NovaGold Resources Inc (NG) 2012 Q1 法說會逐字稿

Welcome to the NovaGold first-quarter 2012 question and project update 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, this conference is being recorded on April 16, 2012. I would now like to turn the conference over to your host, Ms. Melanie Hennessey. Please go ahead.

Thank you, Jessica, and good morning and welcome, everyone, to NovaGold's first-quarter financials and project update webcast. Our news release, which was issued last Thursday, April 12 before market open, and today's presentation, are available on NovaGold's website. On today's call, we have Greg Lang, NovaGold's President and CEO; and Elaine Sanders, NovaGold's Vice President and CFO. At the end of the formal part of the presentation, we will take questions, both by telephone and by email.

Before we get started, I would like to remind our listeners that any statements made today by the management team may contain forward-looking statements. Such statements include projections and goals which are likely to involve risks, which are detailed in our various SEDAR filings and in various forward-looking disclaimers included in the first quarter financials release and in this presentation.

With that, I have the great pleasure of introducing Greg Lang, NovaGold's President and CEO. Greg?

Thank you, Melanie. The accomplishments of last year set the stage to transform the Company, and unlock the value for our shareholders. In the first quarter of this year, we have executed on our stated strategy, and are well on our way to becoming a pure gold play, focused on the Donlin project. As you can see on slide 5, some of the key highlights, including completing a positive feasibility study on Donlin, strengthening our management team and Board of Directors. Earlier this year, we strengthened our cash balance with the successful oversubscribed fundraising, leaving us with sufficient funds in place to take Donlin up the value chain from permitting to a decision on construction, and we received overwhelming shareholder support for the spinout of NovaCopper.

We are at a true turning point in the history of the Company, as shown on slide 6. After restructuring, as envisioned by management and the Board last year, we will emerge a pure gold play focused on Donlin. Our foundation sets us apart, and is based on a truly unique asset located in the US, a safe political jurisdiction, and with our partner, the world's largest gold producer, Barrick. With CAD400 million on our balance sheet, experienced management, and important stakeholders such as the native corporations, NovaGold is well-positioned to continue delivering on our strategy.

Turning to slide 7, there's a lot I like about Donlin. I wouldn't have left Barrick if I had not seen tremendous opportunity, which the Donlin asset offers. Donlin has attributes that make it truly unique in terms of size, grade, and production, and it is in Alaska. On slide 8, you can see that Donlin is significant in size. It ranks in the top 1% of all known gold deposit. When you look at the other prominent gold development projects, many are either controlled by major companies or they are in challenging parts of the world.

We have all known a few gold deposits that ultimately grew to 40 million ounces. But I'm sure most of us can't think of many that started that big. You can clearly see on slide 9 that there is room for continued growth. To-date, only 3 kilometers of an 8-kilometer strike have been drilled on close spacing. But with 40 million ounces defined, the resource is already of sufficient size to justify the investment -- certainly very easy to see the potential to double the resources at Donlin.

Similar to an earlier slide, but focused on grade, Donlin is still near the top of the list, and grade is the key to any successful mining operation, and 2 grams-plus is great grade for an open pit mine. Once it's in operation, Donlin will be a top producer in the gold sector as seen on slide 11. The mine's annual production will be 1.5 million ounces the first five years, followed by decades of over 1 million ounces a year. Mines of this size are very rare in the industry. As a 1-million ounce a year producer, Donlin is one of the largest, if not the largest, of the next generation of gold mines.

Moving to capital expenditures on slide 12, we have seen capital costs increase over the years. In fact, many projects are known to have exceeded their budgets. This was an important consideration when Donlin Gold completed the latest feasibility study. They understood where the cost overruns were in similar projects, and reflected this in our estimate.

Multi-billion dollar projects are no longer uncommon. Don't get me wrong, $6.7 billion is a lot of money, but our estimate includes $1 billion in contingency, and very real opportunities to further reduce capital expenditures. For example, third-party construction of a gas pipeline, an oxygen plant, operation of the port facilities, or leasing the mining equipment. Just these areas alone provide us an opportunity to decrease the capital by $1 billion.

Another reason why I like the Donlin project is the tremendous leverage it gives our shareholders, as shown on slide 13. We have provided both a 5% and a 0% discount scenario because we believe that mines located in North America will warrant a 0% discount rate as they did in the early 1980s because of their jurisdictional safety.

