NovaGold Resources Inc (NG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NovaGold second-quarter conference call and webcast. My name is Laura, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Melanie Hennessey, Vice President of Corporate Communications. Please proceed.

Thank you, Laura. Good morning and welcome to NovaGold's second-quarter financials and Donlin Gold project update webcast. Our news release, which was issued this morning before market open, and today's presentation are available on the home page of our website.

On today's call we have Greg Lang, NovaGold's President and CEO, and Elaine Sanders, NovaGold's Vice President and Chief Financial Officer.

At the end of the formal part of the presentation, we will be taking questions both by telephone and by e-mail. 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 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. Welcome, everyone, and thank you for joining us on today's call. NovaGold successfully completed a number of milestones in the first six months of fiscal 2012. We are delivering on the reorganization plans which were announced last November.

At the start of the fiscal year, we filed the Donlin Gold updated feasibility study. And as outlined in yesterday's release, the Donlin Gold Board approved this study and gave Donlin authorization to file permits, which is a significant milestone for the project.

The timing of our financing was fortuitous, and it strengthened our balance sheet. With about CAD300 million cash and reduced expenditures going forward, we have sufficient financial resources to advance Donlin to permitting.

NovaCopper, which now owns the Upper Kobuk Mineral Project in the highly prospective Ambler district, and being led by Rick Van Nieuwenhuyse, was successfully launched as an independent company.

Recently, we hosted an institutional investor site tour of the Donlin Gold project. We were quite pleased to hear from important stakeholders that Donlin was a model project for responsible development. Our stakeholders, who include the Alaska Native Corporation, Calista and the Kuskokwim Corporation, own the Donlin Gold mineral and surface rights. They are our strong supporters.

In addition, we signed an important agreement with Bering Straits Native Corporation to divest of the Rock Creek asset, which is a non-core asset of the Company. This transaction represents a major step towards streamlining NovaGold's financial and management resources to focus on the flagship Donlin Gold project.

You will note on slide six that we provide some key highlights from yesterday's announcement regarding the authorization to file permit applications. The commencement of permitting at Donlin is a major milestone, further advancing the project up the value chain. We will be filing a late application in the coming weeks which will trigger the stars of the NEPA, or permitting process.

This process requires the preparation of an environmental impact statement. We would expect overall permitting to take approximately three to four years. During this time, Donlin Gold will look at opportunities at reducing capital costs and further de-risking the project.

We are at a turning point in the history of the Company, as shown on slide seven. After restructuring, as envisioned by the Board and management late last year, we will emerge a pure gold play focused on the Donlin project. Our foundation sets us apart and is based on a truly unique asset located in the United States, a safe geopolitical jurisdiction, with the world's largest gold producer, Barrick, as our co-owner.

With CAD300 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.

Now turning to slide eight, I note the tremendous opportunity which the Donlin Gold asset offers. Donlin has attributes that make it truly unique in terms of size, grade and production profile and location. It is in Alaska.

Donlin Gold, as included on the bar chart on slide nine, is significant in size and among the top 1% of all known gold deposits. Most of the prominent gold development projects are either controlled by major companies or are located in very challenging parts of the world.

The future mine, as the graph on slide 10 shows, will be about two kilometers by three kilometers within a district of over eight kilometers. Over the last five years, Donlin Gold's mineral endowment has more than doubled. Tremendous exploration upside exists at Donlin, particularly in the targeted areas highlighted and listed on the map.

Not only is Donlin a large-scale project, it is also at the top of the list in terms of grade, as shown on slide 10. Grade is the key to any successful gold mine, and two grams is excellent grade for an open-pit mine and places Donlin above most of the other gold development projects.

To appreciate the true significance of Donlin, it is insightful to look at all the other mines throughout the industry, as shown on the pie chart on slide 12. The 200 mines on this chart illustrates the scarcity of mines that produce in excess of 1 million ounces a year. There are only currently five mines producing more than 1 million ounces a year, and only two projects are slated to produce greater than 1 million ounces a year.

Once in operation, we are looking at a high production rate. The mine's annual production, as per the bar chart on slide 13, will be 1.5 million ounces per year for the first five years, followed by life-of-mine production of over 1 million ounces per year for decades to come. As a million-ounce-a-year gold producer, Donlin is rare among the next generation of gold mines, and most of these other properties are located in risky jurisdictions.

NovaGold is bullish on the price of gold, and one of the qualities of Donlin is its excellent leverage to gold prices. As shown on slide 14, even in a low price environment, the project has a positive rate of return, and this return jumps to double digits in today's price environment.

