NovaGold Resources Inc (NG) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the NovaGold Resources third quarter 2007 results and project update conference call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Rick Van Nieuwenhuyse, President and CEO. Mr. Van Nieuwenhuyse, please go ahead.

Thank you, operator. Good morning, everyone. I'd like to welcome you to the NovaGold third quarter update presentation and thank you for joining us today. I'd first like to remind everyone to maybe refresh their computer screens to make sure you have the final version of the upload. So just if you would just take a second and refresh your computer screens. We will, of course, being be making forward-looking statements throughout the presentation so just to remind you of the forward-looking statement which I'm sure you've all seen before.

I'll do a quick overview of the Company for those of you who are new to the NovaGold story and then we'll have Don MacDonald, our CFO discuss the third quarter financials and then we'll do a quick update of our projects, our major projects including update from the field up in Nome by Peter Harris, our Chief Operating Officer. NovaGold is advancing four projects, all of which are located in North America. We also have a number of early stage exploration projects that we will continue to advance through -- advance as well.

Our Nome operations located in Alaska will become NovaGold's first producing mine with production targeted by the end of this year. Galore Creek is a world class copper gold asset located in British Columbia. The project received its environmental assessment certificate earlier this year and we started construction in June with first production targeted for 2012. NovaGold is building the Galore Creek project in a 50/50 partnership with Teck Cominco. Our Donlin Creek property is located in southwestern Alaska and is one of the largest undeveloped gold deposits in the world. It's being developed in joint venture with Barrick. It is also located, or excuse me also located in Alaska is our Ambler copper zinc gold silver project which is a joint venture with Rio Tinto. We will talk more about all these projects a little bit later in the call. I'd like to just share with you our vision.

For NovaGold it's become a low cost, midtier North American gold, silver, and copper producer. Our approach is to create shareholder value by exploring, developing, and operating these projects in a sustainable manner that benefits the stakeholders and respects the environment. This is particularly true of our approach in working with Alaska native corporations and Canadian first nation people.

2007 was certainly a big year for NovaGold. We started construction at Galore Creek. We finished up construction. We are finishing up construction at Rock Creek. That will make us a -- make this transition from explorer to producer. We've initiated a number of other new projects that will continue to build a pipeline of exploration projects that NovaGold and the shareholders can see grow into the future.

We've identified here a number of value drivers for each of the projects over the next 12 months. We've talked about those throughout the year. I think we've done very well on achieving most of our objectives. We're a little slower behind schedule on Rock Creek than we wanted to be, but we do expect to achieve initial production by the end of the year. We'll talk more about all the projects a little bit later in the presentation.

The next slide shows our production growth profile starting in 2008 with a full year's worth of production at Rock Creek. We'll be about 100,000-ounces of gold and then ramping that up, and of course with Galore and Donlin Creek coming on line we'll be producing upwards of 1 million-ounces of gold and about 200, over 200 million pounds of copper. Those costs, the costs of that production will be starting out at about $300 per ounce with our Nome operation and then dramatically reducing to at or around near zero with the coproduction of copper from our Galore Creek project. Obviously being a very low cost, high quality North American gold producer.

With that quick overview and just stating our goals I'd like to now ask Don MacDonald, our CFO, to go through third quarter financial results and then we'll update you on each of our major projects after that.

Thanks, Rick. As Rick will outline later in the presentation, it's been a very productive year so far. With many milestones achieved. From a financial viewpoint for our three major projects, the transaction with Teck Cominco at Galore Creek has been the most significant. The total initial contribution of over $500 million from Teck Cominco covers 100% of the cash payments for Galore Creek from August 1, 2007, to well into 2008. At Rock Creek the project is well on the way to construction completion and is already fully financed from our cash. At Donlin Creek, the other major projects expenditures are being currently fully financed by Barrick, and then on our development project Ambler project which is in the early stages the needs for that project are relatively modest at this point in time.

