NovaGold Resources Inc (NG) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the NOVAGOLD third quarter conference call and webcast. My name is Deanna, and I'll be the operator for today. At this time, all participants 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 for replay purposes. I would now like to turn the call over to your host, Ms. Melanie Hennessey, Vice President, Corporate Communications. Please proceed.

Thank you, Deanna. 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 phone 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 disclaimer included in the third quarter financials release and in the presentation. With that, I have the great pleasure of introducing Greg Lang, NOVAGOLD's President and CEO. Greg?

Thank you, Melanie, and welcome, everyone, to this morning's call. NOVAGOLD has achieved important milestones since the start of the year, and we are delivering on the organization plan that was announced last November. Despite achieving all of our objectives since the start of the year, Barrick's second quarter comments as they related to Donlin were misinterpreted and have led to an extraordinary disconnect between NOVAGOLD and its historical ratios and hence the share price performance. So let's look at the facts. We are moving ahead with permitting as we always plan to do, and this misunderstanding has lead to an aberrational opportunity for investors that management intends to rectify. Among our list of achievements, the first was the filing of the Donlin Gold updated feasibility study, which was subsequently approved the by Donlin Gold Board, and most importantly, the commencement of permitting occurred in the third quarter. This was by far most significant milestone for NOVAGOLD.

At Galore Creek, the [initial] drill program is now complete, and we look forward to updating the market on the results. In the third quarter and more recently, we announced the appointment of David Deisley as Executive Vice President and General Counsel and David Ottewell as Vice President and Chief Financial Officer. Both individuals are leaders in their respective fields and we are pleased that they will be joining us in a few weeks. Additionally, we continued to advance the closure and divestiture of the Rock Creek property during the quarter and expect it will be finalized by year-end. We have sufficient cash on hand with CAD267 million. This will take Donlin all the way through permitting and ultimately a construction decision.

NOVAGOLD is an institutional quality investment with tremendous shareholder support from our largest shareholders, as listed on the table on Slide 6. We're a solid Company. We have significant high grade reserves, excellent exploration potential, and an experienced management team. We have a healthy balance sheet, and our assets are all located in secure jurisdictions. This is truly a golden opportunity with the Company and is committed to shareholder value that provides superior leverage to the price of gold.

After surprises from previously safe jurisdictions such as Argentina and Australia, there's been an even greater industry focus on jurisdictional safety and resource nationalization, one of the top concerns facing the industry. Investors are becoming increasingly aware of the inherent risk in investing in these jurisdictions. The jurisdictions with low political risk such as North America will soon warrant a safety premium, and investors will only have a handful of companies to choose from in this jurisdiction. We're well positioned with our assets in British Columbia and Alaska to achieve premium valuation.

Next important to look at where we're at with our partner. Both NOVAGOLD and Barrick jointly approved the feasibility study on July 11 and commenced permitting on July 26. While we're permitting, both parties will work to identify areas to reduce capital and further optimize the Donlin project. Permitting is expected to take three or four years, at which time we will be in a position to make a decision on the construction of the project. While other major projects around the world have seen delays or cancellations over the last quarter, Donlin has continued as previously planned and is now moving up the ranks in terms of major gold projects and their timeline. As the market realizes that nothing has changed with regard to Donlin Gold's progress, we believe NOVAGOLD's share price will respond accordingly.

The most important milestone in the third quarter was indeed the commencement of permitting. With the submission of the Donlin Gold Plan of Operations, this launched the NEPA process. Over 16 years of work has gone into accumulating the baseline data in preparation of permit applications. This is one of the most robust databases prepared in advance of permitting, and we expect that it will bode well as we permit Donlin. US Army Corps of Engineers, who are our lead agency in this process, have selected an independent contractor to prepare the environmental impact statement.

The next step in the permitting process, as shown on Slide 10, will be the filing of a notice of intent by the federal agencies. This is expected in the coming weeks and will be followed by a public scoping period. Permitting in the US is a very structured process. It occurs concurrently with and is supported by the EIS regulatory process. With a project of this scale, permitting requires a multitude of permits and can take anywhere from three to four years. With the permitting process underway, the federal government will provide opportunities for the public to review and comment on both the scope of the agencies' review, as well as the draft environmental impact statement.

