NovaGold Resources Inc.
Q3 2015 Earnings Call Transcript

Published: 7 Oct 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the NOVAGOLD third quarter 2015 conference call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host for today, Ms. Melanie Hennessey. Ma'am, you may begin.

[Melanie Hennessey:]

Thank you, Ben and good morning everyone and thank you for joining us on today's third quarter call and also update on our latest activities. Today I am joined by Greg Lang, our President and CEO and also David Ottewell, our Vice President and CFO. Before we get started, I would just like to remind our listeners that some of the statements will contain forward-looking information and risks that are detailed in our various filings and materials that can be found on SEDAR and EDGAR. So with that I will pass it over to Greg

[Greg Lang:]

Thank you, Melanie. Good morning everyone. We appreciate you taking the time to join our call this morning. Today, we will be speaking about the activities on the two great assets that we have, the Galore Creek project, which we co-own with Teck in British Columbia and the Donlin Gold project, which is well into permitting. Barrick is our partner in this project. We were a very much a permitting focused group this year. The preliminary draft EIS was finalized. We are taking all of those comments from the various agencies and stakeholders groups and incorporating them into the draft EIS. This is probably the most comprehensive permitting process that I have ever undertaken in my career and we are really pleased with how it's going. By year-end, we anticipate the draft EIS will be published for a final round of public comments. The other activities underway this year are really still focused on permitting. We have added a little bit to the permitting staff up in Alaska as we are at the stage in the process where decisions are made every day and there is tremendous communications with all the agencies to get the draft done this year. At Galore Creek, we had site visits and we are continuing to work to optimize the mining and waste management systems and we are doing additional work on the tunnel through the Galore Valley. We are proceeding with this project at a fairly measured pace given the copper markets. When the time is right, we still intend to sell the Galore Creek project. Turning to slide seven. Community outreach is an important part of the permitting process. We have been diligent in visiting the villages throughout the Y-K region. We sponsored various programs in the communities at both of our projects. I will now pass it over to Dave to review the third quarter financial results.

[David Ottewell:]

Thank you, Greg. As Greg discussed, activities at Donlin Gold are focused on advancing the draft EIS, permitting and community engagement in the Y-K region. At Galore Creek, technical studies focused on optimizing mine planning and design are underway. Our share of project cash funding year-to-date was well under budget at $9.2 million with $8.7 million at Donlin Gold and a $0.5 million at Galore Creek. We have lowered our total 2015 forecast project spending for Donlin Gold and Galore Creek from $14.2 million to $12 million. Slide nine highlights our operating performance. Our third quarter operating loss of $6.6 million was approximately 39% lower and the first nine-month loss of $25.1 million was 17% lower than the prior year periods. General and administrative expenses were lower due to lower professional fees and favorable foreign exchange translation of expenses incurred in Canadian dollars. Year-to-date, our share of losses at Donlin Gold were $2.5 million lower than last year as 2015 activities continued to focus on permitting. At Galore Creek, our share of losses was offset by a $639,000 gain on the sale of surplus equipment. Moving on to our cash flow on slide 10. We spent $4.7 million during the third quarter. $2.8 million was used to fund our share of the Donlin Gold and Galore Creek projects and $1.7 million was used in operating activities primarily for administrative costs. We ended the quarter with cash and term deposits totaling $130 million. Based on spending to-date of $35.5 million, the full year 2015 spending forecast has been reduced from $44.8 million to $41.3 million. Greg, back to you.

[Greg Lang:]

Thank you, Dave. Turning to slide 11. Donlin is one of the largest undeveloped gold deposits in the industry. Right now, everybody is focused on hunkering down and cutting costs and no new investment. We are two years away from a construction decision and when sentiment changes, mines like Donlin will be needed to sustain the gold industry. Turning to slide 12. Donlin's size and production profile clearly distinguish it from the other undeveloped gold deposits. It's far and away the largest, better than twice the annual production of the nearest competitor. On slide 13, we compare Donlin's grade to the industry averages. Better than twice the average grade in the industry, which will contribute to its low operating costs. Donlin is already a large deposit that is illustrated on slide 14. We have only explored less than half of the gold bearing system. When the time is right, the owners will resume exploration. Certainly a very prospective piece of ground. On slide 15, we look at what's been happening in the gold industry. Exploration spending is significantly down and there hasn't been a major discovery in over four years. Gold production has peaked and it will continue to decline in the coming years. Without major gold deposits like Donlin, the industry cannot sustain itself. We think our timing to complete permitting will happen at a time of rising gold prices. On slide 16, one of the very appealing aspects of the Donlin project is the leverage that we have to rising gold prices and over its 27 year mine life, one would anticipate that it would capture many up-markets. We also have very strong partnerships from our partners and Teck and Barrick to our native corporation partners in Alaska and British Columbia. These partnerships are key to a successful development in today's industry. And these relationships with Donlin has spanned over 20 years. Both TKC and Calista have a strong interest in seeing this project go forward. We are also working with the National Fish and Wildlife Foundation on conservation projects in the region around Donlin. Yes, so what has our focus been this year? We are going to advance the Donlin Gold project through a construction decision. Neither owner has a build at any price mentality. When the market is right, we will go forward with this project. And while we are doing this, we will keep our relationships and stakeholders fully engaged. We will also safeguard our strong financial position. As Dave noted, we have continued to reduce our expenditures. In closing, the company is well financed to advance the Donlin Gold project. In less than two years we will have a permitted project and still strong cash balance. We really are a standout in the space in terms of our financial strength and the quality of our assets. Operator, we are now ready to open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of John Bridges of JPMorgan. Your line is open. Please go ahead.