Back to Galore Creek, it's a very large project and so looking forward we are already working on various financing packages particularly with Citigroup's Project Finance Group to cover expenditures over the period 2008 through 2012. That's not obviously covered by Teck Cominco. That project is a 50/50 partnership with Teck Cominco, as Rick says.

As NovaGold is not yet a producing Company our nonproject expenditures are not really material to the Company's valuations and so our income statement is not that significant. For the nine months to date our loss was $12 million of which almost 5 million related to foreign exchange. I compare that, for example, separate from our project finance to cash flow we would expect to be receiving. In 2008 we will expect about $65 million to come in from in the money warrants that will mature in that year and we should expect cash flow from Rock Creek over the next four years of at least 100 million to $125 million at current prices.

Looking at the last month's as we see from the slide, we began this fiscal year with $169 million of cash and marketable securities and on August 31, 2007, the total was 186 million. During the nine months we've spent over $230 million on our projects and our financing activities included equity funding of $221 million funds from Teck Cominco at Galore Creek of $78 million. The breakdown of our cash and marketable securities of $186 million is split into $127 million in cash including $44 million in Galore Creek's accounts, $34 million in the value of our short term investments and $25 million in long term investments. So obviously a significant portfolio of investments as well as the cash that we have in our treasury. If people have further questions on our cash situation, I will open that obviously to the Q&A but in the meantime I'll pass it back to Rick.

Thank you, Dan. I would like to now take you through our four major products and give you an update on each starting off with our Nome operations in Alaska, Nome operations, of course, located just outside the the town of Nome where we're building a 7,000-ton per day mill, three stage crushing, single stage ball mill, gravity flotation concentration, followed by carbon and leech circuit. We started testing the circuits already and we plan to have first production targeted by the end of the year. By next year we then expect to achieve a level of production on an annual basis of 100,000-ounces per year. Again cash cost about the $300 per ounce range. That should generate between 25 million and $30 million of free cash flow for the project. There is no debt associated with the project. This has been completely equity financed and the gold is, of course, not hedged in any manner. I'd like to invite Peter Harris, our Chief Operating Officer, who is actually up in Nome to give us a live from Nome update of the project going on there. Peter, are you online there?

I sure am, Rick. Thanks a lot. Can you hear me?

We can hear you fine here.

Okay. Good morning, everyone. I'm currently on the line from Rock Creek site near Nome, Alaska. Temperatures are a balmy 20 degrees Fahrenheit. It's really tremendous to be here at this point in time as we transition the Company from explorer to producer. We have currently over 300 construction operations personnel on the site. Operations starting levels are at about 70% of final manpower staffing requirements. With a large number of people in the recruitment pipeline.

Our prime construction contractor Alaska Mechanical has been challenged in the last quarter by trace personnel shortages, a common issue throughout the construction industry, but over the last four weeks we have successfully increased manpower levels on site to ensure all areas of the process facility are rapidly advancing towards construction completion. With the crushing and reclaim circuits essentially complete, tested, and ready for feed.

We are targeting first ore feed into the circuit this quarter with some gold production soon there afterward. Commissioning and ramp-up will continue into Q1 2008. The open pit mine has now been operating for some time. With production levels now up to 20,000-tons per day. We are targeting waste materials from the open pit to be used in construction of roads, tanning storage facilities and other construction earthworks. Ore encountered is being separately stockpiled ready for circuit startup. Currently around 100,000-tons have been separately stockpiled above cut-off grade.

Our current bench within the open pit is pleasantly above the mine average strip ratio. We're looking at currently on the existing bench 60 to 70% of the bench running ore grades above cut-off grade. So we have been pleasantly surprised with what we're finding out there. Rick, that's our current status up here in Nome. There's a lot happening up here, there's a lot of energy and it's probably a little bit noisy outside the window here. So I'm going to mute myself.

Thanks very much, Peter, and we'll have you stay on the line in case there are questions during the question-and-answer period, but just to remind everybody, we are exploring a district in Nome. We've got an initial five years of mine life in the current mine plan. In addition to that, we have about 2 million-ounces of measured indicated resources that we will continue to look at ways of advancing that into a reserve base. We will continue to explore the upside with our Big Hurrah, Saddle and our Nome gold projects in the immediate vicinity there.

