NovaGold Resources Inc.
Q4 2014 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the NovaGold Fourth Quarter 2014 Conference Call and Webcast. My name is Caroline, and I’ll 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 conference over to your host, Mrs. Melanie Hennessey, Vice President, Corporate Communications, please proceed. Melanie Hennessey Thank you, Caroline. 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 would like to remind our listeners that any statements made today may contain forward-looking information such as projections and goals, which are likely to involve risks detailed in various EDGAR and SEDAR filings and forward-looking disclaimers that are included on Slide 3 of this presentation. With that I’ll handover the call to Greg, who will detail some of our results and then speak to both of our projects. Greg?

[Greg Lang:]

Thank you, Melanie. Hello everyone and thank you for joining us this morning. What makes NovaGold unique? We’re 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% partnership with Teck is expected to be the largest and lowest cost copper mine in Canada. I’m 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 continued to promote the safety, education and work force 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 Miami old spring in clean up green up event where record 52 villages participated this year in community-wide 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 the 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 yearend financial results. David?

[David Ottewell:]

Thank you, Greg. Turning to Slide 7, our project activity is 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 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 base compensation and savings and office rent and professional fees. Galore Creek expenses were reduced as there is 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 cost, lower interest on our convertible notes and favorable working capital movements. Project funding decreased to 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 to permitting, support fund going 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 continue 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 [Bear]. On Slide 11, you can see that our healthy financial position gives us flexibility to continue funding project activities at our current burden rate, close out the remaining convertible notes and fulfill other financial obligations for multiple years. Greg, I will now pass to back to you.

[Greg Lang:]

Thank you, Dave. Turing 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 have been fortunate to have worked on mines that ultimately operated for decades by discovering additional allowances as they carried our production. Donlin Gold is the first project that I have ever worked on. It has a resource sufficient to support several decades of operation. It’s endowment which is only of its many attributes really set for the part for many other gold asset in the industry. With the resource base of about 39 million ounces, grade of 2.2 grams, it’s 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 files over two years ago. The production is anticipated to be greater than $1 million ounces over its 27 year mine life. Another key attribute is the excellent quality of the deposit. With the measured and indicated resource grade at 2.2 grams per ton 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 in precious metal industry as reserve grades continue to decline and sources for merging 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. It’s also at the top of the list when compared to the grade of the top gold producers. Donlin’s grade is very where the industry was 10 years ago. The future mine as shown on Slide 16 occupies only 3 kilometers of an eight kilometer gold bearing system. Tremendous exploration upside existed at Donlin with multiple targets that are under explored and drill ready. In my view it’s very like that Donlin’s gold mine 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 un-expiring run on gold. Even in a low price environment the project has a positive return and this jumps to double digit to higher gold prices. Moreover, Donlin Gold distinctively long life offers a high likelihood that will enjoy multiple bull markets over the period of the mines operation. The next chart on Slide 18 demonstrates the importance of being half way through the permitting especially when the time line to bring new discoveries to the 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 shower ready as we successfully complete the permitting and market conditions improve. We have the super imposed on back drop of projects being shelved or canceled and 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 very small group of projects that will be shower ready or incensement returned 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 to permitting and to record a decision. But with all that said, it's important to note that neither partner has [indiscernible] 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 community is a huge plus for the project. As I mentioned earlier, our strong partnerships were further reinforced by the updated long term surface use agreement between Donlin and TKC for the entire mine line. 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, the 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 water sheds, protect wildlife habitat and advance sustainable fisheries. Slide 22 provides a snapshot of Donlin Gold’s lifecycle. We are half way through permitting. This investment and 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 damp safety permits. In 2014 Donlin G4old provided support advancing permitting activities which were mainly focused on the preparation of the draft EIS. The Corp completed the identification of alternative and established a reasonable range of alternatives to be evaluated in EIS. The Corp also distributed the initial draft to the EIS to the cooperating agencies which in turn provided their input to the core by year end. The Corp is now considering the agencies comments and will incorporate them into the draft EIS which is on schedule to be published for public comment in 2014 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 infrastructures such as the gas pipeline port and oxygen plant. And we 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 Pueblo Viejo operations at 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 is an asset, it is expected to be one of the Canada’s largest and highest quality copper producers. Over the last year we have conducted workshops and engineering analysis and evaluating and optimizing scenarios for an integrated mining, waste disposal and water management plans. We are also active in the community sponsoring local fund raising events, supporting Tahltan literacy camps as well as providing, assisting and funding for research on the Tahltan language dictionary. In 2015 NovaGold and Teck were to continue 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 Donlin Gold project toward a construction decision. Secondly, uphold strong relationships with all of our stakeholders. Thirdly, we will advance Galore Creek with mining and project design and 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 continue 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:]

Okay. Thank you. [Operator Instructions] Please standby for the first question which comes from the line of John Bridges. Please go ahead.

