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NovaGold Resources Inc. (NYSEMKT:NG)

Q4 2012 Earnings Call

February 12, 2013 11:00 am ET

Executives

Mélanie Hennessey - VP, Corporate Communications

Greg Lang - President & CEO

David Ottewell - VP & CFO

Analysts

John Bridges - JPMorgan

Derek Macpherson - National Bank Financial

Kerry Smith - Haywood Securities

Operator

Good day, ladies and gentleman, and welcome to the NovaGold Fourth Quarter Conference Call and Webcast. My name is Matthew and I will be your operator for today. At this time, all participants are in listen-only-mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now, I would like to turn over the call to Mélanie Hennessey, Vice President, Corporate Communications. Please proceed.

Mélanie Hennessey

Thank you, Matthew. Hello everyone. 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 telephone 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 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 fourth quarter and year end financials release, as well as in this presentation.

With that, I have the great pleasure of introducing Greg Lang, NovaGold's President and CEO. Greg

Greg Lang

Thank you, Mélanie. It's been a year of many accomplishments for NovaGold. The company successfully completed a number of milestones throughout 2012, and the fourth quarter was no exception, as we can see in Slide 4.

As a result of much hard work and cooperative effort between the State of Alaska and the company, NovaGold completed the transfer of Alaska Gold Corporation, including the Rock Creek project to the Bering Straits Native Corporation.

The notice of intent to preparing Environmental Impact Statement for Donlin Gold was published on December 14th in the federal register. This is a very important milestone in the permitting process.

Our senior management team was further strengthened with the appointment of David Deisley, as Executive Vice President and General Counsel; and David Ottewell, as our Chief Financial Officer.

To recap the year, we strengthened our balance sheet in the first quarter by competing one of the year's largest offerings at nearly double the price of our previous equity sale.

We have a strong cash position with $253 million at November 30th, and additional proceeds of $54 million from the exercise of warrants subsequent to year-end. With reduced expenditures going forward, we have sufficient financial resources to advance Donlin Gold through permitting and satisfy all pending financial obligations.

NovaCopper was successfully launched as an independent company, which is led by Rick Van Nieuwenhuyse. NovaCopper owns the Upper Kobuk Mineral Project and contains one of the highest grades copper deposits in the world. It has the potential to be one of the sectors most exciting new districts.

Lastly, the most important milestone in 2012 was the approval of the Donlin feasibility study in July, which was followed by the commencement of permitting.

Slide 5, illustrates the key attributes which make Donlin Gold unique. With measured and indicated resources of 30 million ounces, it's the largest gold development project in the world. The quality is just as important as quantity. With a grade of 2.2 grams, Donlin is blessed with exceptionally high grade for a large open pit deposit. It's a grade that can be very forgiving in comparison to an industry average of a gram or less. In addition to size and grade Donlin has great exploration potential and will get substantially bigger over the long-term.

The existing reserves and resources are situated in a 3 kilometer section of a gold belt that extends at least 8 kilometers. With production greater than a million ounces a year over the life of the mine, Donlin's life is measured in decades. It would be the largest gold producing mine if it was in production today.

At a time when world class assets are rapidly being defined by where in the world they're located, Donlin is in Alaska, one of the safest jurisdictions and a state that welcomes responsible mine development. With resource nationalism becoming a prominent concern for mining companies and investors, we're fortunate to be in Alaska. Because of these attributes, we believe NovaGold will emerge as one of only a handful of premier, institutional quality, must own gold equities.

It's now my pleasure to introduce David Ottewell, who joined us in the fourth quarter as Vice President and Chief Financial Officer. David comes to us from Newmont where he was Vice President and Controller, responsible for all global accounting at Newmont. This is Dave's first NovaGold quarterly call. We're happy to have him on board. David.

David Ottewell

Thank you, Greg. I'm very pleased to be here and part of the NovaGold team. Turning to our financial results on Slide 7, our share of Donlin funding for the year was $18.5 million. In 2013 we expect our share to decrease to $15 million as permitting activities continue.

At Galore Creek 27,000 meters of exploration and geotechnical drilling was completed in 2012 with our share of funding at $16.3 million. In 2013, we expect our share to be $8 million, primarily for follow-up drilling and testing new targets.

In the fourth quarter, we completed Phase 1 of reclamation at Rock Creek. We sold the property in November recording a gain of $5.3 million. We transferred the remaining $13 million reclamation bond to the new owner who assumed full responsibility for the remainder of the Rock Creek reclamation activities as requested by state and federal regulatory authorities.

