Donlin Creek destined to become behemoth

After six years of hard work, NovaGold Resources Inc. is moving closer to its goal of developing a world-class gold mine in the hills above the Yukon-Kuskokwim River Basin of southwestern Alaska.

The Vancouver, B.C.-based junior is set to produce its first gold at the Rock Creek project near Nome this year, but its ongoing development of the Donlin Creek deposit hundreds of miles southeast of Nome is more likely to propel the company onto the world stage as a mega-producer of the yellow precious metal.

NovaGold and its 50 percent partner, Barrick Gold Corp., June 10 reported a revised resource estimate for Donlin Creek of 31.7 million ounces of measured and indicated gold with an additional 4.2 million ounces of inferred gold.

The company said the partners have begun work on a feasibility study for the Donlin Creek project and have already identified a preferred design for supplying the huge amounts of power that will be needed to process about 50,000 metric tons per day of ore.

"We've been working toward this goal since we acquired the property in 2002," said Rick Van Nieuwenhuyse, president and CEO of NovaGold. "I am particularly pleased that after careful consideration and a review of all possible alternatives, the partners are aligned on the path forward. NovaGold and Barrick will work together to optimize the final project design, complete a feasibility study and initiate permitting. We're one step closer to building one of the world's largest gold mines."

Van Nieuwenhuyse said the higher resource estimate resulted when the company finally received assays from the remaining 20,000 meters of its 2007 drilling and incorporated those results into the calculations.

Measured resources total 6.2 million metric tons at an average grade of 2.87 grams per metric ton for 600,000 ounces. Indicated resources are estimated at 387.6 million metric tons at 2.49 g/t for 31.1 million ounces.

Measured and indicated gold resources increased 8 percent to nearly 394 million metric tons, grading 2.5 grams per metric ton gold, while inferred gold resources climbed 20 percent to 55.4 million metric tons, grading 2.33 g/t gold, from a previous resource estimate released in February 2008.

Estimate constraints outlined

NovaGold said the estimates for Donlin Creek's resources are constrained within a Lerchs-Grossman open-pit shell using the long-term metal price assumption of $750 per ounce of gold. Assumptions for the LG shell included pit slopes variable by sector and pit area: Mining cost is variable with depth, averaging $1.80/t mined; process cost is calculated as the percent sulfur grade multiplied by $2.65 + $12.44; general and administrative costs, gold selling cost and sustaining capital are reflected on a per-metric-ton basis. Based on metallurgical testing, average gold recovery is assumed to be 90 percent.

NovaGold said the resource has been constrained within a conceptual pit based on $750 per ounce of gold and using recent estimates of mining, geotechnical and metallurgical parameters. A variable cutoff grade averaging 0.87 g/t gold is based on recent estimates of mining costs, processing costs (dependent upon sulfur content), selling costs and royalties.

The updated resource estimate was based on a three-dimensional geologic and mineralization model that integrated all exploration work on the project through 2007, including 173,031 assayed sample intervals in 1,678 holes. Metal grades were estimated with 6-meter-long drill-hole composites, using inverse distance cubed estimation methods into 6-meter-by-6-meter-by-6 meter blocks. Geologic controls to mineralization were applied using lithologic constraints and grade shell. High-grade outlier composite values were capped based on a review of cumulative frequency plots for each major rock type.

All drill samples were analyzed by fire assay and ICP at ALS Chemex Labs in Vancouver, B.C. The 2007 drill program and sampling protocol was managed by Barrick, as were assay quality control and quality assurance standards. However, a 2008 drill program and sampling protocol currently underway is being managed by Donlin Creek LLC, as are assay quality control and quality assurance standards.

Partners settle on power design

NovaGold and Barrick Gold considered a number of power alternatives before settling on using onsite diesel and wind cogeneration for power.

Van Nieuwenhuyse said Donlin Creek will need 30 megawatts of power, enough to light up a city of 75,000 people.

The company narrowed the choices to building a line to connect to the Alaska railbelt power grid or going with on-site power generation.

"Certainly, there are a lot of benefits to bringing in a power grid, especially for the local communities, but the business risks were so great with the power grid alternative that the partners opted for site generation," Van Nieuwenhuyse explained.

He said the risks included having to rely on numerous small electric utilities to obtain the needed power.

The preferred design calls for using wind power to generate 25-30 percent of the project's electricity needs, which requires construction of a 130-megawatt wind farm because of the intermittent nature of wind power.

"It's very cheap power, but the capital costs are not insufficient," Van Nieuwenhuyse said.

The remaining 70-75 percent of power would come from on-site diesel generators.

Van Nieuwenhuyse said Donlin Creek LLC will continue to study other energy sources for power generation, including natural gas and peat, in search of a more economical alternative. "But all of these options have issues," he added.

