NovaGold Resources Inc (NG) 2011 Q2 法說會逐字稿

Good morning and welcome to the Q1 2011 financial results conference call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions). As a reminder, note that this conference is being recorded July 14, 2011. I would now like to turn the conference over to your host, Rick Van Nieuwenhuyse, President and CEO; as well as Elaine Sanders, CFO. Please go ahead.

Thank you, operator, and good morning, ladies and gentlemen and welcome to NovaGold's second quarterly conference call, where we'll review the results of Q2 2011. I'm joined here by Elaine Sanders, our Vice President and Chief Financial Officer. As in previous quarterly updates, we will start off with an update on the projects as well as a brief commentary on markets. And then Elaine will review our financial results and planned expenditures for the remainder of the year. I will wrap up then and open it up to -- open the phone lines up for questions and answers.

As is customary, we will be making forward-looking statements, and I direct you to this slide for more details.

Just starting out with some market commentary, obviously metal prices are great. I looked this morning; it was $15.85 for gold, $38 and change for silver, and copper was at $4.36, so at or near all-time highs for all three metals. I think we still have very bullish fundamentals in place on the supply/demand side for these three metals, and we continue to see that the margins are increasing.

We certainly do see cost pressures. Gold is, in part, related at least fundamentally to fears of inflation or real inflation, and so we are seeing cost pressures. But I think, more importantly, we are seeing that the margins are increasing.

And yet, despite this we have seen all the equities, resource equities, and in particular the gold equities, really underperform the gold price. Whether it's junior, mid-tier, senior producers, they have all underperformed for the first half of the year here. We think that provides a great opportunity for investors. We do think investors are concerned about the European debt default issues with Greece, Portugal, Ireland, Italy all having -- all struggling and having issues to deal with. There's also a lack of clarity on the US budget and debt ceiling there, and that is weighing on investors, no doubt.

And there may be just a persistent concern about being at all-time highs, and will things correct. Is China's economy slowing down? There's a lot of concern about that until the numbers came out yesterday, that they have a 9.5% growth rate, which isn't bad at all, still requiring more copper and other metals.

So we, again, feel that the supply/demand fundamentals are in place. We have great metal prices, good margins. And again, we think this is just an opportune time for investors to take a look at stocks like NovaGold.

Meanwhile, the team here is continuing to advance our projects along with our partners, Barrick and Teck, continued to de-risk our world-class portfolio of gold, silver and copper assets, providing shareholders exposure to our 30 million ounces of gold, 150 million ounces of silver and 9 billion pounds of copper. It's one of the largest resource bases of any junior or intermediate company. We are located in a politically stable North America, so low geopolitical risk. We believe that this continues to present shareholders with an exceptional platform for both gold and copper resources, and we will continue to advance these as we go forward here.

Just a brief overview on the three core projects here -- Donlin Creek, again 50-50 partnership with Barrick, 34 million ounces of proven and probable reserves, average grade 2.2 grams. We envision an open pit mining scenario here with 25-year mine life. And we're just finalizing the feasibility study and preparing the project for permitting, which we expect to report on later in the year in Q4.

Our Galore Creek project, located in northwestern British Columbia, again, 50-50 partnership with Teck, 9 billion pounds of copper, 7 million ounces of gold, 120 million ounces of silver in the measured/indicated categories. Again, a large open pit, conventional flotation producing a copper concentrate, a high-quality copper cont with a mine life of approximately 20 years. As mentioned earlier, we will be completing the prefeasibility and expect to release results on that later this month.

Meanwhile, our Ambler project, which is 100% owned, it's a polymetallic copper, lead, zinc, gold, silver project -- exceptional grades, close to 8% copper. We envision an underground mine here with a 25-year mine life. And this quarter we completed the PEA, or the preliminary economic assessment, and are continuing with environmental and engineering studies advancing it towards prefeasibility and continuing with district exploration there.

