Mine Setback Slams NovaGold

Shares plunge more than 40%.
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Shares of gold prospector

NovaGold Resources

(NG) - Get Report

were plunging Monday on news that the Vancouver-based firm would stop work on the development of its Galore Creek project in British Columbia.

The stunning decision came after the firm said capital costs for developing the mine, which NovaGold jointly owns with

Teck Cominco

(TCK)

, would balloon to about $5 billion, more than double the $2.2 billion previously estimated.

Management says the project, which was due to start producing in 2012, would need a further 18 to 24 months of work to complete. Changes in the construction of a tailings dam and water-flow structures accounted for the majority of the cost hike.

Investors beat a hasty retreat on the news, marking down shares 44% to $11.25 in extremely active trading. That's a 52-week low.

"It's a complete shock," says Gijsbert Groenewegen, portfolio manager at Gold Arrow Capital Management in New York, who doesn't currently own the stock. "The share price and the reaction tell us everything. I think we can forget about owning it for the moment."

Both Teck Cominco and NovaGold expect to record charges related to the decision, but they didn't specify the timing or the magnitude of the impact. They will also review their personnel needs for the project over the coming weeks. At the moment, the project employs about 400 workers, either directly or as contractors.

"We reached this decision after considerable review, and we share the disappointment of our employees," said NovaGold CEO Rick Van Nieuwenhuyse in a prepared statement.

NovaGold recently settled a

dispute with

Barrick Gold

(ABX)

over the development of an Alaskan deposit estimated to hold more than 30 million ounces of gold.