NovaGold Resources Inc (NG) 2003 Q3 法說會逐字稿

Good evening and welcome to the NovaGold project update and third quarter financial report conference call for October 30th, 2003. Your host for today will be Rick Van Nieuwenhuyse. Mr. Van Nieuwenhuyse, please go ahead, sir.

Good afternoon and welcome to the third quarterly update for 2003 for NovaGold Resources and SpectrumGold. My name is Rick Van Nieuwenhuyse, President and CEO. I'm joined today by Don MacDonald, our CFO; Greg Johnson, our VP of corporate development and communications; and Doug Brown, VP of business development. Doug and Greg are joining us live from the New Orleans Gold Conference.

It’s been a very busy few months since our last conference call. Not only have all our projects advanced significantly, but we have completed financing in both companies so that Spectrum and NovaGold are now in stronger financial positions. NovaGold has over $50m in the bank on a consolidated basis, while Spectrum has just over $4m.

In addition, we have successfully listed our 56 percent owned subsidiary Spectrum Gold on the Toronto Stock Exchange. That took place on Monday of this week, and I have to say that was a pretty exciting day. Spectrum has since performed very well in the market and we are very excited about the prospects for this company.

Although Donald Creek still represents the company’s largest and most important asset, it now only represents half of our 14m ounce net to the company. While Posture is advancing this project to the construction decision, we have been focused on exploring and developing our other quality assets.

I am now going to review briefly each of our main projects and give an update. Don MacDonald then will follow with an update on the financials for each company, both NovaGold and Spectrum and then finish up with an update on the AMEX listing for NovaGold. We will then follow this with a question and answer period for participants.

So first off, I would like to talk about Raw Creek. NovaGold completed a 10,000 meter infield delineation grow program within the main rock creek pit area. The objective of this program was to bring the resource up to a measured and indicated category, with completion of an updated resource model anticipated for completion in February of 2004.

The delineation grow program used a new sampling protocol that is resulting in a better and more reproducible gold assay, which is significantly upgrading the average grade of the deposit. We expect the new resource will reflect an increase in the overall average rate of the deposit. At this point, we are not prepared to say by how much, only that our expectation is that the grades will go up and not down with incorporation of the new drill results.

We will have to wait until the new resource estimate is completed early next year to see what the net effect will be on the average grade of the deposit, however, since 80 percent of the gold is expected to be recovered with simple gravity methods, we do expect that this will be good news for the economics of the project.

Other work ongoing include water well monitoring, air quality monitoring as well as numerous environmental studies that will be used to establish an environmental baseline and incorporate it into final feasibility study, which we expect to be completed in June or July of 2004. Condemnation drilling is ongoing on the project now as we speak, and we expect to complete that by the end of the year, that’s drilling underneath the tailings facility, the waste dump area and the mill facilities to ensure we are not putting these facilities on top of a major ore body.

Doug Nicholson, our project manager, is attending a kick-off meeting with the permitting agencies today in Anchorage. This first meeting assembles the permitting team and outlines the project and the approach to be taken. Officially we will initiate the permitting process with the completion of the feasibility study next June, and we are anticipating that permitting will take approximately one year to complete.

Additionally the State of Alaska, Department of Transportation has received approval for their environmental assessment study which opens the way for construction of the Glacier Creek bypass road. This is a three mile direct link between the project area and the Gnome Keller Highway. This will provide a more direct link for the town of Gnome, which is only eight miles away, and it will also provide the utility corridor to bring in power from Gnome’s own utility.

We also held a town meeting in Gnome a few weeks ago to review plans for the development of the project with the entire community. In addition, we were invited to make a presentation at the annual general shareholders’ meeting of the Bering Strait Native Corporation, who are our partners at Rock Creek and own the subsurface rights to much of the Native land in the region.

NovaGold was well received at both meetings, and we came away with a sense of strong community support for the project. All in all, the project is advancing very nicely, it’s on schedule and on budget.

