NovaGold Resources Inc (NG) 2011 Q1 法說會逐字稿

Welcome to the Q1 2011 financial results conference call. At this time, all lines are in a listen-only mode, but later we will conduct a question-and-answer session. As a reminder, this conference is being recorded on April 14, 2011.

I now would like to turn the conference over to your host, Rick Van Nieuwenhuyse, President and CEO. Please go ahead, sir.

Thank you, Operator, and good morning everybody. I am actually in Zürich, Switzerland for the Denver Gold Group Zürich Gold Conference. So it is getting to be a late evening for me, but the conference is very well attended. There's probably about 600 people over there. So obviously a lot of interest in gold.

I'll be joined today by Elaine Sanders, our Chief Financial Officer, who will review the financial statement for the Company. I will start by giving you a bit of an introduction on things that are going on in the gold market and some general comments.

But I also just wanted to announce that we are trying a new webcast program today that will actually allow you to ask questions by phone, but also online, so for participants who have logged into the webcast itself. The operator will give more specific instructions at the end of the presentation here when we are ready for Q&A, but so wait for her instructions there.

I am hoping this new online option will generate additional questions. Obviously, if we get too many questions, we will have Rhylin Bailie, our Director of Investor Relations, to get back in touch with you when the call is over.

Obviously we will be making forward-looking statements and encourage you to come to the website and just downloading the disclosure documents either from SEDAR or EDGAR.

So beginning now just with some highlights, I think those of you who are familiar with the NovaGold or know our two core projects, our Donlin Creek and Galore Creek, these are two world-class assets with world-class partners, Barrick, our partner on Donlin and Teck, our partner on Galore. Both of these projects are located in North America, United States and Canadian jurisdiction. So, low geopolitical risk.

One of the things I think we've done a great job with over the years is develop strong community relationships and, therefore, strong support for our projects as they go through the permitting process, which again lowers the risk on the projects.

Both of these projects are really districts. We have gone to a great extent to control the entire district so there is a lot of exploration upside yet to come on these things, and NovaGold as a company has great trading liquidity. We are averaging about 5 million shares a day, and with our large gold resource, we certainly offer a strong leverage to a strong -- or a bit large leverage to a large and strong gold market.

Which I just want to spend a bit of time talking about gold. We certainly get a lot of questions on where we think the gold price is going and it certainly has been on a good trajectory for the last 10 years, having gained about 500% over that period. But probably more specifically, in the last couple of years, it's up about 275% since October of 2008, which I think is a date we all remember as one of the gloomier periods of the overall market.

But certainly since then, we have seen gold come back after a modest correction and to achieve all-time highs once again, and today is another great day for gold. I think we are trading about CAD14.59 right now. So we certainly are bullish on gold.

We think gold has a long way to go, certainly with the current macroeconomic picture with governments continuing to print money and the continued demand of gold by investors continues to demonstrate gold's continued upside performance.

Gold equities on the other hand, have underperformed the gold metal. Certainly in the last four months of the year here since the beginning of the year, you can see this chart shows that both large and small junior mining and major mining companies have underperformed the metal. Happy to say that this trend seems to be changing here in the last, certainly within the last month here, and we are starting to see what looks like it might be a breakout in terms of the relationships between the metals and the equities.

So obviously it has been a good opportunity to accumulate the gold equities over the course of the first part of this year.

Looking at this slide on the technicals, certainly gold again looks like it is ready for a breakout or perhaps already has broken out. You can see that the beginning of the year flatness to the slope there and again just within about a month here, or within a few weeks ago, we'd certainly broke out of that with the gold price trading right around CAD14.59 today. So I think things are still very, very positive and if you look at the trend line on the [200-A] trend line, the next stop would be somewhere between CAD1,500 and CAD1,600. So I think very good news story for gold going forward.

Lot of talk about is gold over owned, is it in a bubble?

Certainly this slide would demonstrate that very few people own gold, so it would be hard to demonstrate that gold is in any kind of a bubble when only less than a percent of investors, global financial investors, own the metal itself. So back in the 1980s and 1990s, the average portfolio contained between 3% and 5% in gold. And that is certainly not the case today where it's still under a percent owned by major institutions.

When you look at the capital inflows into mutual funds, only a pittance goes into gold. So none of that sounds like a bubble to us, and yet we certainly see continued interest in gold and we always emphasize of course that NovaGold really provides great leverage to gold by the sheer size of the resource and reserves that we have in the Company. Our -- this represents our share of the reserves and resources of gold along with our share of silver and copper.

