NovaGold Resources Inc (NG) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the NovaGold's second-quarter results 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 Chief Executive Officer. Please go ahead, Mr. Van Nieuwenhuyse.

Thanks very much, Operator. Welcome, everyone, to the second quarterly update call. I'm here with Elaine Sanders, our Vice President of Finance and acting CFO. We'll go through a corporate presentation and then open it up for questions and answers afterward. Obviously, we'll be making forward-looking statements and you can read that at your leisure.

Highlights for the quarter -- we completed a CAD175 million equity financing with two very well-known fund managers, Paulson and Soros Funds. Very pleased to have them as some of our largest shareholders and we'll look forward to working with them as shareholders.

On our properties, we've increased the reserves at Donlin Creek by approximately 15% to now 33.6 million ounces of gold. At our Galore Creek project, we've initiated a pre-feasibility study, which will be scheduled for completion in the first half of 2011. And we've added a new exploration property to the portfolio called San Roque, located in Argentina.

On the corporate governance side, we published our first sustainability report, which we're very pleased about. You can find that on our website. And we've also added two new Directors, Marc Faber and Igor Levental. Igor Levental, of course, is associated with Electrum, the Electrum Group of Funds, and has become very familiar with the Company. We invited him to join our Board.

Marc Faber is a well-known macroeconomist. He's been a long-time shareholder. He's based in Hong Kong, and he'll -- we will look forward to working with him in providing us access to additional Asian investors, which is one of the objectives that we have over the next few years.

Elaine, would you take us through the financial update?

Sure. Thanks, Rick. Good afternoon, everyone. Again, I'm Elaine Sanders. I'm the Company's Vice President of Finance, and I've been with NovaGold for seven years. In April, I assumed the role of interim Chief Financial Officer. I will take you through the highlights of the second quarter.

Our second quarter ended on May 31. Due to the equity financings, our cash position increased at May 31 to just under CAD176 million, which resulted in positive working capital of CAD158 million. We have a loss for the quarter of just under CAD16 million, of which some of that loss was created from our expenditures at our projects of CAD7 million. CAD6.7 million of that amount was our direct spending on the Donlin Creek project.

We received about CAD177 million from total financing activities. Of course, most of that came from the Paulsen and Soros common share placements.

There are not many changes on our balance sheet from the first quarter. The largest change is in cash position and the increase in equity from the issuance of shares. We issued 31.8 million shares during the quarter, and now have 221 million shares issued and outstanding, and 288 million on a fully diluted basis.

The largest balances on our income statement for the quarter are a foreign exchange gain of CAD3.3 million, which was caused by the strengthening of the US dollar against the Canadian dollar; exploration costs expense to CAD5.2 million; and care and maintenance costs of CAD5.5 million.

I will now go through the budgets on the projects starting with our partnerships, and then our 100%-owned projects.

At Donlin Creek, the Donlin Creek LLC has spent CAD13.6 million of the total CAD47 million budget. The project is on track to complete the gas line studies and begin the process to revise the feasibility study. NovaGold funds 50% of these costs.

At Galore Creek, the Galore Creek Mining Corporation has spent CAD3.5 million of the CAD20 million budget. The project has ramped up during the past two months and is on target to meet its budget at year-end. Teck funds 100% of these costs.

At Rock Creek, we have spent CAD10 million of the CAD19 million budget allocated mostly for environmental compliance. The project is forecasted to be within budget at year-end. At Ambler, we have a small budget of CAD1.5 million allocated for community engagement and baseline studies.

Our newest project is San Roque in Argentina. Our option agreement requires us to spend CAD3 million in two years to earn 49% interest, and another CAD6 million in the following three years to earn a 70% interest in the project.

I will now turn the presentation back to Rick.

Thanks, Elaine. I'd like to just go through project by project update -- starting with, of course, Donlin Creek, where, as I mentioned earlier, we increased the reserves by about 4 million ounces to 33.6 million ounces in total. Again, this is a 50/50 partnership with Barrick. The reserve increase resulted from basically using a higher long-term gold price of -- from CAD725 to CAD825 gold.

