Barrick, NovaGold pulling no punches

Two Canadian mining companies traded accusations in November as they hurtled toward the latest deadline in Barrick's hostile takeover bid for NovaGold. The world's largest gold producer upped its offer from $14.50 per share to $16 per share and announced it would take up all shares tendered by Nov. 21, regardless of whether it obtained the minimum 50.1 percent of NovaGold that it originally hoped for.

NovaGold would have liked to see a "white knight" ride in and rescue it from Barrick's advances with a shinier offer. That didn't happen, although 11 companies were said to have flirted with the idea, then changed their minds. So it was left to NovaGold shareholders to defend their turf, for which the company's president and CEO, Rick Van Nieuwenhuyse, thanked them in a conference call Nov. 8. NovaGold itself spent $4.7 million in the third quarter of 2006 on legal and advisory costs related to Barrick's bid.

"I think our shareholders have spoken loudly and clearly to Barrick," Van Nieuwenhuyse said in what would be the first of three conference calls by the two companies.

"We're just getting to the fun part," he added, referring to the transition of NovaGold's projects from exploration to development and production.

Van Nieuwenhuyse and the company's board asked shareholders to reject Barrick's bid because they believe it fails to take into account the future value of the projects.

Rock Creek gold mine near Nome, Alaska, is under construction and set to be in production next year, and as soon as that happens, construction is scheduled to start at the Galore Creek copper-gold-silver project in northwestern British Columbia.

Galore Creek is one of two large projects that Barrick is keen to acquire, the other being the Donlin Creek gold project in Alaska, where Barrick and NovaGold have been in an uncomfortable joint venture partnership since Barrick took over Placer Dome last year. NovaGold has filed a lawsuit against Barrick about its concerns over the interpretation of the joint venture agreement, which states that Barrick must produce a feasibility Donlin Creek study by November 2007.

Barrick Donlin Creek operator with 30%

NovaGold is confident it will regain 100 percent ownership of Donlin Creek after Barrick fails to meet the requirements of the joint venture agreement. Barrick insists it will meet the deadline. Currently NovaGold owns 70 percent and Barrick owns 30 percent of the project, but Barrick is the operator. NovaGold has no significant financial needs for Donlin Creek until the project starts construction, which will could be as early as 2010, Van Nieuwenhuyse said.

"We have returned 70 percent to our shareholders on an annual basis for seven years," he said. "This part of the curve has really been generated by growing our resource base. ... We're close to 42 million ounces of gold now and almost 14 billion pounds of copper. To put that in perspective, that's a larger resource base than Glamis Gold, and … it's not just resources any more, it's resources and reserves." Vancouver-based Goldcorp paid $7.5 billion to acquire Glamis Gold in November.

NovaGold published a feasibility study for Galore Creek in late October and the project is in British Columbia's environmental assessment process. After reading the public comments on the project, the company didn't see any "show-stoppers," Van Nieuwenhuyse said. Barrick is "desperate" for Galore Creek, he added, comparing it with Barrick's Zaldivar copper mine in Chile. He compared Donlin Creek with Barrick's flagship property, the Goldstrike open pit and underground mines in Nevada, which produced over 2 million ounces of gold in 2005, noting Goldstrike is in its "waning years."

A study by SRK Consulting, published in September, estimated Donlin Creek could produce an average of 1.4 million ounces of gold per year for 22 years.

NovaGold team experienced

"Despite the current environment of high demand for talented people, in over 35 years I've been in this industry I believe we have attracted some of the most experienced mine builders and operators I have ever worked with," Peter Harris, NovaGold's COO said in the conference call. "It is interesting to me that so many people have joined our team despite the Barrick cloud our team has to put up with every day." NovaGold's Alaska and B.C. teams have more than 40 people with over 25 years' experience each, he said.

Financially, NovaGold is capable of developing its large projects with joint venture partners, NovaGold CFO Don MacDonald told shareholders. Historically, he said, most large copper projects in the last few years have been developed through joint ventures, including Zaldivar. Construction capital for Galore Creek is NovaGold's only major financing need for the next three years, and the equity for Donlin Creek could easily be covered by surplus cash flow from Galore Creek, said MacDonald. "Contrary to what Barrick has been saying in the markets, we feel that these projects are well within our grasp," he said.

