North of 60 Mining News - The mining newspaper for Alaska and Canada's North

Under the chairmanship of historian and entrepreneurial billionaire Thomas Kaplan, there is little chance Novagold Resources Ltd. will be among those of which Spanish philosopher George Santayana warned when he wrote, "Those who cannot remember the past are condemned to repeat it."

Kaplan, though, does not need to exercise his bachelor's, master's and doctoral degrees in history from Oxford University to see the wisdom of marching Donlin Gold - a 40-million-ounce gold deposit owned equally by NovaGold and Barrick Gold Corp. - toward production.

"Thinking back on just how much the world has changed since 2008 is proof enough that we live in unpredictable times. For reasons ranging from this same unpredictability to more fundamental reasons of simple supply and demand, we are, however, confident of one long-term theme, and one theme alone: that the case for gold is strong, and getting stronger all the time," said the NovaGold chairman. "This unambiguously bullish commitment to gold, and only gold, underpins our corporate strategy ... and the firm belief that Donlin Gold is on the path to being built into one of the world's biggest and best gold mines."

Kaplan's comments come on the heels of an announcement that, due largely to the US$6.7 billion price tag for building a mine at Donlin, Barrick Gold would not make a construction decision on the world-class gold deposit at this time.

"However, they (Donlin Gold and Cerro Casale) contain large, long-life mineral resources in stable jurisdictions, have significant leverage to the price of gold, and therefore represent valuable long-term opportunities for the company," Barrick explained in its second-quarter report. "We will maintain and enhance the option value of these projects by advancing permitting activities at reasonable costs which, in the case of Donlin Gold, will take a number of years.

During this time, we will monitor the attractiveness of these projects and evaluate alternatives to improve their economics.

This will provide the company with the option to make construction decisions in the future should investment conditions warrant."

Adding production profile, grade, and exploration potential to the list of attributes cited by Barrick, NovaGold said Donlin is an exceptional gold asset poised to grow in value.

"We are very encouraged by the position taken by Barrick Gold regarding the advancement of Donlin Gold," NovaGold President and CEO Greg Lang commented.

On Aug. 7, Donlin Gold LLC - owned 50-50 by subsidiaries of NovaGold and Barrick - submitted permit applications for development of the 40-million-ounce gold deposit in Southwest Alaska.

"This is a major milestone towards moving the world's most significant undeveloped gold project up the value chain," said Lang. "During permitting, we will have opportunities to optimize costs and, by extension, the project's economics to further increase Donlin Gold's value."

It is expected to take about four years to gain the some 100 permits needed to develop Donlin. This will provide the partners - which are sharing the annual US$40 million or so in permitting costs - ample opportunity to evaluate the wisdom of building a mine.

Nervous investors

The brief mention of Donlin Gold in Barrick's second-quarter financial report sent nervous investors scrambling and NovaGold's stock on a one-day tumble of more than 25 percent to US$4.01 on the New York Stock Exchange.

Global financial fears - fueled by the sovereign debt crisis in Europe, uncertainty about where the U.S. economy is headed and increasing social unrest - have prompted all but the most steeled investors to move their money away from anything that is perceived as risky; a sentiment that played a key role in the mass exodus of NovaGold stock on July 26.

Kaplan leveraged the Aug. 7 submission of permit applications as an opportunity to assuage the uncertainties stirred up by the announcement made by its Donlin Gold partner.

"Notwithstanding the misinterpretation of Barrick Gold's quarterly report last week, as it relates to Donlin Gold, the simple fact remains that nothing - literally nothing - has changed with regard to the project itself," Kaplan responded. "As Barrick Gold affirmed, and as we are re-affirming today, permitting is going ahead, and at a very reasonable cost to the co-owners. Once Donlin Gold is permitted several years from now, the co-owners of this project will have the first real opportunity to make a construction decision."