To ensure that permitting is a smooth process, solid foundation is needed with a team that has the strength, depth, experience, and understanding needed. A good reputation and local support, which the project enjoys, are equally important. There are five key attributes which make the Donlin Gold project truly unique in terms of its size, the largest gold project in development. It has among the highest grade. It's got tremendous exploration potential along strike and at depth. If built, it would potentially be the largest gold producer in the industry, and it's located in Alaska. Donlin is significant in size and among the top 1% of all known gold deposits.

On Slide 14, we're looking at the grade of Donlin. It is again among the highest, and grade is the key to any successful operation. On Slide 15, we look at what's been happening in the industry, where an environment of declining grades and escalating costs with limited new discoveries. Donlin Gold has 39 million ounces of resources with a grade of 2.2 grams, one of the world's largest high-grade undeveloped gold deposits. Over the last decade, there's declining grades in inflation, industry has seen rising costs, Donlin is at the top of the chart for grade, and its grade compares favorably to what the industry was mining only 10 years ago. The current resource understates considerably the true potential of the deposit. The existing footprint of this asset covers only three kilometers of eight kilometer ore bearing strike length. This represents significant exploration upside, which will significantly increase the mine's endowment or life. Over the last five years, as drilling continued, the endowment more than doubled.

On Slide 17, to really appreciate the significance of Donlin, it is insightful to look at the other mines throughout the industry. The approximate 200 mines of any consequence, only a handful produce more than one million ounces a year. When compared to the other development projects, as a one million ounce a year producer, Donlin is expected to be the largest by a wide margin. Even without further expansions, it is expected to average over a million ounces per year during its 20-year life. The project is located in Alaska. Alaska has a vibrant mining industry, the second largest gold-producing state in the US, and its production has increased in recent years. It is a state that appreciates the value of a healthy natural resources sector. The project enjoys excellent partnerships with the native corporations Calista and TKC.

Slide 20 illustrates the tremendous leverage which Donlin Gold provides. NOVAGOLD is bullish on the price of gold. Even in a low price environment, the project has a positive rate of return. It has great rate of returns in today's price environment. But NPV is only part of the appeal of Donlin. It doesn't reflect the value of additional reserves and resources, its exploration upside, or its jurisdictional safety. When you look at the cash flow on this slide, it is striking how early in the life of the mine payback occurs.

Slide 22 highlights the cash costs. It's these very low and competitive cash costs that contribute to the rapid payback at Donlin. CAD6.7 billion is a significant investment in Donlin, but it includes CAD1 billion in contingencies. During the permitting process, both owners have committed to look for ways to reduce capital by bringing in third parties to share in the infrastructure.

Turning to Galore Creek, this project as envisioned in pre-feasibility study is expected to be among the largest in lower-cost copper mines in Canada. In the third quarter, Galore Creek completed the drilling program, and we will be updating the market in the coming months. We have initiated the sale process for Galore Creek, and discussions with several parties are ongoing. We have extended the timeline into the first quarter of next year, due to the requests of additional participants in the process. If an attractive offer is made, we are prepared to sell our interest in the project. But there is a lot of value in Galore Creek. We will only sell it if we achieve full and fair value. If we end up keeping it, we will significantly reduce our activities next year to focus on Donlin. Even without the cash that a transaction on Galore Creek would bring, we have CAD267 million on the balance sheet which will see Donlin through permitting.

Turning to the management team, I think it speaks volumes to the quality of assets that we have been able to attract a high quality leadership team. The Company recently announced the appointment of David Deisley as Executive Vice President and General Counsel. During his career, Dave has held various senior executive roles with Goldcorp and with Barrick North America. At Goldcorp, Dave played a leading role in the implementation of corporate development transactions and participated in the advancement of the company's flagship development projects. While at Barrick, Dave was responsible for advancing the cause of social responsibility and has permitted some of the largest gold mining operations in North America.

