Companies dispute Donlin Creek deal

If there are any NovaGold shareholders left who aren't aware that the Vancouver-based junior is in a dispute with Barrick, the world's number one gold producer, they must be living on the moon. Facing a hostile takeover bid from Toronto-based Barrick, the management of NovaGold filed lawsuits against the major recently in Alaska and British Columbia, alleging that Barrick is misrepresenting the facts about NovaGold's properties to its shareholders.

Even if NovaGold doesn't win either of the cases, their existence will almost certainly ensure that the company succeeds in its aim of making all sides of the story public. That includes the news that at one point Barrick considered offering NovaGold an operating interest in its Round Mountain mine in Nevada in exchange for an ownership interest in NovaGold's Galore Creek project in British Columbia and an increased stake in the Donlin Creek project in southwest Alaska.

The lawsuit in Alaska relates to Donlin Creek and the lawsuit in British Columbia is about Galore Creek. These are NovaGold's two largest properties, although the junior also started construction recently on its first mine, the Rock Creek gold project near Nome.

Donlin dispute began in 2003

The first ruling in the Donlin Creek lawsuit came Sept. 13, when U.S. District Court Judge Timothy Burgess denied NovaGold the injunction it had requested against Barrick's tender offer. However, Judge Burgess acknowledged that there was a "genuine dispute" between the two companies and that this dispute could be settled later in court.

The dispute over Donlin Creek has actually been going on since early 2003, when NovaGold's joint venture partner in the project, Placer Dome, was still an independent company. Last year Barrick acquired Placer Dome, including its joint venture agreement with NovaGold. In its own reports to shareholders, NovaGold made no mention of any problems until after Barrick initiated its takeover bid. At that point NovaGold began to allege publicly that Barrick was unlikely to meet the November 2007 deadline for earning an additional 40 percent of the Donlin Creek project. At present NovaGold owns 70 percent and Barrick owns 30 percent.

The basis of NovaGold's lawsuit against Barrick in Alaska was the allegation that Barrick misrepresented its ownership interest in Donlin Creek in violation of Section 14(3) of the Securities Exchange Act. After the hearing in Anchorage Sept. 6, Judge Burgess ruled that Barrick's clarifications of its position at Donlin Creek since the lawsuit was filed were adequate and that NovaGold shareholders were already fully informed about the ownership issues regarding the project, so there was no need for an injunction.

Donlin agreement signed in 2001

The mining venture agreement for Donlin Creek signed by NovaGold and Placer Dome in July 2001 and modified in 2004 gave Placer Dome the right to increase its interest in the project to 70 percent if it fulfilled three conditions within five years of exercising its back-in right. These conditions required Placer Dome to spend a certain amount on the project, to provide a feasibility study to NovaGold and to receive the approval of its board of directors to construct a mine on the property with an anticipated production rate of not less than 600,000 ounces of gold or gold equivalent per year during the first five years of commercial production.

Placer Dome exercised its back-in right in February 2003 and the start of the five-year period for the company to meet the three conditions was established as Nov. 13, 2002, making the deadline Nov. 13, 2007. But as early as January 2003, Placer Dome was expressing concern about the definition of a feasibility study in the mining venture agreement. Robert Pease, who was Placer Dome's general manager of global projects at the time, wrote to NovaGold CEO Rick Van Nieuwenhuyse to point out that a feasibility study only had to include a plan for obtaining permits, not the actual permits themselves.

"We agree that completing a FS (feasibility study) does not imply obtaining the necessary permits to construct a mine," Van Nieuwenhuyse wrote in his response to Pease. "However, the relevant issue really is not the FS but the Board-level approval to construct a mine. ... It is our position that the five-year time period is firm, and that 'a Board decision to construct a mine' cannot be subject to other conditions such as permitting, gold price or lack of available power."

Second agreement requested

Nevertheless, the following month Placer Dome's management asked Van Nieuwenhuyse to countersign another letter agreeing that it would be possible for the board to approve construction of a mine whether or not the necessary permits and financing were in place.

