The mining newspaper for Alaska and Canada's North

Novagold set to ride out tempest

CEO says company has no immediate need to sell its 50% interest in Galore Creek; has wherewithal to develop mine at Donlin Gold

Novagold Resources Inc. is well-equipped, not only to ride out the financial tempest that is battering most of the titanic gold producers and junior exploration companies, but to take advantage of the inclement market conditions that are forcing others to take shelter.

"Notwithstanding the share price and the continued market conditions challenging mining equities, we find ourselves in a better position as a company than we had hoped," Novagold President Greg Lang informed shareholders in a July 10 letter.

With roughly US$215 million in cash and cash equivalents at the end of the second quarter, Novagold said it has more than enough money to meet its current financial obligations, advance its Donlin Gold project in Alaska all the way through the permitting process to a construction decision, as well as fund the exploration and other ongoing activities at its Galore Creek copper-gold project in British Columbia.

"In less than two years' time and ahead of the recent market decline, we completed the company's reorganization and the divestiture of non-core assets; streamlined expenses, reduced the debt and further strengthened the balance sheet; built a management with expertise in developing and operating large-scale projects; de-risked Donlin Gold and Galore Creek; as well as progressed our permitting and exploration activities as planned," penned Lang. "With these actions, we have effectively positioned the company to benefit tremendously from what we anticipate will be a very bullish environment for gold in the coming years."

In the meantime, Novagold is situated to take advantage of the current downturn in mining equities and bear run on gold prices. At a time when the company is beginning to shop around for the people, equipment and contractors needed to build and operate a mine at its enormous Donlin Gold deposit, the company is finding these commodities are becoming surplus as its peers in the mining sector scale back.

"A lot of circumstances are working in our favor right now," Lang told investors during a July 11 presentation.

Simpler Novagold

While providence may have its role to play, Novagold's positioning to take advantage of the current market conditions was deliberate.

Over the past couple of years Novagold topped off its coffers with the funds needed to carry the company through 2015, about the time permitting is expected to be complete at Donlin. Additionally, the well-timed company significantly de-risked its balance sheet by shedding the Ambler and Rock Creek assets.

Ambler, a high-grade volcanogenic massive sulfide project in Northwest Alaska, was spun out into NovaCopper, Inc. Rock Creek, a small gold operation near Nome that nearly reached production in 2008, was sold to Bering Straits Native Corp.

Novagold CFO David Ottewell informed investors that, setting aside foreign exchange gains, the company had cut its quarterly operating loss by half compared to the first half of last year.

"Administration expenses have been reduced by 40 percent from the prior year and property-related costs have been eliminated entirely due to the spin-out of NovaCopper and the sale of Rock Creek, last year," the financial officer expounded.

As a result, Novagold's financial obligations for 2013 are about US$41 million, compared with US$128 million last year.

"Novagold is a simpler and more focused company," summarizes Ottewell.

Fair value for Galore

To further the streamlining of Novagold, the Donlin-focused company is also seeking a buyer for its 50 percent ownership of the Galore Creek project in northern British Columbia. But, with no immediate need for the funds the sale would generate, the company is not willing to sell this enormous copper-gold asset at a bargain.

"Right now the industry is in a lot of turbulence and uncertainty; and frankly, it is not a good time to be selling assets," Novagold CEO Lang conceded.

"We do not need to sell the Galore Creek asset to raise money and we are in great shape financially. So, we are content to hang on to that asset and advance it until market conditions are such that we can get fair value," he added.

When asked what Novagold would consider as a fair price for Galore Creek, Lang pointed to the C$373 million Teck Resources Ltd. was willing to spend to earn a 50 percent ownership in the property as a reference point to the value of the copper asset.

According to a prefeasibility study completed in 2011, Galore Creek has proven and probable mineral reserves of 528 million metric tons averaging 0.6 percent copper, 0.32 grams per metric ton gold and 6.02 g/t silver.

The PFS foresees this deposit producing 6.2 billion pounds of copper, 4 million ounces of gold and 65.8 million ounces of silver over an 18-year span - making the proposed mine larger than any copper operation in Canada.

The study includes an enhanced plan that envisions adding some 200 million metric tons to these reserves by upgrading resources in Galore Creek's Central Pit and expanding it to encompass the adjacent Bountiful zone.

Galore Creek Mining Co. - the operating company equally owned and supported by subsidiaries of Novagold and Teck - began implementing the enhanced plan with an 18-hole program carried out in 2011, 15 of which cut significant intercepts.

Highlights from the 2011 drilling include:

•GC11-0824 cut 185 meters grading 1.29 percent copper, 0.51 g/t gold and 9.5 g/t silver;

•GC11-0835 cut 108 meters grading 1.25 percent copper, 0.81g/t gold and 10 g/t silver;

•GC11-0833 cut 162 meters grading 1.09 percent copper, 0.54 g/t gold and 8.1 g/t silver; and

•GC11-0831 cut 176 meters grading 0.90 percent copper, 0.42 g/t gold and 7.7 g/t silver.

A 27,900-meter drill program carried out by the Galore Creek partners in 2012 continued to have success in infilling the Central Pit, including Bountiful.

Highlights include:

•GC12-0847 (Bountiful) cut 122 meters grading 1.02 percent copper, 0.28 g/t gold and 9.1 g/t silver;

•GC12-0842 (Central - North) cut 207 meters grading 0.84 percent copper, 0.21g/t gold and 9.3 g/t silver; and

•GC12-0838 (Bountiful) cut 193 meters grading 0.59 percent copper, 0.18 g/t gold and 5.8 g/t silver.

