NovaGold Resources Inc (NG) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the NOVAGOLD third-quarter 2014 conference call and webcast. My name is Philip and I will be your operator for today.

At this time, all participants are in listen-only mode. Later we will be conducting 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 conference over to your host for today, Ms. Melanie Hennessey, Vice President Corporate Communications. Please proceed.

Thank you Philip. Good morning everyone. We are really pleased that you joined NOVAGOLD's third-quarter call where we will be speaking to our results and providing updates on the development of the Donlin Gold and Galore Creek projects. On today's call we have Greg Lang, NOVAGOLD's President and CEO, and David Ottewell, 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 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 information such as projections and goals which are likely to involve risks detailed in our various EDGAR and SEDAR filings and in various forward-looking disclaimers included in the third-quarter 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. Good morning and thank you for joining us on our third-quarter call.

For those who are new to NOVAGOLD, we are a development stage company that has two great assets in North America which are highlighted on Slide 4. Our 50% owned flagship asset, Donlin Gold, is well into permitting and is poised to become one of the largest producers in the gold industry. Galore Creek, which is held in 50% partnership with Teck, is expected to be the largest and lowest cost copper mine in Canada.

The next slide provides an overview of our third-quarter project activities. At Donlin Gold, the key focus was on permitting, which progressed with the submission of the outstanding data to the Corps of Engineers that was needed to complete the preliminary draft EIS. The draft EIS continues to be on schedule to be released to the public for comments in 2015.

Earlier in the quarter, an updated long-term surface use agreement was signed by Donlin Gold and TKC thereby extending Donlin Gold's right to use the surface land owned by TKC. This agreement was extended to coincide with the terms of the exploration and mining lease with the Calista Corporation. This agreement represents an important milestone in the advancement of Donlin Gold towards development and future production.

Beyond permitting and extending partnership agreements, NOVAGOLD announced its commitment to invest in the National Fish and Wildlife Foundation's Alaska Wildlife Fund with conservation initiatives to protect, conserve and restore habitat in Alaska. Many of the proposed projects are locally led efforts which will be conducted in the Yukon Kuskokwim region, where the Donlin project is located.

The focus this year at Galore is to incorporate the drilling results from the 2012 and 2013 programs, including the discovery of the Legacy zone, into a new mine model and advanced mine planning and project design. As a follow-up to the workshops conducted in the second quarter, activities in the third quarter focused on optimizing scenarios for mining, waste development and water management.

With those highlights, I will now turn it over to Dave Ottewell, our CFO.

Thank you Greg. Turning to Slide 6, third-quarter spending at our projects remain on track with our budget for the full year. As Greg discussed, activities at Donlin Gold are focused on the draft EIS, permitting and community engagement in the region while at Galore Creek technical studies to advance the project are underway.

Our share of project cash funding year-to-date was $11.3 million with $9.4 million at Donlin Gold and $1.9 million at Galore Creek. We are right on track at 75% of our total expected project expenditures for the year.

Slide 7 highlights our operating performance in the third quarter. Our operating expenses continue to decline. We are focused on reducing general and administrative expenses as well as costs at our projects. Our third-quarter operating loss of $10.7 million was 32% lower and the first nine-month loss at $30.4 million was 29% lower than the prior-year periods. We have realized savings in office costs, professional fees and our program at Galore Creek is significantly reduced this year.

Looking at our cash flow on Slide 8, cash decreased by $0.5 million in the third quarter and $10.4 million for the first nine months. Term deposits decreased by $5 million in the quarter and $10 million year-to-date. At the end of the third quarter, we had cash and term deposits totaling $170.8 million, a reduction of $20.5 million from the beginning of the year and on track for our full-year estimate of $30 million in spending.

So far this year, we used $11.3 million to fund Donlin Gold and Galore Creek and $8.9 million for administrative costs with interest and other working capital changes making up the remainder. We are in great financial position to advance Donlin Gold through permitting, support ongoing activities at Galore Creek, and repay the remaining $15.8 million of convertible notes in May next year.

Greg, I will now pass it back to you.

Thank you Dave. With permitting past the halfway mark as well as on schedule and budget, the opportunity to make a construction decision will come quickly.

