NovaGold Resources Inc (NG) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the NovaGold 2008 second quarter results conference call. Please be advised this call is being recorded. I would now like to turn the meeting over to Mr. Rick Van Nieuwenhuyse, President and Chief Executive Officer. Please go ahead, Mr. Van Nieuwenhuyse.

Thank you, operator, and good morning, everyone. I'm joined today by Don MacDonald, our Chief Financial Officer, as well, who will be making some comments on our financials for the quarter. We had planned to have the call last week, but due to a fluke power failure here in part of downtown Vancouver, which shut down power all over the area here, we decided to postpone it. It was pretty much the whole week that we were down for power so it was a pretty significant inconvenience but we apologize for not having had the call last week. I will be making forward-looking statements and direct you to the cautionary language in the disclosure.

NovaGold is focused on gold. We are dedicated to advancing our world class portfolio of development stage projects through to production with the objective to become a mid tier North American gold producer. Highlights of the company include over 27 million ounces of gold attributable to the company. Those are divided into three main projects, our Nome operations, our Donlin Creek project in joint venture with Barrick and our Galore Creek project in joint venture with Teck Cominco. We do expect first gold production of course this year. I will be talking more about that at our Nome operations. That will transition us from an explorer to a producer. And I think we're -- it is obvious that Donlin and Galore are two very sizable projects but we are advancing those to feasibility studies the next year, both projects, and then on through permitting and construction and production.

Our corporate objective is to become and build a premier North American precious metal company. Our strategic plan is focused on precious metals, both silver, focused on advancing our three main projects, Donlin, Galore, and our Nome operations and maximize shareholder values by divesting our interests in noncore assets and I will be updating you on our progress there as well. We will acquire -- we will achieve growth by acquiring producing assets with potential for expansion. We will put our exploration expertise to use there. In addition, we will be looking at advanced stage development assets with the potential for rapid advancement through to production. Those are our -- that is our strategic plan in a nutshell.

Operationally, we're focused in Alaska and northern British Columbia, the map here shows all of our projects the near production at Nome operations, the two big joint venture projects, Donlin located in southwest Alaska and the Galore Creek project in northwestern BC. Also shown on here are some of our early stage or most of our early stage exploration projects which as I mentioned will be looking at divesting of those in the near term here. But we are North American focused, low geopolitical risk scenario.

Focusing on our Donlin Creek project, initially, almost 32 million ounces of measured indicated resource and additional 4 million ounces of in pit inferred resource there, again located in southwestern Alaska and NovaGold owns a 50% interest in this project along with Barrick Gold who has the other 50. The value drivers for the Donlin Creek project, earlier this year, we released that the partners had agreed on a preferred project design, incorporating a 50,000-ton per day milling scenario on site, wind cogeneration with diesel as a power source, yielding a rough mine life of between 25 and 30 years. With the currently in defined in pit resource. Clearly, there is a lot of exploration potential around the district. This operation would be expected to produce in the neighborhood of 1 to 1.5 million ounces of gold annually for that 25-year period.

Our objective is to complete a feasibility study by Q1 of '09. We are working on that now. The objective then -- or the result then would be to have proved and probable reserves for the lion's share of the in pit resources. We will then initiate the permitting process, with expected three-year time frame for the permitting process, and then be in a position to start construction in 2012.

Clearly, there is a lot of exploration potential around the deposit and around the district. The next slide shows the in pit resource outlined in the red -- the red shapes, and then in the orange there, or the golden shape is the favorable -- the geologic units, the chosen, and the chosen dikes that hold the lion share of the mineralization. The one box there outlines some of the exploration upside around the east Acma structure. We had released results earlier last year on some of the excellent drill results there. We've now completed an expansion program there. We will be looking at releasing that information as that -- all of that information gets finalized and QA/QC work is complete on that. Clearly there is exploration upside in and around the pit. The deposit is open at that point a long stripe. Looking at the rest of the district, this is a surface soil map along with some -- showing the favorable geology there. Obviously, it is about eight kilometers of strike plank, favorable mineralized. We are really not just exploring now to find more ounces. We're looking to explore for higher quality ounces. So either they're higher grade or they're better recovery, or they're nearer surface, lower strip, those kinds of things, value-adding ounces. One of the areas we think has great potential is the Dome property. We will be drilling some more holes on that later this summer. That area is important or significant because the mineralization there is nonrefractory so it's a sulfide ore, it would be leachable, treatable with just direct cyanidation, without the expensive auto laving process. So those will be much cheaper ounces. So that is one area where we see some exploration upside and that we will be focused on.