So we provide superior leverage. You buy CAD1 worth of NovaGold stock and you're getting exposure to about CAD10 worth of gold and actually about CAD10 worth of silver and copper as well. And these are in -- these two projects really represent, they are truly world class, they represent a very small portion of all of the gold ever mined in the world. These large deposits plus 20 million ounce gold deposits are very rare and between our two projects, you can see the --. Not only that they are rare but they are partnered with big companies, so you are again derisking these things having partners like Barrick and Teck. And by the fact that they are located in North America, again heavily derisking these projects.

And we provide that leverage exposure to gold at very good value. Primarily because the production timeline to production is 68 years and so the natural discounting gives that value -- on an enterprise value basis makes it a very good value story. We are trading at about CAD125 an ounce on an enterprise value per ounce basis whereas the average development company is more in the mid-200s and of course the producers are up between CAD350 and CAD400.

Interesting to note that recent acquisitions are substantially above all of those levels. Frontier, Red Back, and Andean are certainly three high-profile acquisitions that are averaging around CAD745 per ounce. And, of course, that is a good metric to keep in mind. Most of these good high-quality projects do get acquired by intermediate or majors. So that's not something that's -- certainly that could happen to ourselves as well, but meanwhile we are going to continue to work with our partners to advance these projects through to feasibility permitting in, through to production.

With that, I will turn it over to Elaine Sanders, our CFO, to go through the quarterly financials. Elaine.

Thanks, Rick. Good morning, everyone. I will take you through our first-quarter results. We ended the first quarter with a cash balance of CAD129.3 million, working capital of CAD112.1 million and a total asset base of just below CAD730 million. Our cash was spent this quarter on our Donlin Creek and Rock Creek projects as well as for G&A and activities related to the Copper Canyon acquisition. Teck is still funding 100% of Galore Creek.

The net loss attributable to shareholders this quarter was CAD51.5 million. This amount includes a one-time impairment charge for power transmission rights for multigas that we no longer need for the Galore Creek project.

In late February, BC Hydro, the provincial electric utility, announced that they received approval under the Environmental Assessment Process to build a 287 kV power line in northern British Columbia. This power line has the capacity to provide electric power for the Galore Creek project. BC Hydro has amongst the lowest power rates in North America which provides the project with a reliable source of low-cost power. So although we had to book an impairment charge, the capital cost savings from not having to build a power line is good news.

Backing out the transmission power line impairment, the net loss attributable to shareholders this quarter would have been CAD22.3 million. Net cash received from finance activities this quarter totaled CAD3.1 million and our largest expenditure under investment activities is 50% of our funding for the Donlin Creek project, which totaled CAD9.2 million during the quarter and CAD4.4 million was expended at Galore Creek.

We started informing shareholders during last year's Q3 financial results that we would be looking at options for all of our non-core assets with the goal to realize value. Our first significant sale happened during this quarter. We sold gold alluvial lands near Nome, Alaska for CAD21 million payable in three installments. All the lands plus a CAD4 million cash back reclamation bond is being held by the Company as security for the installment payments.

We also continue to solicit offers for the balance of the lands in the Nome area to realize value. And we were also evaluating options to bring value from our Ambler project which hosts a resource of high-grade copper and zinc.

To finish my part of the presentation, I have got a couple of slides on the outlook for the next quarter for our projects. At Donlin Creek, the project expended CAD9.2 million in quarter one, which was close to its Q1 budget. In quarter two, Donlin has a CAD12.7 million budget for environmental studies and work on the feasibility study update.

At Galore Creek, the project expended CAD4.3 million which was slightly above its Q1 budget. The site experienced better-than-expected weather conditions and opened the camp earlier than planned to begin some environmental work. In quarter two, a CAD5.2 million budget is approved for care and maintenance and work related to the pre-feasibility study.

At Rock Creek, expenditures of CAD2.6 million on care and maintenance activities for the quarter was exactly on budget. Next quarter's budget of CAD2.6 million is for the same.

At the Ambler project, quarter one expenditures was approximately CAD200,000. Activities are generally slower for this project in the winter months due to the remote location of the site. Quarter 2's budget is CAD3.1 million and will be focused mainly on exploration activities. After this morning's announcement on the preliminary economic assessment results for Ambler, we will convene and revisit our 2011 plans for the project.

