NovaGold Resources Inc (NG) 2005 Q3 法說會逐字稿

Good afternoon, and welcome to the third quarter exploration and development update for October 26, 2005. Your host for today will be Rick Van Nieuwenhuyse, President and Chief Executive Officer. Mr. Van Nieuwenhuyse, please go ahead, sir.

Good afternoon, ladies and gentlemen and welcome to our third quarterly update. We will focus on our recent exploration and development update.

2005 has been a very busy and productive year for us. I believe it represents a turning point for Nova Gold as a Company as we transition from explorer to a producer. We continue to deliver on our promise of exploration success by advancing confidently towards a construction decision at Rock Creek in 2006; Galore Creek by mid-2007 and Donlin Creek with our joint venture Placer Dome by late 2007.

In light of our transition from explorer to producer, I am pleased to announce that we have added three key professionals to the Nova Gold team. These include Peter Harris, who brings over 30 years of experience in developing and operating mines, particularly large mines in challenging environments. He will be joining NovaGold as Senior Vice President and Chief Operating Officer. Peter was formerly with Placer where he was the head of the Project Development Group.

Kevin Francis, with over 20 years of experience in resource estimation, most recently the senior consultant with AMEC, will also be joining the team and will be in charge of our research estimation efforts.

In addition, Alberto Chang with over 20 years of experience in mine design and operation, most recently in Newmont at the Yanacocha operation, will be joining us to bolster our mine design team.

These individuals will complement our already growing team which includes Carl Gagnier, who has been heading up our Galore Creek project as our general manager; Dean Lindsay as our Chief Engineer; and Sue Craig who has been responsible for environment permitting and land. So as you can see, we are continuing to build our operating team. So in addition to being good explorers, we will be now good miners.

As we continue to grow the team, we will remain dedicated to continuing to apply our proven skills in exploration and add value to our existing projects, as well as to identify new opportunities. In these past years we have seen our exploration success at two of our earlier stage projects as well, Khotol and Ambler which I will speak on briefly as we describe each of the projects.

NovaGold remains debt-free and financially strong as illustrated by our latest quarterly release, having successfully completed a financing earlier this year, we ended the past quarter with $66 million in cash, which is a position that we feel we can confidently advance all of our projects and remain on the rapid growth phase that we have established.

I also want to just briefly mention an investment we made in US Gold. This investment was made which we basically had identified an undervalued asset in the Cortez Trend, the Tonkin Springs property. We were interested in acquiring that asset. We made that investment prior to Rob McEwen, the former President of Goldcorp making his investment in US Gold. Subsequently the shares have increased in value over 300% for an unrealized gain of approximately $10 million. We remain in discussions with US Gold on our plans for going forward.

I would like to now just briefly talk about each of the projects. We will do that sequentially starting with the ones that we feel will go into production first, and then further the projects that are more early stage exploration, we will end up on those.

So beginning with Rock Creek, during the last few months we have been actively preparing to start construction for a 7,000 ton per day milling operation centered around the Rock Creek deposit located just outside of Nome. In order to prepare for construction we have been engaged with the permitting agencies in Alaska for the last three or four months and we expect to have our permits in place by the second quarter of 2006.

We expect to complete a new resource update and a mine plan for the nearby Big Hurrah project, which is located about 40 miles east of Rock Creek. This is a smaller but high-grade resource there.

In addition, we have been working with Francis Pitard who is a widely acknowledged expert in grade control, to ensure that our operating practices will allow us to accurately control the grade fed to the mill. This is particularly important because we see a fairly high nugget effect in the ore at Rock Creek.

These activities are all being overseen by Dr. Doug Nicholson who is a seasoned mining executive with a lot of experience in Alaska, most recently with the Fort Knox mine outside of Fairbanks. Doug has been expanding his team in preparation for the 2006 construction start-up. He has hired Ken Foley as the construction manager and Warren Woods as mine manager, and both of those individuals were senior executives with the Fort Knox mine, which produces about 400,000 ounces of gold per year. So that team really brings a huge amount of operating experience in Alaska.

Also in preparation for the 2006 construction season, NovaGold has purchased all of the mobile equipment and the key supplies required to start construction. These items were placed on a barge a few weeks ago. We are happy to report that they are now safely in Nome and have been offloaded and are awaiting a start-up decision once we get the permits issued, which we do expect to be by March, 2006.

Although Rock Creek is a small asset in comparison to our two monster assets at Galore and Donlin, I am excited by its potential. It is situated in the very highly prospective districts with its initial production averaging about 100,000 ounces starting in 2007, we believe that we will be able to add real value to the Company by establishing ourselves with an operating base in Alaska. We foresee continuing to explore the district over the next years.

