NovaGold Resources Inc (NG) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NOVAGOLD fourth-quarter 2014 conference call and webcast. My name is Carolyn and I will be the operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. As a reminder, the conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mrs. Melanie Hennessey, Vice President, Corporate Communications. Please proceed.

Thank you, Carolyn. Good morning, everyone. I'm pleased that you joined us for NOVAGOLD's year-end results and also to hear the latest developments of both the Donlin Gold and Galore Creek projects. On today's call we have Greg Lang, President and CEO, and also David Ottewell, our Vice President and CFO.

Before we get started, I just like to remind our listeners that any statements made today might contain forward-looking information such as projections and goals, which are likely to involve risks detailed in the various EDGAR and SEDAR filings and forward-looking disclaimers that are included on slide 3 of this presentation.

With that, I will hand over the call to Greg, who will detail some of our results and then speak to both of our projects. Greg?

Thank you, Melanie. Hello, everyone, and thank you for joining us this morning. What makes NOVAGOLD unique? We are a development stage company with two great assets in North America, highlighted on slide 4. Our 50% owned flagship asset, Donlin Gold, is well into permitting and poised to become one of the largest gold producers in the world. Galore Creek, which is held in 50-50 partnership Teck, is expected to be the largest and lowest-cost copper mine in Canada.

I am very pleased with the progress that was achieved in 2014. It was a productive year for NOVAGOLD as we set the stage to bring Donlin through permitting and up the value chain. Firstly, Donlin Gold collaborated with the Army Corps of Engineers and cooperating agencies to advance permitting activities both on budget and on schedule. The EIS alternatives development was completed. All related third-party comments were submitted. And the initial chapters of the draft EIS were finalized.

Secondly, throughout 2014 we continue to promote the safety, education, and workforce development by supporting local and regional events, scholarships, and other programs in Alaska. We led and participated in multiple community meetings throughout the region and took part in the annual spring Clean Up, Green Up event, where a record 52 villages participated this year in communitywide efforts to reduce litter and promote recycling.

We have established a good framework for community engagement and participation. We are working hand in hand with our neighbors.

Additionally, as shown on slide 6, we extended the Donlin Gold surface use agreement with TKC to coincide with Calista's exploration and mining lease. This agreement now covers the entire projected life of the project. We also announced a new partnership with the National Fish and Wildlife Foundation on the Alaska Fish and Wildlife Fund, a truly unique partnership to protect, restore, and conserve Alaska's fish and wildlife.

All of this was accomplished while continuing to reduce expenditures, with total spending 14% less than our budget. We have streamlined the Company's structure and strive to be careful stewards of the capital that was entrusted to us by our shareholders.

I will now pass it over to David Ottewell, who will walk us through NOVAGOLD's year-end financial results. David?

Thank you, Greg. Turning to slide 7, our project activities are proceeding as planned. Our share of Donlin Gold and Galore Creek funding totaled $3 million for the fourth quarter and $16 million for the year. Project funding is expected it to decrease to $14 million in 2015 as we continue to support Donlin Gold permitting activities and Galore Creek technical studies.

Slide 8 highlights our income statement items for 2014. Overall, our operating loss decreased by about a third compared to last year. General and administrative expenses were further reduced in 2014 as a result of lower share-based compensation and savings in office rent and professional fees. Galore Creek expenses were reduced as there was no exploration program in 2014 and equipment was fully depreciated in 2013.

Turning to our cash flow on slide 9, our total cash and term deposits decreased by $26 million, $4 million less than our budget of $30 million for 2014. Cash used in operating activities decreased as a result of lower general and administrative costs, lower interest on our convertible notes, and favorable working capital movement. Project funding decreased at Galore Creek, as there was no exploration program in 2014. Cash used in financing activities in 2013 included $79 million for convertible note repurchases, partially offset by $54 million in proceeds from warrants. We ended the year with cash and term deposits totaling $165 million, sufficient to advance Donlin Gold through permitting, support ongoing activities at Galore Creek, and repay the remaining $16 million of convertible notes in 2015.

On slide 10, we provide a breakdown of our budget for 2015. We expect to spend $29 million on our projects and for administration, and $16 million to retire the remaining convertible notes. In 2015, Donlin Gold will continue to advance permitting through the issuance of the draft EIS by the Corps for public review, in addition to continued community engagement activities.