Just going, now, over to the specific projects, just a word of note that we have changed the name of the Donlin project to Donlin Gold rather than Donlin Creek, since we are really not mining in a creek. We thought that this is a more appropriate rebranding of the project. So from here forward, you will see us refer to the project as Donlin Gold. Again, the 50-50 partnership with Barrick -- we continue to work closely with our Alaska Native Corporation partners, Calista and TKC, as well as the regulators, as we continue to advance this project towards a permitting decision.

This is a very large-scale project with 34 million ounces of reserves. We envision a mine that will produce in excess of 1 million ounces of gold a year for at least a mine life of 25 years. The feasibility study is on track for completion in the second half of the year, probably releasing results in Q4, and the Board then would make a decision on going forward with permitting.

The project update or the feasibility study update will incorporate concepts around a natural gas pipeline to deliver fuel to fuel the 155-megawatt power plant for the site. Obviously, we will be updating capital and operating costs as well, as well as an updated reserve resource statement and cash flows. And as I mentioned, expected later in the year would be initiation of permitting for that project.

On Galore Creek, again 50-50 partnership with Teck and a really great working relationship with the Tahltan First Nation. We signed a participation agreement back in 2006. We have both been working with it since then and really have developed a good working relationship with a lot of Tahltan and Tahltan businesses working on the project.

Teck has completed, earlier this quarter, their earn-in, having spent CAD373 million to earn their 50% interest in the project. From that point forward, the partners approved a CAD30.5 million budget for the remainder of 2011, largely working on additional geotechnical drilling around the tunnel and some of the pit slope stability areas, particularly on the Bountiful area of the resource where we are also doing resource -- infill resource conversion drilling, converting inferred resources to, measured/indicated, along with, of course, continued environmental and engineering studies in preparation for feasibility-level studies.

Meanwhile, the BC Hydro and the province have initiated the construction on the northwest transmission line, which they report should be -- was started earlier this year and should go through the fall of 2013. As mentioned, the prefeasibility study, we will respect to release results at the end of the month here, and with the Galore Creek Mining Corporation board then making next step announcements.

On our Ambler project we completed a preliminary economic assessment. This, again, is a polymetallic deposit with exceptional grades of copper and zinc. It is a district. We are advancing additional exploration -- sorry -- spending additional exploration dollars there on some new targets. Just the results of the preliminary economic assessment, at a net present value using 8% discount rate pre-tax, over $700 million value with an internal rate of return of over 30% using current metal prices. And I should say base case prices was $2.50 copper. Current metal price net present value at 8% is well over $2 billion with an almost 60% rate of return.

So a very valuable project. I think we have demonstrated that with the PEA. It's a fairly -- it's a high-grade, relatively small underground mine. So your capital costs are pretty modest at $262 million with -- as is typical, with underground mines, a fair bit of sustaining capital. Operating costs, right around $100 a ton, and then with net of byproducts credit you're producing copper for less than $0.90 a pound.

We envision an underground mining operation here with current resources indicating a 25-year mine life using a 4000-ton-per-day throughput, you'd be producing three marketable concentrates -- a copper con with a gold byproduct, a lead con with silver and gold byproducts and a zinc con with some silver byproduct. You're producing around 67 million pounds of copper and 80 million pounds of zinc, plus precious metal credits and, over the life of mine, nearly 2 billion pounds of copper, 2 billion pounds of zinc, plus the precious metals. So a nice small mine, but producing at a nice rate.

With the completion of the economic study now, we have turned our attention to our field programs this year. We have built a new camp. We have got two drill rigs working with a 10,000-meter program underway. One rig is focused on geotend, gold hydrologic and infill drilling on the arctic deposit. This is where the resource that we have established exists. And then we are -- the second drill rig is working on one of the new targets we have identified. It's a really high-quality target that we expect to be announcing results on later this year.

Have engaged Wardrop to commence engineering studies with the objective of working towards a prefeasibility level of study. Meanwhile, we continue to work with our Alaska Native corporation partner, NANA, to finalize our agreement, which we hope to get done and be able to report on at the next conference call.

