NovaGold sells hydro assets for $40M

NovaGold Resources (NG-T, NG-X) has started cashing in its non-core assets to help it deal with ongoing cost overruns at its three major northern gold projects — but at least one analyst says that NovaGold’s plan may not be enough.

The company got the ball rolling by selling its hydroelectric development projects in northwestern British Columbia for $40 million but that didn’t change the “sell” rating that Salman Partners’ Haytham Hodaly gave NovaGold recently — or his 12-month target price of $5 per share.

“I think they are definitely taking the right steps,” Hodaly says. “But those steps unfortunately may not work for them in this environment because the project capital costs may just be much too high.”

Pointing first to NovaGold’s Rock Creek project, Hodaly says that the $40 million will take care of the additional $25 million in development costs and $19 million in post-completion costs added to the original $42-million budget. The mine is targeted to begin producing 100,000 oz. gold annually before the end of the year.

It’s the Galore Creek copper-gold project that has caused NovaGold and its 50% partner, Teck Cominco (TCK. B-T, TCK-N), the most financial grief. The project was put on hold last year after capital costs shot up to a projected $5 billion from $2.2 billion.

Hodaly says the future of Donlin Creek, half-owned by Barrick Gold (ABX-T, ABX-N), is another question mark. A feasibility study and permitting are expected to begin next year for the open-pit project, expected to produce at least 1 million oz. gold per year over 25 to 30 years. Development cost estimates have already doubled to $4 billion.

NovaGold announced plans to monetize its non-core assets in its second-quarter results, released July 18. The company reported a loss of $8 million for the three-month period ending May 31, and earnings of $20 million for the six months ending on the same date.

“NovaGold’s strategy is to focus our financial and management resources on the advancement of our core mining projects,” said the company’s president and CEO, Rick Van Nieuwenhuyse in a statement.

Calgary-based Atlas Gas has signed a binding agreement to buy NovaGold subsidiary NovaGreen- Power, which holds development-stage run-of-river hydro projects in northwestern B. C. Atlas will pay $35 million on closing and an additional $5 million by Feb. 15, 2009, subject to certain conditions.

David Stein, an analyst with Cormark Securities, says that selling NovaGreenPower is “slightly positive” for NovaGold.

“The bigger issue is going to be what they are going to do with Teck on Galore Creek,” Stein argues. “We are expecting some news in the second half of the year on their conceptual plan on how to re-engineer the project.”

He says timing might be an issue with Rock Creek because of problems with storm water pollution from the construction site.

“In this market with gold at almost US$1,000 per ounce, you’d like to be a gold producer here, so that’s unfortunate that they can’t get that up and running,” Stein says.

Up next in NovaGold’s storefront window is its 51% interest in the 140-sq.-km Ambler exploration property, also in Alaska.

The Arctic deposit on the Ambler property has an indicated resource of 1.5 billion lbs. copper, 2.2 billion lbs. zinc, 500,000 oz. gold and 32.3 million oz. silver. The deposit also has an inferred resource of 900 million lbs. copper, 1.3 billion lbs. zinc, 300,000 oz. gold and 18.6 million oz. silver.

Stein doesn’t have a value rating for the Ambler property but said that NovaGold would probably be able to get more for it than NovaGreenPower.

“It’s a substantial project, albeit challenging,” Stein says.

Stein’s latest 12-month rating on NovaGold is a “speculative buy” with a target of $10.50 per share.

NovaGold shares were up almost 5%, or 42, on news of the NovaGreenPower sale, to $8.90 on a volume of 344,000 shares.