The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Are Novagold, Barrick ready to pull the trigger on Donlin Gold development?
Thomas Kaplan
Novagold Resources Inc. and Barrick Gold Corp. – equal co-owners of the Donlin Gold project – have both said they are unwilling to develop the 40-million-ounce gold deposit in a weak gold price environment. So, with Donlin entering the final phase of a five-year permitting process, are the partners ready to build a world-class gold mine in Southwest Alaska?
With gold prices up roughly 16 percent since the start of the year and showing resilience at around US$1,250 per ounce, the partners are sounding more optimistic than this time last year.
In his opening statement at Novagold's annual shareholder meeting held on May 13, Thomas Kaplan said he is privileged to "be able to be the chairman of a company that I believe is in the right place, at the right time, with the greatest gold asset on the planet."
While Kaplan has never swayed from his long term bullish position on gold or the value of Donlin, roughly a year ago the Novagold chairman warned that neither partner is willing to begin construction until "gold prices have resumed their uptrend in earnest."
The Donlin Gold permitting process is not expected to be complete until the end of 2017, providing Novagold and Barrick management some time to weigh whether market conditions are right to invest the estimated US$6.7 billion needed to develop a mine in Alaska that will produce nearly 30 million ounces of gold over an initial 27-year life.
Peak gold?
From a low of US$250/oz. hit in 2000, gold went on a 12-year bull run, setting new price pinnacles each year through 2011. From that historic apex, however, the cost of an ounce of gold has descended at a rate of about US$175 per year – averaging US$1,669/oz in 2012, US$1,411/oz in 2013, 1,266/oz in 2014 and 1,166/oz in 2015.
"I call that leg-one of the bull market; and my belief is that what we are experiencing now is a pull-back within that bull market," Kaplan commented on this longer term uptrend in the market.
For perspective, the Novagold chairman noted, "If a stock went from $2.50 to $19.00 and pulled back to $10 or $11 on its way beyond $19 and perhaps to $29 or $39, nobody would be surprised."
So far in 2016, the price for an ounce of gold has averaged US$1,210, surging from US$1,080 in January to a high of US$1,294 in early May.
In a May 23 report, Citi Research hiked its predicted average gold price for the third quarter to US$1,300/oz. The research arm of Citigroup anticipates the precious metal will average US$1,255/oz. this year, which would be the first year-over-year gain since 2011.
Kaplan is reluctant to predict which way gold will go in the short term, but he believes the longer term trend points to gold more than doubling its US$1,900/oz. high.
Kaplan's belief that gold will surge to multiples of its current price is not predicated on some apocalyptic economic or geopolitical scenario. Instead, his bullish outlook is based on market fundamentals.
"I believe that the reason to own gold – shedding, stripping away the emotional aspect of the reasons why people own gold – is just the fact that it is an industry in distress and in turmoil," he explained.
The crux of this turmoil is that miners are depleting their gold reserves faster than they can replace them, which is expected to result in lower production in the coming years.
Novagold is not alone in believing that a scarcity of gold will lead to lower production. In fact, Eugene King, European metals and mining analyst for Goldman Sachs, has predicted that peak gold was reached in 2015.
"The combination of very low concentrations of metals in the Earth's crust, and very few high-quality deposits, means some things are truly scarce," he explained.
Barrick Gold President Kelvin Dushnisky added, "Falling grades and production levels, a lack of new discoveries, and extended project development timelines are bullish for the medium and long-term gold price outlook."
Kaplan said this supply side restriction is coupled with the fact that the world's central banks are buying more gold than they are selling, a reversal of the three decades of net selling by these institutions since the U.S. dollar decoupled from gold in 1971.
"The companies that mine money can't find it and the central banks that print it can't print enough of it," the Novagold chairman summarized.
"When we look at this, what we see is a perfect storm ... the supply of gold falling at the same time as we see people wanting to own something that isn't someone else's liability," he added.
Realizing Donlin
So, will Novagold and Barrick be ready to commit the considerable resources needed to build Donlin when they have permits in hand? Positive talk from both camps seems to indicate a yes.
"The Donlin Gold project has the potential to become a world-class asset for Barrick and for our partner Novagold. We would like nothing more than to see this potential realized," said Barrick President Dushnisky.
A 2011 feasibility study outlines plans for a mine at Donlin that would average roughly 1.5 million ounces annually during the first five years of operation and 1.1 million oz. annually over a projected 27-year mine-life.
At US$1,200/oz. gold, the base case price used in the feasibility study, this operation is predicted to generate after-tax cash flow averaging US$949.5 million annually for the first five years and US$500.7 million annually over the life of the mine. Under this scenario, the partners would be paid back the roughly US$6.7 billion needed to build the mine in 9.2 years.
At US$2,000 per ounce gold, the mine's after-tax cash flow is anticipated to nearly double to an average of US$1.78 billion annually for the first five years and US$987.2 million annually over the life of the mine – resulting in a payback of initial capital in just 4.4 years.
So anything between today's gold price and the highs foreseen by Kaplan show the potential to be a good investment for both companies and their shareholders.
At current gold prices, we've got relatively modest, positive, but modest rates of return. In a rising gold price environment, gold could go up twofold and the value of this asset would go up twentyfold," Novagold President and CEO Greg Lang explained.
For now, both companies are considering how they are going to pony up the more than US$3 billion each needed to build the world-class gold mine.
While this is a big investment for a company the size of Novagold, the company does have a large institutional shareholder base with the wherewithal and understanding to get behind a world-class project like Donlin Gold.
"They understand this asset for what it is. It's one of the largest gold endowments on the planet. It's an un-expiring warrant on an ounce of gold and we've got the management team and the patience to see it through to a construction decision," Lang explained.
The aspiring gold producer, however, is not depending solely on equity to foot the bill.
"For us, Novagold's shares are as precious as the metal itself. When the time is right, we expect to have multiple financing options available, including equity, debt, equipment leases, and third-party owner-operator arrangements. In the meantime, we're working with Barrick to explore ways to reduce the initial cost of building the project," explained Novagold CFO David Ottewell.
Even the world's largest gold producer must ensure its finances are in order before taking on a project as large as Donlin.
"In the interim, given the current stage of the project, it is too soon to speculate on what form project financing might take," said Dushnisky. "What we can say, however, is that we will continue to strengthen our balance sheet and improve our financial flexibility, so that we have the option to pursue opportunities such as the Donlin Gold project in the future."
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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