As shown on the diagram on Slide 9, in the context of the Donlin Gold mine life which is measured in decades with exceptional potential for growth, the current investment in time and resources required for permitting is relatively small.

Activities in the third quarter were mainly focused on the preliminary draft Environmental Impact Study. Outstanding environmental baseline data and analysis required to complete the draft were compiled and provided to the Corps of Engineers. Once complete, the agencies will review the preliminary draft EIS and provide input which will then be considered and incorporated by the Corps into the final draft EIS.

The draft EIS is expected to be issued for public comment in 2015. The EIS is in large part the determining factor in the overall permitting timeline for Donlin.

Donlin Gold continues to work simultaneously with the other agencies on additional major permit applications such as air quality, water discharge and usage, gas pipeline, rights-of-way, and dam safety. Tremendous amount of effort goes into permitting a large asset such as Donlin Gold. These achievements to date are a testament to the professionalism and hard work from our group. I'm very proud of the progress we have made so far.

As we progress through permitting and get closer to a construction decision, the Donlin Gold project owners are looking at ways to optimize the project by evaluating development scenarios and capital cost sharing opportunities such as third-party owner operators for the gas pipeline, powerplant and port facilities. Prior to making the construction decision, we expect to update the capital and operating costs, input parameters and underlying assumptions that were used in the feasibility study that was published three years ago.

The next chart on Slide 11 demonstrates the importance of being halfway through permitting, especially when the timeline to bring on new discoveries to production has more than doubled over the last 30 years. Between 1985 and 1995, it took eight years on average to bring new mines from discovery to production. From 1996 to 2005, it took 11 years. That's jumped to 18 years in the last couple years. This superimposed on a backdrop of projects being canceled or shelved, and a lack of new discoveries further reinforces the need for high-quality projects like Donlin.

Beyond permitting, as shown on Slide 12, NOVAGOLD has been active over the last quarter in community outreach activities in collaboration with our subsidiaries Donlin Gold and Galore Creek Mining Company. We are engaged in forming partnerships, sponsoring activities at the community level, supporting local youth in leadership endeavors, and visiting the communities in the regions where our projects are located. Year-to-date the Donlin Gold team has visited 26 villages and fishing camps in the Y-K region. During the visits, project updates are given to the communities in English and Yup'ik. In some instances, the teams went to schools to speak with students about education, training, and future employment opportunities.

Donlin Gold's annual visit to the fish camps are part of a partnership with the State of Alaska and the Yukon-Kuskokwim Health Corporation in the Kids Don't Float campaign. This is a good opportunity to raise safety awareness in the region.

At Galore Creek, we remain active in the community, sponsoring local fundraising events, supporting the Tahltan Literacy Camps as well as providing assistance and funding for research on the Tahltan language dictionary.

The current challenging market conditions have not changed our conviction or thesis. We have executed on our stated strategy over the last three years and remain steadfast in our focus to permit Donlin Gold and bring the project up the value chain, as shown on Slide 13. By reducing expenditures over this time period and safeguarding our cash position, we are able to continue our current activities, and if needed, proceed at a reduced expenditure level for many, many years while we wait for markets to improve. We continue to evaluate opportunities to sell all or part of our interest in the Galore Creek project to further strengthen our cash position, and contribute to the funding of Donlin Gold.

As David mentioned earlier, our share of expenditures at Galore Creek are very modest to maintain our 50% interest.

Although this will be familiar to many of you, we wanted to review the attributes which sets Donlin Gold apart, especially in a time when quality assets are scarce.

With approximately 40 million ounces of resources, Donlin gold has a size with the mine life measured in decades.

Beyond size, when compared to the largest gold producers on Slide 15, Donlin's grade is at the top of the list. This is not to be looked over, especially in the context of challenges facing the precious metals industry as reserve grades continue to decline and sources for new production to replace mined-out capacity are becoming increasingly scarce.

When looking at the gold industry's open pit mines, today's average grade is below 1 gram. Donlin's grade of 2.2 grams was where the industry was over 10 years ago.

The bar chart on Slide 16 provides a comparison of Donlin Gold's leading production output of more than 1 million ounces of gold annually, the largest development stage gold deposit.