Meanwhile, we also work with the State of Alaska. They have been budgeted to initiate permitting of the Ambler resource road, and we continue to work with the state and local communities on advancing that project as well.

And at this point I would like to turn it over to Elaine to take us through the financial results. Elaine?

Thanks, Rick; good morning, everyone. We entered the quarter with CAD111 million of cash, CAD18 million lower than the last quarter. The cash was used for exploration and development projects and administration costs.

Total assets at the end of the second quarter was CAD790 million. The increase from quarter one was driven by our Copper Canyon acquisition, which added a little over CAD60 million to the balance sheet. Our liquidity position remains strong as we have over CAD100 million of working capital, which is sufficient to fund our current commitments.

As you all know, we are a preproduction mining company and, no surprise, we are reporting losses on our financial statements. Our net loss for the quarter was CAD7.1 million compared to a loss in the first quarter of CAD51.5 million. Even though we are not in production, we continue to work on activities, and sometimes book transactions in the quarters that are not repeated.

In quarter one, BC Hydro announced the approval to construct the northwest transmission line. As result, we booked a one-time impairment charge of CAD29 million, as we had rights to build an alternative power line that is no longer needed.

In quarter two, we reported a one-time gain of CAD16 million on the sale of non-core alluvial properties. If we back out these one-time events, our quarter one and two losses are about the same, approximately CAD23 million, which are the costs to fund the projects in our G&A.

We received over CAD9 million in cash from financing activities during the quarter the majority, CAD8 million, being Teck's funding contributions to the Galore Creek project. Expenditures at our two main projects, Donlin and Galore, have both increased since the first quarter, as activities ramp up during the year.

We had a couple of significant accounting items during the quarter. On May 20, we completed the acquisition of Copper Canyon resources. We issued 4.1 million shares and paid CAD2.5 million cash for 100% of the issued outstanding share capital of Copper Canyon. That company's main asset was its 40% interest in the Copper Canyon project, which is located near Galore Creek.

It also had a portfolio of early-staged exploration projects which was spun out to a new Company called Omineca Mining and Metals. NovaGold received 1.7 million shares of the new spin-out company as part of the acquisition.

In April, we sold our alluvial gold properties near the town of Nome in Alaska for $21 million, payable in three installments. We have received two of the three payments, the last one due next year. We are now working with the purchaser to put together an environmental reclamation bond so that they can begin operations. And, we're also considering offers for the balance of the land package around the Nome area.

The outlook for the rest of the year at Donlin Gold is a budget of CAD23.4 million, to be spent on environmental studies, feasibility study revision activities and preparing for permit applications. NovaGold is expected to fund half or CAD11.7 million of that budget.

At Galore Creek, the partnership has approved a further budget of CAD30.5 million for the remainder of 2011. The funds will be used for drilling to convert inferred into M&I, geotechnical drilling, environmental and engineering work in preparation for feasibility-level studies. NovaGold plans to fund half of the new budget, as Teck has completed its earning requirements during the month. All budgets going forward at Galore will now be funded 50-50.

At our Rock Creek project, we are tracking on budget for the first half of the year. The budget for the remainder of the year is CAD10.5 million for care and maintenance and preparing for closure activities.

At our Ambler project, the budget for the rest of the year is CAD6.1 million. The funds will be used for advancing the arctic deposit, exploration in the district, environmental work and community engagement.

That is a snapshot of our second-quarter results. Back to you, Rick.

Thank you, Elaine. So just wrapping up here, I think there's a lot of great, great milestones here and value drivers for NovaGold with Galore Creek, as I mentioned, the completion of the prefeasibility study at the end of the month here. We do have ongoing exploration activities on site with infill drilling expected to increase the measured and indicated resource, and then be incorporated into plans going forward. And then, of course, the Galore Creek Mining Corporation board, the partnership board, then making steps in terms of -- next steps for advancing the project.

