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NovaGold Does Not Dazzle

Adam Graf maintains his hold rating on NovaGold despite the recent boost of confidence in the stock from Soros and Paulson.
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) -- Analysts are not so optimistic on


(NG) - Get Novagold Resources Inc Report

as a way to play rising

gold prices

. The stock has run over 27% year to date and currently has two hold and two sell ratings with an average price target of $6.48. Short interest is 6.8% of outstanding shares which means that some traders are putting their skepticism to work and betting on the stock price sinking.

Risky Gold Miner: NovaGold

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NovaGold is a small mining company with two large projects Donlin Creek and Galore Creek, and two smaller properties Rock Creek and Ambler. Donlin, where it has a 50/50 partnership with

Barrick Gold


has the potential to produce 25 million ounces of gold. There are only 20 to 30 gold projects in the world that have resources over 10 million ounces, which means if gold prices keep rising toward $1,200, NovaGold could see big profits.

None of NovaGold's projects will start producing gold until 2015 at the earliest during which time the company has to contend with no cash flow and high expenses.But legendary investors, George Soros and John Paulson are betting big on NovaGold's chances. Their funds bought a total of $175 million of shares in a private offering and they own over 36 million public shares.

In an interview with Adam Graf, director of emerging miners for

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Dahlman Rose & Co.

, he explains why he maintains a hold rating on NovaGold despite the recent boost of confidence in the stock.

Did Soros and Paulson's investment affect your rating on the stock


Graf: In no way. My ratings are not based on momentum, they're based on fundamentals. These guys with big money betting on some of these companies with big assets would not impact the fundamentals of these companies. Especially a company like NovaGold,

which effectively

has two big projects

that are each $4 plus billion projects which means their 50%

share of the projects is $2 billion a pop so $175 million

from Soros and Paulson is pocket change. It's not going to move the needle on their upfront cap ex. All it does is ensure that they can pay their share of early exploration spending and development spending for the next few years.

Also, the other positive recent news was that NovaGold updated their resource estimates at Donlin to 33.6 million ounces of gold, which was an increase of 4.3 million


Graf: It's an increase but it's not going to do much to the project. It's already a huge project. Theoretically those additional ounces aren't coming in for another 35 years, so sure it was good news.

I think the more interesting news at Donlin Creek is that they've been drilling this oxide zone which could give them a couple of years of early oxide production, which is not as important to Barrick but more important to NovaGold. It could give them a couple of years of cash flow. So basically it could mean that they set up some of the infrastructure, the upfront cap ex, then get some cash flow, and then are responsible for a big slug of the cap ex. So it somehow lessens the pain for NovaGold's portion of the upfront cap ex, if that's the way they do it.

When we spoke last time, you told me why you had a hold rating. You liked the properties but that going forward you're worried about their cash, do you still feel the same way


Graf: These are big, big projects. Two of perhaps the biggest projects in capital spending in the world: Donlin Creek is approaching a $5 billion project and Galore Creek will likely be significantly over $4 billion. These are huge projects for a company like NovaGold

and even though they are only responsible for 50% of the capital, how can a company with no cash flows

which is perpetually running short on cash fund their portion of

the project? How is a company like NovaGold going to raise $2 billion twice?

Why don't you have a sell rating


Graf: Well, you know the projects are still good. They

just need somebody to build them and fund them. So NovaGold is still an interesting story. I think that Barrick is interested in owning all of Donlin Creek and

that Galore Creek, which is primarily a copper asset,

could attract a third party

to help fund that project. So I think NovaGold in its current incarnation is unlikely to be able to fund its share of current projects. But I think those projects are still interesting to third parties.

The emerging miner story: small companies with significant assets that larger companies have to purchase. I think that is a theme we are going to see for some time to come.

Alix joined 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.