Keep in mind, this is a district that has produced about 10 million ounces of alluvial gold and this Rock Creek and Big Hurrah will be the first modern, open pit hard rock mine to be developed in this district, so we expect a lot of success with our mine exploration program over the coming years.

Moving on to Galore Creek. This week we are pleased to release the updated economic study on the Galore Creek project, located in Northern B.C. The study -- for which the cost and design criteria have been completed to a pre-feasibility level of technical engineering detail -- demonstrates that Galore Creek has the potential to be a robust mining operation. The current mine plan is based on less than half of the resource space, and consequently, in my opinion, we are dealing with only the tip of the iceberg here. A lot of room for exploration upside and expansion potential.

The Galore Creek Study was overseen by Hatch, which is an internationally recognized engineer consultancy with specialists involved in many, many areas. I think there are well over a dozen specific consultants used with specific expertise, all the way from road building to tunneling to water management.

The study is now available on our website and on SEDAR, you can get the links there. It is a rather voluminous document, so be prepared to wait a while for the download.

I would like to emphasis a few points on the project economics. It is, for a big project of this scale, it is a very rapid payback, it is five years using long-term metal prices. If you use current metal prices you are looking at two years. We believe this will facilitate the project financing.

The project scale is significant for a Company the size of NovaGold, obviously producing some 230,000 ounces of gold, 370 million pounds of copper and generating an annual cash flow, after-tax cash flow, of about $200 million. Again, using long-term prices, which are $1 copper and $400 gold.

Using today’s prices, closer to today’s metal prices, you would be producing about $350 million of after-tax cash flow. So a very, very robust project. The project benefits from B.C.’s low cost of producing hydro power, which is roughly $0.03 a kilowatt hour, and our decision to incorporate the concentrate pipeline versus truck haulage and using electrical shovels and drills in the pit means that the project will be less sensitive to rising diesel costs than the majority of open-pit mining operations worldwide. We see this as a huge long-term benefit.

The project’s competitive cost addition over the next six years on a co-products basis, we would be producing gold for about $140 an ounce and copper for about $0.57 per pound, using a Gold Institute methodology, you are producing gold for negative $300 an ounce net of copper and silver; or, the other way around, you are producing copper for $0.36 net of the precious metals over the next six years, or $0.54 over the 20-year life of the mine. Once again, we think this demonstrates that this is a very, very competitive and robust project, certainly in today’s metal markets.

We have two fundamental objectives in the next few years for Galore Creek. One is basically to advance the project to construction. We are dedicated to advancing Galore Creek on the timeline that we set ourselves out on, which is by mid-2007 we expect to have completed the feasibility study, obtained the permits and initiated construction. We have completed all of the field work required to complete a bankable feasibility study this year, including some 62,000 meters of in-fill, predominantly in-fill drilling, as well as all of the environmental baseline work in and around the Galore Creek project, so we think we are well-positioned to be able to submit documents for the EA process to begin in earnest in March of 2006.

Our immediate objectives then for Galore Creek and I think for outlining what we expect to be producing in the next few months to a year here, as I said we expect to initiate permitting by the end of the first quarter of ’06. We expect a new resource update, including the 62,000 meters of this year’s drilling, we expect that to be done by March. We expect to have a feasibility study out in the second half of ’06, early in the second half of ’06, and along with that we will be lining up project financing and expect to have that done by the end of the year. Obviously we have engaged Rothschild’s to help us in this regard, and I will mention more about that in a second. And then as I said, we expect then to have the construction permits by mid-2007 to do the start-up construction.

On the other side, we want to continue to explore the project. We believe, as I said earlier, we are just really starting out here. We have only been on this project two years, I think we have accomplished a heck of a lot in two years, but we have a lot more exploration to do out there. Our current, our land package out there incorporates about 75 square kilometers of mineralized area. Recognizing this potential, we have put together a five-year, systematic exploration program that we expect to be funding consistently over the next five years to continue to identify quality, near-surface resources.

At least initially, we will focus on adding new, near-surface high grade resources with grades approaching a percent copper and a gram of gold, similar to the four satellite deposits that we have already identified since being involved with the project. These include Southwest, Middle Creek Junction and Westfort. In addition, we will continue to explore the adjacent land packages that we have under option with Eagle Plains and Pioneer, the Copper Canyon and Grace properties.

And then one other exploration topic that I wouldn’t mind just mentioning is the underground potential here. We have several zones in or at the bottom of the pit that are 2.5% copper grade, very significant thicknesses, 50, 60, 70 meters of 2.5% copper. Those can be mined underground. We would plan then in the next five years to start looking at those kind of targets once the thing is up and running, blending those ores in.

