NovaGold (NYSE:NG) Q3 2013 Earnings Conference Call Transcript

Galore Creek is also a valuable asset, expected to be one of the largest and lowest cost copper mines in Canada. We intend to sell all or a portion of our interest in Galore Creek and apply the proceeds to the development of Donlin Gold.

In the third quarter, we continued to achieve a number of key deliverables. More technical workshops were held in Alaska with the Corps of Engineers and other agencies to review the main components of the Donlin Gold environmental and social baseline data. Donlin Gold permitting advanced over the quarter with the review of the project alternatives by the Corps and applicable agencies. Galore Creek completed its 2013 drilling program on time and under budget. And last and certainly not least, we maintained our strong financial position.

I will now hand it over to David Ottewell who will take you through our third quarter results in more detail, after which time I will provide an overview of our third quarter activities at Donlin Gold and Galore Creek. Dave?

Dave Ottewell – Vice President and CFO, NovaGold

Thank you, Greg. Turning to slide six. During the quarter spending at our projects progressed as planned. At Donlin, our share cash funding was US$3.3 million in the third quarter and $10.2 million year-to-date, on track for a total of $15 million for the year to support permitting activities and preparation of the Preliminary Draft EIS by the Corps.

At Galore Creek, our share of cash funding was CAD$3.8 million for the quarter and $5.9 million year-to-date, on track for a total of $8 million for the year. Spending increased during the third quarter as we completed drilling to follow up on last year’s discovery of the Legacy Zone. Expenditures will be lower in the fourth quarter.

Slide seven highlights our income statement items for the third quarter. Our operating loss has decreased dramatically compared to the prior year. Excluding foreign exchange gains, our year-to-date operating loss has decreased by 43%. Administrative expenses have been reduced by 44% from the prior year and property-related costs have been eliminated entirely due to the spin-out of NovaCopper and the sale of Rock Creek last year.

Turning to our cash flow on slide eight. We spent $9.5 million for our operating activities in the third quarter, primarily for our share of funding to Donlin Gold and Galore Creek. At the end of August, we had cash and term deposits totaling US$205.7 million.

In September, we accepted offers from noteholders to repurchase another US$6.4 million of the convertible notes. We believe that we have sufficient funds to advance Donlin Gold through permitting, support ongoing activities at Galore Creek and repay the remaining $15.8 million of convertible notes in 2015.

NovaGold expenditures have been reduced by nearly two-thirds since last year, as shown on slide nine. For 2013, we continue to expect to spend $15 million at Donlin, $8 million at Galore Creek, $15 million in administrative costs and $3 million in interests. We are continuing to pursue opportunities to further reduce our costs.

We have determined that NovaGold will become a U.S domestic filer commencing December 1, 2013. Therefore our future filings will be under U.S. GAAP and we have elected to change our reporting currency from Canadian dollars to U.S. dollars. You will see these changes in our 2013 year-end filings.

Greg, I’ll pass it back to you.

Greg Lang – President and CEO, NovaGold

Thank you, Dave. Starting with an update on Galore Creek. On slide 10, at the end of the third quarter, Galore Creek safely and successfully executed the 2013 exploration program, completing more than 11,000 meters of drilling under budget. The 2013 program was a follow-up on the success of the 2012 drill program and was aimed to define the extent of the legacy mineralization and assess its impact on future mine design.

The additional drilling completed over the last two years improves our understanding of the deposit and increases our confidence in the models. NovaGold and its joint venture partner Teck will be incorporating the 2012 and 2013 results into a capital efficient work plan for 2014 that will advance the project toward a new resource and reserve estimate for ultimate feasibility level mine planning and design. We will continue to enhance the value of this asset while we consider a sale.

Moving on to Donlin Gold. Slide 11 illustrates the five key attributes which make the project unique. With proven and probable reserves of 34 million ounces at an average grade of 2 grams per ton, Donlin Gold is exceptionally high grade for a large scale bulk mining operation. With production greater than 1 million ounces a year over the life of mine that is already measured in decades, Donlin will be the largest gold producing mine today.