The next project I’d like to talk about is Gnome Gold. As you may recall, this project contains some 2m ounces of gold resource in the sand and gravel deposits along the Gnome coastal plain. It’s been historically mined by our subsidiary company, Alaska Gold, for over 80 years. We recently put the 7,000 drill hole database into a modern computer program. This was a huge task, since all the information was on very detailed but old-style hand drawn logs, some dating back to the 1920’s. It was a very impressive database that took a lot of work to get into a modern computer database. Anyway, all the information is now in the computer database and we are in the process of identifying a few areas for test mining next summer. Concurrently, we have initiated engineering studies to support this evaluation. Our expectation is that we will do one or more test mine areas next summer, fairly small areas, to determine the mining, handling, and extraction characteristics of the material.

If successful, we will initiate a long-term mining plan and look at scaling the operation up to match the size of the overall resource. Permitting for next summer’s program will be done under an ATMA or a small mining permit and is expected to take only a few months to complete.

On the Domman Creek project, Domman of course is our flagship property and one of four priority development projects for Posture Dome. Posture Dome owns currently a 30 percent interest in the project and is earning an additional 40 percent of the project from NovaGold by extending the next USD$32m by completing the bankable feasibility study and making the mining construction decision by November 2007. The project is currently at a pre-feasibility stage of development, with a feasibility study expected to commence in the second half of 2004. Permitting is expected to commence in 2005, targeting their construction date by 2007. So two years for the permitting process.

Domman Creek holds a measured indicated resource of 11m ounces, and an additional inferred resource of 14m ounces making it the largest undeveloped gold deposit in North America. As currently envisaged, Domman Creek would be developed as a large scale open pit mining operation with a conventional pressure oxidation milling circuit similar to other Posture Dome mines such as Porter and PNG. Domman Creek is located in an area of Alaska that does not currently have infrastructure in place to support a project of this scale.

The challenges of successfully developing a project like Domman Creek, however, speak to Posture Dome’s technical strength as a company. Internal scoping studies have identified alternatives to project access and power supply, and studies to select preferred alternatives for access and power are underway. Posture Dome is closely working with the Native corporation land owners, the state and federal government as well as NovaGold to develop this new, world-class mine.

If that sounded familiar it’s because it’s a joint-venture message track for Domman Creek, so Posture and NovaGold are now saying the same thing. We were very keen to hear Posture Dome today during their quarterly update, responding to a question on Domman regarding specific plans for development of the project. Their response was that pre-feasibility studies were underway, that they expected to initiate the feasibility study next summer and that the feasibility study was expected to take months, not years, to complete. They also indicated that permitting was expected to take two years. This is very consistent with what we have been saying all along and we were pleased to see that Posture is now disseminating this information itself.

The last project under the NovaGold banner is Shockdown. T&R Gold has completed a geological mapping and geochemical sampling survey in the area and the airborne geophysical study is underway and I believe it will be completed later this month, so that project continues to advance as well.

Switching over to projects in Spectrum Gold, starting with Galore Creek, we just completed a 10,000 foot core drilling program with two rigs. The crew just came out of the field last week. We completed four profiles across the two main mineralized zones. Three across the central zone, three profiles across the central zone, one at each end and one across the middle, and then a single profile across the Southwest zone.

The purpose of the drilling was to test our new geologic interpretation that the mineralization represents replacement mineralization of favorable receptive volcanic rock as opposed to stock work and disseminated mineralization related to a typical pour free system. Based on our logging of the core, we have concluded that our geologic concepts are holding up. In the central zone which hosts 80 percent of the known resource, intense mineralization is associated with a garnet-bye type case bar alteration assemblage, typical of replacement style mineralization. We are very excited about the size and great potential of the system. We expect initial drill results within a week or so.

We have engaged Hatch Engineering out of Vancouver, Canada to complete a 43101 compliant resource estimate and an economic assessment study. The study will investigate the mining and extraction alternatives for the project, as well as evaluate the infrastructure alternatives. During this year’s drill program, we took four 50 kilogram bulk composite samples from metallurgical studies. We will focus on a deportation and extraction of the gold. Previous studies focused on the copper, and not the gold, so we think there is significant upside here.

