NEW YORK (
) -- Small-cap miner
could be a prime takeover candidate, as long as
NovaGold has a $1.19 billion market capitalization and two major gold and copper projects, Donlin Creek and Galore Creek. Once they come on stream, NovaGold could produce a million ounces of gold a year and net about $1 billion in operating cash flow as long as precious metal prices stay strong.
Small-cap miners typically have the exploration capabilities and properties brimming with promise, but lack the financing. Large-cap miners take less production risk but can provide capital. In 2006,
initiated a hostile bid for NovaGold and failed.
owned 13.6 million shares of the smaller company, almost a 15% stake. NovaGold rejected the $16-a-share offer, but with shares now trading at under $7 and financing hard to come by, NovaGold could be looking for another buyer.
NovaGold and Barrick currently partner in the Donlin Creek project in Alaska. NovaGold CEO Rick Van Nieuwenhuyse believes Galore and Donlin will come on stream in six to eight years. I asked him if his company's strategy has changed as gold prices skyrocketed and NovaGold gets closer to production.
Inside NovaGold's Strategy
TheStreet: What are some catalysts for NovaGold in 2010?
Van Nieuwenhuyse: On Galore specifically, a preliminary economic assessment done in the first quarter of this year -- so say by March -- and then by the end of the year a pre-feasibility study. And then on Donlin ... the pre-feasibility study at Donlin is, of course, done, but we're looking at various ways at optimizing the projects. We're looking at capital. Capital costs have gone down in the last couple of years, 20% to 30%, so we'll update the capital number. But we also want to look at a gas line alternative to supplying energy to the projects.
Donlin is a very big project, it's going to use over 125 megawatts of power. The feasibility study looked at diesel power, which works on all remote mines ... so it is doable but it does come at a cost. There have been some recent changes in the gas space in Alaska specific to Cook Inlet. Now
there's an opportunity to get gas from Cook Inlet, which is just outside Anchorage, over the mountains to the Donlin Creek project. If we're successful with that alternative, we can reduce our energy production costs on site in half. So to produce a kilowatt of power, instead of costing us 20 cents, it will cost us 10 cents. That'll have a dramatic impact on the cost of producing an ounce of gold
since our biggest single cost center for production is energy.
What will your finding costs be once you start producing
At Donlin Creek, the pre-feasibility study based on diesel is about $394. We think we can probably get a 10% to 20% reduction in overall costs if we can use gas. It's pretty significant. Now Galore Creek is interesting, because it's actually a copper mine that produces a substantial amount of silver and gold byproduct credit. So if you look at it as a gold mine and look at the copper as a credit against the cost of producing an ounce of gold, you're actually producing gold for negative cash costs, probably somewhere in the neighborhood of negative $1,000 an ounce at today's prices. So if you net that cost out on a company-wide basis, including both Galore and Donlin you're actually producing over a million ounces of gold at zero cash cost.
So based on that assessment, what do you project your market cap and share price to be
Well, I think they put you in jail for you telling investors what the share price will be, but I think I can say that we are valued today at about $36 an ounce enterprise value, which is a little on the lower end of average. I think that's because our assets are big and they're going to take substantial years to get into production so you get discounted for that. I think as that time erodes, we'll see that value come back into the stock. Typically, gold companies are valued well in excess of $100 an ounce when they're ready to go into production.
What is your long-term goal? Buyout? More joint ventures with the majors
Our long-term goal is to really maximize the value of these assets. They're pretty unique assets. I mean, there are not that many gold deposits like Donlin, there are very few copper deposits
with the quality and size of Galore. We're also very excited about our recent acquisition of Ambler, which is a 40 million ton, 4% copper deposit.
We realize we are a probably a takeover candidate, just because we have such big assets, and a big companies need these kind of assets. We're in safe jurisdiction. These assets aren't likely to get nationalized like they might have been if they were in a ... Third World country. We like the model that we have with developing big assets, bringing in big partners to help develop them. We think there is access to capital, particularly in Asia. We think the Chinese and Indian investors have access to a lot of capital, particularly in China, and they want copper. They love gold traditionally and culturally. We think we provide them with a great vehicle to invest in.
Is that why you bought the Ambler property -- to make yourself more attractive for a larger company?
The strategy in Ambler is we think it's a great asset. There are very few places in the world where you can get 4% copper. Ambler has 4% copper, 6% zinc, plus precious metal credit. You pretty much have to go to a place like the Congo or Zambia to find copper of that quality. This is in Alaska with great jurisdiction, we know the terrain well we've been working for the last five years with the region and the
native corporations. We think we can bring value and get this project to where it can be developed and more than likely look at a partnership with an Asian group to help develop it.
Are you looking to buy other properties
We're valuing a number of assets around the world. We've obviously been with a North American focus -- which is kind of interesting, as most of my experience is actually overseas. So we are looking at around the world in some, I would say, not politically too challenging of places. ... We'll go to comfortable places but places that have good geological prospectivity.
I'm an exploration geologist and that's what my passion is and I think we are good at recognizing good opportunities and being able to grow them. We tripled the size of Donlin, we tripled the size of Galore. We plan to do the same thing at Ambler. And for anything new that we look at is going to have that same attribute. Look at it, acquire it and then grow it.
Do you then predict that copper and gold prices will keep rising
We're pretty bullish on both copper and gold. They're very different metals. Copper's a useful metal for anything electrical. We see the world continuing to power up, specifically China and India. China's still got a 10% growth rate. They will consume as much copper as the rest of the world consumes today, so if you think about that statistic over the course of the next 10 years ... it's pretty staggering. That means there has to be a lot of new copper. The fact the is that that copper will probably come from lower and lower grade deposits, probably larger and larger to get the economy to scale. That's where things like Galore fit in so well because not only is it very, very large but it's also very, very good quality.
Gold's a different kind of metal. It's a managed metal. It is a currency, so like all currencies it has a tendency to be somewhat managed. It's a bit more difficult to predict. But I think that given that all stimulus going on around the world between the U.S. and Europe and China itself, you're producing lots of new dollars and yuan and euros, and that has to have an inflationary effect eventually. So I think eventually that will kick in and that I think gold will be a very good place to be invested in.
NovaGold's stock is speculative, so what would you tell investors
Although it is a speculative play, it's also a much more leveraged play on gold than say buying an ETF or buying
or Barrick or
. You can see that in our trading. It's leveraged both ways. When the gold price goes down, we're leveraged to go down. When the gold price goes up, we're leveraged to go up. I think with the copper side of the portfolio, you get a bit of a balancing act there....that's something we want to continue to emphasize to our shareholders that we do have that balance point with a substantial amount of copper in the portfolio and again we've always wanted to grow that side of the business.
I think we're also a deep value play. 2008 was a tough year. It was a tough year period for everybody, but it was a particularly tough year for exploration and development stage companies. And because we were developing very, very large assets by the end of 2008, the market said, 'Hey, there's not going to be any financing left for anybody it's the end of the world," so we went all the way down to under a dollar. Well, now we are back at $6 to $7, so it's a highly leveraged play if you like the space. I think we're a great investment that way. I would be more of a long-term player. The kind of recommendations I would tend to make is if you want to be in the gold space and the copper space for the long term watch a development stage company advance from exploration through feasibility through permitting through construction, where you can go from a $36 valuation per ounce today to $200 or $250 valuation in say in four to five years. I think that's a great play.
Written by Alix Steel in New York
Alix joined TheStreet.com TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.