NovaGold completes feasibility on Donlin

An updated feasibility study on the Donlin gold project in southwestern Alaska puts capital costs at US$6.7 billion–down from US$7.0 billion–and includes US$834 million for the construction of a 500 km natural gas pipeline and US$984 million in contingencies. The project is owned by 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 ounces of gold a year at average cash costs of US$409 per oz. Over the full 27 year life of the mine it would produce an average of 1.1 million ounces a year at average cash costs of US$585 per oz.

While the economics of the project look reasonable at current gold prices of around US$1,700 per oz. they turn negative if the price of gold 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 of Dahlman Rose & Co. in New York wrote in a note. Graf has a hold rating on NovaGold’ stock.

Stephen Walker of RBC Capital Markets writes in a research note that the key challenge remaining for NovaGold is to raise $3.35 billion for its 50% portion of the development capex. “The company has announced that it plans to explore options to sell its 50% stake in the Galore Creek copper-gold porphyry project in northern British Columbia (50/50 NG/Teck Resource), which we value at about $325 million using $1200/oz gold and $2.48/lb copper.” He notes that while the announcement of the feasibility study 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 mineral reserves estimated at 33.8 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 1% 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 said in a prepared statement.