Van Nieuwenhuyse declined to sign it.

The dispute flared up again in November 2005, around the time when Barrick made its takeover bid for Placer Dome.

"NovaGold has always maintained that the requirement for a 'decision to construct a mine' means just that - start constructing a mine!" Van Nieuwenhuyse wrote to Placer Dome.

"This is not only the legal wording but the intent and spirit of the Agreement as well as background to our negotiations."

Placer Dome responded that there was a longstanding difference of opinion concerning the interpretation of the back-in requirements, and that the company maintained its view that permits were not essential in order for the Board to take a decision to construct a mine. Van Nieuwenhuyse insisted that construction must begin within 120 days of the Board decision. This would not be possible if permits were not in hand, as the permitting process usually takes two to three years in Alaska.

According to Van Nieuwenhuyse's testimony at the hearing, Placer Dome suggested giving NovaGold one of its non-core operating mines in return for an extension on the deadline for Donlin Creek. Placer Dome hadn't done the necessary drilling at Donlin Creek in 2003 and 2004, despite repeated warnings from NovaGold that the project was falling behind schedule, and in 2005 Placer Dome didn't do enough drilling to make up the shortfall, Van Nieuwenhuyse said. Additional infill drilling is still required to convert inferred resources to the measured and indicated category.

No agreement before Barrick acquired Placer Dome

Nothing was agreed between Placer Dome and NovaGold before Barrick acquired Placer Dome and took over the negotiations. Barrick proposed the three-way deal in which NovaGold would receive an operating interest in Round Mountain and Barrick would receive an ownership interest in Galore Creek and either an extension of the deadline for Donlin Creek or an immediate 70-percent interest in Donlin Creek. Throughout these talks, though, Barrick maintained its position that it would be able to meet the deadline.

"I've never worked at Round Mountain; for a person in exploration with mine geology background, it's almost a legendary property, it just keeps on going it seems," Stan Foo, Barrick's project manager for Donlin Creek, said in a lengthy deposition for the court case. Foo was Placer Dome's Alaska manager from 1997 to 1999, and from 2001 to 2005 he was the mining section chief at the Department of Natural Resources, dealing primarily with permitting.

Foo confirmed that Round Mountain was part of the discussions between Barrick and NovaGold before the takeover bid. Questioned by Roger Magnuson, a NovaGold lawyer, about the nature of the talks, Foo replied, "My best recollection, generally, is that it would be nice if that deadline wasn't there." Foo said the permitting process for Donlin Creek, including the preparation of an environmental impact statement, could begin as soon as the feasibility study was ready, which is now expected to be in the third quarter of 2007.

Magnuson asked Foo if it was true that the Quartz Hill project in Southeast Alaska was never constructed because of the result of the EIS process.

Foo said he didn't recall.

The AJ mine, also in Southeast Alaska, didn't make it through the EIS process, Magnuson pointed out.

"In the case of the AJ, the company backed out of the project prior to the EIS being completed," Foo said.

"Is it your position that a bank would be willing to loan an entity like NovaGold a substantial amount of money at the beginning of an EIS project when they don't have any absolute assurance that the project would even survive the EIS?" Magnuson asked.

Foo replied that he didn't know because he isn't a banker.

The feasibility study is vital to NovaGold because, as a junior mining company, it must raise money from a bank or by other methods to pay for its share of building the project, which could be $300 million out of a $1 billion total. Barrick is in a different position: It has enough money to finance its share without taking out loans. Magnuson also reminded Foo that the price of gold could fall or the price of trucks and steel could increase while the permitting process was under way, again potentially making the project uneconomic and the feasibility study meaningless.

Power to mine an issue

Another issue Barrick must deal with in the feasibility study is how to supply power to the mine. The likely plan is to transport around 40 million gallons of diesel fuel per year up the Kuskokwim River by barge to supply an on-site 80-megawatt power plant. The diesel power could be supplemented by a wind plant, also with an 80-megawatt capacity. "It's not a new technology combining the two, but at this scale it will be the first time that's done. It's a very exciting project, actually," Foo said.