We are currently evaluating a phase 2 mine expansion looking at a 25 perhaps even up to 50% increase in ore production levels over the next few years. We are completing an economic assessment specifically on the Nome gold project which of course, is the historic alluvial gold gold that was produced in the Nome area. Just to remind everybody this area has produced about 5 million-ounces of alluvial gold historically, so that's quite a rich gold endowment. You can see on this map a very large area of surface soil anomalous gold and a number of yellow circles there indicating that it's the targets that we're currently exploring in the Nome area and then also pretty much the same kind of a map I could draw for you at the Big Hurrah site. So we're very excited about the long term exploration potential of this district.

Now moving on to Galore Creek of course located in northwestern British Columbia not too far inland from the Alaska border. Galore Creek, of course being a world class copper, gold deposit, 14 billion pounds of copper and some 13 million-ounces of gold ranks right up there with some of the largest copper, gold deposits in the world.

Construction, of course, is underway. We are still targeting a 2012 production startup. This is a partnership, of course, with Teck Cominco on a 50/50 basis with Teck contributing the next approximately $500 million in construction costs. The Galore Creek construction is proceeding in accordance with the previously announced timelines. We don't expect any significant changes as of right now. We are working on an updated feasibility study which we expect to have done the second half of next year.

Just to remind everyone, there's over 540 million-tons in the current mine plan and an additional billion tons of resource just in the immediate area around that current reserve. The initial five years of production we're expecting on a 100% basis over 400 million pounds of copper produced, about 340,000-ounces of gold and about 4 million-ounces of silver on an annual basis over the first five years. Using long term metal prices, $1.50 copper, 5.25 gold, $8 silver, this is over $400 million of annual pre-tax cash flow using metal prices more similar to today's current prices, your cash flow would be in excess of $1 billion. So obviously a very robust project, very low cash costs on either a co-product basis you're looking at $150 to produce an ounce of gold and about [$0.67] to produce a pound of copper or if you net one against the other, you're producing copper for about $0.38 a pound or gold for a very, very large negative $600 an ounce type of a number. So a very low cost gold and copper mine again located in North America.

Just to update you on the -- go through a series of slides here on some of the progress we've made on site. We have essentially achieved everything we set out to do in 2007 at Galore Creek starting from permitting through all the various steps to actually starting construction forming the partnership with Teck, the last big check mark on the list is the completion of the 15,000 meters of exploration drilling and the guys are still out in the field just wrapping that up, probably be done by mid-November. So that will lead to further resource expansion and I'll talk about that in a little bit here.

Next slide shows a series of helicopter. We've obviously been using a huge helicopter fleet up there this summer, lots of hours on the helicopters. We've moved over 40 million pounds of equipment and 275,000 people moved, obviously a lot of activity going on. We've got seven camps established. We have beds for over 800 people right now. I think currently there are just over 700 people on site. We are currently planning to enlarge the main Galore camp for anticipated scale-up of operations there in 2009 to where we'll have probably over 1,200 people total on site.

Just a couple shots of the road. We've completed about 60 kilometers of road and we'll say it's completed to a pioneer level. That's good enough to drive a pickup truck over. Obviously there's more work to do. We've got to complete the power line and complete the pipeline in there but from the road standpoint it's certainly drivable. There's another 110 kilometers that are -- or a total of 110 kilometers that are cleared for construction. So that's essentially almost the entire access route into the valley there.

We've, obviously there's a number of bridges that have to be built to complete the road. We've got eight permanent bridges done and about 17 temporary bridges. The main bridge crossing, of course, was completed earlier this year and has been working very, very, very well.