On Donlin Creek, the completion of the feasibility study update is, of course, another huge milestone expected in Q4 this year, and then with the Donlin board making a decision to advance towards permitting.

Meanwhile, at Ambler, our ongoing drilling project, which is really split about 80% on exploring this new target area we have identified and about 20% on geotechnical and infill drilling on the arctic deposit -- that work then being incorporated into engineering and environmental studies to advance the project towards the prefeasibility level. And then formalizing the agreement with NANA and continuing to work with the state and local community with regards to construction of the Ambler resource road.

Meanwhile, we continue to look at new opportunities. We are an exploration-driven group, and we think there are some good opportunities out there.

So highlights -- three world-class assets, Donlin Gold, Galore Creek and Ambler; working with world-class partners like Barrick and Teck. We expect to continue to de-risk our projects and advance them towards a production decision. We think we've got a great platform with Donlin Gold and Galore Creek for gold and a great copper platform with Galore Creek and our Ambler assets, again working in very low geopolitical risk places here in North America, Canada and the United States.

We work hard to maintain and develop our strong community relationships, which we think is imperative in today's world to develop mines. And these are districts, so we expect to continue to do exploration long-term in these districts and find more gold, silver and copper.

Our shares continue to trade with great liquidity, averaging over 4 million shares a day trading. And we continue to offer superior leverage to copper, gold and silver in very good markets.

So with that, I will end and turn it back to you, operator, to open it up to our Q&A for the second quarter.

(Operator instructions) Imaru Casanova.

This is Ima Casanova from MLV; hi Rick, Elaine, thanks for taking my question. With all the activity that you guys have planned at Galore -- you are going to have five rigs pretty soon there -- when should we expect to see any drilling results from the drilling that you're going to be doing there this year?

Hi, Ima. We've got -- I think the five rigs are actually on-site now, and with two directed towards sort of geotechnical work and the three really focused on infill drilling the Bountiful area. We probably would get assay results in late Q3/early Q4, and then incorporate that into updating the resource model, with that expectation being towards the end of Q1 to update the resource model.

Great. Now, all the work that you are doing there, clearly it's sort of in preparation for a feasibility at Galore Creek. What do you expect as sort of a base case scenario? When would you be finalizing or completing? And I know we are still pending the release of the pre-feas in July. But in anticipation of that being positive, when should we expect to complete a feasibility study for Galore?

Yes; obviously, we don't want to preempt any decisions by Galore Creek, the partnership, Galore Creek Mining Corporation. But I think the expectation is we'll work towards completion of the drilling and all the other activities that are taking place. We do expect a feasibility study once we make a decision to go forward with that to take probably 18 months. I think that's a reasonable amount of time for completion.

Along with that, we would, of course, be looking at permitting the operation, which in BC, it's a pretty straightforward process. In fact, after our conference call, I'm going to meet with the Federal Minister of Mines to hear what -- he's a new federal minister, so we are anxious to see what he has to say. But we would expect an 18-month to two-year process for permitting.

So those are the things that we are focused on now, and we will -- indulge us a bit, and at the end of the month here we will give a more fulsome report on the results of the pre-feas, and then plans going forward.

Great. Now, Rick, so if I understand correctly, the feasibility work and the permitting would go in parallel?

That's correct, yes. So that's what we would anticipate, with -- coming up with a project description. That's really the next step, is really to find that project description. And it's with that document that you initiate the permitting process here in BC.

Excellent, go it. Talking about Rock Creek, and it looks like you're moving there and you've assigned a budget to close -- to come up with a closure plan. Is the expectation, then, for this project to just be closed? And if so, do you guys have any estimate as to how much that's going to cost?

We are working towards -- yes, we have developed or are developing a closure plan. In fact, Gil Leathley is up in Nome right now going over that plan with both the state and some other local people. We are still looking at opportunities to sell the asset. So that is actually a process that's still running in parallel. But we just want to be prepared to make the decision to close, and be prepared with a closure plan. Of course, that's part of the requirements with the state, anyway, is to have an updated closure plan.