So again, a lot of exploration upside here on the project. I mentioned Rothschild’s and we had a press release earlier this week. We have engaged Rothschild’s to look at and help evaluate various financing alternatives for Galore. They certainly bring a huge amount of experience to our team in lining up financing.

The objectives, we have three main objectives in our financing, and that is to maintain majority equity interest and operating control by NovaGold, so that the untapped exploration value we are convinced is there flows on to our shareholders. We want to minimize the future requirements for equity financing for NovaGold and we want to maintain our timeline of starting construction in 2007.

We have had a huge amount of interest from companies, in particular from smelting companies. About four or five different Japanese groups and several other smelting company groups from around the world – India, China and Korea – have expressed interest in our project and we are advancing discussions with a number of those groups.

This is a high quality concentrate, it is 28-34% copper with no deleterious materials, so this is the kind of product that smelters love. So we think we have a lot of potential to do a financing deal that is in the best interest of NovaGold shareholders long term.

Moving on to Donlin Creek, Placer Dome continues to work on Donlin Creek and have told us that they expect to have a pre-feasibility study done in early ’06, early 2006. They have completed a 27,000 meter drill program this year, specifically targeting upgrading the inferred resources to measured indicated status, and also on geotechnical drilling for fit slope stability and as well as from the condemnation drilling.

The results have confirmed the geological model previously outlined by NovaGold, with consistent grades and in a few areas we have seen some expansion of the mineralized zone. Initial drill results, drill highlights from the first 19 holes showed outstanding results and we expect to have another press release I think out within a week or two on the remainder of the holes.

Placer Dome is currently making considerable progress on the detailed engineering studies and we do expect them to be moving to a feasibility level of evaluation next year. Although I will be pleased to discuss our quarter results, I would like to talk about – before going on to that, I would like to talk just briefly about our two new projects, the Khotol project and the Ambler project.

Khotol is a new silver, lead, zinc project located about 150 kilometers north of Donlin Creek, and just immediately south of the Yukon River. We have just started on this project this year. We just wrapped up the first drilling program on the target where we are targeting a mineralized Gretchen replacement zone along a contact between the [gold] mine quartz site.

We have identified an area about 400 meters by 400 meters with good silver grades and thicknesses. On a rough basis, we are seeing intersections averaging about 10 ounces of silver and 10% lead plus zinc. It is very early days, but a very exciting project.

On the Ambler project, this is our second year of drilling out there. We just wrapped up the 2,500 meter program on this very, very impressive volcanic-hosted massive sulfide deposit. This has a historic resource of some 36 million tons, 4% copper, 5% zinc, almost a gram of gold and a couple of ounces of silver. Drilling in this year expanded the known resource and confirmed the previous geological model. We will be completing – our plans here are to complete a 43-101 compliant resource in Q2 of next year, along with a scoping study looking at the infrastructure and power requirements for the project.

We have also acquired an additional 200 square kilometers in and along this very prolific metalogenic belt identifying at least a number of targets, but at least two very high quality targets with surface expressions of [middelasion]. We are also working closely with the [Nano] Regional Corporation and the Northwest Arctic Burrow on a comprehensive development plan for this district.

I think that wraps up the commentary on the projects. Unless, Don, do you have anything you want to add on the financial highlights from the financials, or do we just open it up to questions? Why don’t we just open it up to questions from the audience now?

Thank you, sir. (Operator instructions) Thank you. Our first question is from David Stein. Please go ahead.

Good afternoon, guys. I just talked to you the other day, so one quick question though. At one time you guys were looking at potentially a big land sale around Nome, and I am aware that that has been caught up I guess with red tape, et cetera. I am wondering, do you guys expect that, you know, the land value – would it be continually increasing as we see with residential properties and stuff in the mainland US? Such that when you do sell this, you might get X amount more than when you originally started the discussion process?

Hi, David. The land sales in Nome I think we see as an ongoing business. I don’t really -- I mean land values in Nome are kind of unique to Nome, they are quite high. We don’t really see that as a focus of the business. It was a great business to run during the dark days when there wasn’t any equity out there, but to be honest with you I think we see it as a business that will continue to generate $1 million to $2 million of cash flow over the next five plus years, and we don’t really focus on it any more than that.

I think as well as being a nice little cash flow generator, it is a great community relations tool.

Yes, okay. I guess I am aware of that. I thought at one point there was a very large package sale that you guys were working on for an airport or something.

