NovaGold Resources Inc. (NG) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the NOVAGOLD Second Quarter 2017 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 follow at that time. [Operator Instructions] As a reminder, this conversation is being recorded. I would now like to introduce your host for today’s conference call Miss Melanie Hennessey. Vice President, Corporate Communication. Ma'am.

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

Thank you, Melanie. Good morning, everyone. Today, we will be reviewing our second quarter results and providing an update on our two projects. Our 50% owned flagship asset, Donlin Gold continues to progress through permitting and is poised to become one of the largest producers in the gold industry. Galore Creek, a 50% partnership with Teck, is one of the largest undeveloped copper deposits in Canada. During the second quarter, Donlin Gold continued to work with the Army Corps of Engineers and other cooperating agencies to ensure that all the required information for the final EIS was delivered in a timely and complete fashion. The Corps has scheduled to issue the final EIS in early 2018. Donlin Gold also advanced other major state and federal permit applications and approvals. The Pipeline and Hazardous Material Safety Administration published a public notice initiating that comment period on the request for a permit to construct the natural gas pipeline. This comment period closed in June with no substantive comments received. The Alaska Department of Environmental Quality concluded the comment period for the air quality permit in May and again no substantive comments were received. Several other major state permit applications were also filed in the second quarter such as the integrated waste management permit and the water discharge permit. It's very encouraging to see that these permitting activities remain very much on track. We're thrilled to be advancing the optimization efforts with our partner as shown on Slide 6. The recently announced drill program will capitalize on the flexibility found in Donlin Gold's unique characteristics of large size, superior grade and strong exploration potential. On the basis of what we know now about the structural controls and the evaluations done to date, plus what we know from the original feasibility study, grade is clearly on our side. As part of the ongoing optimization work, more selective mining methods, has been identified as an opportunity for improvement. Additional structural data collection will enhance our understanding of the targeted mineralized zones. This opportunity is sufficiently encouraging that the partners have increased the Donlin Gold budget this year by 40% and have resumed drilling after seven years to collect additional data that will validate the structural interpretations and support other ongoing optimization work. As noted in the quotes on Slide 7, our joint effort is to build the best-in-class, not to mention, largest pure gold mine in the world. But also to do extensively in terms of economics and closely related to that timing, so that when Donlin will be built only when it will benefit our and Barrick shareholders and all other stakeholders. Patience had supported us to potentially have it all. The optimization studies are looking good enough for us to spend some additional money. We clearly have a large and remarkable ore body with grades already more than two times the industry average, that’s a tremendous advantage when one is laying out the optimal development for a big mine. Yet both NOVAGOLD and Barrick are striving to do better and optimize its developments that it can be among the largest producers, but with lower upfront capital. Many of the inputs into the feasibility study were at peak prices, but there are opportunities beyond that for reduction in capital cost through third-party participation in our infrastructure and the leasing of mining equipment. With reduced upfront capital cost and exceptional exploration upside, our aim is sustaining our production profile as one of the largest gold producers in the world for decades to come. This is a remarkable objective, but that’s where we're heading with this work. We view Donlin Gold as an ore body that will keep on giving, and the alignment between the two companies, has simply never been better. Moving to Slide 8, we've have long believed that in order to maintain a social license to operate, a company must have a thorough understanding and respect for the language, values and culture of the people in the region where our projects are located. Our work in the region, over the last twenty years, has been critical in building a foundation of broad community support. In the second quarter, Donlin Gold continued village meetings across the Y-K region. Donlin was also returning as a principal sponsor and volunteer at the 45th Iditarod Trail Sled Dog Race. I would like to congratulate all the mushers who participated in this year's race with special recognition to Pete Kaiser, who is from the region near the Donlin Gold project and finished in the top ten. Donlin also supported Aniak's 4th Annual Academic Decathlon and Career Fair as well as other activities in the region. At Galore Creek, we continue to support various local Tahltan community initiatives. I'll now turn the call over to our CFO, David Ottewell. Dave?

