NovaGold Resources Inc. (NG) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the NOVAGOLD Resources' Fourth Quarter and Year End 2016 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to hand the floor over to Melanie Hennessey, Vice President of Corporate Communications. Please go ahead.

Thank you, Karen and good morning, everyone. We are pleased that you are with us today for NOVAGOLD's fourth quarter and year end financial results as well as an update on the latest activities at our projects Donlin Gold and Galore Creek. On today’s call, we have Greg Lang, NOVAGOLD's President and CEO; and also David Ottewell, NOVAGOLD's Vice President and CFO. At the end of the formal part of the presentation, will are take questions both by phone and by e-mail. I would like to remind our listeners that our materials and presentations may contain forward-looking information and projections that may differ from actual results. Please refer to the risk and uncertainties that I disclosed in our annual report filed on Form 10-K for the year ended November 30, 2016 and other NOVAGOLD reports and documents filed on SEDAR and EDGAR. With that, I have the pleasure of turning the call over to Mr. Lang.

Thank you, Melanie, and good morning everyone. For those of you who may be new to the company, we are a development stage company and we have two great undeveloped assets in North America. We own half of the Donlin Gold project in Alaska with Barrick and our partner in the Galore Creek project is Teck, one of Canada's largest diversified miners. Before I turn the call over to David to cover the financials, I wanted to provide a brief overview of the achievements in 2016 particularly as it relates to the advancement of permitting at Donlin Gold Project. Slide 5 provides a high level summary of the extensive work accomplished by the team. We have continued to advance Donlin Gold staying true to our strategy even through volatile markets. Our focus last year was two-fold to continue working with the government agencies in collaboration with our native partners by engaging all stakeholders to ensure a transparent and inclusive public process. And second, we worked with our partner on studies to enhance the value of the project and provide our shareholders with a great risk reward opportunity in the gold investment. Permitting is not the most exciting time in the development of an asset but it is an intensive undertaking that needs to be done right. It's truly an understatement say that permitting is progressing as anticipated given the incredible amount of work that's been accomplished. You may recall that it is part of the public process total of 17 meetings were held throughout the region. We were encouraged by the participation and the review. In the fourth quarter of last year, the army core of engineers organized the comments into discrete categories such as water quality, savings management, barging and social economic impacts. The core will now determine how to address each of these comments in the final EIS. Per their latest schedule, the core anticipates the final EIS in early 2018 or about a year from now. The completion of the EIS requires the most resources and is by far the lengthiest undertaking in the permitting process with the end goal of obtaining federal approval to develop a gold mine. But, it's not our only focus, work continues to advance on other state and federal permits that pertain to the clean water act, air quality, waste management, reclamation and natural gas pipeline. I've been impressed with the team work and dedication of everyone involved in the permitting and we have just one goal in sight, to successfully and responsibly permit the Donlin Gold Project. At Galore Creek in the fourth quarter, the partnership completed various technical studies which included the surface water drainage studies and integrated mine planning. Moving to Slide 6, in November we announced the appointment of Andy Cole, as new General Manager at Donlin Gold. As we enter the final stages of permitting and look at ways to optimize and further enhance the project ahead of a construction decision, I can't think of a more experienced person than Andy to lead the project. He is a seasoned Barrick executive with an exceptional track record of building and operating major gold mine such as the Gold Strike property. He was Barrick's Senior Operations Executive before taking on this role a few months ago. Moving to Slide 7, Donlin's high grades and low projected operating cost give us considerable flexibility to entertain fresh thinking. Throughout last year and continuing this year, we are conducting studies and accessing various development studies. This effort led by both parties experienced technical teams have identified opportunities to enhance the project through such ideas as modular construction techniques, selective mining to enhance the grade and automation of certain activities. As we approach the completion of the EIS in the permitting process the owners expect to update the feasibility study to reflect these and other changes. Neither partner has a built at any price mentality, given our bullish view on gold, we think our timing for completion of the EIS will be just right. We are confident, the outcome of our work will establish the best path forward, when the owners are ready to make an investment decision. With that, I will turn the call over to Dave to cover the financials.

Thank you, Greg. Slide 8 highlights our operating performance. For the year, we reported an operating loss of $30.1 million slightly lower than the prior year period. General and administrative expenses were also similar to the prior year at $20 million including share based compensation of approximately $10 million per year. Our share of expenses at Donlin Gold decreased by $2.2 million as activities continue to focus primarily on the EIS and permitting. At Galore Creek, our share of expenses increased by $0.7 million, in the prior year Galore Creek net expenses were lower due to a gain on the sale of surplus equipment. Also in the prior year, net loss benefited from a foreign exchange gain of $4.8 million in other income expense. NOVAGOLD's cash flow highlights are outlined on Slide 9. During 2016, our cash and term deposits decreased by $21.4 million, $3.6 million lower than originally planned and $1.6 million lower than our previous forecast. Cash used to fund or administrative activities were similar to the prior year, while Donlin Gold Project costs were lower in this phase of permitting. We ended the year with cash and term deposits totaling $105 million. On Slide 10, you see that our total 2017 budget is similar to our prior year spending at $23 million. We plan to spend $10 million at Donlin Gold to support Donlin Gold permitting activities, $2 million at Galore Creek and a $11 million for administrative and other expenses. Greg back to you.

