NovaGold, Barrick table feasibility on Donlin

A second feasibility study on the Donlin gold project in southwestern Alaska puts capital costs at US$6.7 billion – down from US$7 billion – and includes US$834 million for building a 500-km natural gas pipeline and US$984 million in contingencies. The project is a 50-50 joint venture between NovaGold Resources (NG-T, NG-X) and Barrick Gold (ABX-T, ABX-N).

If the proposed open-pit, truck-and-shovel operation goes into production, it would be “among the world’s most significant low-operating-cost and long-lived gold mines,” NovaGold says. The mine life is estimated at 27 years based on a processing rate of 53,500 tonnes per day. In its first five years of production Donlin would turn out 1.5 million oz. gold a year at average cash costs of US$409 per oz. gold. Over the full 27-year mine life it would produce an average 1.1 million oz. gold a year at average cash costs of US$585 per oz. gold.

While the economics of the project look reasonable with current gold prices at US$1,700 per oz., they turn negative if the gold price slips back down to the US$1,000 per oz. level.

Donlin’s after-tax net present value (NPV) at a 5% discount rate moves from US$547 million at US$1,200 per oz. gold to US$4.6 billion at US$1,700 per oz. gold, and to US$6.7 billion at US$2,000 per oz. gold.

But at US$1,000 per oz. gold the NPV drops to negative US$1.3 billion.

Similarly, the after-tax internal rate of return (IRR) moves from 2.3% at a gold price of US$1,000 per oz. to 6% at US$1,200 per oz. gold, 12.3% at US$1,700 per oz. gold and 15.1% at US$2,000 per oz. gold.

Payback periods move from 19.1 years at US$1,000 per oz. gold to 9.2 years at US$1,200 per oz. gold, 5.3 years at US$1,700 per oz. gold and 4.4 years at US$2,000 per oz. gold.

“The start of permitting in early 2012 puts first gold production at 2018, at the earliest,” Adam Graf, an analyst at Dahlman Rose in New York, commented in a note. Graf has a “hold” rating on NovaGold stock.

Stephen Walker of RBC Capital Markets wrote in a research note that the key challenge remaining for NovaGold is to raise $3.35 billion for its 50% portion of the development capital expenditure. “The company has announced that it plans to explore options to sell its fifty-percent stake in the Galore Creek copper-gold-porphyry project in northern B.C. [fifty-fifty NovaGold-Teck Resources], which we value at about US$325 million using US$1,200 per ounce of gold and US$2.48 per pound of copper.” He noted that while the feasibility study’s announcement is positive, it is “neutral to the share price, given the uncertainty surrounding future financing needs.”

NovaGold says it believes there is “excellent” exploration upside with the potential to “expand the current open-pit resources along strike and at depth.”

“With proven and probable reserves estimated at thirty-four million ounces established along only three kilometres of a well-established mineralized corridor in excess of eight kilometres long, NovaGold is confident that further discoveries will be made,” the company outlined in a press release on Dec. 5.

“In size, it ranks among the top one percent of gold deposits in the world. And its grade, long mine life and exploration potential are exceptional,” Thomas Kaplan, NovaGold’s newly appointed chairman of the board, noted in a prepared statement.