NovaGold attempts to de-risk high-cost Donlin project

VANCOUVER — NovaGold Resources (NG-T, NG-X) bounced off 52-week lows after announcing it had achieved a number of milestones on the road to developing its Donlin gold project northeast of Anchorage, Alaska. Donlin is one of the largest potential gold developments in the world, and NovaGold is moving ahead with the project alongside mega-miner Barrick Gold (ABX-T, ABX-N), which holds a 50% stake.

NovaGold recently completed a management reshuffle it had announced this past November, where Gregory A. Lang moved into the president and chief executive officer position at the company. Lang was formerly President of Barrick North America and spearheaded executive duties at nine gold operations in the U.S., Canada and the Dominican Republic.

“Greg has an extensive background in developing mines for the largest gold producer in the world, combined with his leadership abilities,” commented outgoing president and CEO Rick Van Nieuwenhuyse following the hire. “Making him the right person at the right time to take the helm at NovaGold as it enters its next phase of development to become a significant North American gold producer.”

NovaGold filed Donlin’s feasiblity study in mid-January, which carries an after-tax net present value of US$547 million and an after-tax internal rate of return of 6% at a 5% discount rate and US$1,200 per oz. gold price. What really makes Donlin unique is the scope of the project. Carrying a US$7 billion capital cost, Donlin is a massive truck-and-shovel open-pit operation that includes an US$834-million natural gas pipeline, 27 year mine life, and throughput rate of roughly 54,000 tonnes per day. Donlin also features industry-low operating costs, expected to produce 1.5 million oz. of gold per year over its first five years of life at a cost of US$409 per oz.

“We are at a turning point in the history of the company,” Lang commented during his second quarter conference call. “After re-structuring as envisioned by the board and management late last year we will emerge a pure gold play focused on our flagship asset. Our foundation sets us apart and is based on a truly unique asset located in the U.S. — a safe geopolitical jurisdiction — with the world’s largest gold producer Barrick as our co-owner. With a strong balance sheet, experienced management, and key partners like the Native Corporations we are well positioned to continue to deliver on our strategy.”

Donlin is also unique as the project is entirely located on private lands. NovaGold holds agreements with Alaskan Native corporations — Calista Corp. for subsurface rights and Kuskokwim Corp. for surface rights — and the company has sourced a high rate of hiring out of local communities.

Now that NovaGold has board approval for its feasibility study, the company can move ahead with a permitting process it expects to take between three and four years. During the conference call Lang mentioned the bulk of the time will be spent on permitting the natural gas pipeline, which will require more due diligence.

“We’ve always anticipated the permitting process would take that long,” Lang explained. “When you look at the other projects of this scale that have been permitted in the U.S in recent years some of them have come in a little under three years and some run longer. I think we’re well positioned to meet that timeline. We have the virtue that the project is largely located on private land and we’ve put a tremendous amount of work into the pipeline and studies at the mine site that we expect will really facilitate the permit process.”

In a bid to focus on Donlin and market itself as a pure gold producer, NovaGold also announced the completion of a spin-out that saw the company place its Upper Kobuk copper property into newly minted NovaCopper Inc. (NCQ-T, NCQ-X). The project is located in northern Alaska’s Ambler district, which is known for “rich copper-dominant polymetallic deposits.”  Former NovaGold president and CEO Van Nieuwenhuyse will spearhead the new company.

“Rick’s team discovered Donlin Gold and Galore Creek and we are looking forward to another discovery in the Ambler district,” Lang wrote in a statement to shareholders. “NovaGold’s shareholders are now well positioned to crystallize value from their interest in this significant asset.”

In addition to spinning out Upper Kobuk, NovaGold continues to explore opportunities to divest its 50% stake in its Galore Creek copper-gold-silver project in British Columbia, which it holds under a joint-venture agreement with major Teck Resources (TCK.B-T, TCK-N).

The company is seeking to streamline its cash position via the divestiture of non-core assets, which also included the signing of an agreement to transfer its Rock Creek gold property near Norne, Alaska to the Bering Straits Native Corporation — the company estimates the transfer should offer cash savings of roughly US$14 million this year.

NovaGold remains in a solid cash position, having completed a bought deal financing in early February that saw the company raise US$333 million through the offering of 35 million shares at a price of US$9.50 per share. Lang described the timing of the financing as “fortuitous” and stated it should give the company the financial capacity to see Donlin through the permitting process.

During the second quarter NovaGold registered a net income of US$94.2 million – or 34¢ per share — a big gain compared to the US$25 million the company recorded during the same period in 2011. NovaGold attributed the variance to a US$72 million gain it realized due to the transfer of Upper Kobuk during the NovaCopper spin-out.

NovaGold shares have suffered since the company revealed a big spike in capital development costs at Donlin late last year — costs jumped from estimates of US$4.5 billion to US$7 billion — leading to speculation the junior company may have trouble raising roughly US$3.5 billion it would need to live up to its agreement with Barrick.

Company shares have dropped 46% or $4.82 since the news of the capital increases in early-September, with NovaGold trading near 52-week lows of $5.00 per share during the second quarter. News of the company’s second quarter results, along with its successful divestiture of non-core assets, offered a nice boost, as shares rose 7% or 33¢ following the July 12 announcement en route to a $5.74 presstime close. NovaGold has 280 million shares outstanding and a $1.6 billion market capitalization.