NovaGold Resources Inc. (NG) Q1 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the NOVAGOLD First Quarter 2019 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]. I would now like to turn the conference over to Melanie Hennessey, Vice President, Corporate Communications. Please go ahead.

Thank you, Arielle, and good morning everyone. We are pleased that you have joined us on NOVAGOLD’s first quarter financial results and also for an update on the Donlin Gold project. On today’s call, we have Greg Lang, NOVAGOLD’s President and CEO; and David Ottewell, NOVAGOLD’s Vice President and CFO. We also have our Chairman, Dr. Thomas Kaplan, who will be on hand to answers questions at the end of the call. At the end of the webcast, we will take questions, both by phone and by e-mail. Before we get started, I would like to remind our listeners that any statements made today may contain forward-looking information such as projections and goals, which are likely to involve risks detailed in our various EDGAR and SEDAR filings and forward-looking disclaimers included in this presentation. With that, I have the pleasure of introducing Greg Lang, NOVAGOLD’s President and CEO. Greg?

Thank you, Melanie. Good morning, everyone. Our 50% owned Federally permitted Donlin Gold project is in Alaska, the second largest gold producing state in the U.S. and is located approximately 300 miles west of Anchorage, as shown on slide 4. On slide 5, we highlight two state permits received in the first quarter. The Alaska Department of Environmental Conservation issued the Final Waste Management Permit and the Alaska Department of Natural Resources issued the Final Reclamation and Closure Plan Approval in January. We are advancing other state permits regarding the project's transportation corridor and pipeline. Additionally, we are commencing work needed for the Alaska Dam Safety certificates that will carry on into 2020. Permitting largely complete, we are increasing our focus on continuing to integrate scoping-level optimization work into a study that will become the basis for an updated project development plan. Slide 6 outlines the permit work that the team has already accomplished over the past year, heavily de-risking the Donlin Gold project, while staying on track with our strategy. With Federal Permits in hand, we have the right, but not the obligation to conduct work on site. Highlighted in green are the two most recent state permits, that were received in the first quarter which I mentioned in the previous slide. We will keep you updated as other permits come in. A big part of our activities in Alaska is working with both Calista and TKC, our native corporation partners. Over the past few months, we continued our outreach efforts and met with tribal councils and key stakeholders in the Y-K region. In the first quarter, NOVAGOLD and Donlin Gold participated in several community activities. Some of the highlights include a meeting with career counselors in the Lower Kuskokwim School District with the goal of engaging youth in an upcoming career fair and participating in the Alaska Forum on the environment where we received the Green Star Certification certificate that recognizes businesses for their efforts in sustainable Environmental Stewardship. Additionally, Donlin Gold hosted their Annual Safety Expo ahead of the Iron Dog Race in Alaska. We attended the State of Alaska Legislative session in Juneau, where we met with state representatives and senators, as well as the newly elected Governor, Michael Dunleavy. Transparent and open communications with local communities is an essential part of our day-to-day responsibilities in the region. And with that, I'll turn it over to our Chief Financial Officer, David Ottewell.

Thank you, Greg. Slide 8 highlights our first quarter operating performance. For the first quarter, we’ve reported a $6.3 million net loss, $1.9 million lower than the prior year. The net loss decreased primarily due to lower share-based compensation costs, lower permitting costs at Donlin Gold, increased interest income and accretion of notes receivable, partially offset by higher interest expense on the promissory note payable to Barrick and foreign exchange losses. NOVAGOLD's cash flow highlights are outlined on slide 9. In the first quarter we spent $5.2 million, $1.8 million lower than the prior year quarter. Total spending decreased due to lower permitting costs at Donlin Gold, increased interest income on term deposits, and the sale of Galore Creek in July 2018, partially offset by withholding taxes paid on vested PSUs. We ended the quarter with $161.8 million in cash and term deposits. In 2019, we continue to expect to spend a total of $24 million, including $13 million for our share of Donlin Gold, and $11 million for corporate, general and administrative costs. At Donlin Gold, 2019 spending is expected to increase with the commencement of field work and detailed engineering to support the application for Alaska Dam Safety Certificates. Looking ahead, as a result of our sale of Galore Creek last year, we have $100 million receivable from Newmont, with an additional $75 million contingent on Galore Creek construction. Back to you, Greg.