Last on the list is the tunnel construction. We've got in excess of 50 meters. The last month here we've been mainly working on in getting the snow canopy completed and installed. I believe that was just completed last week and so now it's just the hard slug out work of between six and eight meters of advancement underground is expected in the tunnel. We plan to be somewhere around 0.5 kilometer by the end of the year. So I think this is kind of a steady grind here in advancing the road and access tunnel.

This shot shows you the overview of the valley, outlined in green is the reserve base, the central southwest and West Fork and junction pits. That's the 540 million tons of reserves. Then outlined in red are the additional resources at, primarily at the Bountiful deposit is about 800 million tons there immediately adjacent to the Central Zone and then Middle Creek, a small resource there and then over on Copper Canyon where we've been doing a significant amount of drilling this summer we do expect to update everyone on the advances in drilling there. We also have a number of other targets in the valley, most notably is the Butte zone there, one of the yellow circles outlined. We've had some good success in our drilling program there. We do expect to continue to drill in the valley and continue to expand the resource base and then eventually be converting that resource to reserves and clearly that would be part of the task of the feasibility study and the ongoing studies that we expect to be doing between now and when production starts at Galore in 2012.

Moving on to Donlin Creek located in southwest Alaska, of course, one of the largest undeveloped gold deposits in the world, over 30 million-ounces of resource there. SRK completed a preliminary economic assessment in September of last year, that was updated in April of this year with substantially the same economics expected from the project. Again, this is a project that can produce close to 2 million-ounces of gold on an annual basis over the first seven years and then about 1.4 million-ounces over the 20 year mine life. Very large operation, clearly generating great cash flows for a gold mine, over $460 million using a $500 gold price, cash costs 223 for the first seven years and 276 over the mine life. That -- clearly we'll be updating that study with the additional work that Barrick has been doing on the project this year. Mentioning the joint venture with Barrick, obviously it's subject to the back end agreement. Management continues to believe the Barrick cannot meet the terms of the back end requirements to earn its additional 40% interest from NovaGold.

This year Barrick has had a substantial exploration program primarily doing about 60,000 meters of infill drilling and additional drilling, geotechnical drilling around the whole project area. We expect to be able to release results. When we get those finalized from Barrick and, of course, we'll update everyone on that when those -- that information is available. They have budgeted $87 million expenditure for this year and I think they're probably a little less than that, but that certainly is a substantial program. The main objective of the program is to complete an initial feasibility study that will result in improving probable reserves for the project. We believe those are good value drivers and then there's an expectation of being able to start permitting in by the middle of next year, 2008. Clearly we see potential value to NovaGold due to Barrick's likely inability to meet the terms of the agreement to earn an additional 40% and I'm sure we'll be updating you on that later.

The Ambler project, I certainly say last but not least. This is a very high quality massive sulfide copper zinc with precious metal credits deposited, located in northern Alaska, over 3 billion pounds of copper, 4 billion pounds of zinc with great precious metal credits. This is part of a district play. We do essentially control the lion's share of the district. It's called the Ambler Shift Belt. The Arctic deposit is certainly the crown jewel in that belt with over 30 million tons of 4% type copper, 5% zinc, but a number of other significant massive sulfide occurrences in that belt. We are -- we completed a 3,000-meter drill program this year and we are working on an updated 43101 compliant resource estimate and an initial preliminary economic assessment that we plan to have out before the end of the year. So we, again those are the value drivers we see for Ambler and the other projects.

As just to review the highlights for the Company, clearly Rock Creek production is -- we're anticipating that obviously you heard the excitement in Peter's voice and being up there and seeing this thing actually getting built, it's a major transition for the Company from explorer to producer. Meanwhile the Galore Creek project with our partnership with Teck is well underway of construction. We'll look forward to continuing to update you on the progress of the road and tunnel over the coming months and then, of course, resolution of the Donlin 70/30 ownership, we see obviously potential upsides there. We think the market has been valuing us about 30% of Donlin and we think that's an incorrect valuation.