In addition to size and grade, Donlin has great exploration potential and could get bigger over the long term. The existing reserves and resources are located in the Acma and Lewis pits, which represent only 3 kilometers of an 8 kilometer strike length.

In light of the political, social and economic instability of many gold producing countries, we feel very fortunate that our world-class assets are located in two of the safest geopolitical jurisdictions. Jurisdictional safety and stability have become very important investment criteria for many fund managers. With very few high quality and significant gold development assets in the world and even fewer in safe jurisdictions, NovaGold is unique.

To elaborate a little bit on the first attribute, Donlin Gold has one of the largest resources in comparison to the other major development-stage gold deposits that are at pre-feasibility study level or higher, as shown on slide 12. Donlin is exceptionally high grade for a large-scale operation and one of the most valuable undeveloped gold deposits in the world. In fact, it’s among the top 1% of all known gold deposits and one of only six gold assets in the world, producing or soon to be producing greater than 1 million ounces per year.

When compared on a cost basis to its peers, Donlin Gold measures favorably, as shown on slide 13. The life of mine all-in sustaining cash costs at Donlin are approximately $500 less than the industry average of $1,223. The low cash costs contribute to the significant cash flow generation and accelerates the project’s payback.

In light of the political, social and economic instability in many gold-producing countries, particularly in many parts of Africa, South America and Asia, we are very fortunate that our assets are in two of the safest geopolitical jurisdictions. With very few high quality and significant gold development assets in the world and even fewer in safe jurisdictions, NovaGold has tremendous attributes.

It’s important to note that Donlin Gold is located in a state that welcomes responsible mine development. As shown on slide 15, Alaska has an important mining industry with many well established operations. It’s the second largest gold producing state in the U.S. and its gold production has increased in recent years. The state appreciates the value of the natural resources sector.

Moving to slide 16. We were particularly pleased that Calista and TKC, the Native Corporations that own the mineral and surface rights to Donlin, are actively involved in the environmental impact study and permitting meetings. They’re both committed to seeing the project to fruition for the benefit of their shareholders. With excellent stakeholders in a pro-resources state, we have a lot going for us.

Moving to slide 17. We extend our congratulations to the Donlin Gold team for being named 2013 Employer of the Year by the National Association of State Workforce Agencies. This award recognizes the Donlin Gold team for their workforce development efforts in creating jobs, recruiting and training residents of the Yukon-Kuskokwim region, as well as engaging with community leaders.

Donlin Gold has a consistent local hire record exceeding 90%. The project’s effort to hire locally has become an integral part of the region and illustrates a new model of successful development in rural Alaska. Being named Employer of the Year is a great honor as we believe that offering employment opportunities and skill development encourages young people to stay in their communities, strengthening the fabric of these communities and offering increased stability and pride. Bringing an economic driver to the region will provide jobs, stimulate economic development and improve infrastructure and access. This really strengthens our already strong ties to our major stakeholders.

We are now a year into the permitting at Donlin. In order to put this process in perspective, slide 18 shows a list of projects and operations, which have been successfully permitted in recent years. Red Dog, Fort Knox and Kensington in Alaska; Rochester, Cortez and Highcroft in Nevada and Climax Molybdenum in Colorado. The permitting is a rigorous defined process.

As illustrated on slide 19 is the timeline for our permitting. Its clearly defined federal and environmental review process involved the preparation of the EIS, and this is the most time consuming portion of the permitting. In the third quarter, the Corps of Engineers filed the Donlin Gold EIS Scoping Summary Report, reflecting the comments which have been raised during the public scoping meetings held in the first quarter. Technical workshops were held with the applicable agencies to review the core areas of baseline environmental and social data related to the Donlin Gold EIS. Donlin Gold engaged with the Native Corporations and other stakeholders in conjunction with community initiatives related to the EIS.

Slide 20 gives a snapshot of the current and ongoing permitting activities. Donlin Gold continues to review project alternatives with the Corps of Engineers and other applicable agencies. In addition, the preparation of the preliminary draft EIS is well underway. The next steps will be to receive comments from the federal and state agencies in preparation of the draft EIS, which is expected to be filed next year.

