Galore Creek mothballed

Vancouver – Just six months after NovaGold Resources (NG-T, NG-X) brought on Teck Cominco (TCK.B-T, TCK-N) as a partner to build a mine at its Galore Creek copper-gold deposit in northwestern B.C., the pair dropped a bombshell by suspending development activities citing escalating capital costs and a lagging construction schedule.

The companies also forecast shrinking operating margins – attributed to the strengthening Canadian dollar making the project uneconomic under its current permitting and development plan along with current long-term metal price projections (thought to be in the range of US$1.50 per lb. copper, US$600 per oz. gold and US$12 per oz. silver).

Although the partners plan to examine alternative development strategies for Galore Creek, NovaGold and Teck Cominco will wind down activities at the site and place it under care and maintenance.

Earlier this year NovaGold engaged engineering firm AMEC Americas to review the 2006 Galore Creek feasibility study (led by Hatch engineers) and commence project engineering. By mid-October, AMECs evaluation indicated capital costs for the mine would be substantially higher than projected in the feasibility study (estimated at about US$1.8 billion) and could run as high $5 billion.

While some proposed changes from the original feasibility study are acknowledged, the latest review attributes a major portion of the capital cost increase to difficult sequencing involved in building the tailings dam and water management structures. The process could protract the construction schedule by up to two years.

We reached this decision after extensive review and the realization that capital costs have increased significantly, stated NovaGold president and CEO Rick Van Nieuwenhuyse in the companys conference call. In addition, reduced operating margins as a result of the strong Canadian dollar have further reduced project economics to the point where the project is no longer viable while using current consensus long-term metal prices. Clearly if we could evaluate this project using todays copper and gold prices it would be economically viable. But industry standards evaluate projects using long-term historical averages.

The industry is experiencing significant inflationary pressures from labour and materials that I think we as an industry are continuing to evaluate what long-term metal prices are appropriate, continued Nieuwenhuyse. Unfortunately we have to make decisions now on what we know now.

The fall-out also sees Teck Comincos earn-in obligations amended. Under the new plan the major will invest a further $72 million in the partnership – earmarked to analyze Galore Creek development options over the next five years.

Teck Comincos sole funding of other project costs incurred after August 1, 2007 will now total $263 million down from the roughly $500 million it was initially obligated for under the original agreement. The subsequent $100 million in costs (primarily project shut-down and care and maintenance) will be shared by NovaGold and Teck Cominco on a 33% and 67% basis respectively and on a proportional basis thereafter.

It is indeed a very disappointing moment and I know there are many stakeholders who would have preferred that we push on in the hopes that commodity prices would stay high and bring things onside, commented Teck Cominco president and CEO Don Lindsay. But in the end we feel compelled to make the prudent decision and cut back spending to a minimum while we determine a new more economic way forward.

When question on the decisions effect to Teck Comincos bottom line, Lindsay confirmed it was important part of the companys growth profile although it wouldnt have been into production until 2012.

Both companies plan to write down the Galore Creek project in the fourth quarter but have not established a long-term carrying value. NovaGold has spent more than $400 million on the project while Teck Cominco will have invested $263 million by year-end.

The wind down is expected to affect most of the more than 400 persons currently working at Galore Creek.

The decision also has the potential to affect the timeline of the recently announced B.C. Government power line initiative along Highway 37 to Bob Quinn. A portion of the estimated $400-million transmission line project was to be paid by the Galore Creek partners.

Shares of NovaGold plummeted to a 25-month low – down 54% in November 26th TSX trading – closing off $10.71 at $9.25 apiece on strong volume. Teck Cominco shed 5% on the day giving up $1.82 to close at $35.67 per share – touching a more than one-year low.

The aftermath also decimated several junior explorers with projects in the region. Copper Canyon Resources (CPY-V, CAYRF-O), with an adjoining resource to Galore Creek, lost 70% of its share value to close down 84 at 37 per share. Shares of Copper Fox Minerals (CUU-V, CPFXF-O) shed 45% down 38 to 46 apiece and Romios Gold Resources (RG-V, RMIOF-O) was down 32% for a 19 loss at 40 per share.