NovaGold Resources Inc (NG) 2007 Q1 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon, ladies and gentlemen. Welcome to the NovaGold Resources first quarter results and project update conference call. I would now like to turn the meeting over to Mr. Rick Van Nieuwenhuyse, President and CEO of NovaGold Resources Incorporated. Please go ahead, Mr. Van Nieuwenhuyse.

Thank you, operator. And our apologies for the slight delay here. We had a few technical difficulties. There are slides available for the conference call. I believe that everybody who is on the call should be able to advance the slides themselves. So I will just try and remember to introduce each slide so that everybody can stay on the same page.

Welcome to our NovaGold's first quarterly update for 2007. Certainly has been an interesting quarter so far, with particularly the events of the last few weeks here. I, of course, will be making forward-looking statements and will refer you to the forward-looking statement slide, which is our first slide. If you turn to the next slide, our review of our first quarter financials and corporate update. Our cash and marketable securities at the end of the first quarter, and with net proceeds from the recently completed financing, now total USD264 million. The offering of 12.5 million common shares of the Company was announced on April 18th, and priced on April 19th at a USD16.25 price, or CAD18.33 per share. That represented a little over a 6% discount from the previous close. The last -- just to put that in context, the last 20 mine financings of between USD100 million and USD 300 million ranged from a 3% to 11% discount with an average of about 6% discount.

So NovaGold's financing this time around was right on the, sort of the average of the industry for financings of this level. The financing closed on April 24th, with net proceeds of approximately USD194 million or CAD219 million. Existing funds plus proceeds from the financing will be used to complete the Rock Creek construction and for further exploration and initial construction of our Galore Creek project. At this time, I would like to invite Don MacDonald, our Chief Financial Officer, to give us his perspective on the first quarter financials. Don?

Thanks, Rick. During our last quarter, we had a loss of CAD5 million, and during the quarter we expended CAD30 million on construction activities and preconstruction activities at Rock Creek and Galore Creek respectively. During that period, we signed a number of initiating construction contracts for Galore Creek that will enable us to start mobilization of our major contracts immediately upon receipts of permits and obtaining the Board approval. We also completed a private placement into Alexco for CAD5 million, bringing our total investment to CAD10 million. The market value of the investment in that company now exceeds CAD35 million. Those -- that value appreciation is not reflected in these financial results, but obviously that's value that's attributable to the Company.

As Rick mentioned, we had completed a financing just very recently. This culminates from -- continues from the announcements we made last year for our plans for the initial financing of Galore Creek. The financing was completed last week and closed earlier this week, and I will be discussing later on the overall financing package for Galore Creek and how this latest financing is critical for our ability to potentially finance all the construction costs at Galore Creek with the support of the appropriate joint venture partner without incurring additional dilution. So as Rick said, we are now at our highest levels of cash and marketable securities ever, at over CAD250 million, and we are well financed to initiate construction in Galore Creek upon the receipt of the permits. I will toss it back to Rick.

Thank you, Don. Just a commentary -- the next slide is recent market activity, just for those of you who are keeping up with the slides. We recognize there has been recent downward pressure on the stock since the offering. Clearly, this is in part, I think in large part due to Barrick having sold their position at roughly the same time as our financing. Obviously there's -- we believe the short-term hedge funds perhaps have moved out of the stock as a result of Barrick exiting NovaGold -- their position in NovaGold. And perhaps they were anticipating Barrick making a renewed offer in the near term. And perhaps -- we believe that may be at least partially responsible for the recent downward pressure. Of course, gold has been off in the last week or so here as well. Again, bouncing off that CAD690 per ounce level, and I think disappointing some in the marketplace. The good news is that there has certainly been a market for these shares. In a two-day period over USD400 million of NovaGold stock was placed around the world with long-term shareholders.

The fundamentals of the Company have been much improved in the last few weeks with the financing. NovaGold now is poised to begin one of its most rapid growth periods in its history -- in its corporate history, with the start of production in Nome later this year, and the start of construction at Galore upon receipt of permits and Board approval. With the financing proceeds, we will continue to add shareholder value by expanding our reserve and resource base and advancing our projects to production.

