Rule violations slow Rock Creek startup

NovaGold Resources Inc. July 11 posted its second-quarter financial results and admitted that the company has encountered significant problems getting Rock Creek, its most advanced gold mining project, up and running.

NovaGold also outlined plans to sell some of its noncore assets, including its Ambler lead-zinc property near the Red Dog Mine in Northwest Alaska.

NovaGold said it initially budgeted about $42 million in fiscal 2008 to complete construction at the Rock Creek mine near Nome.

However, significant adverse weather conditions combined with weather damage to the water recycle pond and extra work relating to storm-water pollution prevention requirements (compounded by unusually high snowfall) have resulted in extended delays starting up production at Rock Creek.

Also, the junior mining company has added another $25 million to the Rock Creek construction budget.

Construction at Rock Creek should be finished soon and the company said it plans to acquire additional mining equipment in the second half of 2008, expand the tailings storage facility for future production and complete additional storm-water prevention measures.

These post-completion costs are expected to total about $19 million.

Rock Creek's difficulties, however, may not be over. In March NovaGold received a Notice of Violation from Alaska regulators related to a lack of preventative measures for storm-water discharges from its construction site. On June 9, the company received a further NOV and on July 7, a draft Compliance Order by Consent from the state.

NovaGold said it is cooperating with state regulators to resolve the problems, but its failure to adequately respond to the notices and compliance order could result in substantial fines, injunctive relief or other enforcement measures, which could materially affect the company's ability to operate the Rock Creek mine.

Still, NovaGold said it hopes to begin gold production at Rock Creek in 2008 at a rate of 100,000 ounces a year. Workers have completed the tailings storage facility and significant testing of the mill and processing facilities, and are currently finishing some alterations to the water recycle pond.

"State regulators have been to site for inspections and have requested some final documents and tests to fulfill permit requirements, at which point we expect the Rock Creek mine will be given final authorization for production ramp up," said NovaGold President Rick Van Nieuwenhuyse in a statement.

In addition, NovaGold has filled key management positions at Rock Creek, and mine activities are moving from construction to operations.

An exploration team also has drilled 1,300 meters of 9,000 meters planned for 2008, with the goal of extending the mine life at Rock Creek and expanding the Nome Operations resource base, according to Van Nieuwenhuyse.

Update on other projects

Vancouver, B.C.-based NovaGold is co-owner of the Donlin Creek gold project in western Alaska and the Galore Creek copper project in northern British Columbia, with Barrick Gold Corp. and Teck Cominco Ltd., respectively. It is also a major investor in Vancouver, B.C.-based Alexco Resource Corp. and several other businesses.

NovaGold said exploration is ongoing at Donlin Creek, with a focus on identifying additional high-grade, high-quality ores that can increase the net present value of the project and reduce the capital payback period. Drilling completed to date in 2008 demonstrates that mineralization continues about 500 meters to the east of the current pit-constrained resource in the East Acma area. 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 company said.

NovaGold provided an updated resource estimate for the project in June, incorporating the remaining 20,000 meters of 2007 drilling. Donlin Creek is now estimated to contain 31.7 million ounces of measured and indicated gold resources with an additional 4.2 million ounces of inferred gold resources, making it one of the world's largest undeveloped gold deposits.

At the Galore Creek project, Teck Cominco is paying 100 percent of the costs associated with re-engineering the project per its agreement with co-owner NovaGold. The two companies share equally the costs required to maintain the infrastructure built during the 2007 construction season, budgeted at $15 million to $20 million annually. NovaGold expects to incur additional costs related to demobilization and suspension activities at Galore Creek.

Operating unit Galore Creek Mining Corp. continues to re-engineer the Galore Creek project and expects to announce a preferred project design in the fall. A new feasibility study, scheduled for 2009, will update cost estimates for the project and may allow for the recommencement of construction, Van Nieuwenhuyse said.

NovaGold is selling some noncore assets, namely its green power business and exploration assets, including the Ambler project, for cash or marketable securities. The company is also negotiating a bank line of credit to be repaid from cash flow from the Rock Creek mine. In addition, the company said it could raise about $24 million by exercising 3.5 million warrants that it holds before Oct. 1. NovaGold said it plans to fund activities during the next year with current cash and the aforementioned transactions.

The company also said a strategic investment in Alexco Resource Corp. resulted in a net loss of $600,000 in the second quarter, compared with a net gain of $100,000 for the same period in 2007. For the six-month period ended May 31, the company recorded a net gain of $500,000 from the Alexco investment, compared to a net loss of $400,000 for the same period in 2007. At May 31, NovaGold had a pretax unrecorded gain of $12.5 million in its Alexco holdings.

Modest land and gravel sales

NovaGold reported a loss of $8 million for the second quarter, compared with $3.2 million during the same three months in 2007. The earlier period benefited from a $4.2 million gain from the sale of its shares of another company.

During the six-month period ended May 31, NovaGold reported earnings of $20.0 million, or 19 cents basic and diluted earnings per share, compared with a loss of $8.1 million during the same period in 2007. The outcome is a result of a $15.3 million gain on disposal of shares in US Gold Corp. and a $16.3 million suspension cost recovery at Galore Creek, net of related non-controlling interest, offset by the $4.2 million gain on the disposal of the Pioneer shares in 2007.

Revenues totaled $300,000 during the three-month period that ended May 31, compared with $2 million during the second quarter of 2007. NovaGold generates modest revenues from land and gravel sales and gold royalties. The decrease in revenues from the previous period relates mainly to decreased interest income due to lower average cash balances in 2008 as compared to the corresponding period in 2007, the company said.

Revenues for the six-month period ended May 31, totaled $2 million, compared with $3 million in the same period in 2007.The decrease in revenues from the previous year's results relates mainly to $1.6 million less interest income in 2008.. This was offset by $600,000 more land, gravel and gold royalty revenue in 2008.