In terms of activities on the project itself, as Elaine mentioned, we've initiated a study on the gas line, which we'll look at using LNG, liquid natural gas, delivered to a port around Anchorage, and then delivered into a pipeline that would connect to the Donlin Creek mine itself, which is roughly 325 miles away.

The study is undergoing and include both environmental baseline studies and engineering technical studies for the feasibility and the cost to build the pipeline and operate the pipeline. And then, subsequent to that, next year, we'll look at how to integrate that into an updated feasibility study for the overall project.

LNG, we believe LNG will have a substantial benefit to costs, operating costs, over the current diesel wind option. Roughly 25% of the operating costs at Donlin Creek are related to power generation onsite, and LNG looks to be much less cost on a per-kilowatt delivered at site. And, of course, we'll be studying that with studies this summer and then integrating that into the updated feasibility study in the first half of next year.

Our plan then is to complete the study this year, update the feasibility study early next year in the first half, and then make a decision as to whether we go through permitting with a gas line option or the wind-diesel option. We plan then to deliver permits, formal permitting process, initiating in the fall of 2011.

On our Galore Creek project, no change in the resources and reserves there. This is, of course, a 50/50 partnership with Teck; the project, again, located in northwestern British Columbia.

We have worked on a new overall mine plan, which would see mining and crushing in the Valley, conveying the ore through a tunnel, connecting it to a mill and a tailings facility, on what we're referring to as the roadside of the mountain. As you can see by the diagram here, roughly the first half of the road is completed -- over to about kilometer [40/48]. And then the red circled area shows the area in which we were looking at location of the mill facility and the tailings facility.

Essentially the tailings facility has been located in that -- the eastern side of that red circle in what we call the [Moor] Highlands, and we are looking at where to put the mill, whether that would be right next to the tailings facility or closer to the tunnel alignment. The tunnel alignment is also something we're finalizing. It will be somewhere between an 11 and a 14-kilometer tunnel, connecting the Galore Valley to the main access road.

Geotechnical studies are ongoing. These will be primarily directed towards the mill and tailings facility as well as the tunnel alignment itself. A number of drill holes will be done for geode technical work. As I mentioned, the tailings facility is pretty well-located in [Moor] Highlands, and additional studies will be used to determine [where] the actual location of the mill facility.

The pre-feasibility study that's underway, we've engaged [Flor] as the primary engineering contractor there. We have scheduled for completion in the first half of 2011. It will look at higher throughputs. We're looking at roughly 95,000 tonne a day throughputs. We have additional metallurgical work ongoing and particularly on the lower grade copper ores, to optimize recovery there. And, of course, the pre-feasibility study will look at providing a capital cost update, and permitting construction and production timelines. And we'll look for completion of that, again, in the first half of 2011.

Other news on Galore Creek is the federal provincial governments have committed to build a high capacity transmission line up to the Bob Quinn area, which is basically where that road in the previous diagram comes out under the main Highway 37. There has also been a recent agreement that AltaGas has signed with BC Hydro to produce power at the Forrest Kerr site, which is just south of Galore Creek and pretty much right next to the Bob Quinn location. So it seems evident that power -- it will be delivered to northern British Columbia and therefore available for Galore Creek when we need it.

Currently, the public review period is finished for the powerline and with an overwhelming support in British Columbia. And construction is now targeted for 2013 -- completion of construction, 2013.

Just as a reminder, Teck is funding 100% of the expenditures, which roughly -- in rough numbers is about another CAD25 million, which we expect will be the cost to complete the pre-feasibility study. That includes this year's budget and next year's budget to actually complete the pre-feasibility study.

On our Rock Creek project, again, this is a project that is substantially constructed. It's currently on care and maintenance. It's 100,000 ounce a year production facility. We have been focusing most of our efforts on improving the water management systems.

We're very pleased -- we went through breakup this year -- spring breakup occurs usually in the months of May and June. And as you can appreciate, Alaska that comes on in full force inside of a -- usually about a six-week period. We came through with good colors this year, no -- the State of Alaska Department of Environmental Conservation visited us during that period and was very pleased with what they saw, and wrote us a nice letter saying that they found no problems with their review.

We are looking at examining go-forward alternatives, which will bring in maximized value to NovaGold shareholders on this project.

