NovaGold sees class action over Galore Creek

A class action lawsuit has been filed against NovaGold Resources (NG-T, NG-N) claiming the company and certain officers issued false and misleading statements about the costs, progress and viability of its Galore Creek copper-gold development project in northwestern B. C.

Galore Creek, which is 50%- owned by Teck Cominco (TCK-T, TCK-N), was put on hold in November 2007 after revised capital cost estimates for the open-pit project put the bill as high as $5 billion — more than twice the original estimate of $2.2 billion.

The plaintiff, a NovaGold shareholder, is seeking damages for investors that owned shares between Oct. 25, 2006, when engineering firm Hatch released a positive feasibility study for Galore Creek, and Nov. 23, 2007, when the suspension was announced.

Following the news that escalating costs had rendered Galore Creek uneconomic, NovaGold shares went into a tailspin, dropping 53% in one day to US$9.48 (in New York).

Two mining analysts, who have buy recommendations for NovaGold stock, aren’t too worried about the company’s disclosure practices.

Paolo Lostritto of Wellington West Capital Markets says it’s meaningful that neither Hatch nor Teck Cominco were named in the suit.

“(Teck and Hatch) were an integral part of the valuation process. NovaGold was relying on their expertise to move things forward,” Lostritto says. “The fact that they were not named in the lawsuit tells you it’s a weak position that the plaintiffs have.”

Mike Niehuser of Beacon Rock Research putalot of weight in Teck’s financial dedication to the project. Teck set a $30-million budget for engineering studies for Galore Creek.

“Following the announcement by Teck that the project would be put on hold, Teck still continued to move forward with the project on a restudy basis,” Niehuser says.

During 2007, NovaGold was also fighting a hostile takeover by Barrick Gold (ABX-T, ABX-N), Neihuser points out.

“Certainly, people had been looking at Galore Creek very seriously,” he says. “All of NovaGold’s assets were under a microscope.”

Lostritto agrees. “It’s hard to argue that the market valuation during the period was representative of normal market conditions.”

But the lawsuit claims the Hatch feasibility study allowed the company to fight off Barrick’s US$16-per-share offer and enabled it to raise $219 million in an April 2007 financing.

The lawsuit says these factors provided NovaGold a motive to misrepresent the Hatch study as a bankable study and that the company systematically assured the investing public that the construction of Galore Creek was on schedule and on budget.

The complaint, filed in the United States District Court for the Southern District of New York by the firm Schiffrin Barroway Topaz & Kessler, alleges that NovaGold and certain officers and directors violated various securities regulations.

NovaGold issued a statement saying it believes it has “substantial and meritorious legal and factual defences,” and will dispute the claim. No one from the company was willing to make additional comments on the case, citing legal reasons.

NovaGold shares fell 5.5%, or 41 the day the lawsuit was announced to $7.03 on a trading volume of 526,000.

Teck is expected to announce an update for Galore Creek this fall. The main problem with the original plan was related to the massive tailings dam needed for the operation, which was expected to produce 430 million lbs. copper, 340,000 oz. gold and 4 million oz. silver annually in the first five years of its over 20-year mine life.

Lostritto says the entire mining industry has become even more cautious when it comes to development projects.

“You’ve got this huge spike in (metals) prices and it hasn’t been met with the supply response that you normally would expect,” Lostritto says.

He blames this on everything from inflationary pressures on labour, delays because of legal actions and the uncertainty associated with engineering documents to move those projects forward.

Niehuser sees the difficulty continuing.

“This industry is going to be very challenged for all these reasons in the next year.”