NovaGold suspends Rock Creek production, short on cash for loan

Vancouver – The share price of NovaGold Resources (NG-T) plunged $1.48 to close at 72¢ after the company announced suspending production at its Rock Creek gold mine and not being able to meet all of its near-term financial obligations.

Suspension of Rock Creek, about 12 km away from Nome, Alaska, only months after NovaGold started production there, came as a shock to investors and left a hole in NovaGold’s cash-flow expectations.

“The cash flow from Rock Creek which the company had intended to use to finance its continuing obligations will therefore not be available,” NovaGold reports in a press release.

Compounded by the company’s inability to raise cash lately, and with only $10 million in unconsolidated cash, money woes from suspended operations at Rock Creek are forcing NovaGold to pick and choose between financial obligations.

NovaGold says it won’t fulfill a cash call of $1.9 million on the Galore Creek copper-gold project in B.C., a 50/50 partnership with Teck Cominco (TCK. B-T, TCK-n) due Nov. 24, 2008. It says it will make a US$3.9 million payment due Nov. 27, 2008 for its part of the Donlin Creek gold project in Alaska, a 50/50 joint venture with Barrick Gold (ABX-T, ABX-n).

If NovaGold can’t reach alternative arrangements with Teck on the payment NovaGold could see its 50% interest in the Galore project diluted to 49.8%.

Also looming on the horizon for NovaGold is a US$20 million bridge loan secured in September that matures Dec. 29. NovaGold says if it “is not able to raise additional cash in December, it will not have sufficient cash to meet its obligations.”

Any equity or debt NovaGold raises now must first go towards that loan.

When it secured the loan NovaGold chief financial officer Don MacDonald said the money would help company to commission Rock Creek. But since September NovaGold has hit a couple of snags at the mine.

First state and federal regulators have told the company that it has not met all the necessary conditions of permits it has been granted. Penalties or additional requirements may be imposed, NovaGold says.

Then, not only did its milling circuit fail due to an electrical problem, but NovaGold also says it continues to have concerns about the efficiency of both the milling and recovery circuits.

And finally NovaGold had forecast $25 million in cash flow in 2009 from Rock Creek – money it had expected to go towards financial obligations. But with the price of gold at US$750 and a less favourable exchange rate NovaGold now says it does not expect to see cash flow in the first half of 2009.

With that and higher operating costs in mind NovaGold made the decision to suspend operations at Rock Creek.

“Though this has been a difficult decision with Rock Creek, based on current economic conditions, and the challenges associated with meeting environmental requirements compounded by working through the arctic winter we believe these actions are in the best interest of the company at this time,” says NovaGold president and CEO Rick Van Nieuwenhuyse in a statement.

Looking to the future Van Nieuwenhuyse says NovaGold will try and raise funds, reduce costs and focus efforts on the Donlin Creek project.