The next slide is the year to date highlights. Of course, Galore Creek resource update done earlier this quarter significantly increased the measured and indicated resources. We're looking at how that will affect the ongoing mine plan there. We expect some good news out of that. The Galore Creek environmental assessment certificate, of course, was issued earlier this year in February, and our permits are expected shortly, with construction anticipated by middle of 2007. We did exercise the option to acquire 100% of the mining claims associated with the Galore Creek deposit.

Moving on to Rock Creek, the modified wetland permit for the Rock Creek project was reissued by the Corps of Engineers on March 13th and construction is proceeding there, as well. We expect -- we are still expecting our first production in Q3 of this year, Q3 of '07, with commercial production expected by the end of the year. With the CAD200 million financing just raised, this will -- of course, the lion's share of that will be used to keep our Galore Creek construction project on track. The camps are opening as we speak on a number of our exploration projects around British Columbia and Alaska.

The next slide is the value drivers for 2007. Again, receiving permits on Galore Creek, we plan to initiate construction. We are continuing our dialogue with a number of potential joint venture partners and have every expectation that we will have a partner in place well before the end of the year. Our plan is then to sell a 40% to 50% stake in the project to senior producers and/or smelting companies. With a joint venture partner in place, NovaGold may need no further equity financing for the Galore Creek project. We believe between debt and other financial instruments that we will be able to put all the cash requirements necessary to bring Galore Creek to production. Meanwhile, production at Rock Creek, as I said, is targeted for third quarter, where we will begin the processing of material that will produce approximately 100,000 ounces of gold production annually. And the Company expects to then be operationally cash flow positive in 2008.

Our continued exploration programs at our major projects will continue to expand the resources and the reserve base at those projects. And, of course, at Donlin Creek there's currently an CAD87 million program underway, largely -- a large part of that program is focused on conversion of measured and indicated ounces into proven and probable reserves with the completion of the feasibility study. Of course, Barrick's back end deadline is in November, where NovaGold expects to retain its 70% interest and ownership in the Donlin Creek project and resume management of the project. Meanwhile, we will be initiating a number of exploration programs on the new portfolio properties that we have recently been acquiring, and with every expectation of having exploration success there, as well.

Next slide on our proven track record of resource growth. From humble beginnings in 1998, we've grown in less than a ten-year period, a Company that now has over 43 million ounces of gold resources to its credit and some 16 billion pounds of copper. That has been our modus operandi for adding shareholder value. We are, of course, now transitioning those resources into reserves, and you can see the darker shaded colors on that graph indicate the reserve levels. And we will continue to advance our projects and advance -- gain more and more conversion of measured and indicated resources to proven and probable reserves. Currently our level of resource base is that of a mid-tier producer. And, of course, that is the objective in the -- over the course of the next several years.

If you turn to the next slide on the gold and copper production rate, you can see we are expecting a modest amount of production in 2007, with then growth from Rock Creek to 100,000 ounces to 125,000 ounces. And then of course, with Galore coming on stream, and then eventually Donlin coming on stream, growth in both copper and gold to the level of over 1 million ounces of gold production and some 400 million ounces of production -- or, excuse me, 400 million pounds of production of copper coming out of the Galore Creek project.

Turning to the next slide, this is the cost curve for gold. I think the average cash cost that we're seeing reported recently by the World Gold Council was about CAD315 per ounce. Clearly, worldwide costs for producing an ounce of gold have gone up. NovaGold expects -- still expects our cost to be in the CAD260 to CAD285 range, so well below the average cash cost. And then, of course, driving down into the very low end of the cash cost curve with production from Galore Creek and eventually Donlin Creek, with cash costs well under CAD50 an ounce for producing an ounce of gold, net of copper and silver by-products. I'd like to now turn the mike over to Peter to review our projects for -- and our plans for the next while here. Peter?