Mine would be among largest

Donlin Creek is currently envisioned as a 50,000- to 60,000-metric-ton-per-day gold mine, which would make it one of the world's largest with considerable capital costs associated with startup.

Using the preferred design, Donlin Creek would operate for 25 to 30 years and produce potentially 1 million to 1.5 million ounces of gold annually. Permitting would start in early 2009 with construction targeted for 2012, NovaGold said.

The operation ultimately would become one of the world's largest gold mines, rivaling Newmont Mining's Minera Yanacocha Mine in Peru and several others around the globe in size.

According to reports, Barrick Gold estimated Donlin Creek's capital cost in 2006 at about $2.1 billion and upped the figure to $4 billion in 2007. However, an official cost estimate for the project will not be determined until the feasibility study is completed, a NovaGold spokeswoman said.

Mindful of the detrimental effect of significant increases in capital costs on a project given the postponement of the Galore Creek Project in northern British Columbia when cost estimates nearly doubled last fall, NovaGold said it will continue to seek ways to improve the Alaska project's design during the feasibility study period.

NovaGold is a 50-50 partner with Teck Cominco Ltd. in the Galore Creek copper-gold project, which is currently being re-tooled in light of the sharp spike in its projected capital costs.

One option to offset a run-up in costs that NovaGold has indicated it would consider is to reduce the junior's 50 percent equity in both Donlin Creek and Galore Creek in the future - once feasibility studies are complete and the process begins for financing capital needed for the projects - as a way to increase shareholder value.

New drilling focuses on pay-back period

NovaGold also will focus on identifying additional high-grade ore that can enhance grade in the early years of production, reducing the capital payback period.

Van Nieuwenhuyse said 19,000 meters of new drilling so far this year extended the mineralized zone and produced intersections of up to 6.97 grams per metric ton over 42.1 meters.

Widely spaced drilling at East Acma demonstrates that mineralization continues about 500 meters to the east of the current pit-constrained resource along the Donlin Creek anticline, an important ore-controlling structure.

The 2008 holes are intercepting mineralization below and beyond the current pit limit and highlight the potential to increase the Donlin Creek resource base with additional infill drilling.

The Phase 1 program is focused on the limits of mineralization and its impact on facilities placement in the East Acma area versus conversion of mineralization to resources.

While Donlin Creek LLC will continue additional infill drilling in the East Acma area during the remainder of the budgeted Phase 1 program, the Phase 2 program in 2008 will largely be focused on finalizing the feasibility study and preparing for permitting.

"We expect to finalize and approve the feasibility study early in'09, probably in February," Van Nieuwenhuyse told Mining News June 17.

Van Nieuwenhuyse said exploration during the rest of the 2008 season will focus on identifying additional high-grade ore that can enhance grade in the early years of production, reducing the capital payback period.

NovaGold envisions employing 500-600 permanent workers at Donlin Creek in a fly-in, fly-out operation similar to that used at the Red Dog Mine in Northwest Alaska. Currently, some 200 people are working on the project, of which 85-90 percent reside in the Kuskokwim region, according to Van Nieuwenhuyse.

He said the partners aim to continue their program of recruiting, training and hiring from the local labor force as the mine is developed.

Lawmaker joins Donlin Creek staff

Separately, Donlin Creek LLC said it has hired state Rep. Mary Sattler Nelson as manager of community development and sustainability for the company, which was formed by NovaGold and Barrick Gold to develop the mine. Earlier this year, Nelson said she would not seek a sixth term, after serving 10 years representing the 56 villages of the Y-K region in the Alaska State Legislature.

After watching the Donlin Creek project for more than 10 years, Nelson said she is impressed with the project's record of keeping its environmental commitments and the positive effects its 90 percent local hire rate has had on local communities.

"I want to work with the company to ensure that these benefits are realized throughout the region so that they can be sustained not only through the construction, operation and closure of the mine - but also beyond," Nelson said.

Startup imminent at Rock Creek

Meanwhile, NovaGold was to meet with Alaska regulators in mid-June to smooth out remaining bumps in the road to startup at Rock Creek, a relatively modest deposit with an estimated 1million-ounce gold resource and project yearly production of about 100,000 ounces of gold. Because acquisition and development costs for the Rock Creek Mine, which encompasses several deposits over the 13,500-acre property, were relatively low, NovaGold expects to benefit from $25 million in annual cash flow from the project.

Van Nieuwenhuyse said construction at Rock Creek is substantially complete at the mine, but an uncommonly heavy snowfall, five or six times the norm, this year in Nome led to additional work to meet requirements of storm water regulations.

"We think we will have a smooth startup in the next two to three months and reach commercial production later this year," he said.