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All in the timing

Novagold pinches pennies through permitting; Donlin input costs drop

With roughly US$150 million of working capital, Novagold Resources Inc. is among a rare few non-producing mining companies that has no need to squeeze money out of a market reluctant to dole funds to the mining sector. This has allowed management to focus on the task at hand - moving the 39-million-ounce Donlin Gold project through permitting to a development decision.

"Our healthy financial position, with more than US$165 million in cash and term deposits, gives us flexibility to continue funding planned project activities, repay the remaining convertible notes and fulfill other financial obligations for years to come," Novagold President and CEO Greg Lang informed shareholders in a Jan. 28 letter.

The development stage company not only has the financial fortitude to survive the roiling world markets, but is positioned to benefit from bargain prices for equipment, fuel and most of the other items needed to build a mine in western Alaska capable of churning out more than 1 million ounces of gold per year.

"The last two years of permitting has really gone by pretty quick, and I think with all the turmoil in the gold space right now, it's been a great way to ride out these turbulent times. Permitting is relatively inexpensive. It has to be done, and we are just positioning the asset for a construction decision based on the market conditions two years from now, and so far, we are seeing a lot of things that have moved in our favor in the last couple of years," Lang explained during a Jan. 29 conference call on Novagold's year-end 2014 results.

Donlin Gold decision

With the U.S. Army Corps of Engineering preparing the draft Environmental Impact Statement for Donlin, Novagold and project partner Barrick Gold Corp. are more than halfway through the permitting process that began in 2012.

"The Corps is now considering all the comments and is expected to incorporate the relevant changes into the draft EIS, which is on schedule to be published for public comment in 2015, with the final EIS anticipated to be issued in 2016," explains Lang.

This puts Donlin Gold LLC - the operating company equally owned by subsidiaries of Novagold and Barrick - on pace to begin construction within two years, if the company decides that building the gold mine is prudent.

Neither Novagold nor Barrick are keen on pumping more than 1 million ounces of gold per year into a market that does not value the precious metal.

"Both companies are happy to take a sober and constructive view. We don't want to subsidize the world's consumption of gold by squandering the treasures that Mother Nature has given us, and we're happy to wait for the higher gold prices that will make the project's economics sing," according to Novagold Chairman Dr. Thomas S. Kaplan.

While it is unclear what the partners consider the lowest gold price threshold for the project that will carry a tune, a feasibility study completed in 2011 was based on a US$1,200-per-ounce gold price. Even with subdued prices, gold averaged $1,266 per ounce in 2014.

The 2011 economic analysis envisions a 53,500-metric-ton-per-day mill at Donlin producing 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, the massive operation is designed to extract 1.5 million ounces of gold annually at an average cash cost of US$409 per ounce.

At US$1,200 per ounce gold, the base price scenario used for the feasibility study, the mine is predicted to generate after-tax cash flow averaging US$949.5 million per year for the first five years and US$500.7 million annually over the life of the mine - resulting in a payback of the foreseen US$6.7 billion capital costs in 9.2 years.

"With the resource base of approximately 39 million ounces, grade averaging about 2.2 grams of gold per tonne (unusually high for an open pit in today's environment) and annual gold production of greater than 1 million ounces anticipated for more than 27 years, Donlin Gold is in a category of its own," said Lang. "Additionally, with its all-in costs expected to average in the region of $735 per ounce for the life of the mine, Donlin Gold should be a substantial cash flow generator for a long time and … its value should increase substantially with higher gold prices."

Lowering cost

Though Donlin is a truly enormous gold project forecast to generate an average of more than US$1 billion of cash flow every two years (at the current gold price), the US$6.7 billion price tag to build such a mine matches the deposit's world-class status.

Novagold, however, sees the potential to shave at least US$1 billion in costs.

For starters, the project has a contingency of nearly US$1 billion, a built in cushion that any untapped portion would be chalked up to savings. But tangible savings will likely come in leasing mining equipment, in place of the outright purchases contemplated in the feasibility study, and in seeking third parties to fully or partially own and operate ancillary big ticket items such as a 315-mile natural gas pipeline, port facilities and oxygen plant.

Novagold and Barrick have allotted a combined US$3 million on studies aimed at finding ways to improve the design and execution of the mine proposed in the 2011 feasibility study.

"I think it's all of the inputs in the major projects like this - particularly the impact of lower energy prices, lower copper and steel - will ultimately bode well for the project, and we will be working with our partner to evaluate the impact of all of this while on the home stretch of permitting," explained Lang during a Jan. 29 presentation on Novagold's year-end 2014 results.

Optimizing Galore Creek

While Novagold's primary objective is to develop a mine at Donlin capable of producing more than 1 million ounces of gold per year over a life expectancy spanning decades, the company has a second world-class project in its pocket - Galore Creek.

If all goes according to plan, Novagold will cash in this enormous copper-gold asset to help fund its share of developing Donlin Gold. The company and its partner at Galore Creek, Teck Resources Ltd., meanwhile, are content with maintaining the project and optimizing the mine plan while global markets stabilize and the demand for and price of copper rebounds.

"I think both Teck and NovaGold have the similar perspective on Galore Creek and that is we want to move it forward at a fairly measured pace given all of the market conditions," explains Lang.

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 mine envisioned in this study would produce 6.2 billion pounds of copper over an 18-year span - making it the largest copper operation in Canada. Crediting the 4 million ounces of gold and 65.8 million ounces of silver forecast to be recovered over that mine-life, Galore Creek also would be the lowest cost copper producer in the country.

Lang said that the bigger is better approach taken while designing the proposed mine presented in the PFS may not be the most prudent idea for developing Galore Creek.

"So, just about any enhancement both in scale and design opportunities is being considered as we advance the project forward with our partner," he explained.

No-dime-before-its-time

Despite having US$165 million in cash and term deposits, Novagold is continuing to pinch pennies. During 2014, the company spent US$25.9 million, or about 14 percent less than the US$30 million budgeted for the year.

"Taking a no-dime-before-its-time philosophy, we strive to be careful stewards of the capital that was entrusted to us by our shareholders," Lang informed investors.

The company's budget for 2015 is US$44.8 million. While this budget is higher than last year, it includes US$15.8 million to pay the balance outstanding convertible notes. Of the remaining US$29 million, US$12.6 million is allotted for permitting and community engagement at Donlin Gold; US$1.6 million to fund Novagold's 50 percent share of technical studies at Galore Creek; US$1.5 million towards the enhancement studies at Donlin Gold; and US$14.8 million in general and administrative expenses.

Lang said the goal of Novagold's management team is the same as it was the day he came on board: "to develop what will be one of the most coveted precious metals mines in the world."

Author Bio

Shane Lasley, Publisher

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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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