Better Times ahead for NovaGold?

By Brad Zigler

The worst is over. At least that's the view of Rick Van Nieuwenhuyse, CEO of NovaGold Resources, Inc. (AMEX: NG), a junior gold mining issue.

Nieuwenhuyse isn't referring to the state of the gold market, but rather to one of its little corners, namely his company's Galore Creek project. Speaking at NovaGold's annual shareholder meeting in Vancouver, Nieuwenhuyse said that planning for the multimetal operation, which was suspended last November because of higher-than-expected expenses, may soon resume with partner Teck Cominco Ltd. (NYSE: TCK).

The shutdown of the highly anticipated joint venture sent NovaGold's shares into a tailspin, paring 59% off the stock's price since November.

Attendees at the recent New York Hard Assets Conference (see "Hard Assets Heresy") got a chance to figure out just how much of that decline was attributable to NovaGold's management. NovaGold was an exhibitor at the conference and was one of the half-dozen stocks randomly selected for inclusion in a hedging study presented on the conference's final day (see "Hedging Gold's Volatility").

Using hedge analysis, conference-goers learned that NG's near-term losses could be blamed in part on the current gold market slump. Management's contribution, however, was not insignificant. NovaGold's residual loss after hedging out gold's decline between February 28 and May 9 was 6.6%. That annualizes to 29%.

So what's that mean? Just this: NG's management has the potential to cost investors 29% of their share price if it continues along the same path as before and if gold remains as volatile as it was in the spring,

That's a lot of "ifs," but at least investors now can regard NG on a level playing field against other mining issues. Shares of another conference exhibitor, Hecla Mining Co. (NYSE: HL), for example, were nearly 11% under water, but with the hedge analysis, management's contribution to market capitalization could be fixed at a positive 25% per annum. It was the downdraft in gold prices that hurt Hecla. And that makes sense. After all, Hecla's producing.

Right now, the gold market's providing a stiff headwind for miners. Gold was higher in overnight trading, mostly on short covering in the wake of this week's decline. Through Thursday's morning fix in London, bullion had given up 3.8% for the week, while the closely followed Philadelphia Stock Exchange Gold/Silver Index (PHLX: XAU) gave up 6.3%.

A contemporaneous and investable spread between the SPDRs Gold Shares (NYSE Arca: GLD) and the Market Vectors Gold Miners ETF (AMEX:GDX) inched a bit wider this week. GLD's price was 1.91 times that of GDX at the close Thursday. The ratio has been stairstepping upward, meaning bullion has outperformed mining stocks, since early November.

Bullion vs. Mining Stocks (GLD/GDX Ratio)

GLD has been appreciating 14% per year over the past two years, while GDX lagged with a 9% growth rate.