Thanks, Rick. Good day, all. Turning to the slide on World-Class North American Project Overview, we're essentially a gold producer located in North America. Our projects are all located between the U.S. and Canada, with Donlin Creek, Rock Creek, and Nome Gold and the Ambler project in Alaska, in the state of Alaska, and our Galore Creek project located north of Stewart in British Columbia. Galore Creek, which is 100% owned by NovaGold, is one of the world's largest undeveloped copper/gold deposits with construction anticipated this quarter. Preconstruction activities are underway. Donlin Creek, 70% owned with Barrick, a 30% owner. One of the largest known undeveloped gold deposits in the world. And Nome operations, including Rock Creek, Big Hurrah and Nome Gold, 100%, again, owned by NovaGold, will be NovaGold's first operating mine, with production starting this year. And finally, Ambler, 51% NovaGold and joint venture with Rio Tinto, one of the world's largest high grade undeveloped copper, zinc, gold, silver deposits.

I will be briefly talking to our Rock Creek and Galore Creek project status on this call. Once again, I'm the guy that gets to talk through all the pictures. I'd like to remind people on the call that you can head to our website and photos of construction at Nome, at Rock Creek and Big Hurrah are on our website. And as we move into construction at Galore, you can also follow our progress. In terms of value drivers in 2007, the value drivers slide, we've completed an updated resource estimate based on 2006 drilling, with an increased measured and indicated resource of 20% for copper, 12% for gold and 21% for silver. We've negotiated a majority of the contracts for infrastructure construction including for Phase 1, road construction, access road construction, tunnel construction, bridges and camps, to mention just a few. We've exercised the option to purchase 100% interest in the Galore Creek project. We've finalized, as Rick and Don have talked to, the initial construction financing. We're expecting to receive our construction permits at any time this quarter. And we will also be expecting a decision of the Board of Directors for construction on receipt of those permits this quarter. We will immediately initiate construction to build the access road, tunnel, pipelines and mine site power lines. We'll complete 15,000 meters of follow-up and exploration drilling.

Turning to the next slide for Galore Creek, construction schedule Phase 1 is anticipated to take 24 months. Once again, camps and equipment have been, and are being mobilized during the preconstruction period. Our focus on the access to the Galore Valley is paramount during this period of time, and will represent approximately 20% of the overall capital cost. We've been very fortunate during this period of time to attract, at this point, 50 construction and project management people to support the team and support the project moving it forward. In Phase 2, our focus will be on the construction of mine facilities in the Galore Valley. The largest portion of capital expenditures is expected during this phase, and it is expected that Phase 2 will be largely financed from traditional project-level bank debt.

Turning to Nome operations, a project overview. Construction was started in August of 2006. We have seen approximately a two-month delay because of various permit issues. A citizens group in Nome has refiled a lawsuit this week against the U.S. Army Corp of Engineers. And as we mentioned separately and previously, we expected this to occur. There is no change to previous claims. The wetlands has now been filled. We expect this to be a nuisance suit and do not expect further delays. Our first gold production is expected to commence in Q3 2007, with commercial production by year end. Our expected annual cash flow is approximately CAD25 million to CAD30 million as we move up to continuous operations.

The next slide in terms of the experienced team that we have on these projects, we've been very, very fortunate to have attracted to both projects in Nome and at Galore Creek experienced construction and project management personnel. These teams have decades of experience behind them, and interestingly enough, in today's very tight labor market for these kinds of people, we are still continuously attracting people to the NovaGold team. And we expect to fully staff these projects as and when we require the people to work on the project. It has been rewarding to me to see such a group of people pull together for both of these projects, and for our future. I'd now like to pass it it on to Rick.

Thank you, Peter. I'd actually like to invite Don to comment -- make some comments on our plans for financing the Galore Creek project specifically. I know there's been a lot of questions from shareholders about this very large scale project, and our ability to raise the financing. So I'd like to Don to spend a few minutes reviewing that.

Thanks, Rick. As we've talked about for some time, we're working on a joint venture partnership arrangement for the project. We have a number of parties that are very interested in structures that vary between basically 40% or 50% ownership of the project, with NovaGold being the construction manager for the project. In our analysis, we have usually used the 40% number, but that number may vary depending on the exact structure that we agree with the investing parties. The total project financing cost is about CAD2 billion, about CAD1.8 billion being construction cost itself, and the remainder being interest during construction and bonding and the like. We've also told -- a number of people are aware that our advisors have indicated that the project will support at least CAD1 billion of debt, so that will leave CAD1 billion of equity to be funded by the JV partners. On a 40% basis, CAD400 million of that CAD1 billion would be covered by our partner, just in terms of the ongoing capital. That leaves a net of CAD600 million. And we would deduct from that the payment that the JV partner would make to purchase the interest in the project, which is -- assume that's a number of about CAD200 million, would reduce our net needs to CAD400 million, and as you can see the number is getting smaller. We've just completed CAD200 million -- sorry, CAD200 million of the recently completed financing was allocated to Galore Creek. So the net remaining is about CAD200 million to come in.

