NovaGold Resources Inc (NG) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the NovaGold third-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, sir.

Thank you, operator, and welcome, ladies and gentlemen, to NovaGold's third quarterly webcast. We will, of course, be making forward-looking statements, and we hope that you are able to join us online with the PowerPoint presentation as we go through it.

I would like to start by just making some brief highlight remarks and an overview of our quarter, then followed by a review of our third-quarter financials by Elaine Sanders, our Vice President of Finance and acting CFO. And then we will go into an update on the projects, and then we will open it up to questions and answers.

So, in terms of the highlights, of course, NovaGold is really focused on our two world-class asset -- Donlin Creek and Galore Creek. These are partnered with but with big partners, big large-cap companies, Barrick and Teck. These are located in low geopolitical risk regions of the world, and we think that is going to become more and more important as the competition for resources continues to heat up. Both of these projects represent districts and not -- they are certainly open to exploration, and we would certainly have future plans to continue to explore these districts and add ounces of gold and pounds of copper. I think the current value in the market that these projects are attracting, they are certainly trading at a significant discount as a pre- production company, but we are certainly working towards moving these -- both of these projects towards production. As a result of that, you really get a superior leverage to gold, and certainly we continue to believe we have a strong gold market.

Today may be a bit of an exception to that, of course. Gold is off with a modest correction of about 3%, but we think overall in general gold has outperformed most other asset classes. And we think it will continue to do that with the macro environment, continue to support gold strength. With low interest rates across the board, continued concerns about the US dollar, trade imbalances and general currency debasement, there is concerns about sovereign debt. Governments continue to stimulate growth, which pretty much means equals printing money. And it is across the board again -- dollars, euros, yens.

We think as a result of this net is that there is a strong continued investment demand in gold. Central banks are becoming net buyers of gold rather than net sellers of gold. And, of course, we see an ever decreasing supply of gold with mine supply itself decreasing, and of course, it takes longer to discover, develop and produce a new ounce of gold today.

Copper markets are similarly bolstered by Asian demand. We see continued demand out of Asia and with again limited supply for the same reasons as with gold. It takes longer and to find and develop new mines. We think this continues to be a favorable pricing structure for copper.

We recently made a decision not to put the Rock Creek project back into production, ourselves. Instead, we will remain focused on developing our two core assets, Donlin Creek and Galore Creek. We have engaged in an independent party to solicit expressions of interest to acquire the Rock Creek asset. The decision really concerns Rock Creek alone and the other businesses of Alaska gold in the Nome area, our aggregates business and real estate business, and the alluvial gold sales will continue. We have -- the staff on-site remains the same, and we remain -- obviously continue to remain focused on meeting all of our permit requirements specifically with regards to managing water at site.

Elaine, would you like to give us a review of the Q3 financials at this time?

Thanks, Rick. Good morning, everybody. I'm going to walk us through the financials of the third quarter that the Company has just completed. This is the quarter ended August 31. The Company ended the quarter off with a strong balance sheet. We had cash of CAD173 million, which is an increase from our year-end figure of CAD38 million. The pulses who are financing that we completed in March has elevated the Company's working capital to CAD150 million. Total assets at the end of the period was just under CAD823 million compared with our year- end figure of CAD781 million.

The Company reported a loss for the period for the three months ended August 31 of CAD147 million, which is the majority of our year-to-date loss of CAD182 million. The bulk of that loss for the period was a result of the impairment loss that we recorded on the write down of Rock Creek. We generated CAD14 million this quarter from cash from financing activities and a year-to-date balance of CAD191 million. And at Donlin Creek, we expanded just under CAD8 million. That is our 50% portion, and our year-to-date balance is just under CAD15 million.

And at Galore Creek, the expenditures were CAD6.6 million for the period and a year-to-date balance of CAD10 million. And, of course, to remind everybody, the Galore Creek figures are at 100% because we are consolidating that project, but Teck Resources is funding 100% of the expenditures at Galore until it finishes its earning in.

On the next page of the highlights from our financial statements, on the balance sheet, we have a healthy cash balance of CAD173 million. Some of that cash was generated by CAD4.3 million warrants that were exercised during the period, which we received gross proceeds of CAD6.7 million. That brings our issued and outstanding capital to 225.4 million common shares.

On the income statement, our three largest expenditures were exploration expenses of CAD13.7 million, care and maintenance expenses of CAD6.5 million, and interest and accretion of CAD3.9 million. The majority of that interest being the interest on our convertible notes.

The Company also recorded an asset impairment for the quarter from our Rock Creek write down. For accounting purposes we have impaired this project and written it off our balance sheet. We took an impairment of CAD116.2 million, which was allocated to two principle areas of our balance sheet -- property, plants and equipment and mineral properties.