But NPV is only part of the appeal of Donlin. It doesn't reflect the additional value related to resources and exploration upside. It also doesn't reflect the jurisdictional safety, and we expect as the world gets more complex that discount rates on assets in North America will be significantly lower. With mine life measured in decades, this could be a core asset for any company and gives NovaGold a foundation on which to build a Company. This mine is expected to generate a great stream of cash flow for decades to come.

When you look at the cash flow over the life of the mine, as shown on slide 15, it is striking how early in life the payback occurs. We are looking at a payback period of about four to five years, which represents only 20% of the current mine life. Discounted cash flow simply does not do justice on a mine life measured in decades.

At current gold prices, the life-of-mine cash flow would be about $12 billion. The payout is excellent due to the leverage that Donlin affords investors.

On slide 16, we provide a breakdown of the expected capital expenditures as per the latest feasibility study. You know, $6.7 billion, that's a lot of money. But that $6.7 billion includes almost $1 billion in contingencies. Utilities also account for about 40% of that total.

As permitting gets underway, we will be looking at opportunities to reduce the upfront capital by working with third parties. For example, we might lease the mining equipment or have a third party build and operate the oxygen plant. The gas pipeline, which is almost a $1 billion undertaking, is quite naturally built and operated by a third party.

Potentially, almost 20% of the capital could be saved through bringing in third parties. While this would increase the operating costs slightly, it would derisk further this project.

Earlier in the year, we highlighted jurisdictional risk as an emerging issue faced by resource companies. A lot has happened since then. On slide 17, we have included a snapshot of some of the most relevant country risks which have emerged in 2012.

In a report released just a few days ago, Ernst & Young global mining and metals leader Mike Elliott commented, the uncertainty and the destruction of value caused by sudden changes in the policy by the governments of resource-rich nations cannot be understated. It is clear that jurisdictional risk has created a lot of uncertainty of asset ownership for companies in these countries.

But the Donlin project is in Alaska, and NovaGold provides an opportunity for shareholders who don't want to see their investments crushed by a coup or their profits diminished slowly by nationalization in a country through ever-increasing taxes.

The bar chart on slide 18, which provides data from the Fraser Institute's mining survey, showed only six jurisdictions which achieved a perfect score in trade stability, and one of them was Alaska.

Alaska has a vibrant mining industry, as shown on the map on slide 19. It is the second-largest gold producing state in the US with seven major mines. Gold production has increased in recent years. This is a state that appreciates the value of the natural resources sector and the opportunities that it provides in Alaska.

Slide 20 illustrates the key elements in a mining project's lifecycle. Allocating three to four years for permitting may seem like a long time, but as it relates to the size and scale of the Donlin project, this time frame is appropriate and is just a blink of an eye.

Moreover, looking at it from the context of our full timeline, it is fairly insignificant.

Since we will be commencing permitting in the coming weeks, we felt it was important to give a synopsis of the process. Permitting is a very structured process in the United States. As per slide 21, permitting occurs concurrently with and is supported by the environmental impact study process. The federal and state agencies will develop and issue all of the required permits and authorizations for the project.

With a project of this scale, permitting a mine requires a multitude of permits, in excess of 100, and can take anywhere from three to four years to complete. Once an EPA review process is set in motion by the federal government, it will provide opportunities for the public to review and comment on both the scope of the agency's environmental review, as well as the draft environmental impact statement.

When the permitting process is nearing completion, the owners of Donlin will be well-positioned to make further decisions on the project.

Outlined on slide 22 are the various government agencies at the state and federal levels that are involved in permitting. Donlin has already established a solid working relationship with the state of Alaska. This is a structured process, and given all the work that has been completed ahead of the commencement of permitting, we believe this will facilitate an orderly permitting process.

This year's field work at Galore Creek is proceeding per the latest updated budget and remains on schedule. The sale process is underway. RBC and JPMorgan are engaged, we've signed CAs with various companies, and we expect to complete this transaction by the end of the year, which would further strengthen our balance sheet. But if we don't get fair value for Galore, we would hold onto the asset rather than sell our interest at a below-value price. Our cash on hand is sufficient to see Donlin go through permitting.

The equity markets for mining companies remain very turbulent, and a healthy balance sheet is one of the most important assets a company can have in times like this. Our successful financing in February of this year takes this risk off the table.

It is also important to note that when the restructuring is complete, the cash demands on NovaGold will have significantly declined, and we will have sufficient funds in place to take Donlin from permitting through to a construction decision.