Slide 8, highlights our income statement items for the year. Donlin Gold and Galore Creek expenses decreased in 2012. Also care and maintenance, mineral property, and decommissioning expenses were lower than the previous year. These expenses were primarily related to Rock Creek and Ambler, which we no longer own, therefore these costs will not continue going-forward.

Share-based payments and administrative expenses were higher as a result of corporation reorganization activities completed in 2012. Other income was higher in 2012 as result of the $71 million gain on the spin-out of NovaCopper last April.

Turning to our cash flow on Slide 9, you can see that we have a significant cash balance with $253 million at November 30th. Thanks to our equity financing completed in the first quarter as Greg mentioned. Cash was used to fund our Donlin Gold and Galore Creek projects and for administrative expenses, which as I mentioned earlier included additional reorganization cost. We funded the NovaCopper spin-out with $40 million and spent $25 million at Rock Creek and Ambler, which will not continue in 2013. Also, subsequent to the year-end, we received $54 million from the exercise of the remaining share purchase warrants.

And so, on Slide 10, with the reorganization complete, NovaGold is a more focused company. We've effectively reduced our ongoing annual operating and financial obligations by almost 70% from 2012 to 2013. With a cash balance of $253 million and additional $54 million in proceeds from the exercise of the warrant, we have sufficient cash on hand to advance Donlin Gold through permitting and repay the $95 million outstanding on the convertible notes.

And now, I'll turn it back to Greg.

Greg Lang

Thank you, David. For 2013, we've listed the key goals and milestones that we're working toward. At the end of the first quarter, we will release the 2012 drilling program results from Galore Creek.

Shortly after that we expect the Donlin Gold public scoping process to come to a close. We're well into this and we've come across no unexpected issues or concerns. Six months into permitting, it is proceeding as we expected it would.

Q3, we will update reserves and resources for Galore Creek and continue exploring this highly prospective property. Late in the year, we expect the Preliminary Draft Environmental Impact Statement to be completed.

Next slide illustrates the permitting process, where are we now? In December -- in July Donlin Gold submitted a plan of operations and a Section 404 wetlands permit, which launched the permitting process.

Our permitting in Alaska is clearly defined environmental review which is coordinated under national requirements. Process involves the EIS which is the most time consuming portion of this process. The notice of intent to prepare the EIS launched the public scoping process. Based on this schedule published by the corps of engineers, we expect it will take three to four years to permit Donlin.

We welcome this scrutiny that permitting process brings given the importance of a project of this size to the state and to the region. We have sufficient funds in place to take us all the way through permitting. I have been involved in many permitting projects and so far I’m very pleased with where we are at to-date. I’m also proud of the excellent relationships NovaGold has developed with our local communities, native corporations and the State of Alaska. Once our permits to construct and operate the mine are in place we expect to move toward a construction decision without delay.

In addition to the permitting activities in 2013, the co-owners of the Donlin Gold will look at ways to maximize the return and reduce upfront capital costs.

As shown on Slide 13, real opportunities to reduce capital exist by sharing upfront costs with third-party owner-operators. $6.7 billion is a lot of money but includes a very healthy contingency and real opportunities to reduce capital expenditures by almost $1 billion.

We are evaluating leasing the mining equipment, third-party owner-operators for the oxygen plant, gas pipeline and port facilities. A good reference point on capital is recently completed Pueblo Viejo Project in the Dominican Republic which was built for $4.1 billion including the power plant. There are many similarities between Pueblo Viejo and Donlin Gold.

Moving on to Galore Creek. NovaGold continues to evaluate opportunities to sell our interest with a view to focus on our flagship Donlin asset. But Galore is a great asset, in many ways we hate to part with it. When we announced our intention to sell it over a year ago, our balance sheet was far different and more strained. With more than $250 million in cash, we are not in a rush to sell Galore Creek. As a result we will continue to evaluate opportunities until such time we are able to sell it at what we view as fair value.

If any production is envisioned by the feasibility study Galore Creek is expected to be the largest and lowest-cost copper mine in Canada, which speaks volumes when compared to the difficult jurisdictions where many copper assets are located. Galore Creek had an active and successful exploration program last year drilling 27,000 meters. We look forward on reporting these results later this quarter.

2013 we will work to update the resource model and have plans approximately 10,000 meters of exploration and follow-up drilling based on last year’s favorable results.

It speaks volumes of the quality of our assets and NovaGold has been able to attract a high quality senior leadership team. In addition to David Ottewell, the company announced the appointment of David Deisley as Executive Vice President and General Counsel during the fourth quarter. During his career David has held very senior executive roles with Gold Corp and Barrick North America. At Gold Corp., Dave played a leading role in the implementation of all corporate development transactions and participated in the advancement of Gold Corp's development projects. While at Barrick Dave were responsible for permitting some of the largest gold mining operations in the world. In summary, we have an excellent team to take Donlin forward to a construction decision.

