Digging Into NovaGold Resources: Big Risks, Massive Costs Ahead

by Sonya Colberg, Senior Editor - 1/7/2016 10:17:17 AM

There may be “gold in them there hills” but investors better not count on NovaGold Resources (NYSE: NG) digging it out.

NovaGold owns 50% of two exploration properties, consisting of the Donlin Gold project in Alaska and Galore Creek in Canada.

Expected expenses are massive. The prospects are iffy. The risks are enormous. And the excavation route goes straight through investors’ wallets.

The company hasn’t responded to our request for comment but investors may find various viewpoints here.

Meanwhile, here are the chief reasons TheStreetSweeper believes this blinding stock rally – up 11 percent in three months - is merely a flash in the pan:

*Donlin Gold project:

No operations. No revenue. The project awaits government approval for over 100 permits. The open-pit mining operations aren’t expected to start up until 2020.

          *Proven and potential gold reserves: While NovaGold reports reserves of 7.7 proven metric tons and probable reserves of 497, no precise data exists showing how much gold may be there or whether any is recoverable, and company expectations are not statements of fact, as stated here and here.  Additionally, acid mine drainage, possibly thousands of pounds of mercury releases, cyanide effects and increased river barge traffic top the project’s environmental risks.

         *Cost to design & build Donlin Gold: $6.679 billion.       

         *NovaGold’s portion of costs:  $3.34 billion.

*Galore Creek project:

No gold recovered despite numerous attempts since 2003. NovaGold and its partner ran out of money for the copper-gold-silver project and suspended construction in 2007 when they discovered construction would cost around $5 billion.

          *Current status: In February 2011, the former president declared, “Galore Creek is one of the most significant copper-gold projects in the world.” Eight months later, NovaGold began trying to sell its 50% stake. In 2012, the company said it expected a sale by the end of the year. Still waiting.

*Unfortunate promotional activity:

No obvious recent professional promotions; but the stock trader prosecuted for stock manipulation at age 15 -  Jonathan Lebed - successfully hyped NovaGold through his Lebed Biz in 2010 to $11.62 per share. Red Chip also promoted the company in the same time frame.

(Source: stockpromoters.com)

Alliances with such promoters are huge red flags for investors.

*Recent announcement:

On Nov. 30, NovaGold’s draft environmental impact statement (EIS) announcement levitated the stock from ~$3.70 to ~$4.45.

(Source: Yahoo Finance)

The draft EIS advances the project, yet requires a public comment period, with any possible approval stretching all the way into 2017.

And once past additional permitting, NovaGold still has to build the project. Roads, water storage dams, tailing dams, power plants, a 312-mile gas pipeline, an air strip and more have to go up around and atop the remote hilltop in Alaska.

So before NovaGold can begin blasting and scooping up its first mass of broken rock hopefully embedded with microscopic gold flakes, it will take three or four years of construction...moving any revenue possibility out to 2020 or 2021.

*May 2015 release:

The company announced in May that it had finished paying off its convertible notes, an admirable move. However, the second graph is of greater interest right now. It says:

“With $135.5 million in cash and term deposits after payment of the convertible notes principal and interest on May 1, 2015, NOVAGOLD has sufficient capital to complete the permitting of the Donlin Gold project, conduct planned studies on its 50%-owned Galore Creek project and have ample financial resources to continue with existing activities for many years should gold prices remain at current levels.

Whoa… this statement was made as gold prices flew to breathtaking levels. Gold reached about $1,234 at that time. But the chart below shows gold’s more recent trend.

(Source: goldprice.org)

Oddly, NovaGold shares are up while the price of gold is down since May.

(Source: Yahoo Finance)

*Accumulated losses:

And now NovaGold is feeling the pressure of gold prices significantly lower than in the spring, plus the Federal Reserve’s interest rate hike and a steadier economy. Such factors make NovaGold’s accumulated losses - $1.7 billion – look even bigger.

*Cash burn, looming capital raise:

At the same time, SEC filings say NovaGold’s cash stash has fallen under $45 million. Yet, even though the company is basically sitting still, it is burning through almost $2 million a quarter.

NovaGold will need to spend more to go after that sparkly metal … at least $3 billion for NovaGold's part of the construction costs. That’s about $1 billion yearly if it takes three years or so.

Where will NovaGold come up with that kind of money?

We think the answer may be a stock offering  - with looming dilution potential for current shareholders.

*They hit gold!

They may not find gold at the Donlin Gold project but rest assured somebody has already struck a rich vein. The top three executives are digging up millions in compensation -  $7.7 million in 2014.

(Source: Company SEC filings)

*Conclusion:

That glitter around NovaGold right now is just about as likely to be fool’s gold as real gold.

Investors who really want to go for the precious metal might instead consider investing in gold exchange traded funds or ETFs. These ETFs track the price of gold and are traded just like stock. GLD, IAU and DGL are some to consider.

As for NovaGold, the approval and construction processes are ultimately much longer, the risks greater and the uncertainty higher than most investors want to gamble on. That stock price looks poised to get hammered to about $2.50 per share - a very fair valuation.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in NG and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].

 

 

 

 

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