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Thomas Kelly

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  • Why a Takeout of Novagold Could Exceed $23/Share [View article]
    Yes, depending on how much the silver and Ambler manage to raise, any additional financing required would reduce the value of the buyout. It's tough to assign to how much lower because we don't yet know how they will finance it. Obviously an equity offering would be most dilutive for shareholders. But for an acquiring company with access to the capital markets, raising debt to cover development costs shouldn't be a significant problem and therefore the value of NG's assets would fetch a price consistent with debt financing in a takeover.

    As for splitting up the assets, I don't think it makes sense unless absolutely needed to raise capital for development costs. You would lose the diversification from a 60/40 gold/copper split and you also give away a significant established reserve in return for a lot of excess capital that must then be invested in identifying new projects with much longer times to production. To me there seems to be a lot more upside in keeping them together and selling in pieces.

    As for the acquiring company, thats tough to speculate on. Barrick could still do it but given the history it would not launch a hostile bid again. I don't think Teck has any interest. I think some of the big copper miners would have an interest. Someone like FCX as it would virtually double the size of their gold reserves, diversify the business better, and still add a big reserve to their core copper business. And the diversified miners have been showing increased interest in stepping outside their traditional products of iron and copper toward more esoteric things like potash, etc. They would certainly have the lowest cost of capital in acquiring so if they want to diversify the business and add precious metals exposure, they could. There aren't many projects the size of Donlin out there that would be meaningful for a big miner so it remains a possibility.
    Jan 23, 2011. 04:17 PM | 1 Like Like |Link to Comment
  • Why a Takeout of Novagold Could Exceed $23/Share [View article]
    Having looked costs further, the $4.5 billion does appear to be NG's share give or take half a billion. With regard to financing it, selling forward the silver and selling Ambler should get you around halfway there, maybe a bit more depending on the price of silver going forward. Whether the rest is paid by a debt offering (NG CEO's stated intention), by selling forward copper or gold, or by an equity offering is a question mark.
    Jan 22, 2011. 10:19 PM | Likes Like |Link to Comment
  • Why a Takeout of Novagold Could Exceed $23/Share [View article]
    Didn't take into account the silver because a good amount of it will probably be sold forward to cover development costs. That, along with Ambler, should cover the costs and perhaps cover costs and then some. And I think the $4.5 billion cost you speak of is overall costs not NG's share. Since Teck and Barrick are 50/50 they'll be half that.

    As for the 27 vs 33 mill ozs, 27 is proven and probable, 33 is measured and indicated. I think the M&I will ultimately be a more accurate number since the proven reserves were proven at $900/oz and with gold where it is now, a lot more will be economically recoverable.
    Jan 22, 2011. 07:46 PM | Likes Like |Link to Comment
  • Why a Takeout of Novagold Could Exceed $23/Share [View article]
    Yes we can both agree it is speculative. And I use the term speculative in a volatility sense and in a Hyman Minsky earnings are not covering the cost of doing business sense. And to be perfectly honest, I think we would all agree that the key variable for NG is going to be where the gold price is trading in a year. That's the real speculation because at $1000 gold, NG is probably priced right and at the very least wouldn't have much in the way of upside. At $2000 gold, obviously it is hugely undervalued. But my opinion on gold is constantly evolving and I think it is an instructive thought exercise to give a valuation to anchor NG relative to the gold price. Would like to put pen to paper on the bull and bear case for gold soon if I can find the time.
    Jan 22, 2011. 01:11 AM | 1 Like Like |Link to Comment
  • Why a Takeout of Novagold Could Exceed $23/Share [View article]
    As far as the timing goes, I took my source from an interview with Novagold's CEO where he said production could be as early as 2015. You can quibble with that aspect of the argument but I don't see it changing the premise of the article that NG is substantially undervalued. Even making the assumption that neither mine starts production until 2018 and adding in 3 years and discounting out to 32 years, you still get a valuation around $19/share. And given that I haven't accounted for the additional boost in reserves that is very likely with the next feasibility, the question of whether production starts in 2015 or 2018 is sort of minor.

    Cash flow is not simply not a useful way of measuring development stage resource companies in their early stages as it is plain to see with all mining, oil and gas, etc that the bulk of the capex costs are front-loaded and then they start to print money like crazy on the back end.

    And NG's checkered past, funding issues, share dilution are all out there and plain to see for anyone doing the research. With regard to Barrick's previous bid, I intentionally used the figure of $1.6 billion as the takeover price rather than the $16/share that most people throw around in order to provide an honest look at Barrick's offer and not make it seem bigger than it was. Companies change with time. My goal isn't to evaluate NG in 2006, but rather, in 2011. And on the whole, I think, the analysis is pretty credible.
    Jan 21, 2011. 08:58 PM | 1 Like Like |Link to Comment