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NovaGold Resources Inc. (NYSEMKT:NG)

Q2 2012 Earnings Call

July 12, 2012 11:00 a.m. ET

Executives

Mélanie Hennessey - Vice President, Corporate Communications

Gregory Lang - President & Chief Executive Officer

Elaine Sanders - Vice President and Chief Financial Officer

Analysts

Paolo Lostritto - National Bank Financial

Stephen Walker - RBC Capital Markets

Eliot Glazer from Du Pasquier & Company

John Bridges - JPMorgan

Operator

Good day ladies and gentlemen and welcome to the NovaGold Second Quarter Conference Call and Webcast. My name is Laura and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mélanie Hennessey, Vice President of Corporate Communications. Please proceed.

Mélanie Hennessey

Thank you, Laura, and good morning and welcome to NovaGold’s second quarter financials and Donlin Gold Project update webcast. Our news release which was issued this morning before market opened and today's presentation are available on the home page of our website. On today's call we have Greg Lang, NovaGold’s President and CEO; and Elaine Sanders, NovaGold’s Vice President and Chief Financial Officer.

At the end of the formal part of the presentation we will be taking 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 first quarter financials release, and in this presentation.

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

Gregory Lang

Thank you, Mélanie. Welcome everyone and thank you for joining us for today's call. NovaGold successfully completed a number of milestones in the first six months of fiscal 2012. We are delivering on the reorganization plans which were announced last November. At the start of the fiscal year, we filed the Donlin Gold’s updated feasibility study. And as outlined in yesterday’s release, the Donlin Gold Board approved this study and gave Donlin authorization to file permits, which is a significant milestone for the project.

The timing of our financing was fortuitous and strengthened our balance sheet. With about $300 million cash and reduced expenditures going forward, we have sufficient financial resources to advance Donlin to permitting. NovaCopper which now owns Upper Kobuk Mineral Project in the highly prospective Ambler district and being led by Rick Van Nieuwenhuyse, was successfully launched as an independent company. Recently we hosted an institution investor site tour of the Donlin Gold Project. We were quite pleased to hear from important stakeholders that Donlin was a model project for responsible development.

Our stakeholders, who include the Alaska Native Corporations, Calista Corporation and The Kuskokwim Corporation, who own the Donlin Gold mineral and surface rights, they are our strong supporters. In addition we signed an important agreement with Bearing Straits Native Corporation to divest off the Rock Creek asset, which is a non-core asset at the company. This transaction represents a major step towards streamlining NovaGold’s financial and management resources to focus on the flagship Donlin Gold Project.

You will note on slide six, that we provide some key highlights from yesterday’s announcement regarding the authorization to file permit applications. The commencement of permitting at Donlin is a major milestone further advancing the project up the value chain. We will be filing permit applications in the coming weeks which will trigger the start of the NEPA, or permitting process. This process requires the preparation of an environmental impact statement. We would expect overall permitting to take approximately 3 to 4 years. During this time, Donlin Gold will look at opportunities at reducing capital cost and further de-risking the project.

We are at a turning point in the history of the company, as shown on slide seven. After restructuring, as envisioned by the board and management late last year, we will emerge a pure gold play focused on the Donlin project. Our foundation sets us apart and is based on a truly unique asset located in the United States, a safe geopolitical jurisdiction with world’s largest gold producer Barrick as our co-owner. With $300 million on our balance sheet, experienced management and important stakeholders such as the Native Corporations, NovaGold is well positioned to continue delivering on our strategy.

Now turning to slide eight. I note the tremendous opportunity which the Donlin Gold asset offers. Donlin has attributes that make it truly unique in terms of size, grade and production profile, and location, it’s in Alaska. Donlin Gold, as included on the bar chart on slide nine, is significant in size and among the top 1% of all known gold deposits. Most of the prominent gold development projects are either controlled by major companies or are located in very challenging parts of the world.

The future mine, as the graph on slide ten shows, will be about 2 km by 3 km within a district of over 8 km. Over the last five years, Donlin Gold’s mineral endowment has more than doubled. Tremendous exploration upside exists at Donlin, particularly in the targeted areas highlighted and listed on the map. Not only is Donlin a large scale project, it’s also at the top of the list in terms of grade as shown on slide ten. The grade is the key to any successful goldmine, and 2 grams is excellent grade for an open pit mine and places Donlin above most of the other gold development projects.

To appreciate the true significance of Donlin, it is insightful to look at all the other mines throughout the industry as shown on pie chart on slide 12. The 200 mines in this chart illustrates the scarcity of mines that produce in excess of 1 million ounces a year. There are only currently five mines producing more than a million ounces a year, and only two projects are slated to produce greater than million ounces a year. Once in operation, we are looking at a high production rate. The annual production as per the bar chart on slide 13, will be 1.5 million ounces a year for the first five years, followed by life of mine production of over 1 million ounces per year for decades to come. As a million ounce a year gold producer, Donlin is rare among the next generation of gold mines. Most of these other properties are located in risky jurisdictions.