We will also be looking at some of the in pit oxidized ores. We think there is opportunity there for the identification of significant resource, several million ounces potential, of oxidized ores, and again will be lower cost to produce. So those are the kinds of upside opportunities we're looking at with the existing resource. The next slide shows an updated map of the part of the Kuskokwim Gold Belt which the Donlin Creek project is a part of it. The belt extends all the way from Alaska to the Yukon and includes other deposits and active and historic mines, Brewery Creek,Dublin Gulch, the Klondike Placer Gold camp, and the Fort Knox and the Pogo deposits in Alaska. There has obviously been a lot of recent staking going on in this belt. You can see where kind of in the middle there is the Donlin Creek project, the partnership with NovaGold and Barrick, but a lot of people have been active in staking new claims in the belt.

Barrick and Newmont among those. In total, there is about half a million acres of new claims staked and roughly half of those are owned by Barrick and Newmont. Of course that is outside of the holdings at Donlin Creek proper. In addition, NovaGold has been of course a leader in this area. We have identified a number of properties that we staked early on. Including a number of blocks around the Timber Creek area and to the south of Donlin Creek and the Colorado Creek project to the north of Donlin Creek. So we're very active in the belt, but so are a lot of other folks. So we expect this to be one of the premier gold districts in the world.

Moving on to the Nome operation. Nome of course located in northern Alaska. Our first mine we're developing, we see a half million ounce reserve there and over 2 million ounces of resource-ization to it. First gold production, we're literally days or weeks away, not months away from production here. We're really very close to getting this thing up and running and we've had a bit of a struggle here, and we do expect to produce on an annualized basis 100,000 ounces of gold. Construction is materially complete. We're basically completing documentation as per our permit requirements to get regulatory approval for start-up and ramp-up of operations over a three-month period.

The rock team is prepared for start-up. The crush and grinding and gravity concentration, flotation, thickener and tailing circuits have all been wet and dry commissioned. We have had a number of unexpected events associated with water management that have delayed production, occur. We experienced an unusually high snowfall in Nome this winter and during the spring melt runoff found that our storm water pollution prevention controls were not adequate for this high snow pack and melt water. So we have redesigned a number of these water diversionary structures and are working to stabilize all of the disturbed ground. We are determined during -- we also determined that during the spring melt the recycled pond wasn't functioning properly and so we made changes there. We basically replaced the entire liner to ensure integrity of the pond. As a result of these changes, we are very close to getting all of these issues addressed and to get regulatory sign-off. We're updating some of the documentation regarding water quality and our storm water pollution prevention plan and expect to receive authorization to begin production once those issues are covered off, and literally, it is a matter of days or weeks at this point. So we're -- we will be very pleased to be able to announce start-up of production there.

In addition to Rock Creek, we are doing ongoing exploration. We've got about a $5 million program there. Our objective is to identify an additional half million ounces of measured and indicated resource that can then be moved into the proven and probable category with the completion of the engineering studies. And then obviously move along the permitting of those new resources and get them into the mine plan. We believe that there is huge potential in this district, and we will be able to sustain operations for many years into the future and to become -- a core focus of the company at this point.

