Is NovaGold Resources a Buy After Earnings?

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As an investor in smaller speculative gold mining companies with no revenues, I think it is very tempting to look for companies with large projects. But such projects take a lot of capital to bring them into production. They also take a lot of time. This time is not just attributable to the fact that a bigger resource requires that a bigger mine be built. It is also attributable to the long and extensive permitting process that precedes this construction.

Environmental regulators and activists are going to devote their efforts toward these large projects, and unless a small project is going to do something horrendous for the environment, its owners should have little trouble receiving a permit in a timely fashion. Consequently I tend to avoid smaller mining companies with enormous projects.

To highlight this sentiment, I will look at NovaGold Resources (NYSEMKT:NG).

NovaGold released its Q4 earnings results on Tuesday. NovaGold’s two mines — Donlin and Galore Creek — are not yet in production, so the company’s sales came in at $0 and it recorded a slight loss due to expenses. However, when analyzing a company that is bringing mining projects into production, it is more important to highlight what the company accomplished in achieving this  production.

The Donlin project is an enormous 50/50 joint venture project with Barrick Gold (NYSE:ABX) in Alaska. It has more than 40 million ounces of gold, and once in production, it will average over 1.1 million ounces of annual gold production (550,000 attributable ounces). In the fourth quarter the company was able to achieve a lot, particularly in receiving permits. In particular, the company received its environmental impact statement (EIS) that shows on a preliminary basis that the operation, once in production, will fall within U. S. environmental guidelines so that it will be legal to operate.

Unfortunately, the company has a long time to wait before it receives its final permits and begins construction. Donlin won’t be fully permitted until 2016 at the earliest, given its enormity. This coupled with the fact that the project will take years to build mean that Donlin will not be producing until 2019 at the earliest. This means that while the company made progress in 2013, it has a long wait ahead of it before investors see any cash-flow from the Donlin project.

To compound this, we have to take into consideration the fact that the Donlin project has a whopping $6.7 billion construction price tag ($3.35 billion attributable to NovaGold). NovaGold simply doesn’t have this. In fact, the company has just $191 million in cash and equivalents, and it has a market capitalization of just $1 billion. While management brags that it has enough capital to bring the Donlin project through permitting, we are still left with the problem of financing the actual construction of the mine.

But this brings me to the company’s second project — Galore Creek, a poly-metallic mine with mostly copper in British Columbia that is a 50/50 joint venture with mining conglomerate Teck Resources (NYSE:TCK). NovaGold has been stating for a while now that it intends to sell its share of Galore Creek in order to help fund the construction of the Donlin project.

Unfortunately there are some issues with this. For starters, at current metal prices, the project is probably not even worth $1 billion ($500 million attributable). Given that the company’s capital needs for constructing the Donlin mine exceed $3 billion, selling Galore Creek will not make that much of a difference. Furthermore, the company has been stating that it is going to be selling Galore Creek for quite some time, and it has yet to do so.

While management may be waiting for higher metal prices so that it can realize a higher price for its share in Galore Creek, it has yet to make this clear to shareholders. It follows that investors should be somewhat confused as to why the company reported that it has continued exploratory drilling at Galore Creek when management has made it clear that it wants to focus its efforts on the Donlin project.

Ultimately I think NovaGold’s management has several issues to clear up before NovaGold stands out as a compelling investment. True, NovaGold shares will perform incredibly well should the gold price rise, but at this point, given the issues I have brought up, I think an investment in NovaGold is too speculative.

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