I will now turn the presentation back to Rick.

Thank you, Elaine. Let's spend a few minutes reviewing and updating you on our projects, beginning of course with the flagship Donlin Creek. Again a partnership with Barrick as a 50% owner, co-owner of the project and then also [a solicitated] corporation that is our local partner there.

Reserves and resources are stated here. They are unchanged from previous quarters. We will be updating these probably next year, using higher gold prices and that will be incorporated into the feasibility study that I will be talking to you about.

Barrick has completed a feasibility study on the project which was based on using diesel as a source of fuel for the power generation, and just to remind you, power is a significant part of the costs and the infrastructure necessary to make Donlin Creek a mine. So we relooked at alternative to diesel prices, looking out over the next 25 years of the mine life. There was an expectation that diesel prices had a good chance of continuing to increase over time and we've certainly seen the oil prices increase back over CAD100.

So our -- we made a decision over a year ago to look at the transition over to using natural gas as a source of fuel being supplied by importing LNG and then converting that into gas and then piping it through a 310-mile pipeline. That, all the studies related to that are completed and they're -- are now being incorporated into an updated or revised feasibility study. None of the other parameters of mining-related parameters will change. It is still a 55,000 [ton a day] throughput and the processing facility is identical to what was envisioned in the Barrick feasibility study.

The only thing that does change is the source of fuel. Obviously that will have an affect on our operating costs. So we will be using the operating costs related to using gas as a source of power generation.

We do expect operating costs to decrease on a comparable basis. We will however be using higher gold prices in the study because, at the time this was originally done, I think we used about a CAD750 gold price and I believe we updated it at CAD825. We -- this feasibility study will use significantly higher gold prices, using basically what would be consensus gold pricing for today's environment.

So, obviously, that usually has a result of increasing cash costs. So there's a trade-off there, but the margins would obviously be increasing as well, using higher gold prices.

So, we obviously think the natural gas pipeline is the best way to go. It certainly simplifies the supply chain logistics. We will have lower emission standards to meet and obviously we think a smaller environmental footprint, as well as softer good synergies for local communities to use the gas as well. So overall, a much better risk profile on the project.

The feasibility study is on track to be completed in the second half of the year, I think, probably end of third quarter being in the fourth quarter and then we would look to initiate permitting before year-end. We are expecting this to be a three- to four-year timeline for permitting. This is a big complicated project.

So again we are very pleased to have a partner like Barrick who has certainly permitted big complicated projects in the United States jurisdiction, and of course we'll look forward to continuing our very proactive community engagement and consultation for the project as it goes through the permitting process. Clearly we know that there is more gold at Donlin Creek and in the future we certainly would expect to increase, expand the reserves and resources there.

Moving over to Galore Creek, located in northern British Columbia. Again partner, 50-50 partnership with Teck, and we have signed a participation agreement with the Tahltan First Nation. This was back in 2006 and they have been very strong supporters of the project ever since, and we continue to have a great working relationship with the Tahltan.

Galore Creek, of course, is a copper, gold, silver project, a very good grade in really all three metals for a large porefree-style deposit. The prefeasibility study is on track for completion at the end of Q2. We are hoping not to see any slippage in producing a 43-101. The -- certainly the engineering groups are getting pressured for their time allocations but the team is working hard to get to that Q2 timeline.

Obviously it will be a significant event for us because we will be able to bring completion of a prefeasibility study, we will be able to bring the copper, silver, gold into the reserved category for NovaGold, so we will see a significant bump up in our reserve statements. We will use obviously consensus metal prices which are considerably higher than they were three or four years ago. Obviously the prefeasible defined new production and cash flow estimates, capital and operating costs, and then outlined what is necessary for the -- from the permitting and construction timelines.

We would expect then to move on to feasibility and permitting. Nice thing about Canadian jurisdiction is that you can be completing the feasibility work while you are permitting. They can go hand-in-hand there. It's unlike the US jurisdiction where you really need the feasibility study to initiate permitting.

So the permitting timeline is likely to take something in the neighborhood of two years. And then once we have permits in place, we can begin construction and we are expecting a four-year construction timeline.

Other news related to Galore Creek, we were able to come to an agreement with Copper Canyon resources on a friendly basis for a plan of arrangement. They will hold their shareholder meeting in early -- or mid-May, I think it is, and we are hoping to be able to wrap that up as -- and acquire 100% interest in the Copper Canyon resource claim block.

