Gold prices top US$1,000-an-ounce mark

Gold shone brightly through the financial tempest that caused base metal prices to plummet and sent stock markets tumbling during the past year. Neither the global financial meltdown of 2008, nor the market stabilization of 2009 has impeded the upward trend of gold prices as they have steadily climbed to new all-time highs.

Gold has been running with the bulls since 2001 when the average ounce of the yellow metal sold for a mere US$271. The value of the precious metal has made steady gains over the past nine years reaching an average thus far in 2009 of US$937.

In September gold set a new record of US$1011.25 an ounce and continued its climb beyond the US$1050 mark. Top analysts believe this trend will continue into 2010.

Rick Van Nieuwenhuyse, president and CEO of NovaGold Resources Inc. and executive chairman of TintinaGold Resources Inc., who oversees gold projects ranging from the early exploration stage at Colorado Creek to the proposed mega-gold mine at Donlin Creek, talked with Mining News about his outlook for the price of gold and the affect it will have on various gold projects in which he is involved.

"The gold sector has, by far, outperformed every other financial instrument out there, Nieuwenhuyse said during an Oct. 13 interview. "Continued increases in the gold price will continue to attract more financial investors to the sector."

US$1,000 is a good start

Van Nieuwenhuyse said Vancouver B.C.-based NovaGold periodically makes a global assessment of where the gold price is heading in the long and short terms. He said his company considers factors such as worldwide operating costs, capital costs per ounce of gold and global economics when trying to foresee where gold values are trending.

He said the company tends to be conservative when forecasting long-term gold prices. These far-reaching gold price predictions are considered when making the crucial advancement and development decisions at its large-scale gold projects like Donlin Creek.

"The current long-term gold price we are using, I think is in line with industry standards, is around US$800 an ounce," Van Nieuwenhuyse said.

While he may be conservative for the sake of long-term planning, Van Nieuwenhuyse said he believes the golden bull-run still has legs.

"I am quite optimistic about the gold price. We are nowhere near where we would be on an inflation-adjusted basis," Van Nieuwenhuyse said. "If you consider exploration costs, development costs, capital costs and operating costs to produce a new ounce of gold cost us about US$800 and you haven't paid your investors anything on their investment yet. I think US$1,000 is a good start, but I think it will go quite a bit higher."

Most top analysts agree that gold prices have not yet reached their zenith, and they expect the yellow metal to average between US$1,100 and US$1,200 in 2010.

"Gold has significant upside potential into 2010," Jordan Kotick, head of global technical strategy at Barclays Capital, wrote Oct. 7. "Channel resistance currently is at US$1,370; history suggests a run at US$1,500. Taking it a step at a time, in the coming weeks, we view consolidation above $1,020 as extremely positive, targeting US$1,050 initially, and (then) US$1,120."

The China factor

Van Nieuwenhuyse said that the amount of debt and new currency being created by the United States, Europe and China is devaluing those currencies, which will continue to bolster gold.

"Led by China and India, the developing countries really have a lot more power than they did 10 to 20 years ago. Between those two countries you have two and a half billion people who are starting to accumulate wealth, and wealthy people tend to buy things that wealthy people like and one of those things is gold," he said.

"Wealthy people tend to all be concerned about pretty much the same thing, and that is foremost holding on to their wealth. They see the U.S. dollar and the yuan being devalued. In the case of China, the yuan is tied to the dollar, so when the dollar devalues 10 percent the yuan devalues 10 percent. If you are a Chinese investor, you want to see your wealth preserved. Gold has outperformed every other investment-class out there. It is not hard to envision why the Chinese want to buy gold. Culturally, historically they have always invested in gold." he added.

The Industrial & Commercial Bank of China, the world's largest bank based on market value, agrees with Van Nieuwenhuyse.

"Chinese always have a custom to keep gold as personal wealth. China's gold market is growing rapidly and has a huge potential with the growth of individual incomes," the ICBC said.

According to recent reports China's Central Television, the country's main state-owned television company, has run news programs informing the public about how easy it is to buy precious metals as an investment. The ICBC is said to be setting up a precious metals division to keep pace with growing demand.

The NovaGold president said China is the world's largest gold producing country and all of the yellow metal stays in the country. "You see the Central Bank of China buying gold. China is the largest gold producer in the world now and the Central Bank buys all of their gold. That gold never hits the outside market," Nieuwenhuyse said.

Lila Lu, head of precious metals at Beijing-based Minsheng Bank Corp, told Reuters, "China has no need at all to buy gold from the international markets. Because China is a large gold producer, it can source gold directly from its domestic makers, most of which are state-run enterprises."

Juniors provide leverage

Putting on his TintinaGold hat and drawing from his past experience with NovaGold, Van Nieuwenhuyse talked with Mining News about the affects of gold prices on young exploration companies.

"Obviously a stock like Tintina is a much earlier stage, much more speculative investment. But the higher the gold price, the more attention is drawn to gold equity investments in general," he said.