Thank you, Dave. Now for a brief overview of Donlin Gold, with its significant size, high grade, incredible output and a mine life measured in decades, along with excellent exploration upside, strong local partnerships and jurisdictional appeal, Donlin Gold is expected to be a pacesetter in the precious metals industry for years to come. I will speak to each of these attributes in the coming slides. Beginning with size, on slide 12, we compare Donlin to 17 other development stage projects in the industry. And if you look at the peer group average, with 39 million ounces Donlin is unique and more than five times the size of the average peer group. Another key attribute shown on slide 13 is the outstanding quality of the deposit. Donlin's grade at 2.25 grams is double the industry average. Given the rapid decline in gold, reserves and grade, deposits such as this are needed to sustain the industry. Beyond the size and quality, Donlin Gold has longevity with an anticipated production profile of greater than 1 million ounces a year, over a 27-year mine life. With the mine life measured in decades, once in production, the project is expected to be the largest contributor in the region, and will bring great benefits to its stakeholders for many years to come. The bubble chart on slide 15, shows the scale of the project and how it compares to 10 largest gold producing mines in the world. Only six are expected to produce more than 1 million ounces a year this year, further illustrating that projects like Donlin are very scarce and needed to replenish the industry's diminishing reserves. Slide 16 depicts the challenges of finding new gold deposits as defined by the blue bars. Gold is getting harder to find, and even as the prices moved up, and exploration spending increased, there have been very few new discoveries. That puts Donlin in a great position when gold resumes its upward trend. Given that it can take on average over 20 years to go from discovery to production, we are in a great spot with the federally permitted projects and control of its development timeline. As shown on slide 17, we have roughly 1,400 holes in this deposit with over 90% of them being core holes, giving us a very detailed understanding of the geology and mineralization. Beyond the drilling completed to-date, there is still substantial exploration potential along the eight kilometer mineralized belt as shown on slide 18. The ACMA and Lewis deposits, which are marked in the blue area, contain the 39 million ounce resource and only occupy about three kilometers of the eight kilometer belt. When the time is right, we will resume exploration drilling. Donlin brings exceptional leverage to a rising gold price, as shown on slide 19. In the current environment, we have a project with modest rates of return, that increase substantially in a rising gold price environment. We have the flexibility and patience to wait for the right time to proceed with development. Another unique aspect of the project is that our property is located on private land, that's owned by two Alaska native corporations, Calista owns the mineral estate and TKC owns the surface rights. This land was set aside for mining related activities and transferred to native corporations for their economic self-determination. We have life of mine agreements with both partners, who have been involved and supportive from the very start. We are thankful to Calista and TKC for their support, and their commitment to Donlin has been key to our success. As slide 21 shows being in a geopolitically safe jurisdiction is another key attribute. Alaska offers jurisdictional stability and welcomes, responsible new resource development. With permitting largely complete, the timeline for development, as shown on slide 22 is within the project owners' direct control. Our focus is shifting more to finalizing optimization work that will ultimately be reflected in a study that will serve as a basis for an updated development plan. An important part of our engagement effort includes outreach to our shareholders and investors throughout the year. Over 50% of our shares are held by our top shareholders as shown on slide 23, for whom we are extremely grateful, not only for their support of our strategy but their foresight in superior gold leverage opportunities that this company represents through Donlin. NOVAGOLD strives to create a balanced development plan that enhances economic growth, provides a safe and healthy workplace and preserves traditional lifestyles, while bringing tangible and long lasting benefits to our community partners. As shown on slide 24, we implement our social responsibility programs and commitment in a number of important areas on an ongoing basis. We are all, to one extent or another, vested and contributing our time to various outreach efforts in Alaska. We have moved Donlin Gold further up the value chain and look forward to the next chapter as we advance the project. It's our belief that our company is truly well positioned to create value for our shareholders. To conclude, with a strong balance sheet of $162 million in cash, a unique asset and a safe jurisdiction, the right partnerships and people to take this project forward, I have no doubt that Donlin has the potential to become one of the most coveted assets in the precious metals industry. Operator, we can now open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Lucas Pipes of B. Riley FBR.

