A year ago, Vancouver-based NovaGold Resources Inc. triumphantly fought off a hostile takeover bid by Toronto giant Barrick Gold. In 2007, the ambitious junior brought its Rock Creek project near Nome to the brink of production, began construction at Galore Creek in British Columbia and just a few weeks ago sealed a deal with Barrick to end their dispute over the Donlin Creek project in southwest Alaska.
On Nov. 7, NovaGold’s share price hit a 52-week high of $21.91. Then disaster struck: NovaGold and its new partner at Galore Creek, Vancouver-based Teck Cominco, announced that the copper-gold project would be put on hold due to a leap in the estimated capital cost from $2.2 billion to $5 billion. NovaGold’s share price plummeted overnight and by Dec. 14 it had hit a new 52-week low of $7.79.
So will the company still be around a year from now? The answer is a resounding “probably.”
The copper may not be coming out of the ground at Galore Creek any time soon, but financial analysts who take a longer-term view are cautiously optimistic.
“The market seemed to write that project off as worthless. I was maybe a little bit surprised that the market was so rough on the company,” David Stein, an analyst with Cormark Securities, told Mining News.
“I think the severity of the reaction has to do with more than NovaGold — it’s the stock market in general; with small cap stocks, the market appears quite tenuous. I think it comes down to two things: a general worry about risks in the market and credit issues in the U.S., the value of the U.S. dollar. When people are worried, they prefer larger cap stocks because they’re lower risk,” Stein said.
Stein has been covering NovaGold for some time from the research side and his company has done some underwritings for NovaGold, he said. He believes an engineering solution can be found for Galore Creek that would reduce capital costs and that investors should be patient. If the project’s capex can be reduced to between $3 billion and $3.5 billion, it could work quite well, Stein thinks.
Better prospects at Donlin Creek“To me Donlin Creek was always the better of the two projects, I’m more bullish on gold than copper,” Stein said. He estimates that Donlin Creek accounts for more than half of NovaGold’s value. “We’ve come to expect delays in the business, it’s just a matter of how long,” he added. The feasibility study for Galore underestimated the capex because consultants like Hatch are overstretched, working for several companies on big projects all at the same time and being pressured to finish their reports as quickly as possible, Stein believes.
“One has to put things into perspective, Galore Creek is a massive deposit with lots of opportunity to grow,” Paolo Lostritto, an analyst with MGI Securities, told Mining News. The inflation in costs for the project is partly due to the demand for skilled labor for Canada’s oil sands and for the Winter Olympics, which are due to be held in Vancouver in 2010. Galore Creek has to be valued as a care and maintenance asset for now, Lostritto added.
The likelihood is that the capex for Donlin Creek also will escalate, according to Lostritto. “The key is whether or not they can move that project forward,” he said. Lostritto estimates that Donlin accounts for 65 percent of NovaGold’s value, up from 60 percent before the announcement about Galore Creek. Galore now accounts for 10 percent of the company’s value, down from 26 percent, Rock Creek is worth about 10 percent and the Ambler exploration project in northern Alaska is worth about 15 percent. One of the reasons for Donlin’s higher value is that it is a gold project and Galore is primarily a base metals project, Lostritto said.
Takeover ‘plausible’ but not likelyA new bid for NovaGold by Barrick is “plausible,” now that the share price is low, but not likely, Lostritto thinks. “I would really like to see NovaGold go forward as a standalone entity; we need more companies,” he said.
Kerry Smith, an analyst with Haywood Securities, doesn’t think that a takeover bid for NovaGold is likely at the moment. Barrick has already been rebuffed once by NovaGold’s shareholders, has solidified its 50-percent ownership of Donlin Creek, and has four other projects in the pipeline. There is no big hurry to buy Galore Creek if it won’t be producing metal for years, Smith told Mining News. Meanwhile, Teck Cominco has been busy recently buying up shares in Fording Canadian Coal Trust.
“I do think that Galore will get built eventually and that Donlin will get built eventually, but not on the timetable that NovaGold was hoping for,” Smith said. “Generally, the north is underexplored. There are still going to be deposits discovered that will be economic and will get built.”
Alternatively, companies could head to the Congo to mine high-grade copper, but they could invest billions there and then the government could take ownership of the project, Smith added.