Thank you, Dave. The next few slides I will cover really are just a top of the waves look at why we think the Donlin Gold Project is unique. On Slide 11, with reserves and resources of over 40 million ounces Donlin is one of the largest undeveloped gold deposits in the industry. Turning to Slide 12, it's just a comparison of Donlin and the other major development projects in this space. Clearly, Donlin is far and away the largest of the emerging producers. It will be a big mine. It will produce 1.5 million ounces a year, its first five years, life of mine over a million ounces a year that's better than twice the output of any of the other projects that are on the drawing board. On Slide 13, Donlin's grade separates it from the pack, at 2.25 gram, it's grade is better than twice of the industry average. These high grades will enable the project to have exceptionally low operating cost. Slide 14, it's just a long section on the gold bearing system at Donlin. We have been drilling on the 3 kilometers of this stretch and when the time is right, the owners will resume exploration, and I have no doubt that we will add significantly to the resources at Donlin. Slide 15, in two slides, illustrates the significant challenges facing the gold industry. Exploration spending has not produced any discoveries of any consequence, it's been at a 10-year low and it's going to further exaggerate the pressures on maintaining production for the major gold producers. The industry need projects like Donlin to prevent further declines in output. On Slide 16, Donlin Gold is obviously important to the owners, but it's equally important to our native partners, Calista and TKC. The development of this mine will help fulfill the vision of the Alaska Native Claim Settlement Act and give these groups self determination. We also enjoy support from the Governor of Alaska and the other state agencies. Alaska like many oil producing regions has had significant pressure on their state budgets. The projects comes at a time when Alaska really need to diversify their economy. Slide 17 is just the attributes of the Galore project. It's one of the largest highest grade undeveloped copper gold silver projects in Canada. When the time is right, we will look to monetize our interest in this asset to further strength our balance sheet. Slide 19 is just a snapshot of our major shareholders. Our ownership is very concentrated over half of our outstanding shares are with our top shareholders, they have been in the company a long time and looked as an unexpiring warrant on an ounce of gold. So, just to recap the call, we are fortunate to have interest in two grade development assets, who have got a strong balance sheet. We operate in safe places. It will be a large scale operation and the last year permitting will go by in the blink of an eye and we will be ready to make a development decision on the project. Thank you. We will now turn it over to questions.

Thank you. [Operator Instructions] Our first question comes from the line of Stephen Walker from RBC Capital Markets.

Great. Thank you, operator, good morning, Greg. Just a couple of questions. When you spoke about optimization of Donlin and fresh thinking about the project and opportunities to enhance, I know that maybe too early to give specifics on that. But, when you look at the major drivers of value whether it's capital cost or operating costs or the plant design itself. When you are talking about optimization, how would you prioritize which are those you have the greatest impact over or the ability to change given the fundamental geological and metallurgical merits of Donlin Gold?

Sure. Well, thank you for the question and joining the call. The work we are doing with Barrick, we are starting -- we started with the geologic database in the resource model. And looking at -- get a greater understanding of the structural controls and the occurrence of mineralization. We think that with a smaller scale, with more selective mining operation, there is opportunities to enhance the grade. So that's certainly a key focus in anything we could do on the revenue side as a pretty significant impact. And you are also evaluating various development scenarios that would impact the scale and I think in our partners [indiscernible] look at the project as staged development and we think, given the times that makes a lot of sense maybe started a smaller rate and expand out of future cash flow. But, I think the basic concept of the project open tip mining and milling are in tact and just looking to enhance them. We are also looking at changes in many of the inputs, certainly energy has weighed down when the feasibility study was done. And the competition that we saw for large capital projects in the mining industry just doesn't exists now. So, it certainly a better environment to contemplate a large scale mining operations than it was when the feasibility study was completed.

Is there presumably a point in time or you could talk about the optimization would be prior to or once you have the final EIS and permitting in hand?

It will really coincide with the final, we are wrapping up the permitting. And that will be about the time the owners need to decide really okay where we going now.

Right. And also if I might ask another question, just with respect to opposition or new opposition, has anything come in the last quarter or recently with respect to change in the view -- the positive view of the native corporations have or have any new NGOs or NGOs that haven't been present prior to now or active NGOs come back with any concerns or has anything changed with respect to potential opposition to the project?

No, Stephen. It's been pretty quite on that front.

Great. That's all for me. Thanks Greg.

And with the close of the public comment period that was really the last opportunity for the general public to weigh in. With the close of the comment period the record on which the EIS is based is now set.

Perfect. Thank you very much for that Greg.

You are welcome. Thank you, Stephen.

