NovaGold Resources' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: NovaGold Resources, (NG)

NovaGold Resources Inc (NYSEMKT:NG)

Q4 2013 Earnings Conference Call

February 12, 2014 11:00 AM ET

Executives

Mélanie Hennessey – Vice President-Corporate Communications

Gregory A. Lang – President and Chief Executive Officer

David A. Ottewell – Chief Financial Officer and Vice President

Analysts

John D. Bridges – JPMorgan Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the NOVAGOLD Fourth Quarter 2013 Conference Call and Webcast. My name is Rachael, and I will be your operator for today.

At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards 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 the call over to Melanie Hennessey, Vice President of Corporate Communications. Please proceed.

Mélanie Hennessey

Thank you, Rachael. Good morning, everyone. We are pleased that you are with us today for NOVAGOLD’s fourth quarter and year-end results. And to hear an update 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 e-mail.

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 our year end financials release and in this presentation.

With that, I have the great pleasure of introducing Greg Lang, NOVAGOLD’s President and CEO. Greg?

Gregory A Lang

Thank you, Mélanie. Good morning, everyone, and thank you for joining the call this morning. For those of you who are less familiar with NOVAGOLD, we have two great assets located in North America as featured on the map on slide four. Our flagship asset Donlin Gold, one of the industry’s largest undeveloped gold deposits is located in Alaska, and held in a 50/50 partnership with Barrick Gold Corporation. At the Galore Creek project, our copper-gold deposit is located in British Columbia, which is expected to be the largest and lowest cost copper mine in Canada.

Galore Creek is held in a 50/50 partnership with Teck. We continue to offer evaluate opportunities to sell our interest in the Galore Creek project and use the proceeds to further strengthen our balance sheet.

On slide five, I’m very pleased with the substantial progress achieved in 2013, as shown on, it’s been a very productive year for NOVAGOLD. Our achievements can be broken down into three areas. First, we advanced the permitting process at Donlin Gold, which continues on schedule and under budget.

Secondly, through a successful drilling campaign, we identified significant extensions to the mineralization at Galore Creek, and we are now able to position ourselves to maximize the value of this asset.

And lastly, following the reorganization of 2012, and divestiture of non-core assets, we streamlined our processes, substantially reduced expenditures, and strengthened our balance sheet. We continue to deal with the company to provide the greatest and safest long-term leverage to gold.

I will now hand it over to David who will take you through our fourth quarter and year-end results in more detail, after which time I will provide an overview of last year’s activities at Donlin and Galore.

David A. Ottewell

Thank you, Greg. Turning to slide six, during the fourth quarter, spending at our projects was lower than the first three quarters in under budget for the full year. At Donlin, our share of cash funding in the fourth quarter was $2 million for a total of $12.2 million in 2013, compared to a budget of $15 million for the year. In 2013, activities at Donlin Gold included supporting permitting activities and the preparation of the preliminary draft EIS by the Corps, as well as community engagement.

At Galore Creek, our share of cash funding in the fourth quarter was $0.8 million for a total of $6.6 million in 2013, compared to a budget of $8 million for the year. Spending in the fourth quarter was lower, as the camp was closed after the completion of the drilling program in Q3.

As we previously reported, the company is required to report with the SEC on domestic forms and comply with domestic company rules. Therefore, today we filed our 2013 financial statements under U.S. GAAP and in U.S. dollars on Form 10-K with the SEC and in Canada on SEDAR.

Slide seven highlights our income statement items for 2013. Our operating loss decreased dramatically by 30% compared to the prior year. Our share of project expenses have been reduced along with our corporate overhead. The net loss from continuing operations in 2012, included a $76 million gain on derivative liabilities related to warrants in our convertible notes.

Turning to our cash flow on slide eight. The cash used in operating activities was $19.5 million in 2013, primarily for corporate administration, working capital and interest on our convertible notes. Investing activities include a $110 million invested in term deposits and $18.8 million for our share of funding at Donlin Gold and Galore Creek.

Cash used in financing activities included $79 million for convertible note repurchases, including an additional $6.4 million in the fourth quarter offset by $54 million in proceeds from warrants in the first quarter. At the end of 2013, we had cash and term deposits totaling a $191 million. We currently have sufficient funds to advance Donlin Gold through permitting, support ongoing activities at Galore Creek and repay the remaining $15.8 million of convertible notes in 2015.

On slide nine, we provide a breakdown of the budget for the Donlin Gold and Galore Creek Projects. In 2014, Donlin Gold will continue to advance the permitting through the completion of the PDEIS by the Corps in late 2014 for agency review and in preparation for issuance of the draft EIS for public review in 2015, in addition to continued community engagement activities.

At Galore Creek in 2014, we are focused on incorporating the 2012 and 2013 results into a capital efficient working plan that will advance the project towards next level mine planning and design. This will involve technical studies in the areas of environmental and water management, as well as site layout. Although the Legacy Zone is still open, no drilling is planned for 2014. Given the already large resource and extensive drilling completed since the last PFS in 2011, it is time to update our technical understanding of the deposit. In the meantime, we continued to evaluate opportunities to monetize the value of the asset.

