NovaGold Resources (NYSEMKT:NG) has seemingly been abandoned by Wall Street. NG had been selling off in recent months with all of the other gold miners (see any of the major gold miner indexes, GDX, GDXJ, NUGT, etc.), given that the price of gold has been under pressure due to a stronger dollar and potential deflation risks. The largest gold ETF, GLD, is only slightly positive for the year, and before the recent rally on QE3 rumors, was negative on the year.
I recommended NG as a buy after it was obliterated due to Barrick Gold's (NYSE:ABX) most recent quarterly report, specifically its decision with respect to the Donlin Gold Project in Alaska, in which NG is heavily invested, owning 50% of it. Recall that in its recent filing, ABX stated about Donlin Gold that it "would not make a decision to construct them at this time. However, they contain large, long-life mineral resources in stable jurisdictions, have significant leverage to the price of gold, and therefore represent valuable long-term opportunities for the company."
Given that the Relative Strength Index reading was well below 30, touching 23, technically suggesting that NG is indeed oversold, I recently put my money where my mouth was an initiated a position, which is currently up 7% at the current trading price of $4.17. I am recommending the stock even at these levels as a long term purchase, in response to many inquiries regarding it in the short term.
Although in the short term progress has been halted following the Donlin blow up, NG is poised well to profit years down the road if a mine ever becomes a reality on the site, along with its partners (which it will need partners to fund the project). Should this site come into full operation in coming years and NG's other ventures play out, particularly since I believe the long term secular bull market on gold is just getting started, I think there are long term prospects for this stock, although it is not as safe an investment as a large cap miner such as a Goldcorp (NYSE:GG), Newmont (NYSE:NEM) or Agnico Eagle (NYSE:AEM).
While the decision from ABX is a significant short term headwind to NG and its share price, I believe NG is still an oversold buying opportunity for the long term gold investor. The entire gold mining sector has been battered in the last few months. Further, the price of gold is heading higher, especially if QE3 becomes a reality, which seems more and more likely. In fact, gold prices could reach $1,900 an ounce according to analysts at HSBC, who have stated:
"Economic uncertainty, geopolitical tensions and the uncertainty of the U.S. November elections are theoretically gold-bullish," and gold should rally in the second half of the year "when U.S. growth is poor and the dollar is weak." We expect prices to rally to above $1,900/oz by the end of the year. Patience is the most important commodity."
Should this thesis play out, it will benefit the entire gold mining space, including NG, but also many of my other favorite plays, including Eldorado Gold (NYSE:EGO) and Anglogold Ashanti (NYSE:AU), both stocks which I think stand to rebound significantly. However, my thesis is that such a rise will impact the more speculative gold miners, particularly NG, as well as Almaden Minerals (NYSEMKT:AAU), Minco Gold (NYSEMKT:MGH), and Sandstorm Gold (SNDXF.PK). Historically when gold miners spike (or plummet), such speculative plays have larger swings.
The increasing price of gold is a great catalyst to own the miners. Other reasons to own NG specifically include NG being a possible takeover target (though do not buy solely for this reason). They are also spinning off into the copper industry, increasing their metals and mining operations, through NovaCopper. Finally, there has not been any insider selling of company shares either, suggesting management isn't worried about further declines in share price. Time will tell if the major institutions that are holding NG have sold out of their positions, or are doing more buying. I would take either as a buy signal, as buying clearly suggests future strength, and selling would suggest the bottom may be in for the stock.
Bottom line, I think the gold miners are a buy right now, and I believe NG makes for a long term buy. I am closely watching the $4.00 level.
At the time of this writing, NG is 15% off of the lows. While the GLD is my favorite direct play on gold, and I have outlined my favorite plays on the gold miners in prior writings, I think an investor with a 5 to 10 year horizon would do well to consider NG as a speculative, long term investment in the gold mining space.