Finally, we negotiated an agreement with Eagle Plains Resources to acquire an 80 percent interest in the adjacent Copper Canyon property. We feel this project has excellent exploration potential for similar style and grade mineralization, and being only four kilometers from the central zone offers great development and synergies. We are planning a major drill program next year on Galore Creek and at Copper Canyon.

On our two other Yukon properties, we’ve had activity on [Maquesten], we’ve completed a 10,000 foot drill program there and thereby earned our 70 percent interest in this project from Eagle Plains. We expect drill results later in November on this project. And, at Burry Creek we’ve completed a detailed mapping and sampling program along the reserve trend, which is the main mineralized structure. And along this zone we’ve identified several sulfite drill targets which will be the focus of a drill program next season.

In conclusion, NovaGold is advancing our four main resource projects towards development, with a continued strengthening in the prices of gold, silver and copper we feel strongly about the future production objectives of the company. As the company transitions to a mid-tier producer, however, we will stay focused on one of our core strengths, which is exploration. We will continue to look for attractive exploration opportunities. In fact, we are working on a few opportunities now that we believe will continue to provide growth upside for both companies.

I’d like to now turn it over to Don MacDonald to give us a review of both Spectrum and NovaGold’s finances and to discuss the AMEX listing for NovaGold. Don.

Thanks, Rick. In my section I will make separate presentations on NovaGold and SpectrumGold. In the NovaGold section I will discuss the third quarter financial highlights for financings completed since August 31 and the status of the American stock exchange listing as Rick mentioned, and our current financial position.

The presentation for SpectrumGold will cover the August 31 2003 financial statements, the recent listing on the Toronto Stock Exchange and filings completed after the end of the quarter. Please note that all amounts are in Canadian dollars unless otherwise stated.

For NovaGold, for the three months ended August 31, 2003 NovaGold had a much reduced loss of $600,000 for the quarter compared with a loss in the first six months of $4.8m and a loss of $800,000 in the same quarter in 2002. Although NovaGold activities have increased significantly over the same period last year, we have brought more activities in-house and thereby reduced our reliance on outside professionals and communications consultants, which has led to the overall reduction in expenses.

On the sales side, our net sales for the quarter was $360,000 compared with sales in the first six months of $325,000. The increase being due mainly to the seasonal nature of our land sales. The company is progressing on the anticipated known gold land sale which we have previously discussed, where the proceeds could be more than $10m and the company will make an announcement when terms are reached on this sale.

On August 31, 2003 on the cash side, the company had consolidated cash of $11.7m. Then on October 1, 2003 the company received $35m from the issuance of 7m units at $5 per unit, each unit consisting of a share and a half purchase, a half share warrant, with each full warrant exercisable in five years at $7 per share. This financing provided us with the initial capital for the development of Rock Creek and the Gnome gold projects as Rick had discussed earlier.

Also in mid-October the company received over $10m from the exercise of warrants that were issued in relation to a financing in April 2002. And also in this period, NovaGold completed a private placement into SpectrumGold, which I will discuss later.

Regarding the company securities filings and listings, I can confirm that since our last conference call the company successfully completed its Canadian Securities filings and became eligible to use a short form prospectus in Canada on August 27th. Because of this clearance, NovaGold was able to complete the $35m financing using a short form prospectus.

Also as discussed last quarter, this process somewhat delayed our filings with the SEC as part of our application for listing on the American Stock Exchange. As previously stated, we do not control the actual listing date, but I am pleased to announce that we have just recently filed with the SEC and hope to be able to announce approval from the American Stock Exchange upon clearance.

On the share trading side here, despite the fact that we have not yet listed on the American Stock Exchange we have been greatly encouraged by the recent share price of NovaGold and with current cash balances of over $50m we are clearly well positioned to build on the potential of our existing asset base without recourse to the equity markets.

Now onto SpectrumGold. This company was newly incorporated on March 31, 2003 and was initially structured by an agreement dated May 1, 2003 to pull the mineral properties of NovaGold and Vice River’s Ore Corporation in Western Canada. At that time, neither company was [inaudible] due to the incorporation and the Galore Creek transaction.