Yes, that is correct and we continue to discuss with the state. I think they have shifted more to rather than doing one lump sum purchase of a large land package they are looking at something much smaller.

Okay. That is all. Thanks a lot.

Thank you. Our next question is from John Newall. Please go ahead.

Hi, Rick. Congratulations on your recent appointment. I was wondering if you were offered a seat on the board of US Gold.

I have had some discussions with Rob McEwen with regard to how we proceed with our investment in US Gold. We have not come to any conclusions, I think I am just satisfied that the discussions are ongoing. I see that he has engaged a new President and CEO, Ann Carpenter who is a very close associate of mine, so I am very pleased with that appointment.

Thank you. Our next question is from Mike Newhouser. Please go ahead. Thank you.

I am curious if you can give some color on interest of others who might be wanting to provide some service or partnering of the Galore property beyond just providing equity that might be able to kind of produce the value for shareholders.

I think from our perspective what we see is in the best interest of the shareholders is putting a financing package together. We do foresee that we will sell some equity in the project and that the partner is going to be one that is going to be able to have the capacity to bring the debt financing package with it. I mean, obviously we need to raise $1 billion for this project, it is a very big project. We believe we built the operating team to be able to handle this project from a technical side. We will need assistance on the financial side, we recognize that.

I think Rothschild’s feels confident that this project has a substantial debt capacity as a large project and so the partner of choice here is going to be a partner that can basically help underwrite that debt facility.

And also, it looks like all – the Nome project as well as Donlin and Galore seem to have a lot of potential milestones coming up, each one significant. Is there one that you think bears closest watching for people that are following this story?

Well I think one of the things that is exciting about NovaGold is that it has a lot of things on the go. I think Rock Creek, although it is our smallest asset in terms of size, number of ounces, et cetera, I believe it will demonstrate that we can execute on being a producer, and I foresee that that will have a beneficial effect on the market in demonstrating that we can make this transition.

NovaGold is not a one-trick pony, we have a lot of things on the go. We are already starting to work on a project, this Khotol project, brand new. We just started this year, and yet we are getting very excited results in silver, lead zinc. So I think that is the earmark of a great company when you don’t just have one project that you sort of slog along on, you keep adding new assets, new exciting assets. I mean, Galore and Donlin, to have Donlin Creek success and then to back it up with Galore, I think is a huge feat. And then, to back that up with Ambler is a third huge feat. These are all world-class assets.

Well I didn’t want to ask this next question, but with the amount of copper that you have, that is not a precious metal, does this mean that you are maybe moving, diversifying away from a precious metal focus or is it more just being open to taking advantage of the benefits of metals outside of silver and gold?

I think we will be, on a net basis, about 70% gold and 30% copper. And that is not a bad mix. I mean, ultimately the objective of a mining company is to make money, so to some degree where we see opportunities where we can acquire assets like Ambler, for example, effectively for just money in the ground, we see that as a long-term benefit to our shareholders. Obviously we are aware of the gold base metal mix and I think we will always have a gold bent to the Company.

And last thing, thank you for taking this many questions – are you opposed to Mexico as a potential opportunity for other projects?

No, not at all. We started in Alaska and we are moving south, I guess.

I noticed. Thank you very much.

Thank you, sir. Our next question is from Dan Hanlin. Please go ahead.

Rick, I just wanted to say you and your team are doing, have done and continue to do a fabulous job for the shareholders and I don’t think there is any other company that is any better managed.

I have two questions. The first question concerns Rock Creek. In the year 2007, when we have Rock Creek up and operating, after you pay the overhead how much free cash flow do you think that will produce?

Do you want to ask your two questions, or do you want to do one at a time?

I will do one at a time.

I think, obviously it depends on the gold price, but we are using a $400 gold price as sort of a base gauge. At $200 I think we will have about $15 million of free cash flow out of the Rock Creek operation. At today’s metal prices, just to give you a sense of the sensitivity there, it would probably be more like $20 million to $22 million.

After you pay, you know, the overhead of the Company, the home office and so forth, how much free cash flow do you think that will produce for exploration and other projects?

Basically we are not including here our Nome operations, the sand, gravel and real estate business which has more than paid all of our salaries and overhead here. I think I will defer a bit to Don on this, but it is about $5 million, right?

Net of the revenues from that business it is about $3 million US. So take $3 million US off the numbers that Rick has. And we don’t see a material increase in our G&A expense as a result of these projects going into production. We have clearly seen an increase in the past year, but we really do not see a lot more beyond that, because once we get through construction and operations, all of those are included in our operating costs.

Wow, that is great.

