NovaGold sells hydro projects for $40 million

The extra $40 million that NovaGold Resources (NG-t, NG-A) will receive from selling its hydro-electric projects in British Columbia, plus funds from other non-core assets, are supposed to help the company deal with ongoing cost overruns at its three major Alaskan projects: Rock, Galore Creek and Donlin Creek.

But one analyst says that NovaGold’s plan may not be enough.

Haytham Hodaly of Salman Partners says the $40 million will take care of the additional $25 million in development costs (on top of the $42-million budget) to complete construction at the Rock Creek gold mine as well as $19 million in post-completion costs.The mine is expected to begin producing at a rate of 100,000 oz. of gold per year before the end of the year.

“I think they are definitely taking the right steps,” Hodaly says. “But those steps unfortunately may not work for them in this environment because project capital costs may just be much too high.”

Hodaly recently changed his NovaGold rating to a “sell” with a 12-month target price of $5 a share.

It’s the Galore Creek copper-gold project that has caused NovaGold and its 50% partner, Teck Cominco (TCK.B-t, TCK-N), the most financial grief. The project was put on hold last year after capital costs shot up to $5 billion for $2.2 billion.

NovaGold announced its plan to monetize its non-core assets in its second quarter results, released July 18. The company reported a loss of $8 million for the three month period ending May 31 and earnings of $20 million for the six months ending on the same date.

Today the company announced it had signed a binding agreement with Atlas Gas to buy its subsidiary, NovaGreenPower, for $35 million paid on closing and an additional $5 million paid by February 15, 2009, subject to certain conditions.

“NovaGold’s strategy is to focus our financial and management resources on the advancement of our core mining projects,” said the company’s president and CEO, Rick Van Nieuwenhuyse in a statement.

David Stein, an analyst with Cormark Securities, says that selling NovaGreenPower is “slightly positive” for NovaGold.

“The bigger issue is going to be what they are going to do with Teck on Galore Creek,” Stein says. “We are expecting some news in the second half of the year on their conceptual plan on how to re-engineer the project.”

He says timing might be an issue with Rock Creek because of problems with storm water pollution from the construction site.

“In this market with gold at almost US$1000 per ounce, you’d like to be a gold producer here so that’s unfortunate that they can’t get that up and running.”

Stein’s 12-month rating on NovaGold is a “speculative buy” with a target of $10.50 per share.

NovaGold shares were up almost 5% today, or 42 to $8.90 per share on a trading volume of 344,000 shares.