By Brian Tracz
NovaGold Resources, Inc (NG) has amassed a "pure gold" portfolio after spinning off other metals and minerals operations. The company sold a 50 percent stake in the Galore Creek copper project and recently spun-off a micro-cap business, NovaCopper. The result: a company completely exposed to the broader gold market. With that, billionaire Jeffrey Vinik, manager of Vinik Asset Management, disclosed his fund's 5.53 percent stake in the company (you can view his portfolio here). As of March 31, Vinik also held Coach, Inc. (COH) and Continental Resources, Inc. (CLR).
Like many other hedge funds, Vinik has been quite interested in gold as of late, holding a gold ETF as one of his top five holdings as of March 31. The metal has been seen as an alternative currency play in a eurozone debt crisis scenario. Neil Gregson of JP Morgan noted that "whatever the outcome in Europe, it will likely be supportive for gold" in the third quarter. The long-term trends for gold are also positive, though short-term pricing will suffer in the event that monetary stimulus or quantitative easing measures are not initiated by central banks worldwide.
According to its second quarter report, NovaGold Resources Inc. is poised to unlock shareholder value via its pure gold strategy. First, the Donlin gold play is among the highest-quality and largest open-pit gold mining projects in the world. Situated in Alaska, the play is free of geopolitical risk and is partly held with Barrick Gold Corporation (ABX), a $34-billion gold procurement company - the largest in the world. Second, the company has $300 million in cash to finance the development of this play.
NovaGold shares fell 30 percent on July 26 as Barrick announced that it would be holding off the development of the Donlin gold due to the unattractive capital structure in the present economic climate. This essentially means that investors will need to wait in order to see major capital appreciation at NovaGold. But the Donlin gold play's quality and overall security is appealing to those who can stand some near-term risk. Donlin has 39 Moz of proven or probable gold reserves, and its average grade is 2.24 g/t, which is higher than the majority of its peers. Along with the Cortez and Goldstrike mines, Donlin is one of only three major gold mines in North America.
But there are reasons to keep an eye on NovaGold. The company's shares, presently at around $4.30, are trading at early 2009 levels. This comes as the price of gold has steadily risen since 2001. Gold production has increased only 0.6 percent per annum since 1999, so a relatively flat rate of production increase and mine development should help bolster the price of gold for the long term. In volatile markets, gold is also an attractive security blanket, especially as one area - the Eurozone - might see its currency collapse if heroic deeds are not initiated by various national premiers.
That said, NovaGold will not be producing substantial amounts of gold in its Donlin mine for several years, meaning that those wanting to play gold within the context of short-term volatility might want to look elsewhere. The mine life for the play is 27 years, and the company is well-leveraged to gold prices.