At Galore Creek we will focus on continuing technical studies. No drilling is planned for 2015. We will continue to consider opportunities to monetize the value of the asset. Our 2015 budget also includes $1.5 million for our share of Donlin Gold studies along with Barrick.

On slide 11, you can see that our healthy financial position gives us flexibility to continue funding project activities at our current burn rate, close out the remaining convertible notes, and fulfill other financial obligations for multiple years.

Greg, I will now pass it back to you.

Thank you, Dave. Turning to our flagship asset, Donlin Gold, on slide 12, it has all the ingredients of scale and quality that are required to build a modern, cost-effective mine. In my career I've been fortunate to have worked on mines that ultimately operated for decades by discovering additional ounces as they carried out production. Donlin Gold is the first project I have ever worked on that has a resource sufficient to support several decades of operation. Its endowment, which is only one of its many attributes, really sets it apart from any other gold asset in the industry. With a resource base of about 39 million ounces, grade of 2.2 grams, it's an unusually high-grade deposit for an open pit in today's environment.

Illustrated on slide 13, Donlin Gold's production profile is at the top of the list when compared to the largest development gold stage deposits. As envisioned in the feasibility study filed over two years ago, the production is anticipated to be greater than 1 million ounces over a 27-year mine life.

Another key attribute is the excellent quality of the deposit. With a measured and indicated resource grade at 2.2 grams per tonne, it's one of the highest-grade large open-pit gold deposits. This is a very important quality in the context of the challenges facing the precious metal industry as reserve grades continue to decline and sources for emerging production to replace mined-out capacity are becoming increasingly scarce.

Donlin Gold's quality is further demonstrated on slide 15, as its grade is more than double the average of the projects currently in development. And it's also at the top of the list when compared to the grade of the top gold producers. Donlin's grade is where the industry was 10 years ago.

The future mine, as shown on slide 16, occupies only 3 kilometers in an 8-kilometer gold bearing system. Tremendous exploration upside exists at Donlin with multiple targets that are underexplored and drill ready. In my view, it's very likely that Donlin Gold's mine life will be significantly greater than currently envisioned.

One of the qualities most sought out by investors is Donlin Gold's excellent leverage to gold. They view NOVAGOLD and hence Donlin as an unexpiring warrant on gold. Even in a low-price environment the project has a positive return. And this jumps to double digits at higher gold prices. Moreover, Donlin Gold's distinctively long life offers a high likelihood that it will enjoy multiple bull markets over the period of the mine's operation.

The next chart on slide 18 demonstrates the importance of being halfway through permitting, especially when the timeline to bring new discoveries to production has more than doubled over the last 30 years. This progress positions Donlin Gold as one of the few major gold projects that could be shovel ready as we successfully complete the permitting, and market conditions improve.

We have this superimposed on a backdrop of projects being shelved or canceled and a lack of new discoveries. This further reinforces the industry need for high-quality projects such as Donlin Gold. Donlin Gold is one of the few of a very small group of projects that will be shovel ready when sentiment returns to the gold industry.

The owners of Donlin are focused on our objectives and are committed to working together to create shareholder value from Donlin Gold's unique optionality as we support the Corps of Engineers and the cooperating agencies through permitting and to a recorded decision. But with all that said, it's important to note that neither partner has a build-it-at-any-price mentality. We both have a very practical understanding of the project and are happy to wait for higher gold prices to deliver the best return.

As shown on slide 20, we do have a head start in Alaska with its vibrant and growing mining industry. Donlin Gold enjoys broad support from both the government of Alaska and our Alaska Native corporation stakeholders, Calista and TKC, who own the surface and mineral rights to Donlin. Our well-established track record of social engagement and environmental stewardship in the communities is a huge plus for the project. As mentioned earlier, our strong partnerships were further reinforced by the updated long-term surface use agreement between Donlin and TKC for the entire mine life. It's a mutually beneficial undertaking that will have far-reaching impacts on both the local communities and all of our stakeholders.