Even in a low-price environment, the project has a positive return. This return jumps to double digits in today's price environment. But NPV is only part of the appeal of Donlin. With the mine life measured in decades, this mine could be a core asset for any company, and gives Nova a great foundation on which to build a company. This mine will generate dividends for decades.

Jurisdictional risk is not readily described, but we certainly know when it manifests itself. This phenomena is no longer limited to countries out on the frontier. Many jurisdictions once viewed as safe, such as Chile and Australia, are joining the ranks of countries who are taking more and more from the mining industry, and we have included just a few recent examples on slide 14. According to Ernst & Young, it ranked resource nationalization as the top concern for the global metals and mining industry. In the last few months, we have seen the impact of a coup in Mali, Indonesia's changes to its long-standing mining traditions, civil unrest in Peru. Hardly a week goes by without disturbing news in this area.

But Donlin is in Alaska, and NovaGold provides an opportunity for shareholders who don't want to see their investments crushed by a coup, or slowly nationalized through ever-increasing taxes. The bar chart provided on slide 15 from the Fraser Institute shows that there are only six jurisdictions which achieved a perfect score on trade stability, and this includes Alaska. Alaska has a vibrant mining industry. It is the second-largest gold producing state in the US, and gold production has increased in recent years, and it is a state that appreciates the value of the natural resources sector.

On slide 17, I wanted to briefly touch on our copper assets, which are expected to be spun out to shareholders about the end of April. The Arctic deposit, which is located in the Ambler district, last year we completed a preliminary economic assessment on this deposit that showed values ranging from $500 million to over $1 billion depending on metal price assumptions. But we think Arctic is only part of the story in the Ambler district. Bornite, as shown on slide 18, is proving to have significant exploration upside. Drilling last year encountered exceptional grades, including almost 180 meters of 4% copper. The metal adds up quickly with these grades and thicknesses. This area will be further tested in the upcoming drill season.

Moving to slide 19, our shareholders are overwhelmingly supportive of the NovaCopper spin out. They will receive shares at a ratio of 6 to 1. The Company will start trading around the end of April, and with $40 million in the treasury, they should have sufficient funding for the next two drill seasons. As a shareholder, I look forward to participating in their success.

Turning to the Galore Creek project on slide 20. It is a tremendous asset, with the potential to be Canada's largest copper mine. In a way, I would rather not sell it. But the reality is that the capital demands of developing two major projects would have been a significant headwind for a company our size. This, coupled with our shareholders' interest to gain greater exposure to gold, and more specifically to Donlin Gold. The Galore sale process is underway, and any proceeds will further strengthen our balance sheet.

Turning to slide 21, not only did we strengthen our Board and management team in the first quarter, but we delivered on our stated strategy. I joined the Company after 10 years with Barrick, the last 8 years running its North American division. Rick, a renowned explorationist, was the founder of NovaGold, is now the CEO of NovaCopper. Tom Kaplan, one of the worlds most successful natural resource entrepreneurs, and a major stakeholder in NovaGold, has joined as Chairman of both companies. In addition, Tony Walsh recently joined our Board. Tony has 25 years of leadership experience in the mining industry, and he has been successful in taking companies with major exploration and development projects along the value chain.

At this stage in the presentation, I will turn it over to Elaine Sanders, our CFO.

Thanks, Greg. Good morning, everyone. This is the Company's first quarter reporting under the new IFRS standards. Two of the main differences that have impacted our balance sheet, as seen here on slide 23, are the way we account for our 50% interest in Galore Creek, and the way we account for the convertible notes. Under previous Canadian GAAP accounting, we used to consolidate Galore Creek at 100%, and then book a non-controlling interest amount for Teck's 50% ownership, which effectively totals our interest to 50%. But you would have to net two lines together on the balance sheet to get to our ownership amount. In our first-quarter financial statements, we are now reporting Galore Creek as an equity investment, and showing our 50% ownership on one line.

As for the convertible notes, under previous Canadian GAAP accounting, we use to bifurcate the conversion feature, and book amounts as debt and as equity. In our first-quarter financial statements, we still record the debt amount as a liability, but the conversion feature is now also a liability but gets marked-to-market based on the Company's stock price at the end of each reporting period.