Hey, good morning, everyone. How are you doing? I wanted to follow up a little bit, Greg on the optimization study that you mentioned. Could you share with us a little bit more in regards to timing? And then what parts you're most focused on at this time. Thank you very much.

Good morning, Lucas. Thanks for joining the call. Our partner -- we've been working very closely with them the last couple of months. As you might imagine there is a lot of data for the new executives to get their arms around. And we're continuing to pursue that with them and advance our execution plan for this year. But I think we're still some months out from committing to a firm gate on when Barrick will finish getting their arms around the project. And as they do we'll keep everyone posted.

Excellent, thank you. And then you've touched on it in terms of the major changes we've seen in the industry, with this consolidation. Greg, what do you think could this mean for Donlin and NOVAGOLD, I would appreciate your perspective on that.

Lucas, we don't really give a lot of thought to what's happening around us in the industry. I think it's fascinating. And really this year, we're financially strong and we're in a great spot to continue to move our project forward.

Hi Lucas, it's Tom. Can everyone hear me?

Hey, Tom. I can hear you, yes.

Great. I'll add just one wrinkle to Greg's answer. When we look back upon the value proposition, and the upside potential of Donlin being unlocked, I believe that I will be proven to be right, that the Barrick-Randgold merger is indeed the White Swan that I referred to in my last comments in the conference call that preceded this one, as well as in my letter to shareholders. The first of that White Swan's offspring -- little swans are called cygnets -- the first white cygnet from that is what we just witnessed between Newmont and Barrick. 25 years ago, the frontier gold rush, the go where the gold is phenomenon, that led from the United States being the most coveted jurisdiction for gold mines to people moving into Peru, when Newmont went in with Buenaventura on Yanacocha, and of course Freeport to Indonesia, and then ultimately Africa and everywhere else. As you know, for a number of years, I believe that, that era is over. And again, I have [standing] [ph]. It was very, very good for me in a number of these countries. But about seven or eight years ago, we realized that it was ultimately all going to come around to jurisdiction. That if one really wanted to be able to get maximum premium valuation for assets, not to mention the ability to sleep at night, you're going to want to be in safe jurisdictions; North America, Australia and the like. And so we withdrew from almost everything in the developing world. And the reason was we thought resource nationalism would rear its head, and it's the nature of resource nationalism, that it's not something that could be contained. And when someone sees that their neighbor over the fence is getting a better deal from a mining company, they demand the same and so on and so on. Before the frontier spirit took hold U.S. assets were valued primarily using a 0% discount rate, because of their safety and also growth potential. They were arbitraged against riskier jurisdictions like Canada, Australia and South Africa. What just happened between Barrick and Newmont is a watershed event, and every investor and analyst in mining should have absolutely no doubt that a major, major game changer has just occurred. What Barrick did with Newmont is they have highlighted that the most attractive assets in the world, are in the United States. Now Nevada, of course, is the number one gold producer in the country. But number two is Alaska. And we believe that we're already on track, when one day we recommence drilling to be able to overtake the reserves of Nevada. Now obviously, if there's more drilling in Nevada, all power to them. But the point is this, for NOVAGOLD shareholders in particular and for shareholders of high quality U.S. assets, the arm wrestling match that just took place over in Nevada reaffirmed that the assets worth fighting for in the gold industry are in safe jurisdictions. Nevada obviously qualifies, so does Alaska. These are both places where research analysts, fund managers and other stakeholders will be very happy to take their families without any risk. It's a place where investors know that when they go to sleep at night, when they wake up in the morning, whatever they thought they owned the night before they still own. It's a place where the rule of law isn't a novelty. We think that what just happened has validated our thesis, that the United States would not only be coming back, but that it would be given the premier status in the world. Now the best way to play the rebirth of the American gold mining premium is through NOVAGOLD. We are a 50% owner of an asset that will rival Nevada in terms of size, the grade we already know, the mine in one or two stages would actually be bigger than the goldmines in Nevada, at any single goldmine. Donlin could prove to be a multi-mine district. Remember, we have 45 million ounces identified on three kilometers of an eight kilometer belt. And that eight kilometers represents maybe 5% of the total property. It’s a quirk of history that it hasn't yet been explored, but there are other targets on this property. In other words Donlin could be in its own right, another Nevada. Now that's great enough, but remember, the last deal that was made between Barrick and Newmont was 61.5-38.5, Barrick having operatorship. I’m sure that there is very good reason for all of that. What matters to us is that we are 50-50 with joint operatorship, that gives neither party any advantage over the other, which means that we are a pure play on an asset that could one day rival Nevada. And we have half of it with joint operatorship. One day when investors are coming back into the space, you can imagine the bullet points on the analyst reports, you can imagine what the bankers will be telling their clients, and brokers will be telling their clients. Would you like a half interest in the next Nevada? With Nevada now being on everybody's lips, as I said, this is the first White Swan. There may very well be others, but what has just happened will be that moment when people will go back and they say you know what they rang the bell for the NOVAGOLD thesis. How quickly it takes for people to come around to it, it doesn't really matter, because once they do, the uplift, the complete reevaluation based on the jurisdiction, not to mention all of the other aspects that make Donlin in the aggregate unique, is going to be a game changer. And so I just wanted to make sure that everyone understands what we just saw is not another ho-hum moment in the mining industry. It is as much a ringing of the bell as when Newmont went to Yanacocha, and unleashed the go to the gold -- go to where the gold is mentality. Fortunately, we have as much gold as any deposit you're likely to find in the rest of the world. We just happen to be glad it’s the best jurisdiction in the world.