Thank you. And our next question comes from the line of John Bridges from JPMorgan.

Hi, good morning, Greg and David. Following on from Stephen, the push of the final date into 2018, is that going to interfere with your work with Barrick on a phase I project or does that give you more time, so you are going to have a ready to go sort of plan, when you have a premise in hand. How do you see that interaction?

Well, I think John, it probably doesn't really have much impact on the work we are planning with Barrick. The core, the schedule is -- the core had the changing at the [indiscernible] and extended the public comment period. So they added a couple of months to the schedule. And at this stage, couple of months does really doesn't matter a great deal one way or another. We are working with our partner and we've got a lot of activities planned for this year. And I think it will coincide pretty nicely with the completion of the EIS in about a year's time. And as we are getting closer and closer to the finish line, the dates -- certainly in the cores, you are getting pretty firm.

Okay. That's great. And then, I seem to remember from the early days of exploration that you found some material there that was so five, ten grams per ton. So, might you will be able to get that sort of five gram a ton head grade for the first few years?

No, John. We are evaluating all different scenarios and the impact on the mining plans. Ten grams in for the first few years is a bit higher than we think is possible. But certainly there is opportunity to bring some grade forward.

Very diplomatic. And you mentioned the difficulty the major miners are having replacing reserves and the importance of what you will bringing to the market, when do you think that might start to impact the major miners at $1300, the major miners seem to be okay last year, if they are redoing the numbers at 12 or something below, do you see cracks in the reserve bases coming?

We do John. I think looking out across the industry most of the majors have done a fantastic job of cutting cost, shutting on core assets and derisking their balance sheet. And I think across the board, they are all in much better steed than they were two or three years ago. And I think they are able to start thinking about okay what's next and where is this company really growing and how do we get there? So I think it's -- it will be good timing for us, if we can keep going to $1200, get it creeping back up to $1300, I think it will be a pretty exciting time in the space.

Okay, great. Keep on the good work. Thanks a lot Greg.

Thank you, John.

Thank you. And our next question comes from the line of John Tumazos from John Tumazos Very Independent Research. Your line is open.

Good morning, Greg. Thank you for taking my call. My question, first, how many public comments where there on your draft EIS, I think Polymet as the record around 60,000, under 1000 might be the average projects?

John, first, thank you for calling in this morning. We have Melanie, we have little over 500 comments, some of them were multiple comments. But, yes, we fell very short of Polymet.

Given the process as it's evolving, could you give us a range of dates when you think the JV might began to break ground and clear site or concrete like maybe between ex-month of year, whatever at the optimistic end and lag month and pessimistic end?

Now, John, we've -- I look at what's ahead of us. We have got a year to wrap -- to get the final EIS out. Then they will take a month or so to prepare a record of decision. And there is an appeal period. So, if you added up, you are looking into the -- at the absolute earliest, the middle of 2018. But, the owners really were focused on getting the permitting wrapped up to where we are able to make a construction decision.

So, the good people at Barrick are not rolling in the money like it was 20/11, as they are going a lot better than a couple of years ago? Unfortunately they are looking at growth. Now, you are not supposed to comment on your partner priorities but as I study Barrick, they have the Gold Rush project which they like, but they haven't began the need for process yet. So, maybe that's five plus years off. They have the Alturas, key region and Chile they want to do. I think they want to do something right at Chile just to prove that they combine without adversely affecting this high Andes and the [Dustin] [ph] whatever is coming down of those. And then, they have the Lama -- side of Pascua Lama and Argentina where they don't have the same regulatory barriers. Alturas is early days, Lama mine maybe it happened this year or two. But other than Lama, what projects does Barrick have that might be 2019 capital outlays construction and [indiscernible] as to whether it's a prettier girl than Donlin and Creek?

Well, John, I think you gave a pretty good recap of their development pipeline and it's really…

[Barrick] [ph] is a pretty girl, but she hasn't grown up yet.

Yes. But, I think we are feeling pretty good where we are at. We are just about through permitting clearly, the end is in sight; the regulatory environment in the U.S. is likely to be simpler going forward and it has been to the last couple of years. So, we think that puts Donlin in a pretty good light in anybody's development pipeline.

Thank you. Congratulations on the better market.

Thank you, John. Appreciate you calling in.

So, we have one more question coming in from the Webcast and the question is what are the anticipated all-in cash cost for Donlin?

All right. Well, I would -- the all-in cash cost life miner -- 526 operating and about 700 always a standing cost, which are substantially below industry averages. And it was -- I would direct any increase to that to the information on our web page, we have a lot of detail in that makes up the operating and all-in sustaining cost.

So with that operator, I don't know if you want to prompt for additional questions.

Certainly. [Operator Instructions] And I have no further questions at this time. I would like to turn the conference back over to Greg Lang for any additional comments.

Well, thank you, operator and everyone, thank you for dialing in and getting an update on the activities at NOVAGOLD. Good day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.