Kaplan - who owns a 21 percent stake in NovaGold and enough warrants to increase his stake to nearly 28 percent - believes that once investors embrace his belief in a long and sustained gold bull market they will clamor for companies holding assets like Donlin Gold.

"As it dawns on the wider market that the bull market in gold is real, the impact on gold mining equities will probably be dramatic," Kaplan penned in a 2011 Financial Times column. "Until recently, in spite of their theoretical leverage, miners have lagged behind the metal's performance. This should not be so surprising. As most analysts haven't changed the long-term pricing of their cash-flow models to reflect a sustained bull market in gold, the shares have underperformed amid assumptions that are outmoded."

The historian's optimistic outlook for the continued strength of gold prices is based largely on his view of the precious metal's long-standing role as money - an observation he emphasized at the 2011 Buttonwood Gathering.

"Gold is not a commodity, it is a currency with the longest known provenance we have - actually gold and silver," Kaplan asserted. "And, that is extremely important because when you start looking at something no longer as a commodity but as a currency, you have to really assess; what is that market, is it deep enough to give people the opportunity to play?"

The NovaGold chairman believes that as central bankers and the wider markets favor gold's historical position as a basis for money over the more recently adopted system of fiat currencies, the demand for gold will grow beyond what can be produced. This, according to the historian, bodes well for gold companies such as NovaGold.

"Experienced observers will note that sentiment is like the seasons, and many who are presently espousing 'hunker down' in the gold industry will be clamoring, when the next leg in the bull market unfolds, to seek out projects with 'leverage and growth.' In an era defined by asset scarcity, NovaGold provides one of the few institutional-quality ways to gain exposure to both," Kaplan expounded.

Fellow billionaire John Paulson agrees that gold serves as protection against the debasement of fiat currency and that NovaGold provides leverage to the precious metal.

During the second quarter of 2012, Paulson, the second-largest owner of NovaGold, added 4 million shares to the some 32 million shares owned by his hedge fund, Paulson & Co.

NovaGold stock, which bottomed out at US$3.66 on Aug. 3, has regained some of the lost ground since permitting began and was trading at US$4.25 on Aug. 14. The stock got a further boost on widespread media reports of Paulson's increased stake in the company. NovaGold jumped 5 percent to US$4.50 on the Aug. 15 news. At Aug. 23, NovaGold stock opened at US$4.80 on the NYSE.

Leveraging gold

If Barrick and NovaGold do decide to develop the mine, the 53,500-metric-ton-per-day mill at Donlin Gold is projected to recover an average of 1.1 million ounces of gold annually at a cash-cost of US$585 per ounce during its initial 27-year mine-life.

By feeding the mill some of the higher grade reserves during the first five years of operation, the massive project is scheduled to produce 1.5 million ounces of gold annually at an average cash-cost of US$409/oz. This increased gold production during the onset of operations will help reduce the payback period for the estimated US$6.7 billion of capital costs needed to build the mine.

Using a US$1,200-per-ounce gold price as the base, the Donlin Gold feasibility study predicts an after-tax net present value (5 percent discount) of US$547 million and an after-tax internal rate of return of 6 percent. This base scenario foresees an annual after-tax cash flow of US$949.5 million for the first five years and US$500.7 million over the life of the mine - resulting in a payback period of 9.2 years.

But NovaGold management, who see strong gold prices prevailing well into the future, touted the exponential returns on a rising gold price.

"NovaGold and its shareholders strongly believe that the secular bull market in gold will continue for many years and appreciate the enormous leverage to gold that this project brings," Lang said.

Plugging in a US$1,700 per ounce gold price, the after-tax NPV (5 percent) jumps 837 percent, to US$4.58 billion, and the after-tax IRR more than doubles to 12.3 percent. Annual after-tax cash flow increases by more than 50 percent to US$1.5 billion over the first five years and US$814.9 million over the life of the mine - resulting in a payback period of 5.3 years.

