The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Billionaires up the ante on a handful of Last Frontier gold explorers
American billionaires John Paulson, Seth Klarman and Thomas Kaplan have taken a keen interest in Alaska's next generation of gold and copper mines.
While it is natural for hedge fund managers such as Paulson and Klarman, and resource investors such as Kaplan, to hold mining stocks in their portfolios, this trio holds major positions in three of the top Alaska-focused mineral exploration and development companies.
In fact, the companies founded and managed by these billionaires are the largest shareholders of International Tower Hill Mines Ltd., which owns of the 20-million-ounce Livengood gold project in Alaska's Interior; Novagold Resources Inc., which holds 50 percent of the 40-million-ounce Donlin Gold project in western Alaska; and NovaCopper Inc., which is exploring copper-rich deposits in Northwest Alaska.
In addition to a vested interest in companies advancing gold and copper projects in Alaska, the billionaires have one other commonality - they see gold as a longstanding and stable form of currency.
"Gold is not a commodity, it is a currency with the longest known provenance we have - actually, gold and silver," Kaplan said.
While such assertions earned Kaplan the title of "Gold's Evangelist" by Bloomberg Businessweek, his views also are reflected in the words and investments of Paulson and Klarman.
Paulson takes Tower Hill
According to filings with the U.S. Securities and Exchange Commission, Paulson & Co. has sharply increased its stake in International Tower Hill Mines, an exploration and development company working to optimize the Livengood project located on a paved highway about 70 miles north of Fairbanks.
As of the end of 2014, Paulson & Co. Inc., a renowned hedge fund, owned 23.06 million shares of Tower Hill, or roughly 20 percent of the Alaska-focused gold company's issued and outstanding shares. This is a 14.15 million-share increase since the end of September and catapults the hedge fund to the top of the junior's roster of shareholders.
In December, Tower Hill raised C$8.4 million through a private placement of 18.245 million shares at C46 cents per share, providing the company with the funds needed to optimize the gold mine described in a 2013 feasibility study completed for Livengood.
The study anticipates a 100,000-ton-per-day mill at Livengood churning out 8.1 million oz of gold over an initial 14-year mine life, or an average of 577,600 ounces annually.
The all-in costs to mine an ounce of gold described in the feasibility study, however, are estimated to be US$1,474.
Undaunted by the high estimate, Tower Hill management launched a battery of optimization studies for the large gold deposit.
The company said the optimization work completed in 2014 identified areas that look as if they will reduce both capital and operating expenses, including a more efficient production schedule that alone is anticipated to significantly improve the financial viability of mining the gold at Livengood.
The 2015 program at Livengood consists primarily of a hefty metallurgical program that aims to validate the observation that bulk samples of the deposit's mineralization return higher grades than drill results show.
The company believes this work could at least show the current resource was estimated conservatively, and could result in higher gold grades for the deposit.
Power supply and camp alternatives are other areas where the company might lower costs.
Together, Tower Hill hopes the studies will outline a financially robust project that can be moved into permitting.
Large stake in Novagold
Though Paulson's company is the largest single holder of Tower Hill shares, the hedge fund's 35.62-million-share position in Novagold is currently worth roughly 11 times its stake in Tower Hill, or about $132.2 million.
Yet Paulson is not the largest Novagold shareholder; that position belongs to Electrum Strategic Holdings, a natural resource investing firm founded by Kaplan.
Baupost Group, a hedge fund founded by billionaire hedge fund manager Klarman, is the third-largest Novagold shareholder.
The three firms own about 45 percent of Novagold's 312 million issued and outstanding shares.
Kaplan, who's Electrum owns nearly 85 million shares, is chairman of Novagold.
Kaplan, Paulson and Klarman are betting that the value of their respective interests in the junior will rise significantly as the company moves the 39-million-ounce Donlin Gold project toward and into production.