At August 31, 2003 the company had $1.5m in cash and $1.35m held in escrow related to a special warrant financing. Subsequent to August 31, NovaGold purchased an additional 3.5m shares of SpectrumGold at 75 cents per share, and the company was listed on the Toronto Stock Exchange earlier this week as Rick mentioned, thus releasing the escrow funds and triggering the issuance of the 3.3m shares to the special warrant holders. At the moment, the company has 20.8m shares outstanding and over $4m of cash.

On the market side, we have all been very encouraged by the market response to SpectrumGold and it appears that the market is recognizing the potential for the assets in the company, which was the main objective of setting out SpectrumGold in the first place. Getting an independent valuation for those assets, and we are very encouraged, as I said, by the trading that’s occurred since the listing. That’s the [inaudible] for SpectrumGold, I would like to now open it up for questions for Rick from the operator. Thank you.

Thank you, sir. (Operator instructions) Our first question comes from Angus Taylor. Please go ahead, sir.

Thank you. First I would like to congratulate the company and all involved in the excellent work that is being done and the very efficient communication, including this particular conference call. I have two quick questions. The American listing, I wasn’t too sure whether there was an indicated likely date of actual listing. Could that be clarified a little?

Yes. We are hoping to list it, it could be as soon as in November. The timing is in the control of the American Stock Exchange, but we are on the last stage of the process.

Thank you. Second question relates to Spectrum and what I will describe as a Galore option. I apologize, because perhaps I should know better, but from the recent information I’ve got I understand there is a $20m amount for exercising the option. My question to that is, any more information on how and when that $20m would be paid, and whether or not there is any what I would describe as pro rata equity or scaled timed vesting? For example, if half of the $20m were paid, would that result in a vesting of 50 percent? I understand that’s not a very good question, but it would be helpful to me if you could explain.

Sure, this is Rick again. First of all, thank you for the compliments on the communication, we strive to communicate with our shareholders and potential shareholders, and it is nice to hear back when we achieve that. On the agreement with the Keen Copper, you are quite right. It is an option agreement. It is $20.3m to acquire 100 percent interest. Fortunately or unfortunately it’s an all or nothing deal. There is no 50 percent vesting if you pay $10m, so it is an all or nothing deal.

We do have three years of very low payments, it was $50,000 then $100,000 then $150,000 for the first three years, then at the end of the three years we have the bulk payment that starts a series of a more expensive level of payments which total $20.3m. You are quite right, it is an option agreement but it is a very soft option, at least for the first three years.

Thank you. A supplementary to that, and I appreciate your answer there. Would there be any facility or benefit discount, if you will, for any prepayment?

It’s not envisioned in the current agreement, but I suppose everything is open for negotiation.

Thank you again.

Your next question comes from Edward Irvin. Please go ahead, sir.

Congratulations, guys, that was a great quarter and Spectrum looks like you’ve taken off like a rocket. I was wondering if you could go into a little more detail on when you think the earliest Rock Creek could go into production if everything goes in place? Also, how does the NovaGold, the Gnome Fields, how is that going to work? Do you actually dig the gravel up and strain -- just explain that a little bit.

Sure Ed, good to hear back from you. With regard to Rock Creek production schedule, I will kind of go back through the whole schedule step by step. We are anticipating a new resource update in February of 2004, and then that will be incorporated into the feasibility study, the ongoing feasibility study which we expect to have completed by June/July of 2004. That initiates the official permitting process which we expect to take a year, so by the late spring, summer of 2005 we would expect to have all the permits in place in order to start mine construction.

Meanwhile, we will have probably already shipped important equipment, purchased important equipment and put it and a barge for shipment up to Gnome for the barge season beginning in May or June of 2005. We are expecting a three to four month construction timeframe, so by late summer, early fall we would expect to have the processing facilities constructed and to initiate mining so that we would be in production -- if that schedule were to hold true -- we’d be in production by the fall of 2005. Obviously it wouldn’t be a full year production, but we’d get a good three months in that year, so somewhere in the neighborhood of 30,000 ounces of gold.