On our Ambler project, again, this is a volcanogenic mass of sulfide deposit, roughly 30 million tonnes; very high-grade deposit; [40%] copper, 6% zinc with precious metals. We have a modest budget there, continuing the community engagement, and ongoing environmental and engineering base line technical studies to look at -- basically in preparation for completing a pre-feasibility level study.

We're also in discussions with the local Native Corporation -- or should I say, the regional Native Corporation, to look at access to the overall mining district. And again, we'll be looking at long-term strategies to maximize the value of this high-quality project for NovaGold.

Just stepping back and looking at things a bit more -- the gold markets a bit more generally. Of course, this has been a pretty volatile period of time for -- particularly for development-stage companies. I think we've, throughout the last year here, we've experienced some pretty volatile markets.

We trade basically with the price of gold and then, of course, on corporate news. Gold has been sort of up and down here of late, sort of bouncing around the CAD1200 level. Today, of course, it's having a down day, which seems to be forming a nice base at around CAD1175 to a little over CAD1200. When it seems to go significantly below CAD1200, there seems to be good buy in there.

We see the macroenvironment is supportive of gold. We see low interest rates, and that's certainly likely to be the case in the United States for the time being. We see continued investment demand. As I said, when the price of gold goes down, there seems to be good support there in the upper CAD1100 region.

And, of course, there's decreasing supply, decreasing mine supply, particularly in South Africa, where they've been decreasing production on an annual basis since about year 2000. Mines are certainly harder to find. There's been a number of recent articles written about this in scientific journals and mining journals. They certainly are taking longer to develop. And you're certainly seeing a lot more news about governments wanting a bigger piece of the pie, certainly, and in some cases, expropriation of the assets themselves.

This also reminds us that our assets are located in the United States and Canada, which are certainly two very safe jurisdictions to work in. And I think we'll continue to be paid a risk premium, if you will, as a result of that.

The thing that's -- we remind everyone about Donlin Creek and Galore that is very unique is the size of these two assets. They really represent the top tier of gold deposits out there on a worldwide basis and they're a very good quality of deposit as well. Donlin Creek being 2.2 grams per tonne certainly ranks as one of the better grade of the big plus-10 million ounce gold deposits that we see being developed today. And Galore Creek as a copper-gold asset certainly has both good grade of copper and gold. And I believe that these will continue to be viewed in the market as attracting a premium because of their size and their quality.

NovaGold's asset base is more akin to the size of an asset base and the quality of an asset base that you see in a mid-tier producer, and that's certainly our objective, is to move along the development chain towards becoming a mid-tier producer. With Donlin and Galore in production, you'd be producing right around 1 million ounces of gold a year at near zero cash costs because of the copper, the significant copper and silver credits. So that's -- we think that's a wonderful company to continue to advance.

On an enterprise value per ounce basis, we're getting -- certainly getting a junior development stage type of evaluation. And you can see where the junior and mid-tier producers, the kinds of valuations that they're getting once they've had the permits to be able to build these mines, and once they're in a position to attract the capital to build them. Our North American location we think, again, will continue to give us a premium valuation as a mid-tier producer.

This already translates into providing our shareholders with huge leverage to gold on a dollar per invested basis; I don't know that there's a better leverage story out there. And again, the safe political position, political jurisdiction -- you're not going to wake up and read in the paper that some government has decided to expropriate your -- the Company's assets that you invested in. We don't see that as a real possibility in Canada and the United States, whereas it is a real possibility in other countries.

I think I'll end on that note. The last page just, I think are the reasons why you should be looking at NovaGold as an investment -- superior leverage and superior value. And with that, I'll turn it back over to the Operator to start the question-and-answer period.

(Operator Instructions). Stephen Walker, RBC Capital Markets.

Rick, just a couple of questions, I guess. First of all, can you walk us through the rationale for starting, I guess, the exploration joint venture in Argentine, San Roque? It seems geographically a long way away. Is this going to take you away from the focus on Ambler and Rock Creek, and some of your core assets here? We know that, obviously, Barrick and Teck are driving Donlin and Galore, but can you walk us through the rationale for stepping out in Argentina?