[John Bridges:]

Hi Greg, everybody. I was just wondering, once you finish this process, are you going to become Dr. Lang for your thesis on Donlin or maybe given the size you should be a professor. Or maybe Tom will save the professorship. Originally the next step to Donlin was really simple and that was that either Barrick was going to buy you out or you and Barrick together were going to develop the mine. But now with all the changes in the industry, there must be a number of different scenarios out there. You are just back from meetings at Denver. I just wondered if you could sort of lay out a few scenarios as to how the project is likely to go forward? What possibilities are there?

[Greg Lang:]

Well, John, I think we are really focused on our permitting activities with Barrick. We have been really pleased with how constructive all the agency comments have been and that gives both owners confidence that we will get the permitting successfully completed in about two years. And while we are working on the permitting, we are also looking at what makes the most sense for the scale of the operation. And this feasibility study was conceived at a different time in the gold industry. Bigger was better. Everybody was growth focused and had lot stronger balance sheets and access to capital than they do today. But we think that's going to be a different world in two years time and working with our partner we are both looking at options to see what makes the most sense. And I think the scenario that's very likely is that as we are wrapping up the permitting in 2016, the owners will update the feasibility study. By then it will be about five years old and a lots changed since then, both in terms of inputs and energy costs. So little over a year from now we will update that and the owners of the site which path makes the most sense. And that could be anywhere from, if prices are strong, building it as big as you can and as fast as you can. If the markets are weak, we will go slowly. So I think there is so much at play with the gold price that both owners want to keep all of their options open.

[John Bridges:]

Yes. I keep on reading about a production cliff. So your asset could be very attractive to a number of different players who are looking at that cliff and would like to take a share in the project.

[Greg Lang:]

I think that assets like this do draw a lot of interest. We really have the view that a fully permitted project is of much greater value than one that's going through the permitting process. That removes the last bit of risk from the equation. And we have read a lot of different reports on production going out five years and you see it dropping anywhere from 12 million ounces or in the neighborhood of 15%. And with the lack of investment and discoveries in recent years, the industry will need projects like this one.

[John Bridges:]

Okay. Thanks, professor. Best of luck.

[Greg Lang:]

Thank you for joining the call, John.

[John Bridges:]

You are welcome.

[Operator:]

Thank you. Our next question comes from the line of John Tumazos of John Tumazos Very Independent Research. Your line is open. Please go ahead.

[John Tumazos:]

Good morning. Presumably your reserves or resources will be the same as Barrick and Teck calculated in their next filings. Probably the drilling will be the same, but the price coordinates could be lower for gold or copper. If Barrick or Teck were to take a financial impairment on their investments in Donlin or Galore Creek, do you think your auditors would use the same financial test and force you to do the same?

[Greg Lang:]

Well, I think I will turn that question over to Dave Ottewell, our Chief Financial Officer.

[David Ottewell:]

Hi John. First of all, at Donlin we only have $1.5 million on the books for Donlin and that basically represents the unspent cash or share of that at Donlin. So there is no risk of any impairment at Donlin. At Galore Creek, we currently have about $250 million on the balance sheet in U.S. dollars and we will be looking at any triggering events for an impairment together with Teck and anything that they do under their IFRS rules would likely be very similar with what we would have under U.S. GAAP.

[Greg Lang:]

And to your question on the reserve, John, both the reserves at Donlin, the feasibility study was completed in 2011 and the trailing average gold price back then was significantly lower than it is today. So we wouldn't anticipate any changes of these at the current price levels.

[John Tumazos:]

Concerning Galore, subsequent to the initial development at Galore, Teck did other things including the investment in Copper Fox Schaft Creek project. Is there any common assets, common infrastructure or ways that you could somehow maneuver that all those assets could be unitized into one in the district where your participation would also be in Schaft Creek as in to merge assets, so to speak? The way of the land is very nice at Schaft Creek. There is an airstrip right below the mountain and there is no 100 kilometer road tunneling through mountains et cetera.

[Greg Lang:]

Yes. I think you have raised a very good point. And clearly Teck takes the long-term districtwide view of Galore and the other projects around it. We are sellers. So I don't think any transaction of that type we would participate in, but it would certainly make our percent lower more attractive to any group that did pull together a large land is such as you describe.

[John Tumazos:]

Finally, roughly three years from now, your cash balance at current spending rates could be drawn down. Do you think your strategy might evolve to do a new equity financing three years from now? Or sell out? Or there is other gold or copper companies that are very undervalued with development properties, merge and add a new development property? Or something else?

[Greg Lang:]

Well, John, I think as Dave articulated, our expenditures, the demands on our cash have been steadily dropping over the coming years. If you move the clock forward two years from now and if our burn rate remain the same, we have a permitted project in somewhere between $90 million and $100 million cash. And that's assuming we don't sell Galore. Once we get the permitting completed, the demands on our cash would drop even further. So I think we could sit there and maintain ourselves for seven, eight years without substantially changing the structure of this company. And philosophically, we don't do down rounds. We will not raise equity at a share price less than our last offer in the $9.50. So we are patient people. Our major shareholders look at us as an unexpiring warrant on an ounce of gold and they take a very long-term view. So we are not really compelled to do anything other than focus on permitting and get Donlin ready for a construction decision.

[John Tumazos:]

So if anything, you are just going to be a little leaner?

[Greg Lang:]

Well, a little leaner. We are not that big a company today, John.

[John Tumazos:]

I know. It's just big partners that spend 50% and don't watch the nickels you got to watch out for.

[Greg Lang:]

We feel very fortunate to be in the financial situation we are in.

[John Tumazos:]

Thank you and good luck.

[Greg Lang:]

Thanks, John.

[Operator:]

Thank you. [Operator Instructions].

[Greg Lang:]

Well, everyone, there are no further questions. So that concludes our call this morning. Thank you for joining us.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Have a great rest of your day.