At this point, I will turn over the presentation to Elaine Sanders, our Vice President and Chief Financial Officer.

Thank you, Greg. Good morning, everyone. Well, it has been a pretty busy quarter for the Company. We held a special meeting of the shareholders at the end of March to approve the spinout of NovaCopper to the shareholders. The vote was more than 90% in favor of the distribution by the security holders. The effective date of the distribution of NovaCopper shares was April 30, 2012.

And on that day, all the shareholders received one share of NovaCopper for every six shares of NovaGold that they held. NovaCopper has been listed on both the Toronto Stock Exchange and the NYSE MKT, which is the old American Stock Exchange, under the same trading symbol, NCQ, on both exchanges.

NovaCopper has been launched with a good starting base, with supportive shareholders and $40 million of cash to get it through a couple of years of explorations. All payments prior to April 30 have been paid by NovaGold. NovaCopper will be using its own cash for expenditures starting May 1.

For accounting purposes, we have to fair value the spinout. We used the volume-weighted average prices for NovaCopper on trading days six through 10 after the initial opening on the stock exchanges, which results in a five-day VWAP of CAD3.11 per share. We excluded the first five days of trading due to, amongst other things, the uncertainty of timing of shareholders receiving their shares in their brokerage accounts. With 46.7 million shares issued at CAD3.11 per share, NovaCopper was valued at approximately CAD145 million.

With about CAD73 million of assets transferred off of NovaGold's balance sheet, this includes the CAD40 million of cash we provided and CAD33 million of capitalized mineral property expenditures. We recorded an accounting gain of CAD72 million during this quarter.

This also results in a CAD0.52 per share reduction for NovaGold shareholders of their cost basis in NG shares. You can recalculate the CAD0.52 by taking the CAD3.11 and dividing by 6, which comes from the 6-to-1 ratio from the spinout.

The last item I wish to highlight is that the convertible notes conversion rate has been adjusted as a result of the spinout. The conversion price has been adjusted using formulas set out in the convertible notes indenture, with the price decreasing from $10.61 to $9.656, which results in an additional 9.8 million shares now to be issued at maturity on May 1, 2015.

Our next slide highlights the assets reported on our balance sheet from year-end to Q1 and now the second quarter. As you can see, we have a healthy cash balance of CAD300 million at the end of the period. We now have classified in the line called assets held for sale our fully-funded reclamation bond at Rock Creek. And you will also see a line called liabilities held for sale for our asset retirement obligations at Rock Creek. This classification is required now that we have signed an agreement with the Local Native Corporation (technical difficulty) to sell the project. The final transfers are anticipated to be completed by year-end.

There is also individual line items, as you normally see, which are investments in our Donlin and Galore projects based on equity accounting under IFRS. There is also a line now called asset held for distribution of shareholders, and it has gone to zero in the second quarter upon the completion of the NovaCopper spinout.

Slide 28 shows the Rock Creek liabilities held for sell, as I just mentioned. The balance sheet also shows the convertible notes, embedded derivatives and the warrants derivative, which we mark to market off the Company's stock price on the last day of the fiscal quarter. As our stock price goes down, the derivative liability correspondingly goes down, and we end up recording accounting gains through the income statement.

That takes us to the income statement highlights. This chart shows the three-and six-month activities for our proportionate share of expenses booked at each of the Donlin Gold and Galore Creek projects. You can also see the accounting gains recorded as a result of the mark-to-market accounting for the derivatives.

The CAD72 million gain from the spinout of NovaCopper is also picked up in this quarter under the heading gain on transfer of assets. We do have accounting net income for the three and six months ended May 31, but we do wish to remind our shareholders that we were not in production at this time and this net income is purely a result of mark-to-market accounting under IFRS.

My concluding slide ends with the budgets for Donlin and Galore to remind everyone Donlin Gold has an approved budget for this year of $37.2 million, of which NovaGold funds 50%. The project spent $3.6 million in Q1 and $9.5 million in Q2 on preparations for the permitting process. Project expenditures at Donlin are on track, and $24.1 million remains in the budget for the rest of the year.

At Galore Creek, the partners have approved a budget of CAD35.4 million, of which CAD10.4 million relates to care and maintenance activities and CAD25 million relate to the infill drill program. NovaGold is responsible for funding 50% of this budget. The project spent CAD2.2 million in Q1 and a further CAD5.3 million in Q2 on environmental and engineering studies in preparation for the 2012 drilling season, which is currently underway.