NovaGold is bullish on the price of gold. And one of the qualities of Donlin is its excellent leverage to gold prices. As shown on slide 14, even when in a low price environment, the project has a positive rate of return. And this return jumps to double digits in today's price environment. But NPV is only part of the appeal of Donlin. It doesn’t reflect the additional value related to resources and exploration upside. It also doesn’t reflect the jurisdictional safety. Now we expect, as the world gets more complex, that discount rates on assets in North America will be significant lower.

With the mine life measured in decades, this could be a core asset for any company and gives NovaGold a foundation on which to build the company. This mine is expected to generate a great stream of cash flow for decades to come. When you look at the cash flow over the life of the mine as shown on slide 15, it’s striking how early in life the payback occurs. You know we are looking at a payback period of about 4 to 5 years, which represents only 20% of the current mine life. And discounted cash flow simply does not do justice on a mine life measured in decades. At current gold prices, the life of mine cash flow would be about $12 billion. Payout is excellent due to the leverage that Donlin affords investors.

On slide 16 we provide a breakdown of the expected capital expenditures as per the latest feasibility study. You know $6.7 billion, it’s a lot of money. But that $6.7 billion includes almost a $1 billion in contingencies. Utilities also account for about 40% of that total. As permitting gets underway, we will be looking at opportunities to reduce the upfront capital by working with third parties. For example, we might lease the mining equipment and plant. The gas pipeline which is almost $1 billion undertaking, is quite naturally built and operated by a third party.

Potentially, almost 20% of the capital could be saved through bringing in third parties. While this would increase the operating cost slightly, it would de-risk further this project. Early in the year, we highlighted jurisdictional risk as emerging issue faced by resource companies. A lot has happened since then. On slide 17, we have included a snapshot of some of the most relevant country risk which have emerged in 2012. In a report released just a few days ago, Ernst & Young global mining and metals leader, Mike Elliott commented, the uncertainty and destruction of value caused by sudden changes in the policy by the governments of resource rich nations cannot be understated.

It is clear that jurisdictional risk has created a lot of uncertainty of asset ownership for companies in these countries. But the Donlin project is in Alaska and NovaGold provides an opportunity for shareholders who don’t want to see their investments crushed by a coup, or their profits diminished slowly by nationalization in a country through ever increasing taxes. The bar chart on slide 18 which provides data from the Fraser Institute's mining survey, showed only six jurisdictions which achieved a perfect score in trade stability. And one of them was Alaska.

Alaska has a vibrant mining industry as shown on the map on slide 19. It is the second largest gold producing state in the U.S. with seven major mines. Gold production has increased in recent years. This is a state that appreciates the value of the natural resources sector and the opportunities that it provides in Alaska.

Slide 20 illustrates the key elements in a mining projects lifecycle. Allocating three to four years for permitting may seem like a long time, but as it relates to the size and scale of the Donlin Project, this timeframe is appropriate and is just a blink of an eye. Moreover, looking at it from the context of our full timeline, it’s fairly insignificant. Since we will be commencing permitting in the coming weeks, we felt it was important to give a synopsis of the process. Permitting is a very structured process in the United States. As per slide 21, permitting occurs concurrently with and is supported by the environmental impact study process. The federal and state agencies will develop an issue all of the required permits and authorizations for the project.

With a project of this scale, permitting a mine requires a multitude of permits, in excess of a 100. It can take anywhere from 3 to 4 years to complete. Once an EPA review process is set in motion by the federal government, it will provide opportunities for the public to review and comment on both the scope of the agency’s environmental review, as well as the draft environmental impact statement. When the permitting process is nearing completion, the owners of Donlin will be well positioned to make further decisions on the project.

Outlined on slide 22 are the various government agencies at the state and federal levels that are involved in permitting. Donlin has already established a solid working relationship with the State of Alaska. This is a structured process and given all the work that has been completed ahead of the commencement of permitting, we believe this will facilitate an orderly permitting process.

This year’s field work at Galore Creek is proceeding per the latest updated budget and remains on schedule. The sale process is underway. RBC and JPMorgan are engaged. We have signed CAs with various companies and we expect to complete this transaction by the end of the year which would further strengthen our balance sheet. But if we don’t get fair value for Galore, we would hold on to the asset rather than sell our interest at a below value price. Our cash on hand is sufficient to see Donlin go through permitting.