But if prices hold where they are today, Rick, what kind of cash flow can we estimate?

Don, do you want to answer that part of the question?

Yes, the production out of Rock Creek is 110,000 ounces a year, so we would be looking at a cost of $200 an ounce, and if you use $375 an ounce as the revenue, so you’ve got $175 an ounce to come out, so you are looking at $17m, maybe $16m a year U.S. coming out after royalties.

And on the Gnome gold side, it really depends on the throughput that we have. If it’s 100,000 ounces a year, it will be a similar type of economics as well. So combined you could be looking at between $25m and $35m just out of those projects a year.

Edward, to get back to your question on the Gnome Gold project and what type of a mining operation that would be, it would be a standard truck and shuttle, open pit type operation. The mineralization starts just below the surface, anywhere from 10 feet to as deep as 20 feet of overburden that would have to be removed and then you are into mineralized pay gravels down to anywhere from 25 feet to 40 feet thick down to bedrock, and you would mine those sand and gravel deposits down to the bedrock face.

Then the processing would be a typical wash plant and gravity separation mechanism. It’s all free gold, it is a fine free gold so we are envisioning a little more sophisticated process technology than the simply flux box, but nonetheless it is a simple gravity separation circuit and not terribly complicated or expensive.

Well, will you have a market for the gravel sales?

We will continue to sell sand and gravel, and in fact that is kind of the beauty of setting up this kind of a gold operation. On an approximate basis, if we were to mine 20,000 ounces of gold from a typical sand and gravel deposit, we would produce approximately what we have been selling on a yearly basis in sand and gravel as a by product or a co-product from the gold operation. So rather than taking it from our existing stock piles, we can then displace the stock piles production and just replace it with the ongoing gold operation co-product of sand and gravel.

So if you credited that against your gold production costs, you of course would be producing gold for pretty cheap.

Thank you. Great quarter.

Our next question comes from Hatham Hadayi.

Hi Rick, how are you?

Hi, Hatham.

Just a quick question, Rick. Listening to Posture’s conference call this morning, I mean, Jay was a bit cagey I guess with regard to when the feasibility study would be initiated, et cetera. Can you shed a little light on that?

My understanding, from our discussions on Posture, they are not afraid of saying when they are going to initiate something, and I think they have been pretty definitive on saying they will initiate the feasibility study. I think it’s second quarter is what the official language is.

They have been less firm on completion dates, and I think that just comes out of their history of not being able to -- completing a feasibility study is almost an ongoing process, you never complete it until the banks write the big checks for the construction of the operation, so I think that is why Posture is cagey, as you described, in terms of the completion date.

In the context of Alaska permitting, you really have to have at least the main components of a feasibility study completed in order to initiate the permitting process. You have to be able to describe that in significant and subsequent detail to sit down with the regulators, and they have said they will initiate permitting in 2005. It’s sort of read between the lines sometimes, I think.

Perfect. I mean given that time, let’s say they begin mid-2004, would it take more than 12 months for a full feasibility, given the amount of work that’s done?

One of the things they did say is that the feasibility study would take months, not years, to complete, so I think based on the schedule that they’ve outlined for us which is probably more detailed than they would share with the public, that they expected that for completion at the end of 2004, beginning of 2005.

Wow. That’s great. Thank you, Rick.

Our next question comes from Jerry Sheralds. Please go ahead.

I appreciate NovaGold’s efforts and outstanding achievements to date. I was wondering, your outlook here on NovaGold in particular. You are an exploration company, of course, and it takes a long time before you become a producing one, but when do you expect to produce regular profits as opposed to apparent losses, which of course are due to the exploration process?

It’s a good question, and as a shareholder with us we want to always look towards where the profits are going to come from. It really is going to come from bringing Rock Creek online, whereas Don described our expectation is that the initial cash flows will be in the neighborhood of $16m, $17m US a year from that operation. We’ll have to obviously pay back some project loans if we choose to go that route, but we will certainly see significant profits from that operation, so that would be the end of 2005, 2006 we should be profitable.