On our Galore Creek project, you can see this is a very significant copper gold silver resource. Almost 9 billion pounds of copper, 7 million ounces of gold. And again 123 million ounces of silver in the M & I category. We're working very closely with Teck Cominco to complete engineering and optimization work, to develop a go forward plan here in the fall. We're on track to have that out in September. And we will look forward to updating you on all of the specifics of that at that time. Teck Cominco is funding over $30 million in expenditures on engineering optimization studies. The likely scenario, not everything is absolutely locked down yet, but we're still doing some optimization work, but essentially the scenario will be to mine and crush in the valley, and then conveyor slurry the materials to a location outside of the Galore Creek valley, for processing and disposal of tailings. Our expectation again is to have that work, that new development plan out in September, and then to work on a feasibility study in 2009 for completion at the end of 2009.

The other thing that we have been busy with is looking at opportunities to maximize the value of our noncore assets. We've determined that our ambler and early stage exploration assets in Alaska are not going to add -- not going to maximize shareholder value in NovaGold and we're looking at diversifying those -- or spinning those out into a vehicle and having an equity holding in that vehicle. Similarly, the NovaGold power, the Forest Kerr, the run of river hydro project and the other ancillary projects around Forrest Kerr are very attractive. Run of river clean green power asset, but we have determined it is not something that NovaGold is going to develop, and we have run a process and are looking at a potential sale for cash of this asset. And we will update you as that progresses as well.

I would like to invite Don MacDonald, our CFO, to update you on the Q2 financials. Don?

Thanks, Rick. As Rick said, I will discuss the first half financial results and our plans for the remainder of 2008. In the first half of 2008, we had net earnings of $20 million, compared with our loss last year of $8 million. The positive results for the first half arose mainly from a $15 million gain on the sale of our U.S. gold shares and a net $18 million recovery of costs at Galore Creek, offset by $3.8 million of infrastructure maintenance costs at Galore Creek. And the second quarter itself, we had a net loss of $8 million, compared with the $3.2 million loss in 2007. Our expenses were virtually identical at $8.9 million, but the major difference was that last year, we realized a gain on the sale of our pioneer shares of $4.2 million, with no comparable amount in 2008.

Highlights going forward for the next half, as Rick mentioned, we anticipate shortly to be operational at Rock Creek. We will be spending $19 million in the second half of the year on some new additional mine equipment, and continuing work on our storm water pollution prevention plan. And at Donlin Creek, we have completed our first half, $3 million, under budget. And two budgets are under consideration for the remainder of the year. One that will cover the period into Q1, 2009, for the preparation of a feasibility study for Donlin Creek, and a separate budget for permitting for the remainder of this year. These budgets start, still under review, but should be agreed shortly. At Galore Creek, we anticipate NovaGold's share of infrastructure maintenance and roads, connection costs, to be net about $5 million to the company. As you know, Teck Cominco is incurring 100% of the studies' costs that are going on, on that project.

To finance these activities, as you know, we have a substantial portion of the Galore Creek budges, as I mentioned, being covered by Teck Cominco, and Barrick will be funding 50% of the costs going forward, from now onwards at Donlin Creek. We will be getting cash flow from Rock Creek, and we are working on a line of credit to leverage from that cash flow. In addition, we are looking, as Rick mentioned, to realize value for a cash sale of our green power assets and a sale of our noncore exploration assets. In addition to that, we also anticipate $24 million coming in from warrants that mature on October 1, 2008, so we should see funds coming in, in September, on the exercise of those warrants. Perhaps repeating a bit what Rick has said, we look forward to reporting to you next quarter that we have successfully transitioned into commercial operations. We will be reporting on the plans for the feasibility study at Donlin Creek and the new plans for a Galore Creek feasibility study. So we're looking forward to the next call with lots more information and new developments at the company. Back to you, Rick.

Thanks, Don. Just wrapping up here, a couple of slides, the slide shows a number of other North American, North/South American developers and producers, and you can see with 27 million ounces, NovaGold represents tremendous leverage to gold and obviously with the gold price continuing to move up, we think that provides a great opportunity for investors. There are a few North American development stage assets out there to acquire. And certainly not of the size and quality that was represented by NovaGold's assets. We see development stage assets are averaging about $90 per ounce and the sale today of the Aurelian assets or the announced planned sale of the Aurelian asset certainly underscores that kind of value. That is an inferred resource in a country that would, I think, everybody would agree would have more geopolitical risk than North America. So the size of the resource base that NovaGold has is comparable to the likes of (inaudible), those are $10 billion market cap companies.

