The Great Gold Whale: A Category Killer in Alaska

NovaGold. The mine at Donlin is a potential "category killer," in the words of the company's chairman.

“Opportunity is tremendous in Alaska,” Willy Loman’s older brother Ben advises him in Arthur Miller’s Death of a Salesman. “Surprised you’re not up there.” The largest state in America has, at various times unlike our own, been a magnet for those for spellbound by the prospect of gold. Over three years, the great Klondike gold rush lured hundreds of thousands of formerly upstanding U.S. citizens north to Alaska in search of gold, and inspired immortal stories by Jack London and the classic Charlie Chaplin film The Gold Rush. But for gold bugs, the real action in Alaska may be just beginning.

If you are looking for a stock with high-octane leverage to gold, a CEO expert in mine-building, a chairman with a history of hitting it big in commodities, and a high-grade enormous find in the world’s safest mining jurisdiction, then NovaGold (NYSE: NG) might be up your alley. By definition, to like it, you have to love gold, but if you love gold, you’ll probably love its leverage to an increasing price of bullion. As Jim Grant points out elsewhere in the issue, there’s reason to believe that being long gold is one of the more logical plays you can make in today’s macro environment, as the printing presses of various central banks whirr and the hands and minds operating them seem to have no plan or no way to stop. Grant likes Barrick Gold (NYSE: ABX) as a way in on the yellow metal -- but if you’re looking for a junior developer with more potential upside, we recommend NovaGold which, coincidentally, represents a pure play on a joint venture with Grant’s pick for what some are calling the Holy Grail of recent gold discoveries: the Donlin Gold project in Alaska.

Donlin was first discovered by NovaGold when the company was under the leadership of Rick Van Nieuwenhuyse, an award-winning geologist. Geological studies to date already show proven and probable reserves of 34 million ounces of gold, a figure that jumps to 39 million in terms of measured and indicated resources and 45 million ounces including inferred resources. The mine is a whale, with a projected annual output of 1.5 million ounces during the first five years of its life and a lifetime annual output of 1.1 million ounces. It's also worth noting that Donlin is likely to contain a lot more gold, a fact that should be confirmed once the owners can turn their attention back to exploration. (This has been suspended during the permitting process, which is still ongoing.) There are several reasons for this optimism. Firstly, Donlin's contained within just three kilometers of an eight-kilometer-long gold-bearing trend, and secondly, the in-pit area of the mine covers only approximately two percent of the 80,000-acre land package the property comprises. The sheer volume of the resources at Donlin put the project squarely among the largest in the world, an anomaly at a time when gold discoveries are getting rarer and more expensive to find. In fact, 2012 saw precisely zero new discoveries, anywhere -- period. And technical innovation won’t fix this decline, either: gold is where it is, and no genius is going to unlock it with a mineral version of fracking.

Size is only part of what makes the Donlin deposit unusual. Its other distinctive characteristic is its remarkably high grade. Once the mine is up and running, the company expects to be digging up gold with an average grade of 2.24 grams per tonne -- 2.5 grams in the first five years -- more than double the average grade of one gram (and falling) for projects currently in development. There’s also the fact that NovaGold would be able to get the gold out at an all-in sustaining cost per ounce of $735 life-of-mine, very low relative to other comparable projects.

Despite its most valuable asset being located in Alaska, a very safe jurisdiction and thus a rarity for gold finds of this caliber (which normally face major jurisdictional risk), NovaGold has a colorful history. After inheriting half of the project when it acquired Placer Dome, gold major Barrick made a hostile takeover bid for NovaGold in 2006 at $16 per share, recognizing even then the enormous potential of its flagship asset. NovaGold’s stockholders rejected the bid. It was a somewhat pyhrric victory at the time for NovaGold, however, as litigation at another project and a massive increase in projected development costs caused the stock to crater. The company stood on the verge of bankruptcy in the post-Lehman financial crisis. Then, in 2009, it was rescued by the Electrum Group, the vehicle for the commodities investor Thomas Kaplan (interviewed elsewhere in this issue) which acquired 27 percent of the company’s shares at around $1 per share. Thus began a multi-year process of restructuring and refocusing NovaGold. The company’s litigation was settled and two successful financings were undertaken -- first to George Soros and John Paulson at $5.50 per share and then a larger offering at $9.50 per share -- that ensured the company would be fully financed until a construction decision. A mega-copper project was spun off to shareholders as NovaCopper, with Van Nieuwenhuyse at its helm, and a new CEO was recruited -- none other than Gregory A. Lang, the head of Barrick’s North American division and the man who had overseen the Donlin project for the former predator. Lang, a 30-year industry veteran, has tied his fate to that of NovaGold, representing a career bet on the viability of Donlin. He specializes in mine-building -- exactly the right experiential profile one would want to see in the executive of a company trying to get a project as massive as Donlin built. Finally, as part of the restructuring, the company also put up for sale its interest in Galore Creek, the largest undeveloped copper mine in Canada, to focus entirely on the Donlin project and put to rest the market’s concerns about its ability to finance two mega-projects at once. And against this backdrop, the company has slowly but surely advanced the project.