We have a number of sources for that, the final CAD200 million. We are in some discussions with the possibility of some form of silver-related streaming arrangement, which could generate, in fact, the bulk of that CAD200 million. In addition, obviously, this construction is going to occur over a period of five years. During that -- during the next four years, 2008 onwards, we would expect to see at least CAD100 million of cash flow generated from our Rock Creek operations. And in addition to that, next year we have about CAD60 million of warrants that are maturing, that are all significantly in the money. So we have a number of difference sources. And at this point in time, on the assumption that we will get a 40% JV partner and with those numbers of contributions, it seems quite possible that we will need no more equity dilution going forward.

Another factor that's coming to play as well, is we mentioned this CAD1 billion of debt. We have discussed with some other parties the possibility of having more debt than that, not necessarily straightforward conventional debt, but debt that uses the bond market or uses other lending markets. And we've got indications that the number could be significantly above CAD1 billion if we went to the nonconventional -- or sorry, if we didn't go to straightforward bank debt. Okay?

Thank you, Don. Just to bring your attention to the enterprise value per ounce of gold slide, this is one of my favorite slides. It shows the ongoing value in NovaGold, and our objective over the next few years here. Currently, NovaGold is valued at about CAD20 an ounce of gold in ground, and that's gold only. And whereas development stage companies average about CAD114 per ounce, the junior producers, CAD138, and the mid-tier producers, CAD164 per ounce, per resource ounce. That of course, is the direction we're going. We have a resource base, as I mentioned earlier, at the level on par or greater than most of the -- actually, all of the mid-tier producers shown on this slide. So that's the kind of value that we believe we can add for our shareholders, as we now are in a position to bring Rock Creek and Galore Creek into production, we believe in the course of the next -- this year with Rock Creek, and of course, the next four to five years with Galore Creek.

The last slide is the key investment highlight review. Again, one of the largest resource/reserve base of any exploration development stage company, all of our projects located in North America, a proven track record of delivering on objectives and achieving milestones, and most importantly, of delivering shareholder value. Our joint venture discussions for Galore Creek are progressing well. And we do expect and have every expectation of having a partner well before the end of the year. We have the funds in place to finance the initial construction on Galore Creek, and we believe the permits will be issued in short order, and construction will begin once the Board decision has been made.

NovaGold's enterprise value per ounce should rerate as Rock Creek becomes into production, and again, rerate as we become a mid-tier producer with production from Galore Creek in 2012. Currently, we're at about CAD20 per ounce on a gold equivalent basis, or CAD35 per ounce on a gold only basis. Again, compared to mid-tier producer average of about CAD164 an ounce, or a junior average of CAD138. Again, a lot of room to add shareholder value here. We expect to increase our shareholder value by advancing our portfolio of world-class projects to production, and continuing our track record on delivering on our objectives, finding more resources, and converting those resources to new reserves. I would like to end on that note, and open the call to questions from the participants. So operator, I'll turn it back over to you.

(OPERATOR INSTRUCTIONS) Mike [Niehuser].

Just a housekeeping question. After the latest equity raise, what's the share count for outstanding and diluted?

I'll turn that question over to Don, if you would -- .

Yes. The outstanding is 104.5 million approximately. And the fully diluted is approximately 119 million, say 120 million.

And are you anticipating some of that coming in, providing additional cash flow during the year?

There may be some coming in during the year. But right at the beginning of next year, we have a significant -- in January we have half of our warrants coming due, and in July we have the other half of the warrants coming due. So there's about CAD60 million that comes in from that.

Okay. And just a general cash flow question. It sounds to me like you have enough cash flow to be able to complete your 2007 program at Galore Creek. Rock Creek is fully funded. And you're not going to have to contribute any cash until Donlin Creek actually moves into construction. Is that about right?