NovaGold sits today at $1 billion dollar market cap. We provide a lot of upside opportunity for our shareholders. And we look forward to being able to deliver on that in the years to come. The value drivers, just to remind you, to review them, complete the feasibility study on Donlin Creek in Q1 '09. We've decided what the plan forward is now. We are just executing that with our partner Barrick. Objective, there convert the input measured indicated resource to proven and probable reserves and that will be a substantial increase in our reserves, both ours and Barrick's. We will then initiate the permitting process.

And then under Nome operation, as Don just said, we want to achieve commercial production this year and continue to explore the project and extend the mine life in the Nome operations, and we think that with the land position there we hold there is tremendous opportunity there. On Galore Creek, we do plan to announce a go forward plan in September. Along with our partner Teck Cominco, and then proceed to a feasibility study with the plan completion by the end of 2009. And I think I will wrap it up there and operator, if you would open it up for questions and answers, we would be -- Don and I would be glad to take those.

Thank you, we will now take questions from the telephone lines. Please be advised that questions will only be taken from analysts and investors. (OPERATOR INSTRUCTIONS). The first question is from Paolo Lostritto from Wellington West. Please go ahead.

Good morning, gents. Quick question. With the extra capital that you guys are putting in at Rock Creek, does it change your effective tax rate for the remainder of the year at all?

We, Rock Creek, don't anticipate paying taxes on that project for many years. So yes, this will be deductible amounts but the effect for after tax purposes will not be seen for a few years.

Okay. Thank you.

Thank you. The next question is from Ed Irvin from Wyco Securities. Please go ahead.

Good morning, Rick. How are ya'll?

Good.

We've been wasting restlessly -- waiting restlessly for rock creek. I'm sure ya'll have too. How long will it take once we get the permits in hand? I saw a picture, it looked like there were a lot of material that was already mined and crushed, I guess that is ready to go to the mill once it gets the okay?

Yes, literally, Ed, we -- and I appreciate that it has taken us longer, I think the snow pack really did affect and delay us here this year, but we are literally weeks away, certainly not months away, we are meeting with the regulators on a biweekly basis, I talked with Jim Mallory last night, our general manager, and he felt that we would be sitting down and getting the sign-off from the regulators, the latest, within a week or so. Once we get the go switch, we -- as you say, we do have quite a stockpile. I think it is running somewhere around 200,000 tons. So.

350,000-tons.

350 now. So it is a substantial stockpile. So we will be able to run it -- you know, go right straight up and start up. Now, we will be looking at a three-month ramp-up period. That is somewhat typical of a start-up of a milling operation. We want to test all of the circuits and make sure that the system is working the way it is supposed to. So, over a three-month period, we would expect to -- three, four-month period expect to achieve commercial operations. We will let the accountants define what commercial is.

Let me ask you this, Don, if the gold prices remain about the same, like they are here, you know, plus or minus 950 or something like that, what kind of cash flow can we estimate for the first or last six months of this year?

Well, with the extra capital we're going to be putting back into some of the equipment and the storm water prevention plan, that will take a fair amount of our cash flow for the remainder of this year, but looking into next year, when we -- we still will have some ongoing capital requirements, particularly at Big Hurrah, but we were looking at something around $40 million I think was announced cash flow, and that would look to be consistent here.

We're looking at cash costs of about $500, I guess to say it another way, and we have reviewed and updated those numbers, as everyone appreciates, and we -- everybody is seeing inflation on -- inflationary pressures on costs, so we have updated those. One of our bigger cost centers, of course, is fuel, and that's barged in once or twice a year in Nome, so that becomes a fixed cost at some point, and we basically have locked in our costs for our fuel there. So we've got a pretty good idea of what it is going to cost us, we think, a good handle on the costs. So $500 an ounce.