In addition, NOVAGOLD announced the appointment of David Ottewell as Vice President and Chief Financial Officer. David had a long tenure with Newmont, most recently as Vice President and Corporate Controller, where he was responsible for global accounting functions and ensured quality control in external reporting. Dave has a wide frame of reference in corporate financial matters but also has tremendous experience and understanding of the mining industry from the ground up. We're also pleased to announce the appointment of Ryan Modesto to the position of Corporate Controller. Ryan joined us this week and will be overseeing the internal accounting processes and the accounting function. He was previously Manager of Accounting and Financial Reporting with Barrick in North America. We've assembled an excellent team that has the necessary skills to advance the Donlin Gold project and the objectives of the Company.

With the reorganization complete, NOVAGOLD is a smaller, simpler Company with substantially reduced financial obligations. With our cash balance and potential proceeds from warrants of CAD55 million, even with the CAD95 million for the convertible put option which could be called next May, we have sufficient cash on hand to advance Donlin Gold through permitting towards a decision on construction in three or four years. At this point I'll turn it over to Elaine Sanders, our Vice President and Chief Financial Officer.

Thank you, Greg. Good morning, everyone. In our third quarter MD&A, we provided an update on our corporate governance activities, announcing the appointments of our new General Counsel and CFO. Our third quarter was also focused on advancing our projects. At the Donlin Gold project, Greg has previously discussed the submission of formal permitting applications. Permitting is the focus of this year's annual budget at the project of CAD37.2 million. CAD22.8 million has been spent for the nine months ended August 31, of which CAD9.9 million was spent at Donlin in the third quarter, 50% of which is funded directly by NOVAGOLD. We are anticipating the project to be on budget at the year-end.

At the Galore project, the 2012 annual budget is CAD35.4 million, of which CAD23.3 million has been spent to date as at the end of Q3. CAD15.8 million was spent during the quarter on drilling activities related to the enhanced engineering plans. NOVAGOLD is funding 50% of these amounts. The budget was based on 20,000 meters of exploration drilling and 5,000 meters of geotechnical drilling at the Galore site, which most of this activity occurred over the summer months. The Galore project is expected to be on budget at the year-end.

At the Rock Creek project, Phase I of the reclamation plan is progressing smoothly. We anticipate finishing Phase I activities this month and expect to transfer the Rock Creek asset to the local Alaska Native Corporation before the end of the year. The last item to note is that the strengthening of the Canadian dollar against the US dollar in the quarter has continued to create accounting gains for the Company. I will describe this in more detail in the next few slides.

This takes us to the balance sheet itself. We do have a strong cash position that is highly liquid. The asset held for sale relates to the reclamation bonding required by the state of Alaska for the Rock Creek project, which we have agreed upon terms to sell the asset once we have completed Phase I reclamation activities. Our equity investment at Donlin Gold reflects our portion of cash calls remaining with the project at the end of the quarter waiting to be spent. And our equity investment at Galore Creek reflects the cash left to be spent at the end of the quarter and the value of construction activities invested at the site. Assets held for distribution to shareholders has gone to zero as at the end of the second quarter, due to the completion of the spin-out of NovaCopper to existing shareholders at that time.

On the liability side of the balance sheet, we show the asset retirement obligation associated with Rock Creek as an asset held for sale. Our convertible notes liability value on the balance sheet fluctuates with our stock price. We record mark-to-market adjustments at the end of each quarter. With our stock price lower at the end of the third quarter, the embedded derivative of CAD7.7 million is also lower than in Q2. The warrants are mark-to-market based on the Canadian dollar/US dollar exchange rate. With the strengthening of the Canadian dollar, the warrant liability reduces. Both the decreases in the convertible note and warrant liabilities are recorded into the income statement as accounting gains at the end of the quarter.