Our next question comes from Val Miller. Mr. Miller?

I don’t have a question.

Okay, thanks. Our next question comes from Gordon Brits, please go ahead.

Thank you. You’ve given a good rundown on Rock Creek and Gnome. Looking at Galore, you talk about adjusting for the new geological theory. Assuming that that proves out as you anticipate, can you give us a best case scenario of the expected steps to get that project going, a timetable?

Certainly. The timetable we envision right now is the next data that will come out on the drill hole results, which will be out in the next week or two here, the next data will be the completion of the 43101 compliance resource estimate, we are expecting that to be out in February, 2004. That will be followed within a month to six weeks by an economic assessment study. So that will start to put the economic parameters around the project as we envision it.

That will also set up the work program for 2004, the drill work program, which we expect to be a very substantive program. The preliminary budget would be somewhere in the $8m to $10m Canadian range. That money will be spent on Galore Creek and on the adjacent Copper Canyon project as well.

Just a quick follow up. Long term, would you anticipate there might be a copper smelter at that location?

I doubt that there would be a copper smelter on site, certainly not any sort of a traditional smelter, I suppose one might look at some of the new processing technologies using biooctavation and solvent extraction methodologies, but right now we are not thinking so much in that direction as really just producing just a traditional copper concentrate and feeding that to the concentrate market. There’s an interesting dynamic going on in the copper concentrate business with many of the custom smelters being really starved for feed, thereby significantly lowering the cost of toll charges they charge for processing concentrate.

Right now we are thinking it would be more of a traditional -- we’d produce a floatation concentrate onsite and then ship that concentrate to the existing smelters.

Thank you very much.

(Operator instructions) We have a question from Edward Irvin, please go ahead, sir.

Just a follow up question, on Copper Canyon do you have any resource estimates that you are likely to have for Galore?

Ed, there’s not been near as much work on Copper Canyon. There is a report on file on the Eagle Plains, [edar] filing report that discusses a resource in there, but it is certainly not 43101 complaint, and I’d be hesitant to sort of quote it because it’d be sort of hearsay, but there is certainly a substantial amount of mineralization there. There are some very significant drill holes, one of them that I remember has 270 -- don’t quote me exactly on this -- but its got 270 feet of 2 grams gold and 2 percent copper, or actually it’s 1.5 percent copper, so there is certainly some significant intersections of mineralization on the property.

Is it similar structure?

It looks very similar geologically to the main zone, what is called a central zone, at Galore Creek. At Galore Creek we have so far at least we have two principal styles of mineralization, the central zone which is a large replacement deposit and the adjacent southwest zone which is quite a bit smaller, it only represents about 20 percent of the overall resource. But it’s a different, more of a [brecha pipe] kind of an ore body, and it is a disseminated ore body. Right now Copper Canyon looks very similar to the central zone of Galore Creek.

Thank you.

Our final question comes from Adrienne Smith.

Thank you. Adrienne Smith in Michigan. I think your conference calls are great, I look forward to them. Back to the Gnome Alaska holdings, did I understand correctly that possibly progress had been slowed because of a lack of adequate road facilities that the State of Alaska was going to participate in, has Alaska given you a calendar for completion of their part? That’s all, thank you.

Thank you, Adrienne. The Gnome Gold project is literally located right behind the town of Gnome. I’m looking at an air photo of Gnome right now, and there are literally roads all over the place out there. So there are no lack of roads there. The project you might be thinking about is [Domman] Creek and --

They were about 8 miles away and you were waiting for Alaska to give you a hand on that, is that right?

Rock Creek, the road you are referring to is what they call the Glacier Creek Bypass and there is already a road out to Rock Creek, but this new road that the state has agreed to build will make it a more direct. It’s about a three-mile bypass. That’s the one they received the environmental assessment go ahead for, so the are planning on constructing that next summer.

Okay, thanks for the geography lesson. It was Gnome that I was more curious about. Thanks a lot.

You bet.

Sir, there are no further questions.

Well then thank you everybody for joining us and for the questions and the continued interest in NovaGold and SpectrumGold. We look forward to our next conference.