Tom, thank you so much for that detailed description. It’s great to hear that and great to hear that highlighted. Thank you.

Thank you, Lucas.

[Operator Instructions] Our next question comes from Terrence More [ph], a Private Investor.

Good morning, everyone. First thing, I was looking at your measured and indicated, you got measured at 6 million, roughly 6 million ounces, indicated 33 million ounces. Would you do me the honor of differentiating those two and explaining why the indicator is not in a measured?

Well, good morning Terrence, you've actually asked a question which would require a fairly in-depth answer. But I guess the simplest way to put it is the function of the drill holes density. And I'd observe that we strictly adhere to the industry and statutory requirements in how we compute and report our reserves and resources.

Okay, the indicated, the vast amount, your 39 million overwhelmingly is in indicated -- is indicated, that does not have the sound of finality to it. So I know what my question is, is your possibility that you wind up with much less than 39 million ounces.

Terrence, I think to give you more sense of the classification, there is measured and indicated then inferred, and only if you're looking for a category that's if you would say at-risk to either get increased or decreased, it's typically in the inferred. Measured and indicated are very, very solid. And I would direct you to our webpages, which have really very in-depth detailed technical descriptions of the criteria that supports each one of those various classifications. And if you have trouble locating it, please feel free to reach out to us and we will direct you to the appropriate spot in our data.

I've got it on my computer now, I can find that. I appreciate that. Now my next question is, what is the projected date for production to start if there is one?

Well, Terrence, at this stage, we have not announced a development plan. It's our strategy to position this asset, because when the prices and markets are right we're in the position to go forward. And Tom would you like to expand on that question little bit?

Did you look to me?

Yes.

When the conditions are right, when the gold price is higher, can everyone hear me?

