correctly or got the volumes wrong on the amount of materials moved. The increase is due mostly to inflation of materials and wages, and also delays related to litigation and permitting," he said.

All of these things also contributed to the recently announced shutdown at the Rock Creek gold mine near Nome.

Litigation delays Rock Creek

NovaGold received permits needed to advance Rock Creek toward construction in August 2006. By the end of that year, the project's wetlands permit, issued by the U.S. Army Corps of Engineers was challenged in court by a group called Bering Straits Citizens for Responsible Resource Development.

After a lengthy court battle that ended in a January 2008 ruling by the U.S. 9th Circuit Court of Appeals upholding NovaGold's permit, the Vancouver B.C. based-miner resumed construction after a delay of nearly 18 months.

This put the company in the position of trying to complete construction on the project in the brutal cold of Nome's Arctic winter. Not only was the junior forced into construction during a winter recording record snowfalls, but the company also had to complete construction during record high energy prices and missed out on the record high gold prices of 2007, he said.

"Our timing on getting Rock Creek up and running has not been tremendous," Nieuwenhuyse reflected.

"Our society really needs to reassess our fixation on trying to create a zero-risk society. I don't really think it has worked out too well," he concluded.