The next slide is a review of our project budgets and expenditures. At Donlin Creek, on a 100% basis, our Q3 expenditures totaled $15.8 million for a year-to-date balance of $29.4 million. Our 2010 budget for Donlin is $47 million, which leaves $17.6 million left to spend in the fourth quarter. The budget for the year is focused on accumulating engagement, our gas pipeline studies and preparation to revise the feasibility study.

At Galore Creek our Q3 expenditures totaled CAD2.6 million for a year-to-date balance of CAD10 million. Our 2010 budget of CAD20 million is primarily focused on prefeasibility study work. And, again, approximately CAD18 million is remaining for Teck to spend to complete its earn-in at the end of Q3.

At the Rock Creek project, our Q3 expenditures totaled $3.5 million for a year-to-date balance of $14.1 million. Our 2010 budget of $19.1 million for the year is focused in primarily on environmental compliance and a review of the projects as a whole.

At the Ambler project, we have a modest budget of $1.5 million, which is focused on community engagement and environmental and engineering studies.

I will now turn the presentation back to Rick.

Thanks, Elaine. Just a brief project update. I think most people are familiar with our projects Donlin Creek with 33 million ounces of reserves, another 8 million ounces of resource on a 100% basis, of course, located in Southwest Alaska, and a 50-50 partnership with Barrick Gold. As Elaine mentioned, we have been engaged in studying a natural gas pipeline, which would go approximately from just north of Anchorage due north across rainy Pass and then due west over to the project site. We are studying this for a variety of reasons. We think this is a better alternative for as a source of energy for power on site. We think it can reduce our operating costs to produce a kilowatt of power on site with gas. Natural gas would be less expensive than the equivalent amount of diesel. We think our costs based on the feasibility study, the current feasibility study, averaged about CAD394 per ounce over the first five years or CAD467 over the life of mine. And power makes up about 25% of our costs. So if we can reduce our unit costs of producing a kilowatt of power on- site, we think this will have a significant positive effect on the economics of the project.

We think there are additional opportunities to reduce power in addition to using gas elsewhere on the project rather than using diesel trucks, using LNG trucks, and this is something that is being studied. We think the environmental footprint would be significantly reduced using gas, and the logistical supply chain would also provide a better risk profile.

In addition, of course, there will be significant synergies with local communities along the gas line route. So we think this is a very positive step for the project. We have completed all the engineering and environmental studies on-site. I think they are just now wrapping up the final field program, and we will then focus on doing your cost estimate for the gas line itself and then looking at what the implications are in terms of operating costs for the project with our gas energy source rather than a diesel energy source.

Certainly the project piece up over the next slide has significant resource expansion. We have talked about this over the years. We have been engaged -- we are not doing exploration right now. We're really focused on the engineering aspects of the project and on community engagement. We have certainly been involved with that over the years, and this year we have continued to step it up.

We will finalize the studies here this fall and expect to have a feasibility study provisioned by the middle of 2011. We will update the capital and operating costs for the project and, of course, update the reserve and resource figures using higher gold prices and using the gas alternative.

We do expect to file permit applications by the end of 2011 and then advance the project through the permitting process to a construction decision. We are anticipating a two to three-year process for permitting and a three and a half to four year process for construction.

Moving over to the Galore Creek project, again, a mixed metal deposit with significant copper, gold and silver resources, and at this point there continued to be resources. With the completion of the prefeasibility study next year, we will be able to convert these significant amounts to reserves. Again, the project is located in northwestern British Columbia and is a 50-50 partnership with Teck Resources.

In terms of value drivers on Galore Creek, we have undertaken the project redesign, and we have reengineered the projects so that we have mining and crushing in the Galore Creek Valley, conveying through a long tunnel to the mill site and tailings facility located in the upper part of the [Moore Valley]. And what we are working on now is doing a prefeasibility level study on that reengineered scenario. As Elaine mentioned, Teck is funding 100% of the expenditures, and by the end of this quarter, we expect about an CAD18 million remaining on Teck's earn-in. We expect that to be completed sometime in the middle of next year.

The prefeasibility studies I mentioned will be completed Q2 -- toward the end of Q2 next year. It will anticipate a higher throughput scenario. We will, of course, be using higher metal prices given that the significant increase since the last time this project was studied. We will obviously have capital and operating costs to update you with, and we will outline the permitting and construction and production timelines. We expect then to be able to advance the project through feasibility and permitting and a decision to go to construction.