Having completed several large permitting undertakings of major projects in the U.S., I am encouraged by the constructive atmosphere of the permitting process at Donlin. Now we’re certainly on the right track.

In closing, with two well established world-class assets and a strong balance sheet, NovaGold is well positioned even in the current challenging market environments to execute on its stated objective of maximizing shareholder value. With the treasury exceeding $200 million, NovaGold is advancing Donlin Gold through the permitting process and enhancing the value of Galore Creek through the implementation of a modest drilling and evaluation campaign. Both programs are being executed with a great deal of financial discipline and quality control. Our team is truly fortunate to have a loyal, engaged and tremendously supportive group of shareholders. We all share the vision that NovaGold is unique in providing the best and safest leverage to gold in the world.

Thank you. Operator, we would now like to open the line for questions.

Section II: Q&A Session

 

Operator

(Operator Instructions) Your first question comes from the line of John Bridges of JPMorgan.

John Bridges – Analyst, JPMorgan

Congratulations on the progress. And I just wondered, with hindsight, I guess your price being at pretty much top of the market in terms of the cost of building. I just wondered what the latest was in terms of obviously your desktop estimate as to how much saving you can make on equipment given that the equipment makers did have quite the pressure on their build timelines that they had a couple of years ago?

Greg Lang – President and CEO, NovaGold

You raised a very good point. The feasibility study was completed right at the time the industry was peaking. And with that in mind, we also put about a $1 billion contingency into our capital estimate. We’ve seen a lot of signs that whether it’s mining equipment, steel, copper prices, availability of labor and those have all really moved in our favor since the feasibility study was prepared. But we are still a couple of years out from a construction decision. And I think at that time it’s appropriate to update all of the inputs into the capital and operating costs. We know they are going in our favor but we haven’t addressed it in any detail at this juncture.

John Bridges – Analyst, JPMorgan

I appreciate your conservatism and respect that. I’m just thinking that the price of equipment relative to the price of gold was probably pretty high at the time you did the devaluation.

Dave Ottewell – Vice President and CFO, NovaGold

I think it’s certainly correct, John.

John Bridges – Analyst, JPMorgan

And so are you not seeing any two for one offers yet on (inaudible)?

Greg Lang – President and CEO, NovaGold

No blue light specials, but we are getting a lot of even signs the engineering companies are looking for work now, or two years ago you could hardly get your foot in the door. So it’s a good time for us to be taking the project through permitting and through a construction decision.

John Bridges – Analyst, JPMorgan

I am just curious what has forced you to go from IFRS to GAAP accounting?

Dave Ottewell – Vice President and CFO, NovaGold

Hi John, this is Dave. There’s several factors that we have to look at. One is the number of U.S. shareholders that we have. Our main asset is in the U.S. and we have moved management to the U.S. So for our SEC reporting now we have become a domestic filer.

John Bridges – Analyst, JPMorgan

So it’s technicality. Okay thanks guys. Good luck.

Operator

Your next question comes from the line of Paolo Lostritto of National Bank.

Paolo Lostritto – Analyst, National Bank Financial

I’m glad I stopped laughing after John’s two-for-one comment. My question is with regards to the pipeline. Are you seeing any movement in that regard in terms of people being interested from a technical aspect, from a permitting standpoint? I mean, energy is a key component to what you guys are doing up there. And so I just wanted to get a little bit more specifics on how things are going on that front.

Greg Lang – President and CEO, NovaGold

Yes, we’re advancing discussions aimed at potentially bringing in a third party to build and operate the pipeline. Nothing definitive that we can comment on at this stage, Paolo.

Paolo Lostritto – Analyst, National Bank Financial

When could we expect maybe an update in that regard?

Greg Lang – President and CEO, NovaGold

Certainly not until probably sometime middle of next year.

Operator

There are no further questions in the queue at this time.

Greg Lang – President and CEO, NovaGold

Everyone, thank you for joining us on our call this morning.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

 

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