We really see the Rock Creek as sort of dovetailing into our whole Nome operations, and we do have ongoing plans to enhance the sand and gravel business there, and we recently bought an aggregate crushing unit so we can actually produce value-added aggregate products. So I think we will continue to see those revenues ramp up over the next few years, in addition to what Rock Creek will bring.

Wow, that would be great. My next comment is if we convert the copper and silver and so forth to gold equivalents, I come up with about 59 million ounces of a global resource, and it just seems like our Company is very under-valued and that is a comment.

The question is, from the drilling programs this year, Company-wide, do you have any idea how much our global resource could go up?

I like your math, Dan. I am not sure – it is certainly a big number and we sort of think about it as 40-50 million ounces of equivalent. But the objectives of this year’s programs, by and large on the big projects, Donlin Creek, Rock Creek, Big Hurrah and Galore have all been to improve the quality of the ounces. That has been the focus of the program, not so much to increase the ounces.

So I guess I would venture to say that we are not going to see a huge increase in the number of ounces, but we will see a significant increase in the number of measured and indicated resources, and those with the proper pre-feasibility and feasibility level studies plugged on can now be called reserves. Or, we will be able to call it reserves once we have those feasibility studies done on it, which is next year’s objective.

Well just great job, and a great investment in US Gold and keep up the good work.

Thank you.

Thank you.

Thank you, sir. Our next question is from Bruce McGregor. Please go ahead.

I have two questions, and I guess they are two-partners. The first one is with regard to some analysts commented that NovaGold may be a takeover target. Do you want to comment on that at all?

Only to say that it is obviously that with a huge resource base that I am sure we would be on a few lists, but I really have no further comment beyond to acknowledge that that is a possibility.

The second part of that first question is, your partner at Galore Creek – or one of your partners – is Eagle Plains Resources and I have been reading that they are talking about spinning off Copper Canyon into a separate company. Is there going to be some effort to lock up that resource for NovaGold?

We talked with Tim Tremonti on a fairly regular basis and are aware of their plans there. We have no immediate plans with respect to Copper Canyon. We already own, have an option to earn an 80% equity interest in that project, so we are pleased with the business relationship we have with Eagle Plains, or I guess it will be called Copper Canyon Resources when it is spun out.

Thanks, Rick. I wanted to ask now my second question, and it is just really to thank you for the estimates on projects, the very conservative numbers you use with regard to gold and copper prices, and you have done that consistently over the last few years and it is much appreciated, because I think it contributes to a larger upside for shareholders.

My question is, going forward where do you see copper and gold prices going, given the world global demand in China and all of that kind of view?

I guess we agree that I think those are – we want to use conservative, long-term views. We are quite bullish on the metals market, to be honest with you. I think India and China are driving the world economy. It is not that the United States and Europe and Japan are inconsequential, but they are definitely taking a second seat here. I think those economies are more on a plateau than they are on a steep curve.

So in short, we are bullish. I am sure there will be a – you know, copper is at a high, maybe even an all-time high or close to that. It wouldn’t surprise us to see a retrenchment in base metal prices, but I feel confident in saying that I don’t think we are going back to $0.65 or $0.80 copper. I think with what is going on in the rest of the resource sector with oil and gas prices and steel prices and cement and everything, I think it is very, very difficult to see $0.65 or $0.70 copper again.

There is a real scarcity of new projects on the horizon and I think one of the real – that is one of the real interest points that we get from a lot of companies asking us about Galore Creek, because there just are not a lot of large scale, high quality projects out there.

So we are very bullish on the commodities and we are very bullish on the portfolio we have and we think it is very significant that all of our assets are in North America. I think that gives a lot of folks a lot of comfort – I know it sure does me.

Thanks, Rick. I have been a shareholder for a number of years, and I want to echo the congratulations to you and your management team and also regarding the investment in US Gold. Keep up the great work.

Thanks for your support over the years.

Thank you, sir. Our final question is from Kumar Rushamala. Please go ahead.

Hello. Rick, congratulations and my compliments to [inaudible] your quality, expert team and your progressing at an impressive rate on the Galore Creek and all of that. Previous questions were asked about the takeover candidate; all industry gurus are expressing prime candidate, NovaGold. Do you have any plans for a protection from any aggressive or unfriendly takeover candidates? Either poison pill or some other [inaudible] you have in mind?

We certainly have talked with our experts on this topic and we feel confident that if there is a takeover move, we will be prepared for it and to maximize the interest of the shareholders.

Thank you very much.

Well thank you very much, everybody for your attendance and we will look forward to updating you the next round, perhaps in the next quarter here. Thank you much.

This concludes today’s conference call, please disconnect your lines and have a great day.