NovaGold's Acquisition Is a Holiday Bargain

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Includes: GLD, NG, SLV
by: Stephen Leeb
Gold is up today, and the correction in the yellow metal appears to nearing its final stages. We wouldn’t be surprised to see a further 5 percent decline to the $1,040/oz level (close to the 100-day moving average), but given our expectations for where prices could go – we wouldn’t wait for another dip, either. We’re also seeing some divergence in the way gold and both the U.S. dollar and gold miners’ stock act – an encouraging sign for gold on both accounts.
Even as gold has pulled back, some miners have been advancing. One in particular, Small-Cap Value’s NovaGold Resources (NYSEMKT:NG), has moved higher by more than 20 percent in the last two days. The reason was company-specific: The junior miner announced that it’s acquiring the remaining 49 percent interest in the Ambler property in northern Alaska. The company will pay $29 million in stock and cash to a subsidiary of mining mammoth Rio Tinto for the undeveloped 90,000 plus acres of property.
We see the purchase as a tremendous holiday bargain for NovaGold, as just below the grazing moose currently occupying the land lie vast deposits of copper, zinc, gold and silver.
According to 2008 estimates, Ambler is among the largest and richest known copper-zinc volcanogenic massive sulfide [VMS] deposits in the world, while also boasting impressive precious metal deposits as well. Below is a current resource estimate:
Total Contained Metal
Resource
Copper
(Mil. lb.)
Zinc
(Mil. lb.)
Gold
(Mil. oz.)
Silver
(Mil. oz.)
Lead
(Mil. lb.)
Indicated
1,538
2,237
0.45
32.3
350
Inferred
937
1,313
0.26
18.6
210
Given the indicated resources listed above, the $29 million acquisition price tag is quite the bargain. Consider that the indicated copper alone is worth almost $5 billion at today’s prices. There’s also a strong possibility that the estimates could be revised upwards, given management’s history of successes at their other properties.
The terms of the deal were also extremely attractive to NovaGold. The company will issue $5 million in stock up front, with two cash payments of $12 million to be paid in 12 and 24 months. Rio Tinto will retain a 1 percent net smelter return royalty that NovaGold can also purchase at any time for a one-time payment of $10 million.
Granted, it will take billions of dollars to develop the Ambler property in the coming years. NovaGold will no doubt have to issue lots more stock in the process, but its current assets will also be growing in value in the meantime. Shareholders will likely be rewarded with a sharply appreciating stock long before the first ounce of metal is smelted, and we remain buyers.
Given our long-term views on gold (and other commodities), we’d like to make one note about investments in the sector considering that we are quickly approaching tax season. Please be aware of different tax consequences for some ETFs that we recommend. SPDR Gold Trust (NYSEARCA:GLD), which we hold in our Growth Portfolio, as well as iShares Silver Trust (NYSEARCA:SLV) receive special treatment in the tax code.
Since both ETFs are organized as grantor trusts, and hold the actual metal as an investment, the gains on ETFs are taxed as collectibles (as if you were holding gold bars or coins yourself), rather than simply another stock. When held for less than a year, they are taxed as ordinary income like most other stocks. However, when held for more than a year, they are taxed at a maximum rate of 28 percent.
This only applies to those ETFs that hold the actual commodity, rather than futures or derivatives contracts that track metals performance. Gold mining stocks are also taxed like stocks, not like collectibles. Also, at least for now, these tax implications can be avoided by holding the ETFs in a tax-deferred account like an Individual Retirement Account [IRA]. As always, we recommend you consult your tax advisor.

Disclosure: Leeb Group, its officers, directors, shareholders, employees
and affiliated entities and/or clients of such affiliated entities may
currently maintain direct or indirect ownership positions in financial
instruments (i.e., stocks, bonds, options, warrants, etc.) of companies
or entities whose underlying exposure is in the companies mentioned in
this article.