In terms of project financing, of course, we realize these are two very large projects, so this is something we're very focused on. We have CAD173 million remaining in cash, and we think we are well financed for the next couple of years to continue to advance these projects towards production decision. We certainly have supportive shareholders with access to capital. These are large, long-lived mining projects, and we believe in the current metal price environment they will certainly generate strong cash flows. And we believe because of that we will be able to attract project financing for them. Certainly our agreements with both Barrick and Teck anticipate this.

Our strategy here in terms of financing is to maximize the value of our non-core assets, hence the decision on Rock Creek. We think that, as I mentioned, that -- that significant debt financing is possible. We certainly see the requirement in this scenario to raise a significant amount of equity, and we have a number of ways we think we can achieve that. We've got copper and silver to leverage at Galore Creek. If you think about Donlin Creek, if we were just as a possibility, certainly not committing that we will do this, but we think this is a good expression of how we can raise significant dollars to finance these big projects.

If we were to enter into a royalty agreement on just a small level of production, say 7% of the overall production of Donlin Creek for a 15-year period, we think that could bring in in the neighborhood of CAD750 million. And that is just an example of how we are going to be looking at financing these projects over the next several years. Of course, we don't need the financing today. It is very important that everybody understand that. We will be making construction decisions at Galore Creek in probably two to three years and at Donlin Creek in a similar amount of time, perhaps one year later. So we have got plenty of time to look at financing opportunities here.

One of the financing opportunities we think comes from our Ambler project. This is a very high quality asset as I think most people know. It is a volcanogenic massive sulfides. It is copper, lead, zinc, gold and silver with you see the overall percentages there of the metals is about 30 million tonnes we have identified to date at the Arctic deposit, one in a series of deposits. That averages 4% copper, 6% zinc, 0.8% grams of gold and 60 grams silver, which makes it about 8% copper equivalent.

You can see some of the other comparative assets of similar geologic character. Again, these are all VMS deposits. Sabina Silver's Hackett River project similar in terms of size. Nowhere near the great aspects of the Ambler district, and yet there is a CAD450 million market cap.

Similarly the [Delguna] project -- similar again a massive sulfide VMS type much, much smaller in terms of total metal count to date. There is certainly more exploration upside there as they continue to explore the district, but similar grades to the Ambler district. And you can see the market cap of the company there is in the neighborhood of CAD750 million. We believe we can attract this kind of valuation with the Ambler district, and we are looking at perhaps a spin out of this asset to again look at maximizing the value out of this asset over the next several years. So, again, another source of potential dollars to continue to advance our two core assets, Donlin and Galore Creek.

On a comparative basis, NovaGold certainly has a huge resource base comparable to the mid- tier gold producers and again in a very friendly jurisdiction. We certainly on an enterprise value per ounce basis we are significantly discounted from the mid-tiers because of the timeline, the number of years away from production. We certainly recognize that and the fact that we have not yet raised the capital. Those are the two next major obstacles that we are to overcome. Time is just time. As these project continued to advance, that obviously will disappear. So our focus, again, will be on putting the financing package together for these projects. And as other companies who have developed their assets in recent days towards the production decision and they started construction -- Cisco has certainly been a great example of how you advance through the value chain, and of course, they are as yet still pre- production. They are building their mine. They have arranged the financing. Of course, they are attracting a very high valuation in the marketplace comparable to the mid-tier producers. So that is our objective over the next three to five years.

On a value basis, because of this timeline and because of the timeline to production, you get huge exposure to gold and huge leverage, and I think we're probably one of the best leverage stories out there in the gold market.

So value drivers, on Galore Creek a prefeasibility study by the middle of 2011, and we will update obviously the copper, gold and silver reserves and resources there, and then put out the capital costs, production estimates, operating costs and project timelines.

On the Donlin Creek project, we will have a feasibility study revision by the middle of the year. Again, we will be updating capital costs and operating costs and as well as reserve and resources updated there as well. We do expect to file for our permit applications before the end of 2011, and we will continue to maximize value from our Ambler and Rock Creek projects.

And I think with that we will open it up to questions, operator.

(Operator Instructions). [Diana Lakner], private investor.

I was just wondering why do you don't have more analysts covering your NovaGold and if you think you will in the future as you develop these projects?

That is a good question, and we are certainly are working on getting additional analyst coverage. Of course, we had a number of groups covering us in the US, and a lot of them, of course, with the 2008 financial debacle, a number of the groups that were covering us were part of that meltdown. So we lost a number of our high profile coverage at that time. We are working on additional coverage, and we are confident that that coverage will be coming.

(Operator Instructions). We have no more questions at this time. I would like to return the meeting over to Mr. Van Nieuwenhuyse.

Well, thank you, ladies and gentlemen. Thank you, operator, and we will look forward to updating you again in Q4 with our end of the year update. So, again, thanks very much, and have a great day.

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