In closing on Slide 16, last year was a time to reorganize the company, simplify the corporate structure and build a team with the experience of permitting and building large-scale projects as Donlin. We are dedicated to bringing Donlin Gold along the value chain and generate substantial returns for our shareholders. We appreciate your interest in our company.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And your first question comes from John Bridges of JP Morgan. Please proceed.

John Bridges - JPMorgan

I thought you were going to have a quiet time? But looking at your schedule for this year it sounds like you are going to be a whole lot busier. I just wanted to follow up on the capital story. I know we discussed that the -- the sort of bids for capital projects were sort of softening the last time we spoke. I just wondered if you had any more sort of sense as to whether there was actually any weakness even on some of the items that you had put into the previous feasibility study.

Greg Lang

Well, good morning, John, and thank you for joining our call. Yeah we continue to see signs that the development side of the business is slowing whether it be routine inquiries from engineering companies and frankly the availability of good quality projects people. So we haven't really taken any of these signs if you will John and put them against the previous numbers. We've certainly got time to do that in the coming years and this year we'll just put our attention heavily the gas pipeline and other opportunities for third-party participation.

John Bridges - JPMorgan

There was a news item in the last few months that the salmon run in the Kuskokwim River didn't really work this year and the Calista people didn't -- their fishing was not particularly successful. Has that strengthened the Calista support for the project and their encouragement of the government to speed this thing along?

Greg Lang

John, you're right in that the salmon run was quite down this year, it does go through cycles, but this year was one of the lower cycles. And I think, certainly at reinforces is the need for economic opportunity in that part of the world. But I wouldn't say, I think it's really, it's hard to say how that directly ties to support for the project. We already have great relationships with our native partners and the local communities and I don't think that the salmon run in itself would have you know change that in anyway.

John Bridges - JPMorgan

Yes, I was just thinking that it's indicative of the need for some sort of real stronger employment base in the region.

Greg Lang

Yeah. With or without the salmon run economic opportunity in that part of the state is very minimum.

Operator

Thank you for your question. Our next question comes from the line of Derek Macpherson of National Bank Financial. Please proceed.

Derek Macpherson - National Bank Financial

Just wanted to follow-up on the sort of the Donlin and Galore budgets. You guys have got $15 million and $8 million for this year respectively. I guess with the permitting ramping up at Donlin, is that cost something we should be looking at going forward or is that going to get sort of increased?

Greg Lang

Yeah. That's a good starting point for this year. Permitting in itself relative to all the activities prior years, such as drilling and extensive engineering work -- permitting in itself is fairly inexpensive part of the lifecycle of the project. So, I think that we haven't guided that far out but that's approximately what it would cost.

And I think at Galore Creek our budget of $8 million is lower than it has been in prior years. This year we want to focus on additional exploration and step-out drilling based on last year's programs. We think Galore is a great asset with the potential to get figure and we're going to follow that up with additional drilling. We still own the project but we're still intent on selling it. But while this process is going on we think modest exploration budgets will enhance its value.

Derek Macpherson - National Bank Financial

All right. And I guess the slowdown in the pace or the need to sell Galore is just a result of not seeing offered fair value?

Greg Lang

Correct. I think we all recognize this is an unsteady time in the middle markets. And we're fortunate that we're not in a position where we've to sell Galore. We'll only sell it if we get what we think is fair value. And in the meantime, we'll continue to enhance its value.

Operator

Thank you. Your next question comes from the line of Kerry Smith of Haywood Securities. Please proceed.

Kerry Smith - Haywood Securities

Just on Galore, is there still an active process underway to try and solicit more interest or have you just kind of just put it all on the back burner now?

Greg Lang

Well, good morning, Kerry. Thank you for joining our call. Well the process moves forward in a slow if not methodical manner and I think we've to be patient. But I don't anticipate anything will happen until the spring time when other parties can get back out to the site. We don't keep the sites open year around. So we've got a I guess a quite time in the process. And late in the second quarter and early in the third quarter we'll be in a position to provide more definitive update.

Kerry Smith - Haywood Securities

Okay. And then can you give any sense as to the number of people -- or parties that are actually signed to CA? Is it like a little more than five, less than 10? I'm not sure if you can give any guidance.

Greg Lang

Kerry, early on in the process we made the decision not to disclose who or how many were interested in the asset.

Operator

Thank you. There are no more questions at this time. (Operator Instructions)

Greg Lang

Well, there are no further questions. Thank you for your interest in NovaGold and joining our call this morning.

Operator

Thank you for your participation in today's conference ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.

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