[John Bridges:]

Morning Greg and everybody. Thanks for the results again. I just wondered could you give an update on the relationships with Barrick, the new management there and just wondered what their feelings were towards the project at this point?

[Greg Lang:]

Hi 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.

[John Bridges:]

Okay. And also I just wondered the relationship now with the Alaskan government, state government given where oil price has gone, I would imagine that it would be even more interested in your project?

[Greg Lang:]

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 reinforce 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.

[John Bridges:]

Okay. And the cost saving initiatives, I guess I am not seeing the two office on trucks yet, but are you seeing cheaper equipments around?

[Greg Lang:]

Very much so John, I think it's all of the inputs in the major projects like this particularly the impact of lower energy prices, lower copper and steel, all will ultimately bode well for the project and will be working with our partner to evaluate the impact of all of this while home stretch on permitting.

[John Bridges:]

Yes, and I was surprised to see you’re half way through 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 will works on schedule, thank you.

[Greg Lang:]

Thank you for your interest John. I appreciate you being on the call.

[John Bridges:]

You are welcome.

[Operator:]

Thank you for the question. The next question comes from the line of [indiscernible] please go ahead. [Operator Instructions]

[Melanie Hennessey:]

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

[Operator:]

Okay. The next caller is Steven Walker, please go ahead.

[Steven Walker:]

Thank you. Good morning Greg. Just a question on the permitting of the pipeline. Has anything in 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, I guess review or the mine planning project design process?

[Greg Lang:]

Good morning Steven. We are permitting the pipeline and the power plant as part of the EIS. Now that we are getting through permitting and the end of insight 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 being built and deliver more cost effect energy to the fairly isolated parts of Alaska.

[Steven Walker:]

Within the recede of the final EIS on the record of decision does that permit somebody that subcontractor or somebody that is not NovaGold i.e., if this work was contracted or more importantly is sort of develop with a power purchasing agreement allowed them to come in and construct or run a power plant even though that the EIS was granted to NovaGold or there any issues with respect to some are coming in and negotiating a PPA for the project and building at under your EIS?

[Greg Lang:]

We are 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 in an activity that’s really independent of the ownership structure of the pipeline. So, as long as the if a third party get 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.

[Steven Walker:]

Alright, okay. And just on Galore Creek as you go through sort of with 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 and scope design resources reserve etcetera?

[Greg Lang:]

I think both Teck and NovaGold have the similar perspective on Galore Creek and that’s we want to move it forward better at a fairly measured pace given all of the market conditions and I think as prudent owners you volunteer yourself to challenge the initial thinking on the project, it was also conceived at the 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.

[Steven Walker:]

And when we could see potential updates on that or is that again work in progress and can you get the sense when that potential update could occur?

[Greg Lang:]

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

[Steven Walker:]

Thank you very much for that Greg.

[Greg Lang:]

Thank you for joining the call Steven and your interest in the company.

[Operator:]

Thank you for that question and the next question comes from the line of John Levin, please go ahead.

[John Levin:]

Hi, congratulations on a) which you are doing and b) which you discussed and 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. If this – the number of years are off but can you give some frame work on cost because copper price have come down so much. I am just curious conceptually the cost and the deliver transportation to major industrial markets?

[David Ottewell:]

This is David. We have a free feasibility study that we’ve filed, hope [Cedar] 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.

[John Levin:]

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

[David Ottewell:]

You are welcome.

[Greg Lang:]

You are welcome and thanks 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 their lot of investments in Teck, their energy business this year so I think they are like us, they’re content to move the project forward and know that it's time will come but I wouldn't anticipate any major announcements on Galore this year.