And the other think we are building on is to build relationships with financial institutions to look towards project financing for Galore Creek and then, eventually, Donlin Creek a few years later. And then on that note, we've recently hired Greg Martin as Vice President, Corporate Development who will be part of the team working with Elaine and myself and Gil Leathley on arranging the financing for these projects.

On a final note, Elaine mentioned that we released today a preliminary economic assessment on our Ambler project. This is located in northern Alaska. NovaGold owns 100% interest in this project and we are partnered with NANA Regional Corporation, the local regional native corporation in the region who also owns the Red Dog deposit and are very, very familiar and supportive of mining. They have been very pleased with the benefits that mining has brought to the Northwest Arctic NANA region.

So, the Ambler project is a multi-commodity copper gold -- copper, zinc, silver, gold project. You can see the metal count here. Probably more importantly is the grades. We are looking at 4% copper, 6% zinc. You can see the metal distribution here between the indicated and inferred resources on which the economics, the preliminary economic assessment was done. On a using base case metal prices at CAD2.50 copper, the NPV 80% discount rate is over CAD700 million with a 30% IRR. Of course using current metal prices in the CAD4, CAD4.30 copper range, the discounted NPV is about over $2 billion with almost a 60% internal rate of return.

So a very robust project, capital, initial capital is about CAD262 million with sustaining capital of about CAD134 million. That includes a 25% contingency. Our operating costs are about a little under CAD100 per ton milled, yielding a cash cost of just under CAD1.00 per pound of copper. That is of course net of the byproduct credit. So a very robust project.

What is envisioned here is an underground mining operation, approximately 4,000 tons a day yielding a 25-year mine life with the current resource. We'd be producing three different concentrates, copper concentrate containing gold byproduct, a lead concentrate with both silver and gold byproducts and a zinc concentrate with silver byproduct. And the average payable metals on an annual basis over 67 million tons of copper or -- excuse me, pounds of copper, 80 million pounds of zinc, plus some lead, gold and silver. Obviously very significant silver and that's certainly something that could be looked at as a byproduct credit that could be perhaps sold to a silver streaming company for upfront capital.

So we think this product is very doable. And we are very excited about getting this PEA released and demonstrating the value of this asset.

This next slide shows some comparables. There aren't a lot of comparables really to Ambler. It's such a spectacular grade for a volcanogenic massive sulfide to posit that there really aren't a lot of comparables to it. So we've chosen to put sort of next to it, [Delguna] is the comparable project. It is probably the most comparable out there in the world with a little over 5% average copper equivalent grade in terms of base metals and around 2 g gold equivalent in terms of the precious metal credits. It is a lot smaller than Ambler. So but you can see the market capital of Sandfire, there is about CAD980 million.

So, the other metric being Sabena Silver's Hackett River project, which is about the same size, a little different metal mix but much, much lower grade. And again you can see a CAD700 million market cap for that company.

So we think there is great value to be had here at Ambler and the PEA is really the first step in getting that information out to the market. We are very excited about the exploration potential of the district. We have got a controlling land position here that, with other deposits that have been identified by historic drilling, by companies back in the 1970s and 1980s that really no longer exist -- the Anaconda, Noranda, Sunshine Mining, all were very, very active in this district and never -- that really has not been explored since.

Exploration is what NovaGold does best and we are going to get back to our roots and get back at it here with a CAD10 million exploration program in short order.

So, just wrapping up, value drivers for the Company, Galore Creek pre-feasibility study on track for Q2 of this year. We will then look to feasibility study revision update on Donlin Creek using the gas where we will see updated capital operating and reserves using a more up-to-date gold price. We will look to start permitting both Galore Creek and Donlin Creek later this year and we will look obviously to the unlocking value from our Ambler as well as our other non-core assets.

And with that, I'll turn it back to the operator to start the Q&A period.

(Operator Instructions). [Yma Casanova].

This is Yma Casanova, LMV. I just have a couple questions. Obviously today the exciting news, I guess, is the PEA on Ambler, and something that caught my attention as I read through the release was this road that needs to be built and that, I guess, the studies assuming would be built by the state and you guys would basically pay a fee to use over the life of mine. Can you guys talk about what you estimate that will cost and if there is any contingency within this study for this road construction?