Barrick: NovaGold claims unsubstantiated

Barrick's President and CEO Greg Wilkins hosted a conference call Nov. 14 in which he addressed comments to NovaGold shareholders.

"In a conference call last week, amongst the many statements NovaGold management made, a number of unsubstantiated claims and unrealistic projections were described," Wilkins said.

"Of course NovaGold's management is looking for more value.

Their storyline has been used during the auction of the company that has occurred over the last four months, and it certainly appears that it has not been bought by the 11 sophisticated mining companies who all walked away, and frankly, we don't buy the storyline either.

...

Barrick doesn't pay good money for storylines, Barrick pays good money for value," he added.

"Let's start with the basics of the principle assets in question and talk about the technical complexity, the permitting risks, the uncertainties and all of the challenges ahead for Galore Creek which are often disregarded," Wilkins said. "Galore Creek is a major, $1.8 billion-plus capital project. It is located 75 kilometers north of our Eskay Creek mine in the interior of British Columbia. It is very rugged terrain, and it is terrain that we've had much experience with. As a remote location, much like Eskay Creek, it will be a fly-in, fly-out camp. In northern B.C. it presents climatic challenges for construction and operation."

Galore Creek will require 125 kilometers of new roads, a 4-kilometer tunnel through a mountain, a 135-kilometer concentrate pipeline and 12 kilometers of water diversion channels, Wilkins said. The tailings dam and impoundment will be 270 meters high (higher than a 70-story building). NovaGold's recently-released feasibility study, which said the mine could generate average annual after-tax net cash flows of $414 million over a 22-year project life, doesn't include detailed engineering, he said.

Barrick: NovaGold's economics deteriorating

"Unfortunately, a year-over-year, apples to apples comparison between the pre-feasibility study and the feasibility studies prepared by Hatch for NovaGold demonstrates one direction. The project's economics have deteriorated in the last 12 months," Wilkins said. "Specifically, $625 million of deterioration in value of the project was driven by a 64-percent increase in construction costs, up to $1.8 billion and a 21-percent increase in copper cash costs."

Barrick expected some cost increases for Galore Creek, but not of this magnitude, said Wilkins. Also, Barrick doesn't believe that Galore Creek will be permitted by the second quarter of 2007, as NovaGold suggested it would. Over 400 issues were raised during the public comment period, and NovaGold might have to arrange for the amendment of a federal environmental regulation. "The last time the regulations were amended for a mining project, we understand that it took over three years from the end of the environmental assessment process," he said.

Another issue Barrick thinks will delay Galore Creek is litigation by junior Pioneer Metals against NovaGold regarding mineral rights to the area where the tailings facility would be built. Wilkins didn't mention, though, that Barrick is in the process of buying out Pioneer in a friendly deal.

Wilkins called NovaGold's comparison of Galore Creek to Zaldivar "a stretch," emphasizing that Zaldivar's capital costs at initial construction were a quarter of the estimate for Galore Creek and that Galore Creek has significantly higher operating costs. Zaldivar is also located within easy reach of a city, he said.

Barrick: Donlin logistically challenged

Donlin Creek is another logistically challenging project that will cost at least $2 billion to build, Wilkins stressed. "It is located in Alaska, 450 kilometers west of Anchorage, where temperatures reach minus 40 degrees Celsius," he said. "It, too, will be a fly-in, fly-out operation, and supplies will have to be barged 260 kilometers up the Kuskokwim River during a four-month window when the river is free of ice." Developing Donlin Creek will take six years and will involve constructing a 550-kilometer power line to connect the mine to the grid, Wilkins said. In fact, a combination of diesel fuel and wind power is the preferred option that Barrick has been counting on.

"Also bear in mind that the ore is low-grade, refractory in nature, and that the waste rock is acid-generating, requiring large shipments of lime for neutralization," Wilkins said. "The SRK report is at best conceptual, and when it's benchmarked against currently operating mines, it appears unrealistic and optimistic," he added.

Barrick's Goldstrike is in Nevada, which has a world-class infrastructure and a highly skilled workforce, Wilkins pointed out.

The gold grade of Goldstrike is about two-and-a-half times that of Donlin Creek, with easier ore types, he said.

"At 40 percent of Goldstrike's grade, it is not reasonable to believe that its costs will be two-thirds of Goldstrike's costs six years from now as projected in the SRK report," Wilkins added.