Another attribute of Donlin is its tremendous exploration potential. The future mine is shown on Slide 17. It will be only 3 kilometers within an 8-kilometer gold bearing system. Exploration targets are found all along the structure north of the pit. Many targets close to the pit floor could be mined with very little changes.

One last attribute we wanted to highlight is the cash cost structure of the Donlin Gold project. With all-in sustaining costs of $735 an ounce, it's well below the industry average of about $1,000 an ounce.

Beyond the extended timeline required to bring assets to production, the next chart on Slide 19 clearly shows that large quality deposits are getting harder to find, and production is heading for a steep cliff. We will soon see a supply-demand disequilibrium. The number of gold deposits over the last 16 years has declined. During the 1990s, on average there were at least seven new gold deposits every year 5 million ounces or bigger. In fact, 2012 was the first year with no discoveries in more than two decades in spite of the highest exploration spending on record. If we don't find these major deposits, we can't grow let alone sustain production levels.

In closing, the Company is well-financed to continue permitting at Donlin Gold and complete the technical work on Galore Creek. We remain determined and committed to bringing the Donlin Gold project up the value chain and will not let fluctuations in the market deter us from achieving this goal. Donlin Gold will be one of the few projects that will be shovel-ready in just a few years. Our Team has executed on our stated strategy over the last three years with rigorous alignment with all of our stakeholders. We continue on the path of further derisking our assets while enhancing their value.

Operator, we will now open the line to questions.

(Operator Instructions). John Bridges, JPMorgan.

Good morning Greg, everybody. Just wondered, you talk about the trough of the industries. Is that turning into improved expectations for capital costs? And just wondered where you could find some savings to bring down that earlier capital cost.

Good morning John, and thank you for your interest. Since the feasibility study was completed about three years ago, a lot of the inputs into large-scale projects have moved in our favor. Heavy equipment, structural steel, copper prices, labor, all of the big inputs into projects like ours have we think improved in the last couple of years. So as we get closer to a construction decision, we'll refresh all of the assumptions that went into the capital and operating cost estimates.

Okay. And then as a follow-up, you bumped up the size of that pipeline to I think 12 inches. I just wonder. To what extent would that support an expansion of the project at some future date, or allow you to make a lot more friends with third parties in the vicinity by helping them with more reliable power than diesel that they can fly or drive in?

That's correct. The original study envisioned a 12-inch pipeline, but it's a very modest investment to increase that to 14 inches. So the pipeline at 14 inches would have more than adequate capacity to provide fuel to other customers or ultimately provide more fuel to the Donlin project. And as we are getting closer to permitting, there's a lot more interest in the infrastructure by third parties, and the owners of Donlin will evaluate that interest in the coming years.

Okay, great. I stand corrected on the size of your pipe. But anyway, it's great to hear you're in the seventh inning of this thing and best of luck.

Thank you John.

(Operator Instructions).

We have a call coming online -- a question coming, which I will read. Out with the expected engineering and construction of the Donlin mine only a few years out now, how are the costs of construction expected to be met by NOVAGOLD throughout development?

Sure. I'll take that one. It will be a mixture of debt equity, project financing and we think it will be a different world in a few years when it's time to move on. We do have $171 million approximately in funds right now, which is more than enough to take us through permitting and get started on engineering.

Thank you. Operator, any more questions?

Yes. We actually do have one question coming from the line of Eliot Glazer with Wm Smith & Company.

Yes. If you're in the seventh inning, does that mean that you will be ready for construction a decision when? Early 2016, late 2016, or late 2015?

We anticipate that the EIS will be done around the end of 2016.

End of 2016.

Yes. Excuse me, I misspoke. End of 2016, we expect to have the permits in place. At that stage, the owners can make a decision on proceeding with construction or deferring that. And I'm sure a lot of that will depend on gold market conditions at the time.

Okay. Thank you very much.

All right. At this point, we have no further questions in the audio queue, so I will now turn the call back over to Greg Lang for closing remarks.

All right everyone, thank you for your interest in the Company. Good day.

Ladies and gentlemen, that concludes today's conference. Thank you all for your participation and you may all now disconnect. Have a wonderful day.