So we're working those two things in parallel.

And to answer your question on the budget for closure, should we go to closure, we're working that up. So we don't have a final number, but we've always had a pretty decent idea. But we will probably be reporting on that later in the year.

Excellent. And then just quickly, I know you said second-half or later this year for the Donlin final feasibility. Do you guys have a more -- should we expect this October, November, December? Any indication that you can give us as to the timing?

Yes, we are working towards October. So I'd say kind of an early Q4, is what my expectation is.

Okay. And last thing, and then I will stop. You didn't talk about San Roque, but it does look like you are looking to do more work there as part of your agreement there to earn your interest. Should we expect to see any results from there?

Yes. We are still working up final results, and we expect to be reporting on them. I'm not sure what we will consider material. Elaine and I haven't really sat down and gone through that. But certainly, our partner will want to be reporting on those, and they expect that in fairly short order.

Okay, excellent, thanks very much, guys.

John Bridges.

John Bridges, JPM -- I feel very inadequate after listening to all Ima's questions. I've just got one. I just wondered, with the pre-feas and, later, the fees coming through, could you give us a bit of a reminder as to the sources of funding that -- because I imagine, within nanoseconds of the report being released, people are going to be doing their sums as to how the funding is going to be.

Sorry, John, I'm assuming you are referring to the Galore Creek project and funding for the next steps, or -- is that what your question is really about?

Well, once you've got a capital budget, then I imagine people are going to be looking at trying to figure out how you are going to fund that. And then, later in the year, when the Donlin Gold feasibility comes through, the same sort of thing there.

Yes. Obviously, the next steps for the projects for both -- well, for Galore, as I mentioned earlier, is really feasibility and permitting, and we certainly have financed to accommodate those activities. And for Donlin. it's -- with the updated feasibility study, it's really just permitting, which, although not cheap, we are expecting sort of a CAD30 million-CAD40 million level of budget going through the permitting period.

And obviously, we will be working with both our partners and probably more urgently with Teck on Galore on financing for the project. We have reformed the finance committee that Elaine is on, along with Greg Martin and, obviously, their associates from the Teck side. So that will -- our focus will shift from engineering/environmental type studies to how we're going to finance this project.

I think we've had a little bit more time with Donlin. Our expectation is that it will take 3 to 4 years to permit Donlin. That's pretty typical for a US jurisdiction, EIS, NEPA process. So yes; we are certainly turning our attention towards financing Galore.

But presumably, with both these, there will be sort of updated estimates of the full capital cost?

Oh, absolutely. That's the focus of the pre-feas and feasibility will be to give you updated capital and operating costs and, obviously, using consensus sort of pricing, but obviously also giving you the value of the project at higher metal prices.

And the financing is still going to be a mix of shares, metal stream deals, that sort of thing?

Yes. I think all those things are on the table. We've certainly had some good discussions, preliminary discussions with Teck. I can say we've had a lot of interest in the project. I think having a North American/Canadian address, five-day boat ride over to China for concentrates -- I think those are all things that I think weigh in favor of this project over other projects. It will be a major copper producer.

Okay. Just one final -- the PEA -- what's the accuracy of those studies? What sort of plus/minus do they work to?

PEAs are typically -- and I guess you are referring to the Amber project on the Arctic deposit, the preliminary economic assessment. They are typically to 30%, whereas the feasibility is more like 15%.

Right, right. I wasn't sure what that was. Excellent. Okay, good luck, guys. I look forward to the studies.

At this time, sir, we have no other phone questions.

Okay. Well, thank you very much, ladies and gentlemen, for joining us for the Q2 conference call. And we will look forward to -- probably our next conference call will be on Galore Creek, when we update that later this month and then, of course, Q3 in three months. So thanks very much and have a great day.

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, we thank you for participating. And at this time, we ask that you please disconnect your lines. Enjoy the rest of your day.