"Goldstrike has already produced 30 million ounces of gold and has 20 million ounces remaining in reserves.

...

Donlin Creek is a good asset and has the potential to be a great asset, but it faces many difficult challenges, but the comparison to Goldstrike is just not credible."

As a development-stage company, NovaGold will have difficulty obtaining bank financing for its large projects, Barrick believes. "A go-it-alone stance by NovaGold is clearly not a winning scenario for its shareholders," Wilkins said. "These projects are large, complex projects that require the skills that we have to move them forward. That's why we're willing to pay a 37-percent premium for them, but we are not prepared to overpay. ... If we do not achieve a controlling interest, we'll be more than likely the largest shareholder and we will watch to see that NovaGold meets their milestones ahead."

Rothschild resigns from Galore Creek

By the time of NovaGold's second conference call on Nov. 17, there had been more developments. An organization called Bering Straits Citizens for Responsible Resource Development filed a lawsuit against the U.S. Army Corps of Engineers, challenging the Corps' issuance of a permit for Rock Creek mine. The plaintiffs contend the Corps failed to adequately consider environmental impacts of the project, to consult certain Alaska Native groups, and to properly account for public comment. Also, Rothschild, NovaGold's financial advisor for Galore Creek, resigned. NovaGold appointed CitiGroup to replace Rothschild.

NovaGold believes that the Rock Creek lawsuit is without merit and that the process undertaken by the Corps complied with applicable laws and gave ample opportunity for all stakeholders to be heard prior to final permits being issued in August. NovaGold held numerous public information sessions and published weekly articles in the Nome Nugget to keep the community informed, it said.

"Barrick presented many half-truths, highly skewed and downright misleading and wrong information during its diatribe," Van Nieuwenhuyse said. Barrick selected only negative numbers from the Galore Creek feasibility study and ignored the positive numbers, he added, giving examples of companies the size of NovaGold that had recently obtained debt financing for large projects, including Australia's Fortescue Metals, which raised around $2 billion with CitiGroup's help.

The Tahltan Central Council, a First Nations entity in the Galore Creek region sent a strongly worded letter in support of the project, Van Nieuwenhuyse told shareholders. "We understand that Barrick may not be very familiar with the B.C. permitting process, since they've never permitted a mine in B.C.," he said. "Furthermore, despite their posturing that they're familiar with northern B.C., we would like to point out that Eskay Creek was explored, permitted, financed, constructed and operated by a junior mining company. ... I guess they must have forgot all that."

NovaGold agrees with Barrick that Goldstrike was a wonderful mine. "That's our point," Van Nieuwenhuyse said. "Our point is not what Goldstrike was, but what Goldstrike is. ... The market pays for future production, not past glory." Costs at Goldstrike have increased recently by over $100 an ounce, according to Van Nieuwenhuyse.

Barrick involved in Rothschild decision?

In the question-and-answer session, an analyst representing Snyder Capital Management, Kim Stevens, described the Barrick offer as "ludicrously below" what they felt the long-term value of NovaGold would be.

"Greg Wilkins made what sounded to me to be a lot of veiled threats," she said of Barrick's conference call.

"He went out of his way to state a lot of negative facts.

...

I felt like, why does he even want to buy this company, it sounds so horrible, who would take $16 for it?" She asked if it was the case that Barrick had information about Donlin Creek that could potentially increase the value of the project, information that it wasn't revealing to shareholders.

Van Nieuwenhuyse confirmed that Barrick wasn't sharing its information.

"I suspect that the large black hand of Barrick was in play with Rothschild," said another caller, portfolio manager Michael Emmerman from Neuberger Berman. He found it odd that Rothschild had resigned after several months with NovaGold, in the middle of Barrick's takeover bid.

Van Nieuwenhuyse said the question would best be answered by Wilkins, but that NovaGold was very surprised by Rothschild's sudden departure. Barrick responded in a press release that Rothschild's decision might have been motivated by NovaGold's "aggressive projections" on Galore Creek in the Nov. 8 conference call.

Barrick also predicted in its Nov. 17 press release that NovaGold's share price would collapse after Barrick's bid expires. "NovaGold shareholders deserve to be told the whole truth around the risks and uncertainties ahead," Wilkins said.