My last slide shows the three- and nine-month activities for certain accounts on the income statement. We continue to record our 50% share of expenditures at Donlin Gold and Galore Creek, as we are continuing to expense exploration and development costs versus capitalizing the costs on to the balance sheet. Share based payment expense is a quarterly expensing of previously granted stock-based employee programs. Salaries and severance of CAD4.7 million in the quarter contains an accrual for severance costs associated with the reduction of office staff in the Vancouver location. Under other income, we show the accounting gains from mark-to-market accounting of the convertible notes and warrants. And overall, we have losses for the quarter, but the large accounting gains for the nine months ended August 31, 2012 results in a positive accounting income year-to-date of CAD81.2 million or earnings per share of CAD0.33. That's it for my slides. I'll turn this back to you, Greg.

Thank you, Elaine. NOVAGOLD has successfully completed a number of milestones in the first nine months of the fiscal year, delivering on the reorganization plan announced last November. The timing of our financing was fortuitous, and it strengthened our balance sheet. With CAD267 million in cash and reduced expenditures going forward, we have sufficient financial resources to advance Donlin through permitting. NovaCopper, which now owns the Upper Kobuk mineral project in the highly perspective Ambler district, is being led by Rick Van Nieuwenhuyse. NovaCopper was successfully launched as an independent Company.

The approval of the updated feasibility study is behind us, and the commencement of permitting were noteworthy milestones. As we look forward in the fourth quarter, we would expect the Notice of Intent to be filed by the US Army Corps of Engineers, followed by public scoping and the filing of the draft EIS. In addition, we are currently finalizing the divestiture of Rock Creek. If we decided to keep Galore, we will significantly reduce our activity on it to focus our resources on Donlin.

In a time of economic and jurisdictional instability, NOVAGOLD is an excellent way to get leverage to the price of gold. There are a number of catalysts which support our thesis. On a micro level, de-risking of Donlin Gold, as we continue permitting with excellent stakeholders, will trigger a re-rating. Financial optimization, bringing in third parties to participate in building or operating the gas pipeline, oxygen plant, or leasing mining equipment are all options available to reduce the capital costs. We have strong shareholder support and no need to raise capital for many years. On a macro level, Alaska is showing tremendous support for environmentally and socially responsible mining projects. Today, few assets truly are world class and this is now being defined by their longevity and stable jurisdictions, which yields sustainable returns for investors in the secular gold market. We're a long-term option on gold, and Donlin is projected to be one of the largest gold mines in the world, with excellent exploration potential.

And finally, Barrick's second quarter comments on Donlin were misinterpreted by many that the project has been cancelled. It has not. We are proceeding as planned, but this misinterpretation drives an extraordinary disconnect between our share price and the historical ratios, creating an unprecedented investment opportunity. Thank you. We'll now open the floor for questions.

(Operator Instructions)

We have a question on the line from John Bridges, JPMorgan.

Hi, Greg, Elaine. Thanks for the call. I just wondered, I'm intrigued by the potential for the gas pipeline to become an attractive incentive for some of the local communities to have a better way of life. Could you talk a little bit about the level of interest in that pipeline and the interest from the communities along the way?

Well, good morning, John. Thank you for joining the call today. There's -- the Donlin project is located in a part of Alaska that pays exceptionally high prices for energy. And so as you would expect, there's a lot of interest by the communities in that part of the state to see the gas pipeline built and obviously, in one form or another, deliver energy to these communities. And I think that support bodes well for the permitting of the gas pipeline. And as we mentioned earlier, both owners will be exploring ways to optimize the project and bringing in third parties to participate in that. And the third parties are certainly cognizant of the broad support and interest in chief energy in that part of the state.

I see already you've taken that from a 12-inch to 14-inch pipeline. Was that related to interest from the communities?

Yes, John, the pipeline -- you're correct, the diameter -- we've looked at diameters between 12 and 14 inches. 12 inches is certainly sufficient for the project as it's currently envisioned. 14 does a couple of things. It does that. It allows additional gas to be transported, and it gives the mine potential to expand without replacing the pipeline. When you look at the cost of a pipeline, whether it's a 12- or 14-inch, that does not substantially change the total cost, so it was an easy decision to make to upsize that a little bit.

Okay, I'll be tracking that diameter as we progress.

Thank you.

Good luck guys.

(Operator Instructions)

Okay, well, there are no further questions. Thank you very much for joining us this morning.

Thank you, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect, and have a great day.