Van Nieuwenhuyse said investors have several options when buying gold. These options range from physical gold, which is the safest but has zero leverage on the gold price, to junior explorers, which are much riskier but provide the investor a great deal more leverage on the gold price.

While the gold price has risen about 30 percent over the past year, the stock prices of many of the gold explorers have increased exponentially. An investment made last October into Underworld Resources Inc. - the explorer drilling the acclaimed White Gold property in the Yukon Territory - would have swelled by 226 percent. Likewise, International Tower Hills Mines Ltd. - the junior outlining a multimillion-ounce gold resource at the Livengood project in Interior Alaska - has experienced a 336 percent increase in its share price.

"Buying an ounce of gold (and) buying an ounce of gold in the form of an ETF are the lowest risks because they are there; but you also have no leverage. When the price of gold goes up $10 per ounce, you made another 10 dollars per ounce. In an equity, you have more leverage. The seniors, albeit, are paid a bit of a premium for their ounces because they tend to trade at premiums to NAV (net asset value). The junior explorers are obviously the most leveraged, but they are obviously the higher risk," he explained.

Many geological similarities have been drawn between TintinaGold's Colorado Creek property and the 40 million-ounce Donlin Creek property, about 100 miles to the southwest. Nieuwenhuyse also drew similarities between this year's drilling at Colorado Creek and the early days at Donlin Creek.

"We have only released results from three drill holes. They all contain significant amounts of gold, a little sub-economic at this point, but we are just getting started. We have about 11 holes yet to release," Van Nieuwenhuyse said of TintinaGold's Colorado Creek property. "We are quite excited about the prospectivity of that area; it's a great start. When I think back to the early days of drilling at Donlin Creek, it took us four or five years to get into the best area. The drill results we have right now at Colorado Creek are not unlike the ones we had initially at Donlin Creek."

Long-term view at Donlin

Van Nieuwenhuyse said short-term fluctuations, like the current run-up in gold values, do not have a significant effect on long-range mega-gold mines like the one proposed for Donlin Creek by NovaGold and 50-50 joint venture partner Barrick Gold Corp.

"With any gold project, in particular with a big and long-life project like Donlin Creek, we tend to take a long-term view of gold," Van Nieuwenhuyse explained. "Because gold has a good week, good month or even a good year, it doesn't really change our long-term approach to the project."

A feasibility study released in late April placed a US$4.48 billion price tag on building a mine at the 40 million-ounce gold deposit. After reviewing the study, the partners decided to advance the enormous project located in the Kuskokwim Region of Southwest Alaska.

Nieuwenhuyse said the money spent to build the mine doesn't look so bad when you consider the magnitude of the gold contained in the orebody at Donlin Creek.

"Despite the fact that you are looking at a very large capital number to build this mine, when you amortize this capital out over 40 million ounces, it actually doesn't look so out of phase," Van Nieuwenhuyse said at the Denver Gold Forum in September.

Using NovaGold's US$800-per-ounce gold forecast, the 26.2 million ounces expected to be recovered from Donlin Creek's current reserves would be worth about US$21 billion.

The majority of the work at Donlin Creek in 2009 focused on optimization studies and community engagement as the project moves through the permitting process.

Near-term decisions at Rock Creek

While NovaGold must anticipate what gold prices will be 5 to 30 years into the future when considering the economics of Donlin Creek, the company's Rock Creek Mine near Nome could be producing gold in 2010.

"Rock Creek is basically about 90 percent built. To restart it, we would need to make an additional investment of probably somewhere between US$20 million and US$25 million. On a relative basis, it is a much easier decision (than Donlin Creek); it is a lot lower capital," Nieuwenhuyse explained.

Van Nieuwenhuyse said the company's current priority at the mine project is to handle the water that has accumulated behind the tailings dam.

"The plan right now for Rock Creek however is to get rid of the water behind the dam. There was a lot more water in the system than we had anticipated. Before we go forward with making a restart decision, we want to stabilize the site with respect to water," he said.

The 7,000-metric-ton-per-day mill at Rock Creek is designed to produce about 100,000 ounces of gold annually at an estimated US$500 an ounce. At US$1,000 per ounce, gold production at Rock Creek could put about US$50 million per year back into NovaGold's coffers.

NovaGold currently has about 500,000 ounces of probable gold reserves at Rock Creek, and an additional 1.9 million ounces of measured and indicated resources and 0.3 million ounces of inferred resources at its three properties in the region. The company said it is working on a mine plan that will include an updated gold reserve and resource calculation based on drilling carried out this year.

NovaGold put the mine into limited operation in 2008 but mechanical issues and lack of funds forced the company to place the operation on care and maintenance after about three months of testing.

The company said it is currently evaluating the potential to resume the start-up process at Rock Creek or to sell the property or an interest in it to another company.

Author Bio

Shane Lasley, Publisher

Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.

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