In addition to completing all planned activities in 2013, our total expenditures were 7% lower than planned at $38 million. As shown on slide 10, moving into 2014 we’ve planned to further reduce our expenditures to approximately $30 million, which includes approximately $15 million for our share of expenses at Donlin Gold and Galore Creek and $15 million in general and administrative expenses, interest on the convertible notes and working capital. This is approximately $100 million less than our expenditures in 2012. With more than $190 million in the treasury, we are in great position to take Donlin Gold all the way through permitting and fulfill our other obligations.

With that I will now pass it over to Greg.

Gregory A Lang

Thank you, David. Our core focus in 2014 is to continue advancing the permitting at Donlin Gold. As David noted, we will also be undertaking various technical studies on Galore Creek with Teck, while we are evaluating opportunities to monetize this asset. Our community engagement initiatives and activities are equally important in maintaining our social license to operate where our projects are located. Before I provide and update on Donlin Gold and Galore Creek I wanted to highlight why the quality of an asset is so important today.

Slide 12 shows Donlin has a track record of exceptional growth, and with 39 million ounces of resources, it was more than sufficient for us to complete the feasibility study and more recently, move into permitting. Beyond the sheer scale of Donlin, it’s noteworthy to point out that the reserves were calculated at $975 an ounce, well below what most of the industry is using today.

In terms of quality as shown on the bar chart on slide 13, Donlin is considered to be an exceptionally high grade for a large scale bulk mining operation, and one of the most valuable undeveloped open pit gold deposits in the industry. The grade at Donlin is, in fact, where the industry was 10 years ago. When compared to the largest producers on slide 14, Donlin’s grade would be near the top of the list. This is a very important quality in the context of the challenges facing the metals industry, as reserve grades continue to decline and sources for emerging production to replace mined-out capacity are becoming increasingly scarce.

In addition to grade, with close to 40 million ounces of gold and 1 million ounces per year annual production over a 27-year mine life, Donlin is one of the most important undeveloped gold assets. Donlin has all the key ingredients of scale and quality that are required to build a modern gold mine.. Beyond scale and quality, Donlin is located in a jurisdiction with well established rules related to permitting mine development and operation.

As shown on slide 15, we have committed stakeholders and excellent partnerships with the Native Corporations, Calista, and TKC. We also have the benefit that Donlin is on private land designated for mining. Ticks all the boxes in terms of being arguably the most significant undeveloped gold deposit in the world. New gold discoveries are becoming increasingly rare. During the 1990s, on average, there were at least seven new gold deposits of a size of more than 5 million ounces. In fact, 2012 was the first year with no discoveries in almost two decades.

Slide 16 takes a look back at the gold discoveries of any consequence and how these have declined significantly in recent years. Throughout the 1980s and 1990s, there were over 25 discoveries that topped 20 million ounces. Over the past 10 years, they have only been five that meet these criteria and over the last two years there haven’t been any. We don’t find these type of deposits the industry cannot sustain current production levels. When looking at any project's life cycle, and in particular, Donlin Gold's on slide 17. The current investment in time and resources and permitting is relatively small in the overall schedule, which is measured in multiple decades.

On slide 18, we provide an overview of the key elements in permitting in the U.S. Permitting in Alaska is a clearly-defined federal and state environmental review process. This involves the preparation of an EIS, which is the most time-consuming activity in permitting. In 2013, Donlin completed its first full year of permitting. Early in the year, 14 public scoping meetings were held in the various Yukon-Kuskokwim villages and in Anchorage.

Subsequently, the Corps filed the Donlin Gold EIS Scoping Summary Report, which included the comments from the scoping meetings that will be addressed in the draft EIS. Throughout the year, we collaborated with the cooperating agencies as part of the permitting process, and the Corps hosted a number of workshops to review important components of the baseline data that has been submitted to the permitting agencies.

In addition, NOVAGOLD and Donlin Gold engaged with the Alaska Native corporations and other stakeholders on community initiatives, workforce development, and local outreach. The goodwill and professionalism of our team has been recognized. Indeed, Donlin Gold is to be congratulated, as they received the Employer of the Year Award from the National Association of State Workforce Agencies.

At this key juncture of the development of Donlin, we clearly have established the foundation needed for a successful permitting outcome. So where are we today? Slide 19 gives a snapshot of our current and upcoming permitting activities. Donlin Gold is finalizing the review of project alternatives with the Corps and applicable agencies.

In addition to the preliminary draft, EIS is well underway and on target to be completed around year end. The next steps will be to receive comments from the various federal and state agencies on this draft EIS, which is then expected to be filed in 2015. We also continue to work on a number of other major permit applications, such as air quality, water discharge and usage, pipeline plan and development, wetlands and dam safety, just to mention a few. Having completed several large permitting projects in the US, our team is encouraged by the constructive atmosphere of the permitting project at Donlin. We’re on the right track.