We are undervalued in respect to our peer group. There's no other company that has a resource reserve base like NovaGold in North America. We have strong fundamentals. We have $186 million in cash and short term marketable securities. We're unhedged, give you complete exposure to the gold market. We've got a great exploration team and we've put together a (expletive) of a mining team that's building mines. Our business plan is again to become a low cost, midtier North American gold and copper producer and with that I'll end the formal part of the presentation and turn it back to our operator to invite everyone to ask questions. Operator?

Thank you. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) The first question is from [Jim Dunham]. Please go ahead.

Hi, it's Jim Dunham from [Mack, Mack, and Oliver]. How are you guys?

Doing great, Jim. Thanks for the question.

The first question is about Rock Creek. You've been giving an estimate, cash estimate of about 30 million to $35 million for some time now and given where gold prices are today, is that kind of forecast somewhat dated or is that really where it is now?

I think our guidance has always been 25 to 30 and clearly as the gold price has risen, there is potential for the margin to increase. We haven't updated our mine plan as of yet and because of that we haven't really decided to update our guidance. Just to remind you as the gold price goes up oftentimes what a mine plan will do is lower the cut-off grade which will increase the cash costs. So you'll produce more gold. You'll have more reserves, but that's all part of the process that we're finalizing right now with an updated mine plan that we expect to complete here between now and the end of the year before starting commercial production.

Great. The next question is on the power line at Galore Creek, is that 150 million, 155 million that you're putting in, is that sort of MPV neutral compared to the original plan?

Yes. Essentially in the original study we expected to pay a cost for power that would have amortized the cost of that power line in that and so basically you're offsetting -- you're either going to pay it through operating costs or you're going to pay it through capital costs and this new agreement with the government building the 287 line and our 155 million will basically offset operating costs. We'll end up having lower operating costs as a result of the better line.

Okay. And just one final question. You mentioned in the press release yesterday that costs are going up, inflation is increasing. Can you comment on that? In particular maybe just a brief comment on how the Canadian dollar affects you and why that's been -- how that's increased expenses.

Yes. I may invite Don make some comments on exchange rate, but I think, and as a general comment, clearly we are seeing inflationary pressures. I think as Peter mentioned, it is challenging anywhere in the world today including Alaska, including British Columbia to find enough people in the construction business to get the job done and that spills over the same way into the operating end of the business. So there is significant -- I think significant cost inflationary pressures on wages that we're seeing in the mining sector. We've all heard the stories of not being able to get trucks or truck tires and things like that. That clearly is another indication that there is inflationary pressures. On the exchange rate I think I'll invite Don to make a few comments on that.

That's a very good question, yes. There is no question the Canadian dollar has been strengthening against most currencies. That is, however, driven by the Cavantes themselves and the Canadian dollar is rather regarded as being somewhat of a petro currency and so although we are seeing increases in the commodities and we're seeing increases in diesel fuel and so on, the good thing is that Galore Creek is -- base metal is a very substantial part of the revenue that's going to come from the project. So we believe that if the Canadian dollar stays strong that the copper prices in particular will stay strong as well and that they will more than compensate for the increases in underlying construction costs and operating costs and also the strengthening of the Canadian dollar.

I do think it's important as Don alluded to, keep in mind that all these things are somewhat related. You can't have a super high dollar and a super low copper price or a super low or super high oil price. I think one of the other things to make -- to point out with Galore Creek particularly is we're I think quite buffered by the high cost of oil that we're seeing in that the project will get out of its energy from the B.C. hydrogrid and that's some of the cheapest power in the world at about $0.032 per kilowatt hour. So we feel like we've really done a good job of securing low cost power for the project and that's going to be an advantage, an operating advantage, over say most other operations that don't have that benefit.

Okay. Thank you.

Thank you for the question.

Thank you. (OPERATOR INSTRUCTIONS) There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Van Nieuwenhuyse.

Thank you, operator, and thank you, everybody, for listening in today on our third quarter update. We'll again do this, of course, for the fourth quarter or year-end and we'll look forward to having news, of course, on Donlin Creek as well as updates on our other projects for you. Again thanks very much for your participation and we'll look forward to our next update with you.

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