Yes, that's true. There is a small period of time post-feasibility study when NovaGold is funding some of the permitting costs. But obviously, the critical thing is going to be what happens in November of 2007, and we fully expect that Barrick will not be able to achieve their targets, and that the entire project will revert back to us. There will be a process there, obviously, that we'll have to go through. So it's a bit unclear, to be honest, at this point in time what's going to happen post-November 2007.

But there's certainly no obligation to have to contribute there until they've met their requirements.

Absolutely.

And I guess in a worst case, if they really can produce a bankable feasibility study, then you will own 30% of that project that should be increasing in size and rerate as reserves, not as inferred in measured and indicated.

The current program at Donlin Creek, as you point out, is an CAD87 million program, and the objective is to produce a feasibility study. Again, just following on the comments that Don made, we don't believe that the feasibility study will meet the terms of that which is defined in our -- the mining venture agreement. But that, of course, will be the topic of a court decision.

And just one last question. Thank you. With the latest talk about cost overruns at Donlin Creek, or additional versions of costs , and I know you can't reconcile that to what you've done, but do you see any signs that they are slowing down their drilling or other efforts to attempt to meet the feasibility

No, the program that was outlined earlier this year, the CAD87 million program, is in full swing. I think there are close to 200 people in camp as we speak at Donlin Creek. Just to comment on your mention of the increased costs that Barrick put in its AIF filings, it was about a month ago I think, just to point out that Barrick's vision of the project at this time is very different from our vision of the project. And this goes specifically to the solution on providing power to the project. Barrick envisions a diesel -- a co-generation of diesel and wind power. So you're paying capital for two power plants, essentially. And then all of the other costs related to storing and moving fuel up the river. It's a very, very large amount of fuel, as you can well appreciate, for a 150-megawatt power plant. Our vision is to put a power line in from the existing rail belt transportation -- or, excuse me, rail belt power infrastructure at a cost of about CAD400 million. We believe that is a much better longer term solution to the project. But, of course, Barrick, as the current manager, is managing the project as it sees fit. When NovaGold retains -- regains management control in November of this year, which we expect to, we will manage the project as we see fit.

Can you say why there is any confusion on one or the other?

Well, I don't think there's confusion, Mike. There's how Barrick views the project and how they've approached the project with building, as I said, a redundant power generation system of wind plus diesel. And the costs associated with both of those projects -- building both of those projects is quite different.

Okay. And I'll jump off the call, but can you make a comment about the latest lawsuit at Rock Creek and why you perceive that that's not going to be an issue moving into production? And thanks for answering my questions.

Peter, do you want to grab that one?

Yes, Mike, essentially the lawsuit that we're looking at right now is unchanged from the former lawsuit. The key issue that we were faced with previously was the wetlands and the amount that had been previously excavated. We were stopped from excavating any further wetlands, essentially all wetlands have now been excavated. Our construction is ongoing in all areas of the plant site and has not been affected. And we do not believe we will be affected by this new lawsuit.

Thank you.

[Paulo Lostrito], NovaGold.

I apparently work for you now. MGI. Most of my questions have been answered. However, I do want to tie in specific timelines. I know it's difficult, considering you're still in the construction phase, regarding starting the commissioning phase at Rock Creek that would give you the production multiples and obviously, revalue the Company. Are we talking first half of Q3? Second half of Q3? Some guidance, please.

Certainly. And I may ask Peter to jump in and maybe say a few words. We do expect our first gold pour by the end of Q3, and then a three month ramp-up to full scale commercial production by the end of the year. That continues to be our target and our objective, and I believe we are on target for that. Peter, would you comment?

That's essentially correct, Rick. Q3, we're looking at first ore into the circuit and first gold pour, and by the end of the year we're expecting commercial production. So we 're looking at ramp-up through to commercial production in the latter part of the last half of this year.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS)

Well, if there are no further questions, I very much would like to thank the participants, and we look forward to updating our shareholders again in the next quarter. We will plan to do this on a quarterly basis. And we'll look forward to that time when we'll update you, and hopefully be underway in construction at Galore Creek, and that much closer to pouring our first ounce of gold at Rock Creek. Again, thank you very much, and wish you a good day.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation, and have a nice day.