Editorial: NovaGold, Barrick edging towards year-long stalemate (October 03, 2006)

It’s easy to tell that metal prices are high and the stakes are getting even higher as we witness all the acrimony brewing between some of mining’s top CEOs.

Some of this new bitterness was on display at the recent Denver Gold Forum, as the head honchos of NovaGold Resources (NG-T, NG-X) and its erstwhile acquirer Barrick Gold (ABX-T, ABX-N) each pressed their cases to the elite of the gold mining industry.

Barrick launched its hostile US$14.50-per-share bid for NovaGold on July 24, effectively offering a 24% premium and valuing the entire company at US$1.5 billion. The offer was recently extended at the same price through to Oct. 12, 2006, with Barrick only requiring that 50.1% of the shares be tendered.

NovaGold’s big prize is its current 70% interest in the Donlin Creek gold deposit in western Alaska. Yes, it’s extremely remote and low-grade, but it’s one of the largest undeveloped gold deposits in the world, boasting measured and indicated resources that now stand, after a recent preliminary study by consultants SRK, at 16.6 million oz. gold, plus another 17.1 million oz. gold in the inferred category.

SRK’s study also that shows Donlin could conceivably produce 1.4 million oz. gold annually for 22 years at a total cost of US$362 per oz., if measured, indicated and inferred ounces are mined, and mining is carried out at a rate of 60,000 tonnes per day.

NovaGold also owns a full interest in the Galore Creek copper-gold deposit in northern B.C., one of the world’s largest undeveloped copper-gold deposits. There, measured and indicated resources stand at 8.5 billion lbs. copper and 9.2 million oz. gold equivalent, while inferred material totals 3.4 billion lbs. copper and 5.4 million oz. gold equivalent. Annual production from Galore Creek could ring in at 370 million lbs. copper, 300,000 oz. gold and 2.25 million oz. silver in the first six years, according to a 2005 study by Hatch.

(Barrick simultaneously offered a 54% premium for shares of Pioneer Metals, and has now scooped up at least 89% of the junior’s shares. Pioneer’s Grace claims, which are beside Galore Creek, are most useful for a proposed tailings and waste storage facility for any Galore Creek development.)

NovaGold is also forging ahead with building its Rock Creek open-pit gold mine in western Alaska, where production at a rate of 100,000 oz. gold per year is slated to begin in 2007.

NovaGold president and CEO Rick Van Nieuwenhuyse, who owns 2 million NovaGold shares, used his allotted speaking time in Denver to sell the merits of his company’s assets and sow doubts that Barrick was up to the task of developing them.

“It’s easy to see why Donlin fits so nicely into Barrick’s portfolio: it’s another Goldstrike… it’s another company-making asset,” he said.

However, Van Nieuwenhuyse also insists that Barrick is three years late on the required prefeasibility study, three years late on the environmental impact study, two and half years late on the feasibility study, and will be two to three years late beginning construction.

“Don’t tell us that this (original schedule) is not what was intended to be done, which is exactly what Barrick is trying to convince everybody of now,” said Van Nieuwenhuyse. “It was always clear to us… that NovaGold would either own 70% of the resource ounces at Donlin, or would own 30% of what would be one of the world’s largest gold mines. That was the deal, and Barrick needs to stick to it.”

NovaGold believes Barrick will not be able to complete a feasibility study by November 2007 that meets the terms of the original Donlin joint-venture agreement signed with Placer Dome, which Barrick acquired earlier this year.

“November 2007 is when NovaGold plans to take back management control of Donlin Creek, if not sooner through (our) court actions in Alaska,” insisted Van Nieuwenhuyse.

He said that the feasibility study at Galore Creek is on-track to be released this month, “despite the misinformation that Barrick has been spreading that the feasibility is late,” and added that Galore Creek would be “larger and lower cost” than Barrick’s Zaldivar copper mine in Chile, which accounted for 38% of Barrick’s profits from continuing operations in the second quarter.

Van Nieuwenhuyse said there had been much chatter about Barrick’s supposed strategic control on the Galore Creek project thorugh its acquisition of Pioneer, commenting that the B.C. courts “have upheld our work permits despite the repeated requests by Pioneer to revoke them, and NovaGold will follow normal provincial processes to secure surface leases… there’s no tactical control for Barrick.”

As for the offer price, NovaGold says Barrick’s offer of US$100 per measured and indicated resource ounce is only based on a 30% ownership of Donlin by NovaGold, and attributes zero value for Donlin’s inferred resources, Galore’s copper resources, and Rock Creek. This, they say, compares with the last five acquisitions of exploration- and development-stage projects which averaged US$258 per measured and indicated ounce and US$118 per oz. when including inferred ounces, compared to Barrick’s offer of only US$18 per oz. of gold equivalents including inferred ounces.

Van Nieuwenhuyse also pointedly underlined that NovaGold shareholders had enjoyed a 3,927% share appreciation over the last seven years (or a 70% compound annual growth rate), versus 11% appreciation in seven years for Barrick’s shares.

He did take a cue, however, from Barrick chairman Peter Munk — who was widely quoted as saying Canadian mining executives had lacked the “balls” to complete a mega-merger of Canadian base metal miners — and cheekily handed out at the Denver show some 2,000 blue stress balls emblazoned with the NovaGold logo.

Speaking the next day, Barrick president and CEO Greg Wilkins was clearly not amused with Van Nieuwenhuyse’s grandstanding, and commented that “there’s been an awful lot of rhetoric in the last few months… so as I was flipping through the TV channels last night looking at all the new shows, I wasn’t surprised to see that NovaGold was starring in ‘Extreme Makeover: Gold Edition.'”

He said that SRK’s “new resource calculations with limited substantiation are very optimistic and, frankly, I think somewhat unrealistic.”

Wilkins also said he found it “interesting that prior to the bid, there weren’t any issues with respect to whether we were going to earn the interest in Donlin Creek or not. In their own public filings in April, they said they were pleased with Barrick’s rapid progress.”

He similarly wondered aloud why NovaGold launched a hostile takeover of Pioneer Metals “to take care of the Grace claims, but now magically that’s become unimportant.”

Wilkins concluded that Barrick remains on track to deliver the Donlin Creek feasibility study in November 2007, and NovaGold shareholders should carefully consider the cold fact that some eleven other interested parties had signed confidentiality agreements to look at NovaGold and no competing offers have emerged.

With both side so firmly entrenched and well-supported by their respective shareholders, what’s clear to us is that a stalemate is developing that may last until the key deadline comes next November, when Barrick must table an adequate feasibility study for Donlin Creek.

Until then, expect more sniping from both sides.