The equity markets for mining companies remain very turbulent and a healthy balance sheet is one of the most important assets the company can have in times like this. Our successful financing in February of this year takes this risk off the table. It’s also important to note that when the restructuring is complete, the cash demands on NovaGold will have significantly declined and we will have sufficient funds in place to take Donlin from permitting through to a construction decision.

At this point, I will turn over the presentation to Elaine Sanders, our Vice President and Chief Financial Officer.

Elaine Sanders

Thank you, Greg. Good morning, everyone. Well, it’s been a pretty busy quarter for the company. We held a special meeting of the shareholders at the end of March to approve the spinoff of NovaCopper to the shareholders. The vote was more than 90% in favor of the distribution by the security holders. The effective date of the distribution of NovaCopper shares was April 30, 2012. And on that day, all the shareholders received one share of NovaCopper for every share six shares of NovaGold that they held. NovaCopper has been listed on both the Toronto Stock Exchange and the NYSE-MKT, which is the old American stock exchange, under the same trading symbol NCQ on both exchanges.

NovaCopper has been launched with a good starting base with supportive shareholders and $40 million of cash to get it through a couple of years of exploration. All payments prior to April 30 have been paid by NovaGold. NovaCopper will be using its own cash for expenditures starting May 1. For accounting purposes we have to fair value the spinout. We used the volume weighted average prices for NovaCopper on trading day six through ten, after the initial opening on the stock exchanges. Which results in a five-day VWAP of $3.11 per share. We excluded the first five days of trading due to amongst other things, the uncertainty of timing of shareholders receiving their in their brokerage accounts.

With 46.7 million shares issued at $3.11 per share, NovaCopper was valued at approximately $145 million. With about $73 million of assets transferred off of NovaGold’s balance sheet, this includes the $40 million of cash we provided and $33 million of capital mineral property expenditures. We recorded an accounting gain of $72 million during this quarter. This also results in a $0.52 per share reduction for NovaGold shareholders of their cost bases in NG shares. You can recalculate the $0.52 by taking the $3.11 and dividing by 6, which comes from the 6:1 ratio from the spinout.

The last item I wish to highlight is that the convertible notes conversion rate has been adjusted as a result of this spinout. The conversion price has been adjusted using formulas set out in the convertible notes indenture. With the price decrease from U.S. $10.61 to $9.656, which results in an additional 9.8 million shares now to be issued at maturity on May 1, 2015.

Our next slide highlights the assets reported in our balance sheet from year-end to Q1 and now the second quarter. As you can see we have a healthy cash balance of $300 million at the end of the period. We now have classified in the line called assets held for sales, our fully funded reclamation bond at Rock Creek. And you will also see a line called liabilities held for sale for our asset retirement obligations at Rock Creek. This classification is required now that we have signed an agreement with the Local Native Corporation in order to sell the project. The final transfers are anticipated to be completed by year-end.

There is also individual line items as you all normally see, which are investments in our Donlin and Galore projects based on equity accounting under IFRS. There is also a line now called assets held for distribution to shareholders and it’s gone to zero in the second quarter upon the completion of the NovaCopper spinout.

Slide 28 shows the Rock Creek liabilities held for sale as I just mentioned. The balance sheet also shows the convertible notes, embedded derivate and the warrants derivative which we mark-to-market off the company's stock price on the last day of the fiscal quarter. As our stock price goes down the derivative liability correspondingly goes down and we end up recording accounting gains through the income statement.

That takes us to the income statement highlights. This chart shows the three and six month activities for our proportionate share of expenses booked at each of the Donlin Gold and Galore Creek projects. You can also see the accounting gains recorded as a result of the mark-to-market accounting for the derivative. The $72 million gain from the spinout of NovaCopper is also picked up in this quarter under the heading gain on transfer of assets. We do have a accounting net income for the three and six months ended May 31, but we do wish to remind our shareholders that we were not in production at this time and this net income is purely a result of mark-to-market accounting under IFRS.

My concluding slide ends with the budgets for Donlin and Galore. To remind everyone, Donlin Gold has an approved budget for this year of U.S. $37.2 million, of which NovaGold funds 50%. The project spent $3.6 million in Q1 and $9.5 million in Q2 on preparations for the permitting process. Project expenditures at Donlin are on track and $24.1 million remains in the budget for the rest of the year. At Galore Creek, the partners have approved a budget of $35.4 million of which $10.4 relates to care and maintenance activities and $25 million relates to the infill drill program.

NovaGold is responsible for funding 50% of this budget. The project spend $2.2 million in Q1 and a further $5.3 million in Q2 on environmental and engineering studies, in preparation for the 2012 drilling season which is currently underway. Project expenditures are on track for the year. $27.9 million remains to be spent during the second half for Galore.

These are the highlights for second quarter financials. I will turn the presentation back to you, Greg.