And then as a follow-up, are you looking at other exploration opportunities as something that you're going to be focused more and more on?

Yes. No, it's a good question, Steve. The opportunity in San Roque is something we've looked at. We think it's a fairly quick evaluation to decide whether we -- whether a large disseminated target is there. There's good baseline information existing, so this is something we think we can go in and do a fairly quick drill test of. And if we can add significant value, then we think we can -- we can bring that value to the shareholders.

I don't think it's a big distraction. It's a fairly modest program that we have defined to date, and we really want to decide whether this is something that can turn into a large disseminated gold-silver project.

I think we feel very comfortable with the two joint ventures that we have set up with Galore Creek Mining Corporation and the team that's been assembled there of both Teck and NovaGold people, who are working on the pre-feas there. We feel very comfortable and confident that that joint venture is really working well and that the work is ongoing.

Likewise at Donlin Creek, we've had a great working relationship with Barrick for the last several years inside the Donlin Creek LLC. And that team is fully assembled and fully capable of carrying out the work there.

And as per Ambler, we're just [started] ramping up Ambler to undertake the geotechnical work mainly related to the road construction to connect the two -- a large [Hertz] strip at Dahl Creek there, and working with the NANA Native Corporation, which owns the lands to the south of us. And they're very interested in developing that part of the world as well. So looking at working -- continuing to work with NANA Region Corporation to provide access into the Ambler district.

So I guess we feel confident that this isn't a huge step away from what our core competencies are. We've always been known as good explorers. We've done that well in the past, and we certainly believe we can add value doing that in the future.

Great. Just another topic. Can you remind us of the -- for permitting purposes at Donlin Creek, what on the mine site itself versus the pipeline to the coast, what is on 100% native lands and what is on BLM or public lands that the BLM will get involved with? My understanding in discussions previously is that the bulk of Donlin is on native lands so that the BLM is not involved to the same extent. And to what degree will BLM be involved with potential pipelines to the coast?

Okay. First question on -- in terms of the Donlin facilities, all the mine-related facilities are located on private native lands. The road access down to the river is -- it would cross federal lands, BLM lands, so they would be involved in that portion of the permitting process. That's not likely to trigger them being the lead agency, although that hasn't really been determined yet.

With regards to -- and I think the second part of your question was referring to the gas line when you said pipelines to the coast. That is either on -- we've already mapped out the general route -- it is either on State of Alaska lands or on private Native Corporation lands.

So will the BLM be involved in that at all?

Not to my -- no, I don't -- do not believe so.

Okay, thank you. And one last question. Again, I (multiple speakers) --

Let me just put a caveat. We haven't -- we're still studying where that gas line will go, so we haven't fixed it. But I believe the route that we're proposing does not include any federal lands.

Okay. And again, one last question, we've talked about this before and I have to ask it again -- once Galore and Donlin start moving towards a development stage, there's going to be fairly significant cash calls. Your share of capital could be anywhere from CAD3.5 billion to CAD4 billion for these two projects.

Could you give us your thoughts on how you see funding that share of capital spending? Are you committed to the existing 50% ownership in either of these projects? Would you look at bringing in partners? Would you look at spinning out percentages to your partners on these two projects?

We'll certainly look to maximize the value of these assets to NovaGold shareholders. Now, clearly, we've got a pretty blue-chip group of shareholders already, so we don't need to raise the funds today. We are preparing the Company to be in a position to be able to raise those kind of funds. We certainly recognize that that's a lot of money. But I'd also point out that we don't believe that all that money will be coming at the same time.

I think the timeline is such that we believe Galore will probably happen first because the permitting process in DC is much quicker than it is in the United States jurisdictions, completing a full-blown EIS at Donlin Creek. As you know, Galore has already been through the permitting process here in BC and we did it very expeditiously; it was very, very quickly achieved.

I think a reasonable timeline for Galore is to complete the pre-feas first half of next year, then move into -- obviously, if the partners agree, to move toward completing a feasibility study. And then while you're doing that, you're permitting your project and you're perhaps continuing to build -- looking at building a road.

So I think the timeline for Galore is probably first. Looking at it sort of 2013 kind of a startup time for construction, and then Donlin probably a year or two later.

