The 40-million-ounce Donlin Gold project is more than midway through a roughly five-year permitting process, but gold prices are dipping to lows not seen in nearly five and a half years and trending downward.
Will project owners Barrick Gold Corp. and Novagold Resources Inc. be willing to pull the trigger on development once the hard-earned permits are in hand?
The Donlin Gold partners say it depends on where gold prices are headed and what the equity costs are for raising the capital needed to develop the world-class mine in Alaska.
“Any decision to proceed with development … will depend on the (Donlin Gold) project meeting Barrick’s minimum hurdle rate which will depend in large part on the prevailing gold prices and market conditions,” Barrick inked in its 2014 annual report published in March.
Neither Donlin partner has put a number to the minimum gold price required for moving ahead with development of the 1.1-million-ounce-per-year gold operation. However, Novagold Chairman Thomas Kaplan indicated in a recent interview with Octavian Report that neither partner is willing to begin construction until the current downward slide in price is reversed.
“This is something that we would both consider when gold prices have resumed their uptrend in earnest,” he told the publication.
Descending gold
For now, gold prices are moving downward in a trend that began in 2011, when the going price for the precious metal peaked at US$1,900 per oz From that historic apex, the cost of an ounce of gold has descended at a rate of about US$200 per year – averaging US$1,669/oz in 2012, US$1,411/oz in 2013 and 1,266/oz in 2014.
So far in 2015, the gold price has averaged about US$1,200/oz and as recently as July 20 tumbled to US$1,094/oz, a low not seen since March 2010.
Many analysts believe gold prices have reached a valley floor and will likely begin an ascent.
“The magnitude of the declines and the level of positioning suggest to us that the move is overdone and markets should recover from here,” UBS said after the July 20 gold price dip. “We don’t think gold deserves to trade close to or below US$1,100 for a prolonged period.”
The global financial firm, however, said it could take until September for the yellow metal to make any real gains.
Jim Rogers, an investor noted for co-founding the Quantum Fund with George Soros in 1970, told MarketWatch recently that a 50 percent correction in commodities is normal and a low of US$1,000/oz. is not unreasonable.
“Although I am not buying gold, I am expecting an opportunity to buy gold sometime in the next year or two. For instance, if gold goes under US$1,000, I hope I’m smart enough to buy a lot more gold,” he said.
With gold prices taking sharp losses since mid-July, this buying opportunity appears to be drawing nigh.
Kaplan is loath to make any short-term predictions on gold prices but anticipates that once the current correction completes its run, the precious metal is set to rebound to new peaks.
“For the record, I believe a reasonable equilibrium level for gold is US$3,000 to US$5,000 – maybe higher,” he told Octavian Report.
Not giving away gold
If gold does reach levels north of US$3,000/oz and Donlin Gold is built in time to catch these new heights, it would be a boon for Novagold and Barrick.
“Donlin Gold represents tremendous value for all of our stakeholders,” Novagold President and CEO Greg Lang said in a July 7 message to shareholders. “With the stated 39 million ounces of gold resources in the measured and indicated category, at an average grade of 2.2 grams per (metric ton), expecting to yield on average approximately 1,100,000 oz of gold per year over its projected 27-year life, Donlin Gold is one of the largest and highest grade undeveloped open-pit gold deposits in the world.”
With the mine plan targeting some of the richest areas of the Donlin Gold deposit in the early years, the mine is expected to average roughly 1.5 million ounces annually during the first five years of operation.
At US$1,200 per ounce gold, the base price scenario used for a feasibility study completed for Donlin in 2011, the mine is predicted to generate after-tax cash flow averaging US$949.5 million annually for the first five years and US$500.7 million annually over the life of the mine – resulting in a payback of the projected US$6.7 billion in capital costs in 9.2 years.
Gold prices do not need to reach levels foreseen by Kaplan to significantly increase Donlin’s value to its owners.
At US$2,000 per ounce gold, Donlin’s after-tax cash flow is anticipated to nearly double to an average of US$1.78 billion annually for the first five years and US$987.2 million annually over the life of the mine – resulting in a payback of initial capital in just 4.4 years.
On the flipside, the project is slipping below its break-even point at today’s gold prices, according to the feasibility study.
So, Novagold is willing to wait until gold prices have demonstrated they are on their way to new heights, which should be reflected in the stock price of a company on the cusp of developing one of the world’s largest deposits of the precious metal.
“We don’t want to give away two-and-a-half-gram material until we’re paid a higher price for it, and we genuinely believe that our equity is at least as precious as the metal itself,” Kaplan explained. “So with Novagold, the downside and upside are both secure, and with the fundamentals for gold being what they are, time is clearly working in our favor.”
Slow and steady
The Donlin Gold permitting process, meanwhile, continues to move forward at a steady rate.
“Reminiscent of ‘The Tortoise and the Hare’,” we and our partners have been advancing Donlin Gold steadily and without interruption,” Novagold CEO Lang informed shareholders.
The U.S. Army Corps of Engineers are planning to issue the draft Donlin Gold Environmental Impact Statement for public comment towards the end of 2015 and the final EIS is expected to be completed by early 2017.
“This timeline provides ample opportunity for all the stakeholders to become informed and comment on the draft EIS as well as giving full respect to the cultural practices of the Yukon-Kuskokwim region, where the holiday season extends well into January,” said Lang.
This also gives gold an opportunity to reverse its downward slide and head to new heights foreseen by Kaplan and others.
With roughly US$135 million in the bank and no debt, Novagold has sufficient cash to see Donlin Gold through the permitting process. At which point, if gold prices look as if they are heading towards new heights, Novagold and Barrick will likely pull the trigger on constructing one of the largest and richest gold mines in the world.
“In less than two years’ time, market and gold price dependent, the owners will be in a position to make a decision on one of the gold industry’s most vital assets in the next generation of mines,” said Lang.
