Vol. 16, No. 52 Week of December 25, 2011
Providing coverage of Alaska and Northwest Canada's mineral industry

Mining News: New NovaGold leaders focus on Donlin

Click here to go directly to this story within the full PDF version of this issue, with any maps, photos or other artwork that appears in some of the articles.

Email it to an associate.

Former Barrick exec Lang is new CEO, Electrum CEO Kaplan gains chairmanship; restructured company sheds copper in favor of gold

Shane Lasley

Mining News

NovaGold Resource Inc. has made tectonic shifts in its leadership and corporate structure. Shedding all of its assets except for the Donlin Gold project in Southwest Alaska, the restructured company is singularly focused on bringing this 40-million-ounce gold deposit into production by the end of the decade.

Rick Van Nieuwenhuyse – who founded NovaGold and guided the exploration company through 15 years of trials and triumphs – is relinquishing NovaGold’s top executive office to make room for Greg Lang, who will assume the role of president and CEO in early January.

“His extensive background in developing mines for the largest gold producer in the world, combined with his leadership ability, makes him the right person at the right time to take the helm at NovaGold as it enters its next phase of development to become a significant North American gold producer,” Van Nieuwenhuyse said of his successor.

Lang, who is will move into the NovaGold executive office early in January, is no stranger to the Donlin Gold project. From 2003 until accepting NovaGold’s top executive position, Lang served as president of Barrick Gold Corp.’s North America Business Unit. In that job he was responsible for Barrick’s nine operations in the United States, Canada and the Dominican Republic – including the Donlin Gold project, which is equally owned by NovaGold and Barrick.

“Greg Lang brings unparalleled credentials to the leadership of NovaGold. His track record of successfully permitting, building and operating major mines around the world and, in particular, his intimate knowledge of NovaGold’s 50 percent-owned Donlin Gold property, will provide NovaGold with excellent stewardship in the successful development of what we believe will become one of the most-significant and valuable gold mines in the world,” said Gerry McConnell during his final days as chairman of NovaGold’s board of directors.

McConnell remains on the NovaGold board but Thomas Kaplan assumed the chairmanship in November.

Kaplan is chairman and CEO of The Electrum Group LLC, a privately held global natural resources investor. An affiliate of Electrum currently holds around 21.65 percent interest of NovaGold’s outstanding shares.

Electrum Group President Igor Levental also sits on NovaGold’s board of directors and NovaGold Senior Vice President and Chief Operating Officer Gil Leathley joined the board in November.

Lang, Leathley and Levental have worked together in the past. All three held senior executives positions with Homestake Mining Co. immediately prior to that company being bought out by Barrick.

“Donlin Gold is a uniquely attractive asset. In size, it ranks among the top 1 percent of gold deposits in the world and its grade, long mine-life and exploration potential are exceptional. In addition, Donlin Gold is located in the right place – the United States,” Kaplan said. “At a time when the oft-used mining expression ‘world-class’ is losing its meaning, as resource nationalism has meant that great assets are often in political or economic jurisdictions that are simply becoming un-investable, fiduciaries are now being forced to begin their analysis not with size and cost, but jurisdictional safety. Within this overall context, which is likely to get worse over time rather than better, truly great assets such as Donlin Gold, which ‘have it all,’ are becoming ‘category killers’ that we expect will enjoy premium ratings. For all of these combined relative advantages, we believe that NovaGold particularly — a well-managed company transforming itself into a pure-play gold developer with extraordinary exploration potential and exceptional leverage to the price of gold — is set to emerge as one of the select few jurisdictionally safe, institutional-quality development-stage gold equities.”

Significant milestone

In early December, the restructured NovaGold announced the completion of an updated feasibility study for the Donlin Gold project. This study, compiled by AMEC Americas Ltd., revises the feasibility study completed in 2009 with updated mineral reserves and resources, capital cost and operating cost estimates.

One of the primary differences between the current feasibility study compared to the one completed in 2009 is using natural gas to power the Donlin Gold operations, as opposed to the diesel fueled power generation previously considered.

NovaGold said the study confirms the attractiveness of utilizing natural gas over diesel for power generation at the massive gold project.

Power represents about 25 percent of the expected operating costs at Donlin Gold. Natural gas-fired electrical generation is anticipated to be about half that of using diesel.

“The cost of producing a kilowatt of power on-site with gas versus diesel is half,” Van Nieuwenhuyse explained. “This is a huge mine; it will be consuming 85 megawatts of power, which is enough power for a city of 120,000 people.”