The Association of Village Council Presidents, which represents the various Alaska Native entities in the region, has expressed concern that the barges will interfere with subsistence fishing. Barrick could provide a state-of-the-art communications system to let fishermen know about the schedule of the barges so they could adjust the placement of their nets, Foo said. He is confident that the diesel and wind option can be permitted, but Magnuson asked him what contingency plans Barrick has. A power line could be built to the site or peat could be used as a fuel source, Foo replied.

"Peat is an abundant, untapped resource in Alaska," Foo said. "It's a proven technology being utilized in Ireland and Finland, other foreign European countries, I think. And it has some potential, certainly great potential, and that's why it's one of the alternatives being investigated by Barrick at this point." Peat would only cost about 3 cents per kilowatt hour, compared with 9 to 12 cents per kilowatt hour for diesel fuel, according to Foo. But if the peat option were investigated fully by the feasibility study, Barrick would be unlikely to meet its deadline next year. "I always say nothing is impossible, but it would be very challenging," Foo said.

While the negotiations with Placer Dome and subsequently Barrick were taking place, NovaGold's annual reports and press releases gave no indication that there was a dispute over Donlin Creek. "The Company is pleased with Barrick's rapid progress with its transition at Donlin Creek and steady advancement of this world class project towards a production decision under the terms of the agreement," NovaGold stated in a press release on April 13, 2006. After Barrick made its takeover bid in July, NovaGold issued numerous press releases alleging that Barrick was falsely assuring shareholders that it could meet the Donlin Creek deadline.

Barrick continues to insist that it can meet the deadline for earning its 70 percent interest in the project. The company has permitted 20-30 gold mines in the past 20 years, Barrick's executive vice president and general counsel, Patrick Garver, testified. "I think I can safely say that we have built more new gold mines in the past 20 years than any other gold mining company in the world," Garver said.

B.C. lawsuit charges misuse of confidential information

NovaGold's lawsuit against Barrick in British Columbia alleges that Barrick misused confidential information belonging to NovaGold in making a takeover bid for Vancouver-based Pioneer Metals. NovaGold also tried to acquire Pioneer but failed, as management resisted and instead agreed to accept Barrick's offer. On Sept. 12, Barrick announced that it had acquired 81 percent of Pioneer's shares and was in the process of purchasing the remaining shares. Three of the four directors of Pioneer resigned and have been replaced by directors nominated by Barrick.

Pioneer holds the subsurface mineral rights to the Grace property, which is being considered by NovaGold as a location for its tailings facility at the proposed Galore Creek mine. Pioneer strenuously objected to this plan, arguing that there could still be economic mineralization on the Grace property. NovaGold insisted that its drilling showed there was no such mineralization there.

Barrick has stated that NovaGold would be unlikely to obtain permits and surface rights for the Grace property if Pioneer opposed that. "Based in part on Barrick's own experience at their Eskay Creek mine in northwestern British Columbia, we believe that Barrick's interpretation of surface lease claims is inaccurate," NovaGold's Van Nieuwenhuyse said. "In 1994, surface rights were granted at Eskay Creek for waste rock and tailings facilities under nearly identical circumstances. Based on the same legislation and process used at Eskay Creek, we expect to obtain surface rights for facilities at our Galore Creek project."

Hitting back at NovaGold, Barrick announced Sept. 14 that it would apply to the British Columbia Securities Commission for a hearing to cancel NovaGold's recently adopted shareholder rights plan.

Barrick also extended the deadline for its offer to buy NovaGold from Sept. 15 to Sept. 29.

"At the expiry of the bid, NovaGold will have had over two months to table an alternative proposal," Barrick President and CEO Greg Wilkins said.

"It's time for the poison pill to be removed so that Barrick can proceed with its bid and shareholders can exercise their fundamental right to make their own decisions regarding the tender of their shares without constraints imposed on them by NovaGold's management."