NovaGold: A Glittering Long-Term Bet

| About: NovaGold Resources, (NG)

Summary

Gold Prices climbed since the beginning of the year and might climb even further due to several reasons, particularly due to high demand for the yellow metal.

While copper prices have shown some green shoots, China's recovery may be the key factor for future prices.

NovaGold with its vast high quality reserves is a great long-term bet.

NovaGold Resources Inc (NYSEMKT:NG) reported a $10 million loss for the first quarter of the fiscal year 2016. Since the earnings release, the stock climbed to $6 levels, the highest in more than three years in a row. Some analysts have been ruing that the stock price no longer justifies the fundamentals. So does NovaGold's stock make any sense at current prices? Let's dig into the details:

Gold prices will rise over time

Being one of the most important players in the gold mining industry, NovaGold's stock also tends to fluctuate depending upon the market rate of gold. At present, we see gold going a lot higher due to a wide variety of reasons.

First, there is a lot of uncertainty in the global economy. While China's economic pain has somewhat stabilized, Europe remains a problem that's just not going away any time soon. Then we have a slightly bearish sentiment in the US economy, which has led to a flight towards safe havens such as gold. The US dollar, after appreciating against global currencies for some time, has started showing signs of weakness, which could drive the value of gold further upwards. A dovish stance of the US Federal Reserve also works in favor of higher gold prices, which fuels the upward momentum in NovaGold's stock.

Short-term factors such as the strength of the US dollar and the policies of the US Federal Reserve would have its influence on gold prices. If a lot more rate hikes take place than expected, there could be a downward pressure on gold prices. At the same time, strengthening of the US dollar would keep gold prices subdued. However, despite the potential short-term headwinds, NovaGold will still prove a great investment in the long run. Once production commences and as the price of gold rises, NovaGold's stock would rise as well. Countries such as India and China continue to have an insatiable appetite for gold. In India, most households still regard gold as a great investment. With most commodities bottoming out and showing signs of recovery, a great commodity upswing may be in the making, which could send gold prices north for an extended period.

Copper showing signs of a recovery but may correct a bit further

China is one of the biggest consumers of copper worldwide, so no surprise that the country's economic downturn played a major role in the crash of copper prices. However, since the beginning of 2016, copper has recovered to a certain extent. But will this trend continue? Well, many analysts believe that China's pain may not be over as yet. The country's real estate sector, which constitutes about a third of all economic activity, is still reeling under unsold inventories and subdued prices. Realty prices in the top cities might have recovered, but many of the other cities are still lagging behind. Another troubling sign for China is that the marginal recovery it's had so far has just been fueled by a ballooning pile of debt. Furthermore, the recovery of copper prices has only encouraged producers to bring excess production back online, which could again stymie any upward trend.

Positives Specific to NovaGold

NovaGold banks upon the success of its two greatest assets. The first one is the Donlin Gold Project, which the company owns 50% in partnership with Barrick Gold Corporation (NYSE:ABX). Another asset which the company boasts of is Galore Creek which is a copper-gold-silver project owned in partnership with Teck Resources Ltd (TCK).

The Donlin Gold Project is set to emerge as one of the largest producers of gold in the industry. It would be a modern and cost-effective mine that would produce 1.5 million ounces of superior quality gold in a year. Much of the industry suffers from low quality mines that yield low-grade-ore. The Donlin project on the other hand would produce twice the average grade of an open-pit mine, when compared to other similar projects in the industry. The table below demonstrates the returns with this project.

Reserve Grade

Gold Reserves in ounce

Donlin Gold

2.10 g/t

33.9 million

Livengood

0.69 g/t

10 million

Metates

0.87 g/t

18.5 million

DetourLake

1.02 g/t

15.5 million

Canadian Malartic

1.06 g/t

9 million

Click to enlarge

Upon completion, the Galore Creek Project would be one of the largest and lowest-cost copper mines in Canada. Thus, the two assets surely promise a better future for the company and its shareholders alike.

Mining companies like NovaGold are generally capital intensive with large amounts required to be invested. NovaGold seems quite capable in this case as it reported cash and short-term deposit balances of $117 million at the end of the quarter. The pool of funds is expected to easily cover all costs of all the project activities going on, thus making the company less dependent on debt or equity as a source of financing. Besides, over the years, NovaGold has been successful in trimming operating losses and net losses prior to commencement of operations. Also noteworthy is the fact that more than half the shares of the company is held by major long-term investors.

Takeaway

Gold faced challenging market conditions in the past three years. But demand in the yellow metal has begun to pick up of late. According to a demand trend report published by the World Gold Council:

After a challenging first half-year, gold demand steadied and strengthened between July and December. For the last two quarters, demand was bang in line with its five-year average."

In the fourth quarter of 2015, overall gold demand climbed 4%, with demand for investments up by 15% and from central banks and other institutions 25% on a year over year basis. At the same time, overall supply in Q415 dropped 10% with mining supplies falling 9% and recycled gold supply falling by a whopping 12%.

The precious metal has regained its psychological level of $1200 an ounce and demand is expected to rise with fewer restrictions on imports in countries around the world. At the same time, overall production of gold is expected to fall 3% in 2016. In the short term, we may see gold correcting from the recent surge due to technical reasons. However, with a situation of higher demand and lower supply, gold prices are bound to move upwards along with NovaGold's stock in the long run.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.