While results from the infill drilling were encouraging, the discovery of the adjacent Legacy was the high spot of the 2012 drill program. Intercepts along a 700-meter stretch of this new zone returned intercepts with grades and lengths comparable to the main ore-body.

Legacy highlights include:

•GC12-0886 cut 245 meters grading 0.83 percent copper, 0.15 g/t gold and 7.2 g/t silver;

•GC12-0877 cut 101 meters grading 1.01 percent copper, 0.39 g/t gold and 5.6 g/t silver;

•GC12-0849 cut 86 meters grading 1.31 percent copper, 0.46 g/t gold and 6 g/t silver; and

•GC12-0845 cut 229 meters grading 0.55 percent copper, 0.17 g/t gold and 7.2 g/t silver.

"Last year's exploration program yielded excellent drill results with impressive widths and gold grades which have extended the mineralization well beyond the current pit," Lang said upon the February release of the results. "More importantly, 2012 drilling at Galore Creek led to the discovery of the new Legacy zone located in close proximity to the projected pit. With these positive drill results, we are now well positioned to update our reserves and resources and further improve the overall economics of this project as we pursue the sale of our share of this exceptional asset."

The updated resource estimate is due out later in the third quarter.

This year's C$16-million program at Galore Creek, borne equally by each partner, also includes a 10,000-meter drill program aimed at further expansion of the newly discovered Legacy zone.

While Novagold continues to have a "for sale" sign on its Galore Creek asset, the company is content to keep doing property upgrades until a seller's market returns to the mining sector.

"We are happy to keep (Galore Creek) because it is a great asset, it is in British Columbia, and it will be recognized when sentiment changes," Lang said.

Donlin permitting on-track

For Novagold, it would be ideal if this change in sentiment came before the end of 2015, the anticipated completion date of the Donlin Gold permitting process.

At roughly a year since Donlin Gold LLC - the operating company equally owned and supported by subsidiaries of Novagold Resource Inc. and Barrick Gold Corp. - Lang reports that the three-to-four-year process remains on schedule.

"Permitting has now been underway for about a year; I am very encouraged by the progress to date," Lang informed Novagold stakeholders on July 11.

The permitting kicked off with a public scoping and comment period in which the project developers presented their vision of developing and mining the enormous gold deposit situated in the Kuskokwim region of Southwest Alaska.

The mine plan presented was based on a feasibility study completed in December, 2011.

This economic analysis of the potential mine envisions a 53,500-metric-ton-per-day mill churning out an average of 1.1 million ounces of gold annually at a cash cost of US$585 per ounce for 27 years. During the first five years of operation, this massive operation is scheduled to produce 1.5 million ounces of gold annually at an average cash cost of US$409 per ounce.

Using a three-year trailing average of US$1,200-per-ounce gold price as the base, the 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.

With the completion of the public scoping and comment period in March, the U.S. Army Corps of Engineers is currently preparing a draft environmental impact statement that will provide stakeholders with a complete picture of the benefits and potential risks posed by development of a mine at this world-class gold asset. Upon completion of the draft EIS, expected in August 2014, the public will have a chance to review and comment on the proposal. Incorporating the input from the public comment period, the Corps will prepare a final EIS, an exercise expected to take about a year. A decision on the final EIS and the bevy of accompanying permits is slated for the end of 2015.

"We welcome the scrutiny that the permitting process brings, given the importance of a project of this size," Lang said. "And, we have sufficient funds to take us all the way through permitting and to a construction decision."

With or without Barrick

The current state of the mining sector has some speculating whether Barrick will still be involved in Donlin when it comes time to decide to build a mine.

Questions began to rise about Barrick's plans for Donlin a year ago, when the miner said it would not make a construction decision at the time. A similar comment in April added fuel to the speculation.

In its first quarter report, Barrick wrote, "In today's challenging environment, Barrick has no plans to build any new mines."

Donlin Gold and the Cerro Casale gold-copper project in Chile are at the top of the docket of projects being considered for development.

It is unclear though, whether the global miner will cut its losses and write-off Donlin, or simply wait to re-evaluate the project once the time to make development decisions arrives.

At least one analyst is hopeful the global gold miner will write off its half of the Alaska gold project.

"Rooting for Novagold, it wouldn't bother me at all if you had 100 percent of the project," John Tumazos, owner and senior analyst of Very Independent Research, informed Novagold management during a July 11 conference call.

Lang, who served as president of Barrick's North America Business Unit before taking the helm at Novagold, did not betray any indication of what his former employer may be thinking.

"These are turbulent times in the industry, and I really don't know what is happening at our partner's headquarters," the Novagold CEO replied to questions about Barrick intentions. "It is business as usual at Donlin, there have been no changes in the management team, and in these turbulent times, the most important things we can do is focus on the things we can control."

For Novagold, that currently entails lending its full support to the permitting process.

"Novagold certainly, in-house, has the expertise and the experience to complete the permitting and take the (Donlin) project forward - on our own or with our partner," added Lang.

This furthers the assurances Novagold's chairman and largest shareholder, Thomas Kaplan, made in May.

"Donlin will be built, and when it is built it will be one of the great trophies of the industry," he informed fellow shareholders at the company's annual meeting.

Kaplan's privately held company, Electrum Strategic Resources, owns 27 percent of Novagold's issued and outstanding shares.

Author Bio

Shane Lasley, Publisher

Author photo

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.


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