Thank you, Greg. Turning to Slide 9, our share of Donlin Gold and Galore Creek funding totaled 3. (sic) [3.1] million for the second quarter as expected. For the full year, we expect to spend approximately 14 million to fund Donlin Gold and 2 million to fund Galore Creek. Our forecasted spending for the full year at Donlin Gold has increased by 4 million as a result of the recently announced drill program. Slide 10 highlights our second quarter operating performance. For the quarter, we reported a 7.6 million operating loss and an 8.5 million net loss as expected and similar to the prior year quarter. The operating loss and net loss for the first six months were also consistent with the prior year, as our activities continue to focus on Donlin Gold permitting. NOVAGOLD's cash flow highlights are outlined on Slide 11. During the second quarter of 2017, we spent 4.7 million of which 3.1 million was used to fund our share of the Donlin Gold and Galore Creek project, and 1.5 million was used for administrative costs net of working capital and interest. We ended the quarter with cash and term deposits of 93.5 million. Finally on Slide 12, we've increased our 2017 budget from 23 million to 27 million including our 4 million share of the drill program at Donlin Gold. We expect to end the year with approximately 78 million in cash and term deposits. Greg, back to you.

Thank you, Dave. I'll quickly recap the attributes that make the Donlin project unique and why we have focused this company solely on Donlin. In terms of size, Donlin is an immense endowment. Its size and production profile clearly distinguish it from its peers. On Slide 14 the grade, Donlin is a high-grade open pit mine. Many new mines have been built on grades of about a 1 gram. Donlin is better than twice those grades and it's the grade where the industry was 10 years ago. Donlin will be a large scale producer. As envisioned in the feasibility study, we'll produce 1.5 million ounces in its first five years followed by decades of an average of 1 million ounces a year. This is substantially bigger than any of the other emerging producers. On Slide 16, the reserve pit as shown in the white border on the left hand side of the diagram contains the currently defined 39 million ounces of measured and indicated resources at Donlin Gold. When the time is right, we will tap into Donlin's Gold potential along strike and at depth, and test other targets as shown on the diagram at Dome, Quartz and Snow. Donlin has positive returns in the current price environment as highlighted on Slide 17. These returns become robust as the bull market in gold resumes. One of the unique attributes that Donlin has is that it's on private land owned by two Alaska-native corporations. They've been vocal advocates for the project through our permitting. They're supporting our plans and encouraging us to go forward with the project. We're nearing the completion of permitting. Permitting in the United States is a rigorous disciplined project. In the last few years, we've spent advancing through permitting is nothing in the context of a mine whose life is measured in decades. Our Galore project on its own is a substantial endowment of copper gold and silver and it is among the highest grade undeveloped copper deposits in the world, and when the time is right, we'll sell it to further strengthen our balance sheet to advance Donlin. As evidenced by our top shareholders, we're in institutional quality investment in the gold developers. Many of our top shareholders have been with the Company for years and we're appreciative of their continued support. To wrap it up, for the last few years, we've been focusing our resources on one unwavering strategy to advance and de-risk Donlin Gold in order to provide the most attractive ways for our shareholders to profit, from the next phase of the long-term bull market in gold. I'm proud to report that year-after-year, we've been successful in executing on our stated objectives without interruption. We believe that this is the most important gold development project in the world and we're making material and indeed exciting progress on all fronts. Operator, we can now open the line for questions.

Thank you, sir. [Operator Instructions] Our first question is from John Bridges of JP Morgan. Your line is open.

I just wanted to -- good to hear that you're drilling up presumably the higher grade targets for this optimization study. Just wondering if you can give us a bit more detail on what you're trying to do with that and what sort of shape of projects you might come up with?

John, first off I love drilling, it's one of the most exciting activities that the Company can undertake and it's great to be doing it after a long break. We've been working with Barrick in-depth on this project. It's really almost from the ground up understanding the geology, the mineralization controls and looking at various opportunities. Large scale mining operation inherently has higher dilution; with smaller mining equipment you can take advantage of the tighter structural controls. So, we've got some pretty exciting theories in that regard and the best way to test the theory is to get out and drill, and we're really sufficiently excited by the opportunity that in these rather capital challenged times we're willing to invest additional money, and we'll -- as the results come in, we'll certainly update everybody on what they mean to the project.

