Market shrugs for NovaGold’s Galore Creek PFS

NovaGold Resources (NG-T, NG-X) has released a new prefeasibility study (PFS) for its 50%-owned Galore Creek copper-gold project in northern B.C. nearly six years after completing it the first time around. 

Compared with previous studies, the new PFS incorporates a significant increase in scale and a partial redesign of the project, which is a joint-venture with Teck Resources (TCK-T, TCK-N). The companies have planned for a conventional truck-shovel open-pit mining operation with a nominal 95,000-tonne-per-day milling capacity, forecast to produce 6.2 billion lbs. copper, 4 million oz. gold and 65.8 million oz. silver over an 18-year mine life, or 365 million lbs. copper, 225,000 oz. gold and 3.4 million oz. silver per year. Cash costs average 80¢ per lb. copper using base-case price assumptions, and 42¢ per lb. at current metal prices.

Shares of NovaGold fell slightly on the news, closing down 6¢ to $9.45 on 654,000 shares traded.

Large differences between base-case pricing scenarios and those using more current prices occur throughout the prefeasibility study, which makes a point of stating “the project’s economics are highly sensitive to commodity prices.” Galore Creek’s after-tax net present value (NPV) at a 7% discount rate is $137 million when using base-case prices of US$2.65
per lb. copper, US$1,100 per oz. gold and US$18.50 per oz. silver. This compares with an after-tax NPV at the same discount rate of $2.75 billion using metal prices taken at the close of July 27, 2011, namely US$4.44 per lb. copper, US$1,613 per oz. gold and US$40.34 per oz. silver. The project’s internal rate of return similarly doubles from 7.4% to 14% using current metal prices, and at 3.4 years, the after-tax payback is roughly half of the 7.8 years forecast under base-case assumptions.

NovaGold commissioned the first prefeasibility study for Galore Creek in late 2005, completed a feasibility study for the project in 2006 and started construction a year later, after signing a joint-venture deal with Teck. The partners suspended the program in November 2007, after capital cost projections rose sharply to over $5 billion from the $2.23 billion originally forecast in the feasibility study. Notably, those figures used base-case assumptions of US$1.50 per lb. copper, US$525 per oz. gold and US$8 per oz. silver.

These days, NovaGold forecasts mine construction will cost $5.15 billion, including $2.46 billion in direct costs such as building the mine, plant and infrastructure, as well as $1.31 billion in indirect costs and $678 million in contingency funds.

The prefeasibility study is based on proven and probable mineral reserves totalling 528 million tonnes grading 0.6% copper, 0.32 gram gold per tonne and 6.02 grams silver per tonne, containing a total of 6.8 billion lbs. copper, 5.45 million oz. gold and 102 million oz. silver. This allows room for expansion, as Galore Creek also has significant mineral resources not already included in the study. Measured and indicated resources stand at 287 million tonnes grading 0.33% copper, 0.27 gram gold and 3.64 grams silver for contained metal totalling 2.07 billion lbs. copper, 2.04 million oz. gold and 33.5 million oz. silver, while inferred resources add another 346 million tonnes grading 0.42% copper, 0.24 gram gold and 4.28 grams silver, containing another 3.23 billion lbs. copper, 2.7 million oz. gold and 47.7 million oz. silver. 

According to Rick Van Nieuwenhuyse, president and CEO of NovaGold, the study shows Galore Creek could become one of the largest and lowest-cost copper producers in North America. “The project’s scale, long life, low operating costs and exploration upside make Galore Creek a significant value driver for the company. In an environment of strong copper demand and continued political uncertainty in key copper-producing areas of the world, Galore Creek is well positioned with its safe geopolitical location and low operating costs to take advantage of strong metal price fundamentals,” Nieuwenhuyse said in a prepared statement.

In the new prefeasibility study, the mine infrastructure is separated from the mill infrastructure, each to be located in adjacent valleys but connected by a tunnel, which NovaGold says will increase flexibility to enable open-pit mine expansion, higher mill throughput and additional exploration.

The open-pit and waste rock storage areas would be located in the Galore Valley while the plant and tailings facilities would be in the adjacent West More Valley. A 13.6-km tunnel could then convey ore and equipment between the two sites.

As currently proposed, the process plant would involve a conventional single-line grinding-flotation concentrator. A pipeline would be used to transfer the resulting concentrate 71 km away to a remote filter plant and concentrate truck-loading facility, located near Provincial Highway 37. An 87-km-long access road from the highway would also need to be built. From the filter plant, the concentrate would be transported by truck to a port in Stewart, B.C., for international shipment.

Power for the project is by way of the Northwest Transmission Line, which would need to be extended 69 km to reach the plant site and another 27 km to provide power to all the facilities.

Construction is anticipated to take four years from the start of tunnel-boring. Because of the revamped project design, Teck and NovaGold will likely reapply for an environmental permit, or at the very least submit an amendment to the existing environment assessment certificate received in 2007. The companies expect the entire review process to take two years from
submission, which they hope to complete before 2012.

Teck and NovaGold recently approved a $30.5-million budget to carry out further work on the project during the remainder of 2011. This will include infill drilling to convert targeted inferred mineral resources to measured and indicated categories, as well as geotechnical drilling on the tunnel alignment and to confirm open-pit slopes in areas targeted for resource conversion. Should this work be successful, the prospective Bountiful area could then become part of the mine plan.

As for whether or not the joint-venture partners have decided to advance Galore Creek to the feasibility stage, they had this to say: “In reviewing the PFS plan and opportunities identified, the partners have determined to move forward with an enhanced project plan for the project description required for permitting and to support a feasibility decision. GCMC will complete the engineering required to define the project description before year-end 2011.”

Looking ahead, NovaGold and equal joint-venture partner Barrick Gold (ABX-T, ABX-N) expect to complete a revised feasibility study for their large Donlin Creek gold project in Alaska before 2012. The proposed open-pit mine now boasts 33.6 million proven and probable gold oz. in a remarkable 468 million tonnes grading 2.23 grams gold per tonne, with the partners hoping to further improve project economics by incorporating a 525-km natural gas pipeline into the study to supply power to the project. 

NovaGold is also steadily advancing its smaller Ambler volcanogenic massive sulphide project in northern Alaska, for which it completed a preliminary economic assessment in the second quarter of 2011. Lastly, NovaGold’s Rock Creek gold mine near Nome, Alaska – which it unsuccessfully tried to put into production in 2008 – is also still on the auction block. The company plans on closing down the mine shortly should it fail to find a buyer.