NovaGold sells Ambler; mulls future asset sales

Now that troubled NovaGold Resources (NG-T) has found a buyer for the last of its non-core assets, the company says it will consider selling any of its flagship projects in northwestern British Columbia and Alaska if it would benefit shareholders.

Mantra Mining (MAN-V) has agreed to buy NovaGold’s option to acquire 51% of the 140-sq.-km Ambler project in Alaska, plus five other early-stage base metals properties, in exchange for $20 million in Mantra shares. When the deal is complete, NovaGold will be Mantra’s biggest shareholder, holding about 11.32% of the company.

NovaGold president and CEO, Rick Van Nieuwenhuyse already sits on Mantra’s board of directors; NovaGold will be able to nominate one director to Mantra’s board so long as it holds a minimum 10% stake.

At the same time, Mantra has made a deal with Rio Tinto PLC (RTP-N, RIO-L) for the remaining interest in Ambler for $24 million in cash and $5 million in shares.

That means Mantra will hold the complete project, which has an indicated resource 16.8 million tonnes grading 4.14% copper, 6.03% zinc, 0.94% lead, 0.93 gram gold per tonne and 59.6 grams silver.

All that adds up to 1.5 billion lbs. copper, 2.2 billion lbs. zinc, 350 million lbs. lead, 500,000 oz. gold and 32.3 million oz. silver.

The project also has an inferred resource of 900 million lbs. copper, 1.3 billion lbs. zinc, 210 million lbs. lead, 300,000 oz. gold and 18.6 million oz. silver.

NovaGold won’t be able to sell any of its Mantra shares for a year so the company won’t see any financial benefit from the transaction just yet, aside from $2 million for exploration expenses incurred since June. In the second quarter, the company said it planed to “monetize” its core assets. In July it sold its NovaGreenPower hydro assets for $40 million to Calgary-based Atlas Gas.

NovaGold vice-president of strategic development, Greg Johnson, says there is potential to create more value by having a stake in the Ambler project rather than selling it for cash.

“We believe having one hundred per cent of that asset in a company focused on advancing it is going to be worth more ultimately than selling it for cash today,” Johnson says.

David Stein, a mining analyst with Cormark Securities, agrees that NovaGold’s stake in Mantra could benefit NovaGold in the future.

“I would imagine they could’ve used the cash but this gives them more long-term upside,” Stein says.

Haytham Hodaly, a mining analyst with Salman Partners, says the sale of Ambler was dilutive.

“I don’t view it as positive but from a cash generation perspective, they need to be able to generate cash flow without having to dilute shareholders and that’s one way to do it sell non-core assets,” Hodaly says.

But NovaGold says it’s now considering whether to sell off some its core projects, either in part or full, to generate better value for its shareholders.

“We see the current (stock) price level not reflecting the value of assets we have,” Johnson explains. “If that means breaking things up, selling partial interests, going to less than fifty-fifty or any other variation; (if we believe that) creates more value, then the board will consider it.”

Hodaly says selling its core assets shows how restricted NovaGold has become.

“Their ability to raise debt in these markets is going to be very difficult and their ability to raise cash would result in a lot of dilution given the drop in their share price,” Hodaly says.

The company has come on tough times with its Nome, Donlin Creek and Galore Creek development projects.

After added costs and delays, production ramp-up at the Nome project’s Rock Creek deposit is expected to start by the end of the year the mine is expected to produce 100,000 oz. gold annually.

Teck Cominco (TCK.B-T, TCK-N), 50% partner in the Galore Creek copper-gold project, is supposed to come out with a revised plan for the project this fall. Galore was put on hold last year when the companies estimated that development costs could rise as high as $5 billion from the original $2.2 billion. Galore has a measured and indicated resource of 8.9 billion lbs. copper, 7.3 million oz. gold and 123 million oz. silver and an inferred resource of 3.6 billion lbs. copper, 3.8 million oz. gold and 65 million oz. silver.

And the feasibility-stage Donlin Creek project, half-owned by Barrick Gold (ABX-T, ABX-N), could cost the NovaGold as much as $4 billion to develop. The open pit deposit is expected to produce at least 1 million oz. gold per year over 25 to 30 years.

On top of that, a class action lawsuit was filed against NovaGold in August that accuses the company of issuing materially false and misleading statements about the costs, progress and viability of Galore Creek.

NovaGold shares closed 35 lower today at $6.50 per share on a trading volume of 241,200 shares. The stock has 52-week high of $19.90, a low of $5.90 and about 105 million shares outstanding.