Project expenditures are on track for the year. CAD27.9 million remains to be spent during the second half for Galore.

These are the highlights for our second-quarter financials. I will turn the presentation back to you, Greg.

Thank you, Elaine. On slide 32, we have included a timeline of the key milestones for 2012. To date, we have delivered on five of these important milestones, allowing us to simplify the asset structure to focus on our flagship asset, the Donlin Gold project.

Near year-end, we will emerge as a pure gold play.

Turning to slide 33, before we open the call for questions, why NovaGold, why now? NovaGold owns scarce, unique and institutional-quality assets, and we are well-positioned to execute on our business strategies. Our balance sheet is strong. We have experienced management and solid partnerships. We are truly a safe, institutional-quality gold developer with excellent leverage to price of gold.

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

(Operator Instructions) Paolo Lostritto, National Bank Financial.

Just a couple of questions. First, am I right in thinking that in the latest update in the presentation that some of the cost figures that were presented for kind of the life of mine have changed a little bit in terms of operating costs?

No, we have not updated the cost estimates. And really the feasibility study is fairly current, and we don't see any need to do that at this juncture.

Okay. And then in terms of timelines -- and I know you provided it on the slide; I just don't have it in front of me right now -- but in terms of timelines, the timelines are still the same that were previously outlined, correct?

Yes, they are. You know, we started the year anticipating we would begin permitting about the middle of the year, and we've certainly met that objective.

Okay, thank you.

Stephen Walker, RBC Capital Markets.

Just a question on permitting and the timeline there. I believe you made the comment that the permitting process is expected to take three to four years.

That's correct, Stephen.

Can you give me a little more detail on the components of the permitting timeline, that is, the pipeline itself, the rest of the plant site and service site. My understanding is that Barrick has done a lot of the initial work on the pipeline, a lot of the base study work that was required for the permitting at mine and plant site, tailings, et cetera. I'm just curious. My understanding was it was probably closer to a two-year permitting timeline. I'm just curious why it is three to four years now.

We have always anticipated it would be about three to four years. When you look at the other projects of this scale that have been permitted in the United States in recent years, some of them have come in a little under three years and certainly some have gone over four years. But I think we are well-positioned to do this between three and four years.

We have the virtue that the project is largely located on private land. And the pipeline itself, you mentioned that -- you are correct -- we've put a tremendous amount of work involved in both the pipeline and studies at the mine site that we expect will really facilitate the permitting process. And we anticipate it will go smoothly.

So the three to four years is basically to take into consideration details around the pipeline and the work required on permitting the pipeline?

That is correct. And actually, we anticipate the pipeline permitting could be completed before the mine site.

Okay, that's helpful. Great. Thanks for that, Greg.

(Operator Instructions) Eliot Glazer, DuPasquier.

Good morning, Greg. My name is Eliot Glazer. I have been an analyst for 43 years, and I follow most of the metals and mining companies.

My two-part question about Galore Creek, please, is from my other companies, like BHP and Rio Tinto, the sense is that given the worldwide economic situation, their desire to open new mines has been somewhat diminished. And this leads me to the main part of my question is, have you actually had any offers for Galore Creek, whether they be substantially below your target or not?

You raise a good point. Certainly there is a lot of uncertainty in the marketplace right now, and that may impact the price we get for Galore Creek. But we don't need to sell Galore Creek right now. We have sufficient cash on the balance sheet to see us through the next four years of permitting. And we are not going to give this asset away. If we don't get what we consider an acceptable price, we will just hang onto it until market conditions change.

Okay, thanks.

John Bridges, JPMorgan.

Thanks for the call. I'm just intrigued. We've gone through a long period of painful process of rising capital costs. But now with things are slowing down, I am just wondering if you are beginning to see any indication that prices are stabilized or maybe even begun to slip back a little bit for the component parts of building big new projects like Donlin.

John, you raised a good point. Certainly a lot of commodities that are involved with building Donlin, such as steel -- natural gas is down significantly from the feasibility study. So a lot -- you're right, a lot of components have softened in the last few months.

When we get further along with the permitting process, we will revisit all of the parameters of the feasibility study, and be in a position to make the appropriate decisions then. But it is -- everything is a swirling right now, but most of it is -- the changes, I think, have been positive for the project.

Okay, that's encouraging. Thank you.

Sir, there are no further questions at this time. I'd like to turn the call over for Mr. Lang for closing remarks.

Well, we appreciate everyone joining us this morning. Thank you for your interest in NovaGold and your continued support.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.