Page 7 - NOVAGOLD 2014 Annual Report
P. 7

Could you walk us through the points that make Donlin Gold a “category-killer”?
Dr. Kaplan and Mr. Lang: It all comes down to geology, potential, economics, and location.
Geology – With approximately 39 million ounces of gold in the measured and indicated resource categories (541 million tonnes of gold at an average grade of 2.2 grams per tonne), and an additional approximately 6 million ounces (92 million tonnes at an average grade of 2.0 grams per tonne) in inferred resources, Donlin Gold is one of the world’s largest known undeveloped gold deposits. These are excellent numbers, placing Donlin Gold well within the top 1 percent of known global gold deposits in terms of size. It’s also blessed with exceptionally high grade when compared to its peers. As we’ve seen in the recent downdraft in the mining (and now energy) spaces, this kind of quality counts. With Donlin Gold having a measured and indicated resource grade of 2.2 grams per tonne, it is one of the highest-grade known large open-pit gold deposits. Its grade is where the average grade of the industry was 10 years ago, and is believed to be more than double the average grade of the other gold projects currently in development.
Potential – The second updated feasibility study filed three years ago demonstrated that, as envisioned, Donlin Gold will become one of the single largest gold-producing mines in the world, averaging approximately 1.5 million ounces of gold production in the first five years of operation and, assuming no additional resources, approximately 1.1 million ounces of gold production per year over its initial 27-year life. And that’s also assuming no more higher-grade ore is found – or any additional ore at all, for that matter. In addition to its already large mineral endowment, Donlin Gold has excellent exploration potential, with the opportunity to expand the current open-pit resource both along strike and at depth. Considering that the current pit occupies only part of a three-kilometer area that is itself only a portion of an eight-kilometer mineralized belt, in NOVAGOLD’s view it is likely that Donlin Gold’s mine life, already measured in decades, or ultimate production profile – or both – is likely to be greater than anticipated.
Economics – During the first five years, Donlin Gold’s cash costs are slated to be $411 per ounce of gold; over the life of mine, the average is expected to be $635. All-in costs are expected to be $532 and $735 respectively. This is very favorable in today’s world. As this number is a function of our having such enormous reserves, it is yet another example of why size matters. Moreover, Donlin Gold’s leverage to higher gold prices is exceptional. Its after-tax Net Present Value* (NPV), using a $1,200 per ounce gold price and a 5 percent discount rate, was estimated at $547 million, as per the NOVAGOLD news release announcing the results of the Donlin Gold second updated feasibility study. This number rises to $6.2 billion if undiscounted. Importantly, the resultant NPV sensitivity analysis showed a more than eight-fold increase in value to $4.6 billion at $1,700 per ounce of gold ($14.6 billion if undiscounted), and then a nearly 50 percent further increase in NPV to $6.7 billion at $2,000 per ounce of gold. At the zero discount rate with which we believe North American assets may once again be rated, that number rises to more than $19 billion.
Location – Unstable and changing geopolitics, including but not limited to economic and political instability, have altered how the market views investment opportunities on the frontier. According to PricewaterhouseCoopers, “ongoing geopolitical issues...threaten the development and advancement
of projects...around the globe” (Mine 2014: Realigning expectations). In fact, in our view, it’s not an overstatement to say that jurisdictional risk represents the single greatest threat to the mining industry. Many companies and assets in the developing world have been victims of sovereign risk with unanticipated tax increases, royalties, civil unrest, permitting delays, corruption and resource nationalism. When sentiment returns to the space, we believe that Donlin Gold’s location in the United States will give NOVAGOLD a tremendous competitive advantage, especially in a time when heightened resource nationalism and jurisdictional uncertainty is second only to investor sentiment as the most significant factor negatively affecting shareholder value among natural resource companies. Donlin Gold is one of only a handful of large projects located in a safe jurisdiction, where you can sleep soundly and know you won’t wake up in the morning and find out that you’ve been surprised by a coup or a nationalization of your business – and
a place where you can keep the fruits of your leverage to gold. We believe it’s a great advantage to be in a
* Donlin Gold Net Present Value estimates as per the second updated feasibility study effective November 18, 2011, as amended January 20, 2012. All dollar figures are in USD and reflect after-tax net present value (at a 0% and 5% discount rates) of the Donlin Gold project
as of 1/1/2014. At a 5% discount rate, the net present value is: $547m @ $1,200 gold; $1,465m @ $1,300 gold; $3,147m @ $1,500 gold; $4,581m @ $1,700 gold; $6,722m @ $2,000 gold; and $10,243m @ $2,500 gold. Project development costs prior to 1/1/2014 are treated as sunk costs.
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