Natural gas would be delivered to site via a buried pipeline that would run 500 kilometers (310 miles) northwest from Alaska’s Cook Inlet to the Donlin Gold site. The company currently plans to build a 12-inch gas line but may increase the size to 14-inch to accommodate future expansion of Donlin Gold and to supply gas to other users in the Kuskokwim region.

While imported liquefied natural gas is still the scenario being considered in the feasibility study, Alaska gas may still be used to power Donlin Gold. While addressing the potential of sourcing in-state gas, Van Nieuwenhuyse noted the recent natural gas discovery made in Cook Inlet by Escopeta Oil Co., an explorer that has recently changed its name to Furie Operating Alaska LLC.

“It is certainly exciting to see renewed interest in the Cook Inlet,” said Van Nieuwenhuyse. “If gas were available in Alaska we would certainly look to use it.”

The NovaGold leader observed that if gas is transported from the North Slope via an in-state pipeline, Donlin Gold would prefer to use that instead of importing LNG.

Improved environmental management and social infrastructure; provide flexibility for future operational modifications; and facilitate future increases in the scale of operations are other advantages of the natural gas alternative.

“Completion of this study is a significant milestone for NovaGold, joint-owner Barrick, the project and our Alaska Native partners,” Van Nieuwenhuyse told Mining News. “With Greg Lang, a proven mine builder, assuming the leadership of NovaGold and Barrick bringing best practices to permitting, developing and operating large scale open-pit gold mines, Donlin Gold has all of the necessary components to be developed into one of the largest, most efficient, environmentally sound and valuable gold producers in the world.”

Donlin Gold LLC – which is owned equally by NovaGold and Barrick Gold Corp. – anticipates permitting of the Southwest Alaska gold project to begin early in 2012. Estimating that permitting will take 3.5 years and construction will take about as long, the company foresees Donlin Gold project going into production toward the end of 2019.

More gold, less capital

If it is put into production as proposed in the study, Donlin Gold is expected to rank among the world’s largest gold mines.

The updated feasibility study for the Kuskokwim area project outlines 33.85 million ounces of gold in proven and probable reserves, representing a 16 percent increase over 2009. At a 53,500-metric-ton-per-day throughput these reserves are enough to support a 27-year mine life, an increase of six years compared to the former study.

Over the current 27-year mine life, Donlin Gold is expected to average 1.1 million ounces of gold per year at a cash cost of US$585 per ounce. During the first five years of operation, the massive project is scheduled to produce 1.5 million ounces of gold per year at an average cash cost of US$409/oz. This increased gold production at a 30 percent lower cost during the onset of operations will help reduce the payback period for the estimated US$6.7 billion of capital costs needed to build the mine.

Using a three-year trailing average of US$1,200-per-ounce gold price as the base, the feasibility study predicts an after-tax net present value (five percent discount) of US$547 million and an after-tax internal rate of return of six percent. This base scenario foresees an annual after-tax cash flow of US$949.5 million for the first five years and US$500.7 million over the life of the mine – resulting in a payback period of 9.2 years.

Plugging in a US$1,700 per ounce gold price, the after-tax NPV (5 percent) jumps 837 percent, to US$4.58 billion, and the after-tax IRR more than doubles to 12.3 percent. Annual after-tax cash flow increases by more than 50 percent to US$1.5 billion over the first five years and US$814.9 million over the life of the mine – resulting in a payback period of 5.3 years.

While staggering, the capital costs produced in the feasibility study are about US$300 million less than NovaGold forecast in September and include US$834 million for completing the natural gas pipeline and US$984 million of contingencies.

Van Nieuwenhuyse told investors Dec. 5 that the costs in the feasibility study were calculated at a P-85 level, or an 85 percent probability that the actual expenditures will be at or below the capital costs included in the feasibility study.

“We have gone to this P85 level … because, obviously, many projects are experiencing capital cost increases and over-runs; and our decision to go to P85 is really driven by this,” he explained.

Van Nieuwenhuyse said the board of directors has approved a budget to advance Donlin Gold towards permitting, a process scheduled to begin in the first half of 2012.

Over the first two years of permitting capital requirements for Donlin Gold will be minimal. These costs are expected to ramp up as the permitting process advances to a point that is time to pre-order some of the larger equipment.

“Between now and 2014 most of the project activities will be involved with permitting and some of the engineering work; in 2014 you really see the spending step up as you approach that fine line as you expect your permits to be delivered,” Van Nieuwenhuyse explained to investors.

Production spending at Donlin Gold is scheduled to top US$1 billion by the end of 2015 – about the same time the project is expected to transition from permitting to construction.

NovaGold Dec.16 filed a preliminary short form base shelf prospectus that enables the company to raise up to US$500 million through the sale of securities during a 25-month period that begins in January.