So is geotechnical drilling to figure out, if you can be more selective with the mining or more geology to find out where the high grades portions of the ore body exists?

Yes, the program has multiple objectives, John. We'll be collecting additional geotechnical work, see if there's opportunities, for example, steeper pit walls. We will be testing some of the structures and even collecting additional hydrologic data. So, it's a pretty broad program just targeted on enhancing our understanding in the ore body and flushing out some of the opportunities that may lead to enhanced grade.

And it's good to hear that the permitting is advancing and according to plan with no objections, so that's great, and congratulations. And look forward to hearing Q3 and maybe some drill results? Can you give us some information along the way or are you going to keep it all close to your chest?

Well, we'll work with our partner on the timing of releasing the data John, but we're certainly glad to be drilling.

Thank you. Our next question is from David Luchenski [ph] an investor. Your line is open, sir.

Greg, just a few questions. It's hard for me to understand how NOVAGOLD's market cap is 1.4 billion, and yet you own an asset that's worth 20 billion, and how the market doesn't recognize that. It means you're undervalued by a factor of 15, 18 times, how do you feel about that?

Well, I would be very pleased if you were - if that was indeed the case. I think gold developers are valued I think based on the assets of their gold in the ground and the quality of their deposits. When I look at our peer groups, I think we're appropriately valued now. But I think certainly as we continue to advance the project and further de-risk it through permitting and ultimately take the project forward, I think you're correct, the value of our shares will multiply as we become -- get through permitting and into development. And certainly as a producer with endowment of over 20 million assets, I think there's certainly a room to run for the shares.

Yes, to me you're $25 stock all day long. The permit, when do you expect -- I think on one of the previous conference calls you said the first quarter of 2018, is that your target?

Yes, the Army Corps of Engineers, who is the lead federal agency, involved with the permitting, keeps an up-to-date website. You can look -- find the Donlin Gold EIS, and they have stated that they will publish the final EIS in March of next year and issue a record of decision, approximately three to four months later. So, we're -- give or take a year away from finishing up the federal permitting process. And while we're working our way through that is noted on the call, we're pursuing the other various state and federal permits that are necessary for the operation. But clearly the environmental impact study is the largest and most time consuming part of this process.

And another question, would you ever consider paying dividends in bullion instead of -- and that could be done through the intermediaries by having wholesale coin dealers, ship bullion to stockholders. Would you ever consider something like that?

David, that's certainly an interesting idea and we're quite a ways from it, but…

I know I just invite you to think about it, that's all.

When the time is right, we'd love to be a dividend paying company.

Okay, –here is the last question I have. Your legal department, I'm sure you've quite a few law firms involved. What is your opinion of the naked short, so they're down on the COMEX? In the past weeks, you've had -- you've had 4 billion of naked shorts dumped at market, not limit orders, market orders, and then you had within the last five days another 2 billion of naked shorts through the banks. Do you -- does that smell bad to you? It smells bad to me. I mean do you -- it seems like it's totally manipulated the price of gold. And with the prejudice to you and Barrick and everybody else, what is your opinion of that?

Well, I -- over the last couple of months, we were part of the GDXJ and when they announced the rebalancing of the index, we certainly saw a lot of downward pressure on our stock and higher than normal volumes. I think with this GDXJ rebalancing behind us, just in the last week we're seeing shares trade in the pattern that we're used to seeing them trade, which is largely in concert with gold price and on news as the Company progresses through its projects.

But who [adopts] [ph] 6 billion at market, I mean most investors would have limit orders. I mean, it just -- what hedge fund or it just -- do you have any -- I guess here is my question, do you have any suspicion that the gold price is being artificially slammed because quite frankly, it's the only thermostat for foul play in the financial arena?

David, we appreciate your thought-provoking questions, but as a matter of practice, we don't really comment on trading in our shares. And I do note, we're a fairly liquid stock and I think that invites high frequency trading. But I don't see anything sinister in any of it. It all looks, given our circumstances, pretty normal.

Thank you. [Operator Instructions] I see no other questions in queue. I'd like to turn it back to Mr. Lang for closing remarks.

All right, well, everyone, thank you for joining our call this morning, and we look forward to keeping you update as we progress with our drilling and permitting activities. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.