Two of the main differences under IFRS which have impacted our income statement is the translation of foreign currency transactions of our US subsidiaries, and using mark-to-market accounting for the embedded derivative of the US dollar-denominated exercise price of the warrants. Under IFRS, we must now report all foreign exchange translations of the US subs directly into the income statement. And the warrants are adjusted each period based on the US dollar/Canadian dollar exchange rate, with the adjustment recorded as an income statement gain or loss.

Slide 24 shows the highlights from our first-quarter balance sheet. The most significant event occurring during the first quarter was the completion of a 35 million common share financing in February, of which we received net proceeds of approximately $316 million. Our current cash position is now sitting around CAD340 million.

The balance sheet shows Donlin and Galore as separate equity investments. Galore's balance of just over CAD384 million is higher than Donlin's balance of CAD2.3 million because of the capitalization of historical expenditures on roads and other infrastructure. Current expenditures on both projects are expensed as incurred.

The other items that we are highlighting this quarter are the Ambler project being described as an asset held for distribution to the shareholders. The Ambler project has been transferred to NovaCopper, a wholly-owned subsidiary of NovaGold, and we intend to distribute the shares of NovaCopper directly to the shareholders. The shareholders voted in favor of the spinout at a special meeting held at the end of March, and we are currently working to effect the spinout on or about April 30. We should be in a position to announce more details on the spinout very shortly.

Continuing on the balance sheet on slide 25, our reclamation liability is CAD28 million, relate mostly to the estimated closure costs at Rock Creek. We have also put aside $20 million in a bond with the state of Alaska as support to complete the work. The convertible notes show up on two separate lines under the liability section, and the derivative feature of the warrants also show up as a liability.

On slide 26, the income statement has also changed under IFRS. Now, under operating expenses, we are showing our 50% share of the net expenditures on both the Donlin and Galore projects. IFRS has also changed the way we expense our historical stock option grants, the main effect for us being that the expenses now get front-end loaded versus more evenly distributed throughout the two-year vesting period.

There's also a requirement to mark-to-market any derivatives underlying financial instruments. As discussed in my first slide, both the convertible notes and the warrants have embedded derivatives due to their exposure to the US dollar. The impact on mark-to-market accounting for the conversion feature of the notes was a gain of CAD28 million, and for the warrants was a gain of CAD19 million during this first quarter. Mark-to-market accounting will cause fluctuations each quarter, and the impacts of the statements may be significant. At the end of our first quarter, we reported net accounting income of CAD16.8 million or CAD0.07 per share.

The next couple of slides on 28 and 27 provide you with a quick reminder of the 2012 budgets for each of the projects, and a review of the expenditures for the first quarter. At Donlin Gold, the project had an annual budget of approximately $37.2 million, of which our 50% share is $18.7 million; these amounts are all in US dollars. The budget will support the permitting process, as well as of environmental monitoring and community engagement. During the quarter, our 50% share of expenditures was just below $2 million. The funds were used by the project in preparation for the next phase of the project, which is entering into formal permitting.

At the Ambler project, we have approved a $4 million budget to fund all of the activities prior to the spinout of NovaCopper to the shareholders. This budget includes preparatory activities to get the site ready for this year's exploration field season, and costs estimated to be about $1.5 million to get NovaCopper distributed to the shareholders, and listed on both the Toronto Stock Exchange and the American Stock Exchange. NovaCopper will be funded with $40 million just prior to the effective date of the spinout.

At Galore Creek, the project has an annual budget of approximately CAD35.4 million, of which our 50% share is CAD17.7 million. The budget will support the drilling and engineering programs associated with the enhanced plan announced shortly after the release of the results from the Galore Creek prefeasibility study. Our 50% share of expenditures during the quarter at the project were CAD4.1 million.

At Rock Creek, the 2012 budget is $30 million for completion of closure activities, and an additional $7 million for site care and maintenance costs. We spent approximately $2.3 million during the first quarter on closure activities, and $2.5 million on site care and maintenance. These are the highlights from the first quarter.

Greg is now going to wrap up our presentation with a few closing slides.

Thank you, Elaine. The equity markets have been choppy for almost every mining company, including us, and many companies are struggling to raise the capital they need to go forward. Our successful financing in February took this risk off the table. As shown on slide 29, when the restructuring is complete, the cash demands on NovaGold will drop significantly, and we will have sufficient funding in place to take Donlin through permitting to a construction decision.

