NovaGold boosts costs for Donlin

NovaGold Resources (NG-T, NG-X) has updated the cash needed to build its joint-venture Donlin (formerly Donlin Creek) gold project in Alaska, to US$7 billion from US$4.5 billion.

The increase follows the proposed construction of a US$1-billion natural gas pipeline from Cook Inlet to the mine site. NovaGold says the 500-km pipeline could reduce operating costs and risks over the long-run. 

The company and fifty-fifty partner Barrick Gold (ABX-T, ABX-N) anticipate the project’s revised feasibility study to be out by year-end. Donlin’s 2009 feasibility study didn’t include the cost of the natural gas pipeline.

NovaGold’s president and CEO Rick Van Nieuwenhuyse said in a press release that the cost inflation is in step with rising costs in the industry and can be partially offset by the higher gold price. “Since April 2009 the price of gold has more than doubled, yet capital costs have increased in-line with the industry trends. We are encouraged by these developments and look forward to receiving the updated feasibility study before the end of the year.”

Analyst Paolo Lostritto of Wellington West Capital Markets says the industry has experienced a 35% cost increase over the last two or three years, making the US$7-billion figure  reasonable. “It’s basically in-line with everything else we have seen in the marketplace. But at the same time it’s a big number. It’s a really big number.”

But Donlin Gold, the company equally owned by Barrick and NovaGold, cautions the estimate is preliminary and could change in the revised feasibility study.

Barrick, which describes the project as one of the world’s largest undeveloped gold deposits, has initiated a third-party review of the capital cost estimate and will provide the results to the feasibility’s lead consultant, AMEC Americas, before costs are finalized.

Lostritto reckons that Barrick would have to take a “good hard look” to see whether or not the remote project is worth advancing. 

Another sizeable and costly project NovaGold has lined up is its 50%-owned Galore Creek copper-gold project in B.C. Teck Resources (TCK.B-T, TCK-N) owns the other half of the project, which has an estimated $5.1-billion building cost. Lostritto believes that the two projects’ fate depends largely on what the majors decide.

“NovaGold, obviously, they’re really good at adding ounces – that is their forte. In this instance, they now have partners that are capable mine builders. So the marriage of the two should allow for the projects to go ahead. The question is whether or not they make economic sense, and that is going to be determined over the course of the next little while as they advance the projects towards feasibility and permitting. At the end of the day, it really comes down to what the partners want to do because these are big projects. And if the partners want to go ahead with them, they will go ahead with them.”

Both partners have touted the projects. Barrick, in its recent investor presentation, said Donlin has the potential to produce more than 1 million oz. gold a year. 

The 40-million-oz. deposit has 33.59 million oz. in reserves from 467.7 million tonnes grading 2.23 grams gold per tonne. It has another 4.29 million oz. in indicated and measured from 39.8 million tonnes at 3.36 grams gold, plus 4.41 million oz. in inferred from 58.4 million tonnes at 2.35 grams.

The previous feasibility study envisaged Donlin as an open-pit operation, churning through 53,500 tonnes of ore per day.

Greg Martin, NovaGold’s treasurer and vice-president of business development, says the permitting process should start in 2012 and take three or four years to complete. Afterwards, the company will work on a financing plan. 

Following the increased capital news, Lostritto has reiterated a “sector perform” rating on NovaGold, but lowered his target from $10.75 to $10.50 per share. On Sept. 9, shares fell 3.5% to $9.11.