[John Levin:]

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

[Greg Lang:]

Alright. Well stand on the line John.

[Operator:]

Thank you. The next question we have comes from the line of Eliot Glazer, please go ahead.

[Eliot Glazer:]

Hello Greg. This is Eliot Glazer, I have been gold mining analyst for 40 years. I work with the W. M. Smith & Company in Denver. My question has to do with probabilities of lowering the expenditures. The original capital budget of $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 there, if everything goes right, how much can you lower that $6.7 billion capital expenditure for you and Barrick?

[Greg Lang:]

Well, Eliot thank you for your interest in the company. Included in the $6.7 billion was $1 billion in contingency and also to your question you look at the gas pipeline in itself is almost a billion dollar undertaking. The power plant and oxygen plant they are both in the neighborhood of $200 million and about $200 million in mobile equipment that could typically be leased. So, there is easily a billion dollars 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 the major inputs Donlin is a large scale open pit mine and fuel cost right now are significantly less than they were envisioned when the feasibility studies is prepared. So as the owners get through another year or so of permitting and within six months or so of the construction decision that’s really the time to update the feasibility study both in terms of our capital and operating cost and third party participation. So we have – in last two years of permitting has really gone by pretty quick and I think with all the turmoil and the gold space right now it's been a great way to ride out these turbulence times just is permitting is relatively inexpensive, it has to be done and we are just positioning the asset for construction decision based on the market conditions two years from now and so far we are seeing a lot of thing that have moved in our favor in the last couple of years.

[Eliot Glazer:]

This is all very helpful. My follow up question is originally in the net present value, NPV of Donlin is 4.6 billion and [indiscernible] ounce is there a gold price or range of gold prices which would increase the probabilities of this project going forward?

[Greg Lang:]

Yes, certainly the higher the gold price the greater the likelihood the project would go forward, but I think if two years from now gold is still trading around $1300 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 gold space knows, prices have been very volatile in the last couple of years and we have got two years of history that will have behind us when we’re faced with the construction decision.

[Eliot Glazer:]

Okay. Thank you very much.

[Greg Lang:]

Thank you, Eliot.

[Operator:]

Thank you for question. [Operator Instructions] We have a question and it comes from the line of [indiscernible] please go ahead.

[Q –Unidentified Analyst:]

Alright. Just a follow up from Steve’s question. Looking at continuously plans and different configurations to what extent would be EIS the construction on changes to the plan was originally put forward in the feasibility study?

[Greg Lang:]

Difficult to give you complete answer because the changes are not yet finalized but generally speaking the EIS bounds the limits of your activity. So anything that you propose they 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 have got plan.

[Unidentified Analyst:]

So, it can be small or economy bigger than your current that the EIS permits?

[Greg Lang:]

That’s certainly a good way of looking at 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 looked at it in a different lines there maybe will build it stage 1 and 2 as long as in general terms it state within the footprint that would not be a significant issue.

[Unidentified Analyst:]

Okay and then there has been a lot of interest in the last few years in MLPs, have you looked that structure specifically for the pipeline?

[Greg Lang:]

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

[Unidentified Analyst:]

Okay. Great. Thanks Greg.

[Greg Lang:]

You are welcome.

[Operator:]

Thank you, the next question we have comes from the line of John Levin, please go ahead.

[Greg Lang:]

Welcome back John.

[Operator:]

John, your line is in the call, you may have your cell phone mute.

[John Levin:]

I did, I’m sorry. You always said me better than I deserve, on either of these projects is there multi, you say a two year time period. Some reasonable thought of a third party investors of some kind where there may be interest, but the prices are apart or pipeline person says, we will do the pipeline but we want to have some ownership in the prospect is there anything like that that’s one should either think about or hopeful or something? Just to spread the capital cost?

[Greg Lang:]

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

[David Ottewell:]

I think really the time is on our side and we will as we get closer to the end of permitting will be looking at arrangement such as you are describing.

[John Levin:]

Great. Thank you, that makes a lot of sense.

[Greg Lang:]

Thank you John.

[Operator:]

Thank you, 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.

[Greg Lang:]

Everyone thank you for joining our call this morning and as always we appreciate your interest in the NovaGold’s story, have a good day.

[Operator:]

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