Yes. Good to hear from you. Basically we are using the same model that the Red Dog project used when the road and port facility was basically for by through a bonding exercise that was initiated by AIDEA which is the Alaska Industrial Development Export Authority of Alaska. It is essentially an Alaskan development bank.

So they basically fronted the money for the construction of the road. The road was then was paid back over a 25-year, I believe it was 25-year type of a bond structure with Red Dog mine paying that off over a 25-year period. So it's that kind of concept that we are working with the state on and obviously there is a lot of work to do to get us to the point where we have -- well, we get the road built, but we are working towards developing a memorandum of understanding with the state of Alaska to accomplish the same objective that was realized for the Red Dog -- to develop the Red Dog mine which was called the DeLong Mountain structure project which is the road's Red Dog, and the port facility at the terminus of the road.

Great, so you guys don't really at this stage, I guess, a little early to have any sort of capital cost estimate for that, for such --?

Well, that will be, the state will be coming up with that from their side and then what we've -- our model is a value basically operating cost to use the road, which we think is based on some discussions with the state that we think is realistic to fit into that same kind of model of paying the road costs off over a 25-year mine life.

Can you also elaborate, just because obviously at this stage, this is very important and you guys always trust it, which is great, a little bit about what the current status of your talks with the NANA, the Alaskan community there?

Sure. Yes. NANA is northern Alaska's Native Association (technical difficulties) Native American Corporation in Alaska. They own a lot of private land, Alaskan Native-owned land in and around the Ambler district. So we are in discussions with them to put together a working agreement. We have had a good dialogue and good relationship with NANA for the last three, four, five years since we have been working on the Ambler district. So we are working towards an agreement and once we have one finalized, we will be announcing the particulars of that.

But it's similar to where we (technical difficulties) the Tahltan at Galore and [Sholista] on the (technical difficulties) project.

It is very important for us to initiate those discussions early on and (technical difficulties) of the community. Not just the Corporation of NANA itself, which is a for-profit corporation. (technical difficulties) hand-in-hand with working with the local village councils as well as regional corporation head. So it's a core part of how we approach doing business.

Thank you and then I will just ask one more question and let others pass. On Galore Creek and this announcement you made regarding the write down of the power line right. Do you have any sort of estimate as to what the impact on capital expenditures at Galore could be as a result of you not having to build this sort of -- at least a range of what kind of impact we could expect?

It is bit of a -- it is a difficult question to answer. The power line that we would have built (technical difficulties) for Galore and that is what the attributed value is for. And I will probably ask Elaine to comment on this as well.

But it would've been a different power line than the currently envisioned power line that the Province or I should say BC Hydro is building, which is a 287 kV line. We wouldn't have needed to build a 287 kV line just for Galore, but the Province is building a bigger line so that it can [provide] power not only to Galore, but to other projects. Elaine, do you want to comment on the accounting aspects of that?

Yes. The power line that we obviously had discussed back in 2007 had -- we envisioned putting almost like a partnership together with the Province and we would assist funding a portion of capital costs. I think those numbers were in the CAD130 million to CAD140 million range, but those again for a very different kind of power line. So it is hard to answer your question specifically on how much capital cost savings there might be, but we definitely know it was significant dollars.

Excellent. That's helpful. Thank you.

Thank you.

I do have one online question that says what are the chances of being able to prevent a potential takeover target?

Well, I think obviously with large resources like we have, it is not -- certainly a good question and one you can't really ignore. Large gold deposits are pretty rare, they are pretty hard to find. These are being developed with in partnerships with Barrick and Teck, large companies that do things right, quite frankly. These are big complicated projects and we are happy to have those guys as partners. The way I like to phrase it is they do 80% of the work and we get 50% of the credit.

I think we certainly aren't in any discussions. If we were, we would certainly be press releasing that and we don't have any specific -- we haven't engaged any investment bankers to do that. So I don't really have any comments beyond that. I think certainly, I'm sure we look like an attractive company to a lot of other companies given the size and the location of our resources and the partnerships we have built over the years.

There are no more online questions and I don't think there are any more on the phone. So I guess we can wrap it up.

I thank everybody for participating in today's conference call and I hope the new format of both online and on the telephone questions has been helpful and we'll look forward to our next conference call in three or four months. Thanks very much, everybody.

Thank you, sir. Ladies and gentlemen, this does conclude your conference call. Once again, we thank you for participating and at this time we do ask that you please disconnect your lines. Thank you again and have a good day.