On slide 20, we provide a diagram of assets' historical performance as they have gone through the stages of development. We are at an inflection point, which is further reinforced by the quality, scale, and location of Donlin Gold. It will be one of the most coveted precious metal assets in the world. It's a compelling investment opportunity on a backdrop of significant challenges in the gold industry.

Moving on to Galore Creek on slide 21, the drilling program in 2013 exceeded our expectations and confirm that beyond the current 18-year mine life considerable exploration upside exists. With more than 11,000 meters drilled, last years program demonstrated an extension of the mineralization at the Legacy Zone and increased the drill density sufficient to prepare an inferred resource. And the results provided additional data needed for further mine planning and design. The work was completed ahead of schedule and under budget. Additionally, Galore Creek is to be congratulated for their enhanced safety practices and no lost time accidents.

The results from the 2013 drilling campaign combined with the work program focused our next level mine planning and design is expected to enhance the value of Galore Creek and its marketability. Galore Creek is expected to be one of the largest and low-cost copper producers in North America. As shown on slide 22, in terms of grade, it compares favorably to other North American assets. We continue to evaluate opportunities to monetize our interest in Galore. Kind of asset it should be a core mine for many companies.

Moving to slide 23, we are fortunate to have an excellent shareholder base, who believe in the opportunity and the superior leverage, which NOVAGOLD provides. We remain steadfast in our commitment to develop what will be one of the most coveted precious metal assets in the world. Patience has, and will continue to bring rewards for all of our stakeholders and we are grateful for the continued support and interest of our shareholders.

In closing, why should you be interested in NOVAGOLD today? In terms of quality, scale and upside, we have the best assets located in two of the top mining jurisdiction in the world. The company is well financed through permitting, and managed by a team of mine builders and operators with a strong track record of success and a rigorous alignment with all of our stakeholders.

We are proud of what we have achieved and are looking forward to an exciting future. Operator, we would now like to open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We do have a question that’s come through and it’s from the line of John Bridges of JPMorgan. Please proceed.

John D. Bridges – JPMorgan Securities LLC

Good morning, Greg, everybody. Congratulations on being in the sweet spot in the gold industry, where you’re sort of on a little island of stability.

Gregory A Lang

Thank you, John.

John D. Bridges – JPMorgan Securities LLC

I just wondered, with the permitting, you’ve got the large mine permitting group helping you in Alaska. How is that working out? Is that helping? Could you give us a bit of detail on how that’s developing?

Gregory A. Lang

John you’re correct, there is a large permitting, mine permitting group in Alaska and they’re working very closely with all the various state agencies, our native corporation partners and many of the local stakeholders, it’s a concept that has worked well in Alaska before and it certainly helps enhance the cooperation and communication between all the different agencies involved with permitting a large scale project like this. So it’s yes we are pleased with where we’re at John, and we will just continue to press on. And I think you’re right. We certainly may feel like we’re in a very sweet spot of low demands on our capital and very strong balance sheet.

John D. Bridges – JPMorgan Securities LLC

Right. I know there was some concern about the interaction of having the gas pipeline permitting together with the mine permitting. How is that developing?

David Ottewell

John, same. I think the entire process is moving forward very smoothly, there is a lot of will by the state of Alaska to see if this process goes smoothly and I think that’s bringing a greater sense of cooperation between the different agencies.

John D. Bridges – JPMorgan Securities LLC

Okay, great. And then, the big picture, you mentioned the shortage of new discoveries that have been made in this industry. You’ve been in this business for a long time. Just wondered what you see as being the problem. Are they not making the goes like they used to in the old days?

Gregory A. Lang

Well, John, I think it’s really a testament to the scarcity of gold right now, in spite of what’s in the last 10 years exploration spending throughout the industry really picked up. And in spite of that high level of spending and frankly improved technologies, there were very few new discoveries. So I think it really speaks more to the scarcity of gold than the ability of the geologist.

John D. Bridges – JPMorgan Securities LLC

Okay, great. And you're sitting on quite a bit of it, I seem to remember. Thanks a lot.

Gregory A. Lang

Thank you, John.

Operator

Thank you. We have no further questions. (Operator Instructions)

Mélanie Hennessey

Rachael, I have two questions that have come – comes through online. The first is what is your current cash cost estimate once Donlin Gold goes into production?

David A. Ottewell

So this is Dave Ottewell. This information is included in our feasibility study and it’s on Page 40 of our 10-K. And in there you can see that our cash – cost applicable to sales per ounce under U.S. GAAP would be $634 per ounce.

Mélanie Hennessey

Thank you, David. We do have a second question coming from online, when would operation at Donlin Gold commence?

Gregory A. Lang

Yeah, I’ll take that question Mélanie. Right now we’re not quite at the halfway point of permitting. As we reach the end of permitting, the owners of the project will be in a much better position to make a construction decision. Once that decision is made, it will take about four years to build the mine.

Mélanie Hennessey

Great. Thank you, Greg. And with that operator, we have no further questions online.

Operator

Okay, we have no further audio questions. So I’d now like to turn the call back over to Greg for closing remarks.

Gregory A. Lang

Everyone, thank you for your interest in the company and participating in our call this morning.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.

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