Donlin Gold is a model project for responsible development, a reputation that was further reinforced this year by our unique strategic alliance with the National Fish and Wildlife Foundation. We are very proud and honored to collaborate with them to promote healthy watersheds, protect wildlife habitats, and advance sustainable fisheries.

Slide 22 provides a snapshot of Donlin Gold's lifecycle. We are halfway through permitting. This investment in time and resources in permitting is relatively small in the overall schedule associated with the mine life measured in decades. We also continue to work simultaneously on other major permit applications such as air quality, water discharge and usage, pipeline plan of development, wetlands permits, and dam safety permits.

In 2014, Donlin Gold provided support, advancing permitting activities which were mainly focused on the preparation of the draft EIS. The Corps completed the identification of alternatives and established a reasonable range of alternatives to be evaluated in the EIS. The Corps also distributed the initial draft of the EIS to the cooperating agencies, which in turn provided their input to the Corps by year-end. The Corps are now considering the agency's comments and will incorporate them into the draft EIS, which is on schedule to be published for public comment in 2015 with the final EIS anticipated in 2016.

As detailed on slide 24, throughout 2015 NOVAGOLD and Barrick will be evaluating opportunities to reduce initial owner capital, such as third-party financing on capital-intensive infrastructure such as the gas pipeline, port, and oxygen plants. It will also look at leasing mining equipment. We are investing about $3 million on a 100% basis on technical studies to identify potential design and execution enhancements from the 2011 feasibility study. Potential benefits from these optimizations could include lowering additional initial capital to build the projects.

There are many opportunities to implement lessons learned from past and current experience such as the Pueblo Viejo operation in the Dominican Republic. There is the opportunity to expand with future cash flow generation. And when sentiment returns to the industry, the project will be ready to go.

Turning to Galore Creek, it is an asset that is expected to be one of Canada's largest and highest quality copper producers. Over the last year we have conducted workshops and engineering analysis aimed at evaluating and optimizing scenarios for an integrated mining, waste disposal, and water management plan. We are also active in the communities, sponsoring local fundraising events, supporting Tahltan literacy camps as well as providing assistance and funding for research on the Tahltan language dictionary.

2015, NOVAGOLD and Teck will continue to advance technical studies in mine planning and design while maintaining the site on a care and maintenance status. We continue to seek opportunities to monetize our interest in Galore Creek to support the development of Donlin, and we will wait until market sentiment improves and we can achieve full value for Galore.

Looking at the year ahead, NOVAGOLD will focus on the five key areas shown on slide 26. Firstly, advance the Donlin Gold project toward a construction decision. Secondly, uphold strong relationships with all of our stakeholders. Thirdly, we will advance Galore Creek with mine and project design. Fourthly, we will evaluate opportunities as they arise to monetize this asset. And lastly, we anticipate maintaining a healthy balance sheet going forward.

In closing, we are grateful for the two world-class assets in our portfolio. We continued to deliver on the objectives that were set when all of us joined the Company three years ago. We are committed more than ever to develop what will be one of the most coveted precious metal assets in the world. We are humbled by the continued support and interest of all of our shareholders.

Operator, we would now like to open the line for questions.

(Operator Instructions) John Bridges.

I just wondered could you give us an update on the relationship with Barrick, new management there? And just wondered what their feelings were towards the project at this point.

Well, John, I think we have a great relationship with our partner. We have met with John Thornton and many of the new team. I think they are taking a fresh look at all of their assets and are committed to being great partners and moving this project forward.

Okay. And also, I just wondered -- the relationship now with the Alaskan government, state government. Given where oil prices have gone, I would imagine they would be probably even more interested in your project.

John, that's very much so. With the drop in oil prices that's really putting a lot of pressure on the state budget, which, as everybody knows, is primarily driven by the oil production from the North Slope. So they are really very supportive of it and doing everything they can to encourage us to get this project through permitting to a construction decision. So I think it's certainly put a significant dent in the state budget and really reinforced the need for the government to diversify their economic base. So I think it's all very positive for Donlin, both in the lower energy prices and the importance of the project in the state of Alaska.

Okay. And the cost-saving initiatives? I guess I've not seen the 2-for-1 offers on trucks yet. But are you seeing cheaper equipment around?