"Donlin Gold's exponential leverage to gold is clear. Yet, at its initial projected production of 1.5 million ounces a year, as a growth story the project is in a league of its own," Kaplan noted upon announcing the initiation of permitting.

Scratching the surface

Both NovaGold and Barrick have in the past indicated that they have only scratched the surface when it comes to the exploration potential at Donlin Gold.

"In addition to the already significant resources, the exploration potential is high. Several areas have already been identified, with the potential to extend the mine-life. There are almost 40 million ounces identified here, and the deposit is open to the north and the east - and is only limited by the current drilling," Lang said during a presentation last September.

Lang's familiarity with Donlin Gold is not only a product of his executive office at NovaGold, a post he has only held since early January. Instead, his knowledge of the project comes from his nearly nine years as president of Barrick Gold Corp.'s North America Business Unit.

"That we are embarking upon the permitting process with Greg Lang on our side of the table can give us confidence in what the future will bring. He has an impeccable track record of building major mines on-budget and on-time and operating them cost-efficiently with a great attention to safety and social responsibility," Kaplan noted. "While Greg's move to NovaGold was statement enough as to his belief in Donlin Gold, it is indeed hard to find people more qualified than Greg Lang to represent NovaGold's share of the project as we take it along the value chain."

Rick Van Nieuwenhuyse, who was NovaGold President and CEO at the time, expounded on this growth potential during a separate presentation last September.

"I am an absolute believer that it will be a 100-million-ounce (gold) district before it is all said and done," Van Nieuwenhuyse predicted. "The vision I have for Donlin Gold is: you will double the throughput from 55,000 to 110,000 (metric tons), and you will be producing well over 2 million ounces of gold annually for 50 years."

Before the NovaGold founder's vision can be realized in its entirety, the initial operation must be permitted and built - an exercise estimated to take seven or eight years.

Worth the wait

Despite being located some 400 miles from the nearest road, Kaplan believes Donlin Gold is ideally situated.

"In addition to its size, grade, exploration potential, and mine life, Donlin Gold will be the only one of 3-million-plus-ounce gold producers to be located in North America, one of the world's safest geopolitical jurisdictions," said the NovaGold chairman. "It's hard to overstate the importance of this last point, for we believe that investors are beginning to grasp the increasingly 'existential' nature of jurisdictional safety and will soon recognize what a jewel Donlin Gold represents."

According to Ernst & Young's Business Risks Facing Mining and Metals 2012-2013 report, released in July, resource nationalism remains the greatest risk to global mining companies. This trend of governments taking over mineral projects located in their jurisdiction has long been a concern for Kaplan.

"Resource nationalism and an accelerating unreliability in the political landscape in many of the world's most prolific mining districts are evolving aggressively, and will likely continue to develop very unpleasantly, into the single greatest challenge for mining companies and their investors," the historian noted.

"Thus, while great assets in the gold industry are very rare and, as seen by declining grades in the large-scale projects and a lack of new discoveries, getting rarer still ...

the truly great assets like Donlin Gold, which resides in a safe country which adheres to the rule of law and enjoys political stability in a world characterized by disturbing trends away from both of these virtues, is rarer still."

The United States has recently been scourged for its long and drawn out permitting process. According to Behre Dolbear Group, the United States is tied with Papua Guinea for the longest permitting process of 25 mining jurisdictions assessed by the international mining and mineral advisory group. Kaplan believes having your project on American soil is worth the wait.

"The permitting procedure in the United States may take a bit longer than it does in some of the more exotic mining jurisdictions, but the flip side of this process is that when it is finalized, and if ultimately the mine goes into production, the investors have peace of mind knowing that when they wake up in the morning, they will still own the mine and its profits," he observed.

Author Bio

Shane Lasley, Publisher

Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.

• Email: [email protected]
• Phone: (907) 726-1095
• https://www.linkedin.com/in/shane-lasley-ab073b12/