The key upcoming milestones for the Company in the next few months will be the official launch of NovaCopper. We will continue to strengthen NovaGold's Board, and we will commence the formal permitting process at Donlin in the first half of this year. Selling part or all of our 50% interest in Galore Creek -- the process is underway, and we have retained RBC and JPMorgan to assist us, and we anticipate completing a transaction by year-end.

Turning to slide 31 -- in closing, before we open it to questions -- why NovaGold? Why invest now? Both NovaGold and NovaCopper own scarce, unique, institutional-quality assets, and are well-positioned to execute on their respective strategies, our strong balance sheet combined with experienced management and solid partnerships. We are truly a go-to, safe, institutional-quality developer with excellent leverage to gold.

With that, operator, we can open the call to questions.

(Operator Instructions)

Our first question comes from Diana. She asks what is the last day we can buy the NovaGold stock and get the NovaCopper stock spinoff as well?

Melanie, it is Elaine. Maybe I can answer that question. We were going to make a formal announcement on those dates in short order here, within a couple of days. We are just working with both the Toronto Stock Exchange and the American Stock Exchange to set those dates. But we anticipate with the effective date of around April 30, we will probably trade ex-NovaCopper and ex-distribution right around the middle of the week prior, so around April 24 or 25. Again, we will have those dates solidified with the exchanges and press release to the public very shortly. Does that answer the question Melanie?

That is great, thank you Elaine.

[Capice Patel], JPMorgan.

Hi, it is John Bridges on the line. I just wondered, Elaine, you're the first person to talk in a bit of detail about the IFRS accounting standards, which south of the border here are a little bit of a mystery. I don't know if you've touched on this, I know it is quite far off, but some companies seem to be booking deferred stripping already and others are pushing it out till next year, I think. Have you looked at that part of the new rules?

Hi John, I haven't spent a lot of time looking at those new rules on deferred stripping because of course NovaGold isn't in that situation yet. On early review, it looks like you can early adopt those roles. If you'd like I could send you some write up directly about deferred stripping because it's a bit of a hot topic right now; the accountants are looking at it in quite a lot of detail.

Absolutely. Yes, anything that simplifies that would be great. I just wonder, is there any sort of idea as to how people will make it a little bit understandable for the analysts in terms of understanding what the deferred balance is going to be, so we can actually manage our models on this topic.

You make a really good point. The accounting world has always had some challenges on the complexity of the accounting and trying to explain that to everybody who is reading the statements. But it is a very good point that you make, John, and we obviously will try our best on NovaGold site to explain things as easily as possible to our readers.

Appreciate it. Thanks a lot, and best of luck.

Thank you John, take care.

(Operator Instructions)

We have another question that has come up via e-mail. The question is as follows -- what will happen to the value of NovaGold once NovaCopper is spun off?

Melanie, I will take that one. We believe that the value of the Ambler district was generally overlooked by the market. We think the analyst really look at NovaGold almost entirely based on the value of the Donlin project and to a lesser extent, Galore. As such, it is our expectation that subsequent to the spinout we would not see any significant impact on our share price. In fact, today we announced the restructuring, the share price moved up almost 25%. So spinning Ambler out makes sense on both fronts. It makes Nova a cleaner investment, and it allows Ambler to be valued more appropriately by the market.

[Andy Chastick]

Thank you. Elaine, I forget what number slide it was, it may have been 24, but equity investment in Donlin, CAD2.3 million, and then you mentioned capitalized cost as being the reason why the equity investment in Donlin was represented as it was versus Galore. What are the capitalized costs on the balance sheet for Donlin at this time?

It is really just the cash that hasn't been spent. It is really just the cash that we've contributed into the project that the project hasn't spent at period end. So all costs at Donlin are expensed as incurred and we just picked up our 50% through the P&L as our share of losses. Of course they are not generating any revenues so we will see losses until that project goes into production.

And what is the proposed symbol for NovaCopper?

That symbol is going to be announced with our press release with the distribution date. So, in the next couple of days here, Andy, we will have that announced.

Okay, thank you.

Take care, Andy.

Melanie, there are no more questions on the phone at this time.

All right, everyone, thank you for participating in our call this morning.

Ladies and gentlemen, this does conclude the conference call for today. Please disconnect your lines and thank you for attending.