NovaGold narrows focus on Donlin

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 announced this past November, where Gregory Lang became president and CEO of 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,” outgoing president and CEO Rick Van Nieuwenhuyse commented 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 the Donlin project’s feasiblity study in mid-January. It 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. Donlin also has a vast project scope — carrying a US$7-billion capital cost, it is a massive truck-and-shovel open-pit operation that includes an US$834-million natural gas pipeline, 27-year mine life and a throughput rate of 54,000 tonnes per day. Donlin also features low  anticipated operating costs, expected to produce 1.5 million oz. gold per year over its first five years 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 restructuring 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 delivering on our strategy.”

The Donlin project is entirely located on private lands. NovaGold holds agreements with Alaskan Native corporations — Calista for subsurface rights and Kuskokwim 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 would be spent on permitting the natural gas pipeline, which would require more due diligence.

“We’ve always anticipated the permitting process,” 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 facilitate the permit process.”

In a bid to focus on Donlin and market itself as a pure gold play, NovaGold also announced a spin-out that saw the company place its Upper Kobuk copper property into newly minted NovaCopper (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 Nieuwenhuyse will spearhead the new company.

“[Nieuwenhuyse]’s team discovered Donlin Gold and Galore Creek, and we are looking forward to another discovery in the Ambler district,” Lang writes 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 is exploring opportunities to divest its 50% stake in its Galore Creek copper-gold-silver project in B.C., which it holds under a joint-venture agreement with major Teck Resources (TCK-T, TCK-N).

The company seeks streamlining its cash position by divesting non-core assets, which also included signing 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 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 by offering 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, which is 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 after transferring Upper Kobuk during the NovaCopper spin-out.

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

Company shares had dropped 46%, or $4.82 since the news of the capital increases in early September, with NovaGold trading near 52-week lows of $5 per share during the second quarter. News of the company’s second-quarter results, along with its divestiture of non-core assets, offered a nice boost as shares rose 8%, or 41¢ following the July 12 announcement, en route to a $5.76 presstime close. NovaGold has 280 million shares outstanding and a $1.6-billion market capitalization.