Donlin Gold, in which Barrick Gold Corp. holds the remaining 50 percent, has passed the halfway point of permitting which began in 2012. This puts the project on pace to begin construction by early 2017.
A feasibility study completed for Donlin in 2011 envisions a 53,500-metric-ton-per-day mill producing 1.1 million ounces of gold annually, at a cash-cost of US$585 per ounce, for 27 years. Targeting some of the higher grade reserves early on, the massive operation could extract 1.5 million ounces of gold annually at an average cash cost of US$409 per ounce over the first five years.
At US$1,200 per ounce gold, the base price scenario used for the feasibility study, the mine is predicted to generate after-tax cash flow averaging US$949.5 million per year for the first five years and US$500.7 million annually over the life of the mine - resulting in a payback of the foreseen US$6.7 billion capital costs in 9.2 years.
Novagold, which ended 2014 with roughly US$150 million in working capital, will likely not need to raise additional funds until a decision to develop Donlin Gold is reached.
Majority of NovaCopper
Novagold's top three investors are also the largest shareholders of NovaCopper, a company spun out of Novagold early in 2012. In fact, Electrum, Paulson and Baupost own more than 50 percent of NovaCopper's issued and outstanding shares.
NovaCopper is focused on exploring and developing copper-rich deposits in the Ambler Mining District of Northwest Alaska. Since becoming independent of Novagold, this exploration company has expanded the resources in the district to the equivalent of nearly 10 billion pounds of copper.
The spinoff, which started with roughly US$40 million in cash, needed to raise funds last year. NovaCopper's largest shareholders, including Paulson and Electrum, agreed to back a US$7.5 million financing to move the project ahead.
NovaCopper anticipates needing another US$20 million to complete a new feasibility study to develop the Arctic deposit as an open pit mine.
A 2013 preliminary economic assessment of the open-pit scenario predicts a 10,000-metric-ton-per-day mill at Arctic would produce roughly 125 million lbs. of copper per year at a cost of US62 cents per lb., including credits for zinc, lead, silver and gold by-products also found in the volcanogenic massive sulfide deposit.
As a result, the scoping-level study finds that an open-pit mining scenario at Arctic would produce an after-tax net present value (8.0 percent discount) of US$537.2 million, along with an after-tax internal rate of return of 17.9 percent; and would pay back capital expenses in about five years.
NovaCopper plans to refine and potentially improve project economics of a feasibility study for Arctic, scheduled for completion as early as 2016.
NovaCopper, which had US$4.8 million in working capital at Nov. 30, hopes to carry out an US$8-million to US$10-million program at the Upper Kobuk Mineral Projects in 2015.
Stability
Why are these billionaires interested in companies seeking to develop gold deposits in Alaska? The answer may boil down to one word - stability.
"Gold, at least, has been regarded as 'money,' for thousands of years, and it is relatively stable and widely accepted store of value and medium of exchange," Klarman wrote in a 2014 newsletter for Baupost.
Paulson believes that the U.S. Federal Reserve's quantitative easing (money printing) will eventually result in inflation, which is good for gold.
"Historically gold has been a very good currency alternative - an excellent currency alternative in times of inflation," the hedge fund manager explained in 2013.
He said that while gold prices have slipped, "the rationale for owning gold has not gone away. I think the consequences of printing money over time will be inflation. It's just difficult to predict when."
Being located on U.S. soil adds another level of stability to Livengood, Donlin Gold and the Ambler Mining District.
"Resource nationalism and an accelerating unreliability in the political landscape in many of the world's most prolific mining districts are evolving aggressively, and will likely continue to develop very unpleasantly, into the single greatest challenge for mining companies and their investors," Kaplan noted.
The Novagold chairman added that while quality gold projects worldwide are scarce, "truly great assets like Donlin Gold, which reside in a safe country which adheres to the rule of law and enjoys political stability in a world characterized by disturbing trends away from both of these virtues, is rarer still."
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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