Gregory Lang

Thank you, Elaine. On slide 32, we have included a timeline of the key milestones for 2012. To date we have delivered on five of these important milestones allowing us to simplify the asset structure to focus on our flagship asset, the Donlin Gold Project. Near year-end we will emerge as a pure gold play.

Turning to slide 33, before we open the call for questions, why NovaGold, why now? NovaGold owns scarce, unique and institutional quality assets and we are well positioned to execute on our business strategies. Our balance sheet is strong. We have experienced management and solid partnerships. We are truly a safe, institutional quality gold developer with excellent leverage to the price of gold.

With that operator, we can open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Paolo Lostritto from National Bank Financial. Please proceed.

Paolo Lostritto - National Bank Financial

Just a couple of questions. First, am I right in thinking that in the latest update in the presentation, some of the cost figures that were presented for kind of the life of mine have changed a little bit in terms of operating cost.

Gregory Lang

Paolo, no, we have not updated the cost estimates and really the feasibility study is fairly current and we don’t see any need to do that at this juncture.

Paolo Lostritto - National Bank Financial

Okay. And then in terms of timelines and I know you provided on the slide I just don’t have it in front of me right now, but in terms of timelines, the timelines are still the same that were previously outlined, correct?

Gregory Lang

Yes, they are. You know we started the year anticipating that we would begin permitting about the middle of the year, and we have certainly met that objective.

Operator

Your next question comes from the line of Stephen Walker from RBC Capital Markets. Please proceed.

Stephen Walker - RBC Capital Markets

Just a question on permitting and the timeline there. I believe you made the comment that the permitting process is expected to take three to four years?

Gregory Lang

That’s correct, Stephen.

Stephen Walker - RBC Capital Markets

Can you give me a little more detail on the components of the permitting timeline, that is, is the pipeline itself, the rest of the plant site and surface site. My understanding is that Barrick has done a lot of the initial work on the pipeline, a lot of the study work that was required for the permitting at mine and plant site, tailings etcetera. I am just curious, my understanding was that it was probably closer to a two-year permitting timeline. I am just curious why it’s three to four years now.

Gregory Lang

Stephen, you know we have always anticipated it would be about three to four years. When you look at the other of this scale that have been permitted in the United States in recent years, some of them have come in a little under three years and certainly some have gone over four years. But I think we are well positioned to do this between three and four years. We have the virtue that the project is largely located on private land and the pipeline itself, you mentioned that -- you are correct, we have put a tremendous amount of work involved in both the pipeline and studies of the mine site that we expect to really facilitate the permitting process and we anticipate it will go smoothly.

Stephen Walker - RBC Capital Markets

So the three to four years is basically to take in consideration the details around the pipeline and the work required on permitting the pipeline.

Gregory Lang

That is correct. And actually we anticipate the pipeline permitting could be completed before the mine site.

Operator

(Operator Instructions) Your next question comes from the line of Eliot Glazer from Du Pasquier & Company. Please proceed.

Eliot Glazer - Du Pasquier

My name is Eliot Glazer. I have been an analyst for 43 years and I follow most of the metals and mining companies. My two part question is about Galore Creek, please is, from my other companies like BHP and Rio Tinto, the sense is that given the worldwide economic situation their desire to open new mines has been somewhat diminished. And this leads to the main part question is, have you actually had any offers for Galore Creek whether they be substantially below your target or not?

Gregory Lang

Well, Eliot, you know you are raising a good point. Certainly there is a lot of uncertainty in the marketplace right now. And that may impact the price we get for Galore Creek. But we don’t need to sell Galore Creek right now. We have sufficient cash on the balance sheet to see us through the next four years of permitting. And we are not going to give this asset away if we don’t get what we consider an acceptable price. We will just hand on to it until market conditions change.

Operator

Your next question comes from the line of John Bridges from JPMorgan. Please proceed.

John Bridges - JPMorgan

I am just intrigued, we have gone through a long period of painful process of rising capital costs but now with things slowing down, I am just wondering if you are beginning to see any indication that prices are stabilized or maybe even begun slip back a little bit or the component parts of building big new projects like Donlin.

Gregory Lang

You know John, you raised a good point. Certainly a lot of commodities that are involved with building Donlin such as steel, natural gas is down significantly from the feasibility study. So, you are right, a lot of components have softened in the last few months. And when we get further along with the permitting, we will revisit all of the parameters of the feasibility study and be in a position to make the appropriate decisions then. But everything is swirling right now but most of its, the changes, I think have been positive for the project.

Operator

Sir, there are no further questions at this time. I would like to turn the call over for Mr. Lang for closing remarks.

Gregory Lang

Well, we appreciate everyone joining us this morning. Thank you for your interest in NovaGold and your continued support.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect.

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