Golden upside

Add measured and indicated resources to the 33.85 million ounces of proven and probable reserves, the Donlin Gold deposit tops 39 million ounces and the pit encompasses an additional 5.99 million ounces of inferred resource. These 6 million ounces of gold that has not yet been proven to a standard that is reliable enough to be considered in the economics of the project is currently treated as waste but a large portion is expected to be upgraded during the course of mining.

Van Nieuwenhuyse said that gold-rich ore remains in the sidewalls and floor of the current pit at Donlin, leaving the deposit open both laterally and at depth.

“The pit is really limited by the drilling,” the outgoing NovaGold CEO said. “There is nothing that limits the orebody at depth, and we certainly believe that with additional drilling we will be able to extend the pit down further.”

NovaGold said the more than 40 million ounces of gold reserves and resources are located along about 2,000 meters, 25 percent of a mineralized corridor that stretches for more than 8,000 meters.

“As an exploration geologist I love to talk about the exploration potential of the Donlin project – I think it is one of the best gold deposits in the world,” Van Nieuwenhuyse beamed. “It is a fantastically large-scale system with over 40 million ounces, and we have only drilled about a quarter of the property package.”

Several drilled prospects and other exploration targets are found along the underexplored 5,000-meter trend north of the Donlin Gold deposit.

While still serving in his former role as president of Barrick North America, Lang spoke about the upside potential at Donlin.

“In addition to the already significant resources, the exploration potential is high. Several areas have already been identified, with the potential to extend the mine-life,” he said.

NovaGold said one of these targets in particular, Dome, has the potential to support a stand-alone operation.

“I am an absolute believer that it will be a 100-million-ounce (gold) district before it is all said and done,” Van Nieuwenhuyse touted. “The vision I have for Donlin Gold is: ‘You will double the throughput from 55,000 to 110,000 (metric tons), and you will be producing well over 2 million ounces of gold annually for 50 years.’”

The company notes, though, that the future impact of these Donlin Gold-trend exploration targets depends on location, geological complexity and capital cost.

Pure-play gold developer

In order to help raise the cash it will need to advance Donlin Gold to production and achieve its new maxim of becoming “a pure-play gold developer,” NovaGold has decided to move the copper-rich Ambler and Galore Creek projects out of its portfolio.

NovaGold’s Ambler project in Northwest Alaska is being spun out into NovaCopper Inc., a company in which Van Nieuwenhuyse will assume the role of president and CEO.

On the other hand, the gold-focused company has put its 50 percent interest in the Galore Creek project located in northern British Columbia up for sale. According to a prefeasibility study completed in July, NovaGold’s 50 percent share of the capital requirements to develop the massive copper-gold-silver project would be about US$2.58 billion – Galore Creek-partner, Teck Resources Ltd., would be responsible for the other half.

“With two large-scale, truly world-class deposits in Donlin Gold and Galore – we would have to raise a very large amount of money to develop both of these projects,” said Van Nieuwenhuyse.

Seeking the financial expertise of J.P. Morgan Securities LLC and RBC Capital Markets, NovaGold decided to sell its stake in Galore and use the funds to help foot its half of the some US$6.7 billion needed to build a mine at Donlin.

Galore Creek is forecast to produce 6.2 billion pounds of copper, 4 million ounces of gold and 65.8 million ounces of silver over about an 18-year mine life with cash costs averaging US80 cents per pound of copper at base price case assumptions of US$2.65 per pound copper, US$1,100 per ounce gold and US$18.50 per ounce silver and a foreign exchange rate of 1.11 C/US.

If put into production as contemplated in the prefeasibility study, Galore Creek would be the fourth-largest copper mine in North America and the largest in Canada. Van Nieuwenhuyse believes a project of this size, located in politically stable British Columbia, makes it an attractive asset to a number of miners seeking to add copper, gold and silver to their production stream.

“We think there will be a lot of interest, and we look forward to executing the process in the New Year,” he said.

“We have engaged the Royal Bank of Canada and JP Morgan to assist us with the sale of Galore Creek,” Van Nieuwenhuyse added.

Did you find this article interesting?
Tweet it
Digg it

Submit it to another favorite Social Site or Article Directory. Facebook Furl Mixx NewsVine Reddit StumbleUpon YahooMyWeb Google LinkedIn Live MySpace Sphinn Technorati Yahoo! Buzz
Print this story | Email it to an associate.

Mining News North - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- ---

Copyright Petroleum Newspapers of Alaska, LLC (North of 60 Mining News)(Petroleum News Bakken)(Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.

This story has 225 lines. and it is 6536 pixels high.