Very much so, John. All of the inputs into a major project like this, particularly the impact of lower energy prices, lower copper and steel, all will ultimately bode well for the project, and we will be working with our part to evaluate the impact of all of this while we are in the home stretch on permitting.

Yes, and I was surprised to see you are halfway through it. It doesn't seem like five minutes since you started. So I guess it feels a bit longer than that for you, but best of luck, and I hope it all works on schedule. Thank you.

[Fred Scholz].

Carolyn, you can go ahead and take the next question.

Stephen Walker.

Just a question on the permitting of the pipeline and power plant. Has anything changed in the design or what your thinking has been on the pipeline and the power plant here as you go through the design review for the mine planning project design process?

Good morning, Stephen. We are permitting the pipeline and the power plant as part of the EIS. Now that we are getting through permitting and the end is in sight, if you will, we are starting to have more serious discussions with parties that would be interested in building and operating those facilities. So we are proceeding as planned, but the design of both is essentially the same that was presented in the feasibility study. And we are, generally speaking, encouraged by the interest in the pipeline, both in pipeline operators and many of the local communities in that part of the world who would really like to see that pipeline be built and deliver more cost-effective energy to the fairly isolated parts of Alaska.

Within the receipt of the final EIS and record of decision, does that permit somebody that's subcontracted or somebody that is not NOVAGOLD, i.e., if this work was contracted out or, more importantly, is developed with a power purchasing agreement, allow them to come in and construct or run a power plant even though that the EIS was granted to NOVAGOLD? Or are there any issues with respect to someone coming in and negotiating a PPA for the project and building it under your EIS?

Stephen, in general terms, the EIS and ultimately the approval put a fence around the project, if you will. As far as the pipeline goes you are permitting a disturbance and an activity that's really independent of the ownership structure of the pipeline. So as long as the -- if a third party did come in, as long as they were to construct and operate what was envisioned in the permitting, the ownership is not particularly relevant to the approvals. And that comment also pertains to the power plant.

Okay. And just on Galore Creek, as you go through with the initial data that has been collected here, do you have a sense on where Teck and yourselves could be looking at the project as far as changes in scope, design, resources, reserves, et cetera?

Well, I think both Teck and NOVAGOLD have a similar perspective on Galore Creek, and that's we want to move it forward but at a fairly measured pace, given all of the market conditions. And I think as prudent owners you over to yourself to challenge the initial thinking on the project. It was also conceived at a time when bigger was better, and that may not be the most prudent course of action to take, given the market conditions.

So just about any enhancement, both in scale and design opportunities is being considered as we advance the project forward with our partner.

And when could we see potential updates on that, or is that, again, work in progress? And can you give us a sense of when the potential uptake it occur?

Yes. We will keep everyone informed as our studies progress. We haven't really put out a lot of guidance on that at this stage, Stephen, but we will take that under discussion and see what's appropriate to inform our stakeholders on the progress.

Thank you very much for that, Greg.

John Levin.

Congratulations on, A, what you are doing and, B, what you have discussed in the quality which you are approaching this. Could you explore Galore Creek in terms more of its effective cost, production cost, and then the full delivered cost into major markets, as you see it? Is this -- it's a number of years off, but can you give us some framework on costs? Because copper prices have come down so much, and I'm just curious, conceptually, the cost and then delivery, transportation to major industrial markets.

We have a prefeasibility study that we filed both on SEDAR and is available on EDGAR. And you can see all those details in that study. If you wish, we could follow up with you to get you those materials.

I can find them. You are always so helpful; I thank you very much.

You're welcome.

You're welcome, John. And thank you for your interest. And we will continue to advance Galore throughout the year. And it's a great project, but I think Teck has got a lot of investments in Teck and their energy business this year. So I think they are -- they are like us; they are content to move the project forward and know that its time will come. But I wouldn't anticipate any major announcements on Galore this year.

I know that. We've spoken to Teck several times. If there are no questions at the end, I'd like to ask one more question but I don't want to ask it now.

All right. We will stand on the line, John.

Eliot Glazer.

I've been a gold-mining analyst for 40 years. I work with Wm Smith & Company in Denver. My question has to do with probabilities of lowering the expenditures. The original capital budget is $6.7 billion. Can you quantify how much you can reduce that either with the partners in the gas pipeline or third-party leasing of equipment? If everything goes right, how much can you lower that $6.7 billion capital expenditure for you and Barrick?