Yes.

Yes.

Hello?

Hello, yeah, I can hear you.

Yeah, we can hear you, Tom.

Are we still on?

We seem, Terrence, we seem to have encountered a communication failure there. But really to answer your question a little bit more.

I'm back on, sorry about that. I hope you can hear me now.

Much better.

Much better, great. Basically, when the gold prices rise, and we'll know it when we see it. Don't ask me what that price is going to be? You'll see it in an explosion in the share price, you'll see it in investor sentiment. People will understand that the next leg of the bull market is moving. That's when we and of course we have a partner -- and Barrick will make a construction decision.

Tom the reason I asked that, because I've been an investor in NOVAGOLD for many years, literally many. And I remember -- and correct me if I'm mistaken, but my memory is usually pretty good that at one point NOVAGOLD was offered to buy out at $17 a share which NOVAGOLD turned down. And that was --

That correct. That was before I was a shareholder in the company by the way. That was 2006, when Barrick made a hostile bid, correct. I came into the company on December 31, 2008. It was a very, very different story at that time. The one thing that I can tell you is that if you have read the annual report, you will see that every promise we've ever made to investors from the time that we have come into the company, we have fulfilled each and every one of them. I don't think there are many companies that over the last decade would be able to say they haven't made one mistake. And the result is that we have a federally permitted project in the United States with one of the best management teams in this space. We haven't done anything to dilute shareholder value. On the contrary we spun off Trilogy, which is now a $0.25 billion company in its own right. We sold Galore, not for pennies but for real money. We are now a pure play on 50% of an asset that in its own right could rival Nevada. Now you've been an investor for a long time, and you've clearly seen that the last decade has been very difficult for gold stocks over the most part. Nonetheless, what I would suggest is that where we are now in a position to be able to wait for the higher gold prices that will allow us to get the kind of great return that everyone should be looking for before they build a gold mine in this environment. We are, I think, better positioned than any other company in this industry. So I hope to be able to reward you. One thing, I can assure you, I sit exactly on your side of the table. If anything, you could say that the owner lives above the shop. I love the story more now than when we got into it 10 years ago and I was pretty excited then. But the fact that all of the boxes have been checked, the fact that we have been de-risks. The fact that all of the upside is so very clearly obvious, and that we are sitting with enough cash to be able to survive any downdraft in the industry that could devastate other companies that are producing or developing prematurely in my view. This is exactly the kind of vehicle that you should be looking for. I know personally, this is exactly the kind of vehicle that I want. And I don't know if anyone that is better, because if there were, I would be buying it.

I appreciate that. And I'm still with the company. I've got a good position with you. But let me let me wrap this up, because somebody else might have a question. I can't ask all the questions. You mentioned Galore Creek, which was one of the things I was going to bring up because you did not address that. You sold 50% Galore Creek, but we still retained 50%. What is the status of Galore Creek as far as development?

Well, Tom. I'll take that question.

Please take that one, Greg. Thank you.

Terrence, we had owned 50% of Galore Creek and it was co-owned by Teck. So now we sold 100% of our 50% interest. So Galore Creek are owned by Teck and Newmont.

Okay. All right. I did not understand that, I though we still had 50% of that. Last thing gentlemen, let me make a comment here. I am glad to see that Paulson is owns a lot of your stock, because I am also in the Detour and Detour was an absolute mess. It was a scam until Paulson took over the Board and straightened that company up. So I have a lot of hope for Detour too under Paulson's leadership. So just thought I'd throw it in there that I think it's a good point that Mr. Paulson and his companies are heavily invested in NOVAGOLD.

We're very pleased to have them as shareholders and I'm sure your remarks will find their way to Paulson Group.

I hope so. Okay, gentlemen, thank you very much. Sorry take up so much time.

All right. Thank you.

Thank you Terrence.

This concludes…

All right, well everyone. Thank you for your interest in NOVAGOLD. We appreciate you taking the time to join our call. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.