Okay. Great. Thank you, Rick.

(Operator Instructions). Haytham Hodaly, Salman Partners.

Stephen touched on a couple of my questions. I just have one housekeeping question; it's probably for Elaine.

Just with regards to the money that's going to be spent at Donlin, I know you'd said that there was a CAD14 million original budget and then they added a supplemental budget of CAD18.7 million, of which your share is CAD9.4 million. Over what period of that time will that CAD9.4 million have to be spent?

That is for the rest of this year, Haytham.

Okay. So that is -- all that should be spent by the end of this year?

That's correct.

Perfect. That's all I needed to know. Thank you.

[Selmik Goshe], RedChip.

I have a question on the Donlin Creek's timeline. It looks like from what you had said in the previous quarter, the optimization study seems a bit delayed, if I am right?

I'm having a hard -- a little bit of a hard time hearing you, but I think -- I believe you asked, is the timeline for the feasibility study at Donlin different from what it was last quarter -- is that correct? Is that the question?

Yes, that's right. That's what I was asking.

I don't believe so. Our timeline -- we basically have a feasibility study completed for Donlin and it's based on using diesel with wind cogeneration. That was completed in early 2009. So there is a feasibility study table.

We, the joint venture, the Donlin Creek LLC, decided late last year to go ahead and look into updating the feasibility study by using gas. And so the first step was deciding should we really look at this gas alternative? And given the high prices of diesel and given some of the logistical challenges of moving diesel up the river, we decided that it was a worthwhile effort to do.

We did that early last year -- or excuse me, earlier this year -- and then in, I think, about May or so, we decided to pull the trigger and go ahead and do the full-blown gas line study. The LLC then committed to spend an additional CAD18 million specifically on the field program of that study.

And then with the completion of that work this year, which is essentially environmental baseline work -- wetlands mapping, looking at the fish and fauna, et cetera, and then also the geotechnical aspects of building the gas line -- we will then get the estimated capital cost to build the gas line, and then be able to then integrate what the gas line -- using gas onsite to generate power -- what implications that has on the feasibility study costs themselves.

Obviously, there will be differences in capital. There'll be some pluses and some minuses, and we believe that the pluses and minuses will be more or less the same. We also believe that the operating costs will be significantly less using gas, because gas in rough numbers costs about half as much to produce a kilowatt of power onsite as diesel wind does.

So that will then result in us updating the feasibility study in the first half of next year. And then with that, we'll make a decision going to go permit either the gas line option or the wind-diesel option in the fall of 2011. So I don't believe that's a different timeline than we outlined earlier.

Okay. That explains it. And the other question I had was on the exploration and development costs. Are you going to be spending an additional CAD9.4 million, if I have it right, for the rest of the year?

At Donlin.

Are you referring to Donlin?

I'm referring to Donlin, yes. And then the lower -- I guess it's 100% Teck-funded, right?

That's correct. So the CAD9.4 million at Donlin is our share of Donlin that we'll be contributing. And as you point out, Teck is currently spending 100% of the funding for the pre-feasibility study.

Yes, okay. And so the balance of your budget is for Rock Creek?

Rock Creek and Ambler, and then a modest budget on the San Roque project, the new project in Argentina.

Okay, thanks. And my last question would be on the cash balance that you have currently of CAD175 million. I just want to know what are your plans with the cash? Any near-term plans to deploy the cash or anything else that you plan for?

Well, we're -- we basically want to preserve our cash. We've invested the best we can and these markets aren't very good for making a lot of money on your cash. So we'll preserve the cash.

Obviously, we have a fair bit of work to do on Galore and Donlin next year. Those are our two core assets. And we're running the Company with those as our core assets and we're basically looking at ways to optimize value out of our other assets -- Rock Creek, Ambler, and San Roque. Those are -- we obviously recognize the cash needs that we have for our core assets, but we think there are ways of adding value to the shareholders of NovaGold with those other assets.

Okay. Yes, thanks. That's all from my side. Thank you.

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

Well, thanks very much. And thanks, everyone, for joining us this beautiful afternoon here in Vancouver and hope it's a nice where you are. And we'll look forward to updating you in Q3, in the fall. Thank you very much.

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