When do you see a chance of raising money from the sale of some of the assets that you want to sell? I mean is this going to be two years out, or six months out or --

I think it is something -- definitely something we will get done this year, and I would be hesitant to say by the end of this quarter, but that's certainly something we're shooting for.

And well, last question, how about the sale of land to the -- for the airport. Anything more about that?

I haven't talked about that for a while.

Yes.

To be honest you with, it is not something we've been focused on.

Okay. Well, let's hope and pray those guys can get those permits available.

Well, we're working hard on it. Thanks, Ed.

Thank you. The following question is from Haytham Hodaly from Salman Partners. Please go ahead.

Just a couple of quick questions. Just to follow-up on Rock Creek first. So commercial production effectively by when?

It will be towards the -- probably in the fourth quarter, beginning of the fourth quarter. Remember, we have a noncalendar year end at at -- NovaGold.

So a month, which month would that be.

Don't hold us to a month. We said we will be in production at the middle of the year. We are on track of that.

I'm trying to remember what your fourth quarter, when it starts, officially?

September 1.

Okay. And then production, where you quote the 40 million, what type of production are you looking at there?

Well --

You quoted $500 per ounce cash costs so --

As you know, when you look at our mine plans, we actually exceed 100,000 ounces, so it works out, if you took 100,000 ounces, obviously there is 400 -- there is a $40 million margin on that, but we're hoping to actually exceed that level, so $40 million is a reasonable number. But we have detailed mine plans in the feasibility study which again I think you're fully aware of, but we anticipate fully updating all of those plans by the end of this year. The big issue that we have, at Rock Creek, obviously is the potential nugget effect there and we're hope that we get some upgrading in terms of the amount of ounces that are coming out of the pit. We're already seeing that somehow, some way in the material that we've mined to date. We really want to run it through the facility, see what we're going to recover, and then I think issue new numbers for next year and hopefully they will be better than we're talking about now.

And so if you're looking at roughly let's say 100,000 ounces a year and in commercial production for let's say one quarter, that makes sense to say 25, roughly 1,000-ounces in the fourth quarter, at a cash cost of $500 per ounce, so the $40 million you're quoting was for a full-year number, is that correct? Correct. And the $500 per ounce is reasonable obviously given the escalation we've seen. What do you see happening next year to that number?

Well, it will depend where fuel prices are to a large degree. That is one of the larger component, as you are aware, probably, power is generated in Nome with diesel and the barge shows up twice a year, in June and in September. So -- and that's priced in Seattle. So we will see -- we are set for this year. Obviously, next year, your guess is on the oil prices is as good as mine. But that is certainly a driving factor. Obviously, we will be looking, as we get the operation up and running, to look for efficiencies, and you do see that typically in operations. You're high to begin, with and then you find efficiencies, and work those kinks and bugs out, and as Don said, I think there is is the potential upside here is for there to be more nugget gold in the ore than could be -- than could be reported in it, and a measured indicated resource or a proven probable reserve. As you know, nugget gold is -- it is the most difficult gold to estimate, but it is the easiest gold to recover. So we will be struggling with, that I'm sure, in operations, and from a start-up standpoint, but we will work out the kinks and we will hope to be able to reduce our costs.

Okay. Maybe I will flip over and talk a little bit about Dome. The wind diesel scenario, I always talked about this in the past, what was the original CapEx number for the wind diesel scenario, and why was -- if you can refresh my memory, Rick, just how did that take precedent over the power line scenario again?

I'm not sure what you mean by the original number.

I think all we can really say is that NovaGold never had an initial number with wind diesel. Barrick had work that they did on the wind diesel plan and it was different from NovaGold's plan. I think overall, I think the numbers are in the public domain for the amount that Barrick had estimated.

I think it was a $4 billion number, roughly.

If you look to the mathematics it was somewhere between 3.6 and $4 billion.

