NOVAGOLD RESOURCES (TSX/AMEX:NG):
FOLLOW-UP NO 17 / NOVEMBER 17, 2010
Home age of NG
Chart 10 years
NOVAGOLD RESOURCES: RETURN ON CAD 10,000 INVESTMENT
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Purchase
Date
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No. of
Shares
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Purchase
Price
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Cost
(CAD)
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Price
Today
|
Value
Today
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February 4,
2002
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3'000
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3.16
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9'480.00
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|
|
Total
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3'000
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3.16
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9'480.00
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13.76
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41'280.00
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Profit
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|
|
|
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31'800.00
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Profit (in %)
|
|
|
|
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336%
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SHARES ISSUED / FULLY DILUTED
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MARKET CAP
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225.5
Million / 286.8 Million
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CAD
3.0 Billion
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52 WEEK LOW / HIGH
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TSX/AMEX
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CAD
5.32 to 13.48
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524,110
(200-day) / 2,820,343 (200-day)
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RECOMMENDATION
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RISK RATING
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BUY
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HIGH
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IN PARTNERSHIP WITH THE WORLD'S LARGEST
GOLD MINING COMPANY AND CANADA'S LARGEST DIVERSIFIED MINING COMPANY
Business Summary
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.
Projects:
Donlin Creek
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.
2009 Milestones
- Completed
feasibility study
- Converted
measured and indicated resources to reserves
- Initiate
permitting process, continue community engagement
2010 Objectives
- Continue
with community engagement and permitting activities
- Complete
optimization studies to consider alternate power sources, including
natural gas
Feasibility Study
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
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.
Project Milestones
- 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
Project Development
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.
Ambler
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
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.
2009 Achievements
- 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.
Exploration
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.
Fundamental Considerations
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.
Technical Considerations
AS THE WORLD POPULATON GROWS, SO WILL
THE DEMAND FOR COPPER.
How to invest: http://www.timeless-funds.com/en/timeless-precious-metal-how-invest
Peter Zihlmann
The Timeless Precious Metal Fund
Peter Zihlman is
an independant Swiss asset manager, who manages the Timeless Precious Metal
Fund and the Sierra Madre Gold and Silver Venture Fund.
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