Teck Cominco Partnership a 'Grand Slam' for NovaGold

We recently joined NovaGold Resources (AMEX: NG) and Teck Cominco (NYSE: TCK) for the 2007 analyst day at their jointly owned Galore Creek project in northwestern British Columbia. This was our third visit to Galore Creek in three years and the progress is nothing short of amazing. The scope of the project has even attracted videographers from the Discovery Channel for their Extreme Engineering series.

In our opinion, the organization of activities and rate of construction clearly demonstrates great detail and planning in 2006. An impressive accomplishment considering NovaGold was under threat of being taken over by Barrick Gold Corporation (NYSE: ABX). This appeared to be the general sentiment of other analysts new to Galore Creek upon reviewing construction progress for the first hundred days.

Figure 1. – Iskut Bridge

In a joint presentation by NovaGold and Teck, the companies reported clearing 63 km of a 143 km road to Galore Creek, including completion of 40 km of road to grade. The Iskut Bridge (Fig. 1) has been completed (the first of five major bridges) in addition to numerous “puddle jumpers.” Two other major bridges are rapidly approaching completion including the Sphaler II Bridge (Fig.2). In addition to roads and bridges, 50 meters of the 4.3 km tunnel had been completed (Fig. 3). Tunneling should average about 6.5 meters per day through the winter which when complete in 2009 will accelerate construction.

Figure 2 – Sphaler II Bridge under construction

Figure 3. North Portal Tunnel Entrance

The rapid progress in road construction was made possible by establishing five road construction camps along the proposed route between the camps at both ends of the road. This would include Km3 near Bob Quinn Lake and Galore Creek with 200 rooms each. On the way to Galore Creek we flew along the road over four of the camps: Filter at 8 km still under construction, More at 36.5 km with 100 rooms (Fig. 4), Round Lake at 74.5 km with 120 rooms (Fig. 5), and Sphaler at 91 km with 120 rooms (Fig. 6). We did not have the opportunity to view Porcupine at 115 km with 70 rooms. Altogether, the camps hold 790 beds hosting 600 workers, which is anticipated to increase to over 1,200 by 2009.

Figure 4. – More Camp – Wolf (Ch’iyōne)

Figure 5 – Round Lake Camp – Grizzly Bear (Hooh)

Figure 6. – Sphaler Camp – Goat (Espaw)

Building roads and camps have been made possible by a fleet of 15 helicopters. This includes four heavy lift helicopters plus numerous Bell 205s and “long rangers.” The fleet has moved over 30 million pounds of equipment and mobilized 250,000 people flying 8 to 10 hours a day.

Galore Creek Project Summary

Galore Creek was initially discovered in the 1950s. From the 1960s to the 1980’s Galore Creek was developed by Kennecott and HudBay. In 1990 a Pre-Feasibility Study was completed and the project was inactive until optioned to NovaGold in mid-2003. NovaGold consolidated the district in 2004 and continued to drill and expand the resource until October of 2006 with completion of a Feasibility Study.

In February of 2006 NovaGold completed a comprehensive Participation Agreement with the Tahltan First Nation receiving praise from the Province of British Columbia. In February of 2007, NovaGold received an Environmental Assessment from the Province of British Columbia with primary permits to commence construction and surface rights over the Grace claims.

The Participation Agreement with the Tahltan First Nation includes significant incentives including minimum payments during construction and step payments linked to production. In addition, preference is given to Tahltan companies which provides for sustainable economic development of Tahltan owned businesses over the life of the mine. This has become even more valuable to the Tahltan First Nation considering the closure of Barrick’s nearby Eskay Creek.

Teck Cominco Partnership

In May of 2007, NovaGold and Teck Cominco completed a 50-50 partnership for construction and operation of Galore Creek. This was followed by final permits, and construction commenced in June. The project has a budget of C$2.2 billion based on the 2006 Feasibility Study which should be updated in early 2008. Teck is scheduled to provide the next US$500 million in construction costs, alleviating NovaGold to provide funding until late 2008. Primary costs expended over the next two to three years include access and infrastructure items which comprise approximately 20% of the overall budget. This includes the power line, roads, bridges, and a tunnel, much of which is limited to completion during the summer construction season.

Exploration focus will be to upgrade approximately 1 billion in resources outside feasibility “starter pits” to extend production at initial levels beyond the first six years of production. The identified reserve is 540 million tonnes grading 0.56% copper and 0.30 g/t gold (at $1.25 lbs Cu and $425 oz Au). The proposed facility is expected to process 65,000 tpd with annual production of 400 million lbs of copper or 400,000 ounces of gold equivalent (at a cost of $0.38/lbs Cu net precious metals credits). Ore is to be recovered from four starter pits with an average strip ratio of 1.64:1.

We see this partnership as a “grand slam” for NovaGold, validating of the Galore Creek project and alleviating concerns that may have surfaced during the failed takeover attempt by Barrick. The action by Teck validated the economic base case in NovaGold’s Feasibilty Study, the project’s resource expansion potential, and long-term copper prices. In addition, the partnership offered support for NovaGold’s ability to construct a tailings dam on the Grace Claims, granting of surface rights, and potential to earn 60% of the Grace Claims. The partnership also reduced NovaGold’s financial risk by an immediate injection of cash by Teck Cominco into the project for completion of infrastructure. This should carry the project through late 2008 when project costs will be shared equally.

We had the opportunity to observe how Teck Cominco perceived NovaGold and Galore Creek. It appeared that Teck was impressed with NovaGold’s ability to rapidly advance the project through feasibility and permitting. This was evident as the Galore Creek Corporation, the organization formed to hold Galore Creek, retained existing NovaGold management, construction, and exploration teams. It is anticipated that as the project approaches construction of the mill and production that Teck’s involvement should increase. In addition, it was apparent that the cultures of the two companies were compatible by a similar appreciation of the Participation Agreement with the Tahltan First Nation.

Possibly the key to the partnership was the buy-in on the economic base case presented in the feasibility study. It is evident that Galore Creek has significant expansion potential. Both NovaGold and Teck were clearly in alignment on the importance of bringing the project to production by 2012, and there appears to be consensus that there is potential for production to as much as double in size with additional power and resource optimization. This suggests that Galore Creek has the potential to become one of the world’s largest copper-gold mines.

Galore Creek appears to be a good fit for Teck Cominco. Approximately 30% of the company’s revenues are from copper-molybdenum production and 2% are from gold. Galore Creek is anticipated to provide Teck nearly as much copper production in 2012 as their current largest copper mine at Highland Valley and appears important to retain a growth profile for copper production beyond 2012. Based on our conversations with the companies and the visit to the project, we are impressed with the progress and the potential of Galore Creek and reiterate our “Top Pick” Buy recommendation for NovaGold.

Disclosure: The author is long NG and has no positions in any other stocks mentioned in this report. An affiliate of the author’s employer provides corporate advisory services to NG.