And I guess from that, and I don't know how much discussion you've had, I'm sure there has been quite a bit, of that 3.6 to $4 billion, what was the actual -- did they incorporate the wind diesel, did they not?

They did, yes.

And do you know what percentage of that $4 billion that wind diesel scenario was?

It is not as -- and I don't have the number off the top of my head, it is something we can probably provide here.

And the wind diesel scenario will be oil price sensitive and we've seen a significant increase in the oil price. And I'm wondering what we could see the overall capital increase to, just based on the oil price change and I guess it is too early to answer that question.

You mean operating costs?

Sorry, no, capital cost. No, capital and operating costs.

I guess my answer would be let's wait and see what the feasibility study demonstrates.

Fair enough. Thank you.

The next question is from Terrence Ortslan from TSO & Associates. Please go ahead.

Thanks. Rick, the Donlin Creek feasibility study, before I get there, the budget for this year is still $18 million for Donlin Creek?

No, we haven't got a budget for the remainder of the year that's been approved yet. So we had a budget of $25 million. $3 million less than we budgeted -- in fact, $3 million less than we funded was spent on that budget. So we had a surplus carried forward to the second half of the year, but we haven't announced the new two-part budget as I mentioned in my presentation. It will be out shortly.

Okay. The beginning of the year, there was a presentation, I guess I can't remember what date, but talking 18 million all together for Donlin Creek for 2008. Nevertheless, how much will the feasibility study cost?

Well, that's being determined by this specific budget that we're doing right now, and it is really an updated study. So we don't have a number to tell you. And we don't want to tell you something that is just an estimate or a guess.

Okay. A reminder to you, it is 5, 10, how much?

It is a significant budget. It will be, I don't know, on the order of $50 million dollars for all the work that is planned. But that is split between the two parties. 50/50.

And that goes to next year.

And that goes into Q1 of '09.

The task is to get the feasibility study done in time for the release of the year end of Barrick and the year end of NovaGold, I guess, the announcements of those companies.

So we're just targeting Q1 as our completion date.

And the permitting process, going parallel to it, right?

Yes.

But the permitting process, you got to put some numbers, down like you've been talking about 50 to 100,000 tons, that is quite a difference for the permitting guys to hear and try get their mind set to it. What is the number that are you probably putting on the table with the permitting people?

Well, what we announced earlier this year was that the partners have agreed on a plan which is approximately 50,000 tons, they will be optimizing that plan and it might be a bit more. But all that will be fixed in the feasibility study, and it will be -- that document basically makes the foundation for the permitting process.

Okay. And who is doing what between yourself and the partner?

Well, geez, there is a whole host of people working on this. Obviously, Barrick has a very substantial team, plugged in along with ourselves, into managing a whole host of engineering and geotechnical and water quality people. The lead group is AMEC, which is one of the leading engineering consultants in -- well, in the world, actually.

Okay.

And the group that they're specifically working with is mainly based here in Vancouver, but they obviously draw in people from around the world.

Fair enough. I thank you very much.

Thank you for the questions.

Thank you. The following question is from Gary Porter from Insight Capital Corporation. Please go ahead.

Hi, good morning, gentlemen.

Good morning, Gary.

My question to you both is, in regards to one of the early stage properties, specifically to the (inaudible) lake project here in the Caribou Mining District of British Columbia, I was just wondering if the drill results from last year had been released or if there was any plans of them to be released. And secondly, if this was possibly one of the early stage properties that NovaGold might be divesting itself from?

To answer your first question, on the results, we did not release them. They were not material to NovaGold. On our plans going forward, we're really still formulating that as part of an overall -- our overall strategy.

That's great. Thank you for your response.

Thank you very much for the question.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Van Nieuwenhuyse.

Thank you, operator. And thank you, everybody for joining us for our second quarterly call. We will look forward to updating you on our third quarterly call, but obviously in the interim we will be having press releases and updating you on the progress. Hopefully the next one is that we announce production here in short order on the Rock Creek operation. So we look forward to that day and updating you then. Have a good day, everybody.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you you for your participation.