Elliott, thank you for your interest in the Company. Included in the $6.7 billion was $1 billion in contingencies. And also to your question, you look at -- the gas pipeline in itself is almost a $1 billion undertaking. The power plant and oxygen plant are both in the neighborhood of $200 million and about $200 million in mobile equipment that could typically be leased. So there's easily $1 billion plus in facilities or infrastructure that we could bring in third-party involvement if the terms and conditions are right such to do so.

And I think also just as the major inputs -- Donlin is a large-scale open pit mine and fuel costs right now are significantly less than they were envisioned when the feasibility study was prepared. So as the owners get through another year or so of permitting and within six months or so of a construction decision, that's really the time to update the feasibility study both in terms of our capital and operating costs and third-party participation.

So we have -- the last two years of permitting has really gone by pretty quick. And I think with all the turmoil in the gold space right now it's been a great way to ride out these turbulent times. Permitting is relatively inexpensive. It has to be done, and we are just positioning the asset for our construction decision based on the market conditions two years from now. And so far we are seeing a lot of things that have moved in our favor in the last couple of years.

This is all very helpful. My follow-up question is, originally the net present value, NPV, of Donlin is $4.6 billion, at $1,700 an ounce. Is there a gold price or a range of gold prices which would increase the probabilities of this project going forward?

Well, certainly the higher the gold price, the greater the likelihood the project will go forward. But I think if two years from now gold is still trading around $1,300 an ounce, I think that gives people -- two years of that history will give us a lot more confidence that that's a reasonable price to make an investment decision on. And I think, as everybody in the gold space knows, prices have been very volatile the last couple of years. And we've got two years of history that we will have behind us when we are faced with the construction decision.

Okay, thank you very much.

(Operator Instructions) John Bridges.

Just a follow-up from Steve's question -- looking at contingency plans and different configurations, to what extent would the EIS be a constriction on changes to the plan as originally put forward in the feasibility study?

Difficult to give you a complete answer because the changes are not yet finalized. But generally speaking, the EIS bounds the limits of your activity. Anything that you propose that did not change either the disturbance or, say, barge traffic on the river, as long as you stay within the general frame line of what you are permitting, we wouldn't anticipate a major impact on any of the activities that we've got planned.

So you can be smaller but you can't be bigger than the EIS permits?

That's certainly a good way of looking at it. As long as you -- if you were to say we want to build twice the facility, obviously you would have to restart many aspects of the permitting. If you look at it in a different light and said, well, maybe we will build it in stage one and two, as long as in general terms it stayed within the footprint, that would not be a significant issue.

Okay. And then there's been a lot of interest in the last few years in MLPs. Have you looked at that structure specifically for the pipeline?

I think we are seeing interest from pipeline operators to build and operate that pipeline. And as we are working through this year, we are going to advance the discussions in that area.

Okay, great. Thanks, Greg. Good luck.

John Levin.

On either of these projects, is there in the multi- -- you say a two-year time period -- some reasonable thought of a third-party investor of some kind, where there may be interest but the price is apart or the pipeline person says will do the pipeline but we want to have some ownership in the prospect? Is there anything like that that one should either think about or hope for or something, just to spread the capital cost?

John, there's a lot of opportunities that are out there for arrangements such as you are describing. But we've taken the view that -- it's good to meet with these people and explore what they're thinking, but we've taken the view that an asset that's permitted and ready to go gives us substantially greater negotiating room than where we are sitting today. And since we are very cashed up to get through permitting, we don't see any reason at this stage to consider, say, selling a part of the asset to fund our construction.

So we've got -- I think, really, time is on our side. As we get closer to the end of permitting we will be looking at arrangements such as you are describing.

Right. Thank you. That makes a lot of sense.

That's the end of the Q&A session. So now I'd like to turn the call back to Greg Lang for closing remarks.

Everyone, thank you for joining our call this morning. And as always, we appreciate your interest in the NOVAGOLD story. Have a good day.

Thank you, Greg. Ladies and gentlemen, that concludes your presentation. You may now disconnect. Have a good day.