Just in case somebody missed Taylor's commentary:
NOVAGOLD RESOURCE COMMENTARY
NOVAGOLD RESOURCES (Toronto-NRI-$3.24) - This stock is up 636% since we recommended it back in July 2000 at $0.44. By January 1, 2001, we were beginning to wonder about the wisdom of our recommendation as the stock fell to US $0.09. But cash flows from a small portion of the company's real estate holdings, gold royalties and gravel sales of $0.10 plus some enormously attractive gold properties, told me to hang in there with NRI. Needless to say, I'm sure glad I did as are many of our subscribers who have profited greatly from this recommendation.
But what about now? Should we still hold NRI or is it overpriced? First of all, let me say that if you are in a position to recoup your initial investment in NRI, please by all means do so. In fact, I think that is almost always a good strategy. A glance at our Portfolio Scorecard at the end of this past week revealed that no fewer than 13 of our gold stock recommendations have at least doubled since we first recommended them. Nothing wrong in our view with taking your initial investment on those, no matter how much you like them. If you do that, you have eliminated the risk of losing your initial capital.
But getting back to NovaGold. At US$3.24, is this an overvalued stock now? With 50.1 million shares outstanding, the company has a market cap of $162 million. With a gold resource at the Donlin Creek deposit alone of 19.2 million ounces and given NovaGold's 70% interest in this property, the market is pricing gold in the ground at about $12 per ounce which is rather low compared to other major deposits. Of course, the cost of production remains to be seen. Much of the ore is refractory so higher energy costs and lower recoveries may render this a higher cost mine than many others. That fact coupled with the assumption the market is making that Placer Dome will exercise its right to "back-in" to a 70% joint venture interest in the Donlin Creek project may well justify the current relatively low price the market is paying for gold ounces at Donlin Creek. If we factored in a 30% interest instead of a 70% interest for NRI, that company's share of the existing resource would be 5.76 million ounces of gold, in which event, the current price equates to $28.12 per ounce of gold in the ground. That price would be more in line with what one might expect for a major gold deposit though this value does not factor in the company's other three Alaskan gold deposits and four gold targets in the Yukon Territory, any one of which could develop into a significant gold find.
A Placer Dome Shocker?
We wonder if perhaps the market might not be making a mistake in automatically assuming Placer Dome will back in for 70% of Donlin Creek. Actually, Placer Dome has in recent years taken on an anti-gold posture more akin to that of Barrick. It has in fact become more of a banking organization than a company interested in expanding its gold production. As such it had cut back its exploration staff considerably. In fact, NovaGold CEO Rick van Nieuwenhuyse was himself a senior geologist for Placer Dome. He simply got tired of not utilizing his services at Placer Dome. However, he took his knowledge of Alaskan geology and gold deposits with him for the benefit of NovaGold shareholders.
The market seems to be assuming Placer Dome will back into Donlin Creek. But will it? NovaGold has really put the pressure on Placer Dome by forcing it to make this decision much earlier than expected. That is true because Nova Gold has so aggressively met its exploration expenditure of $10 million in just 15 months, following the signature of the joint venture agreement with Placer, a back in decision will come much sooner than Placer had anticipated. In fact the Placer will have less than 90 days to decide whether to remain a 30% partner in the Donlin Creek project with NovaGold remaining the operator, or convert its interest to a 5% net profits interest, or back-in to a 70% interest.
Most analysts discount the possibility that Placer will opt for a 5% NPI. But the other two choices pose a rather difficult alternative for the company, especially since they don't have much time to think about it. If they back-in they will have to commit to have the mine in production and producing 600,000 ounces per year within five years. And they will have to assist NovaGold in securing financing, if required, thereby eliminating the risk that NovaGold's interest would be diluted. In this event, your editor believes the shares of NovaGold are currently fairly priced on the basis of Donlin Creek alone. But obviously there is enormous upside potential from:
a) higher gold prices b) additional gold resource discoveries at Donlin Creek or c) the expansion of gold resources on any one of seven other outstanding exploration prospects.
On the other hand, if Placer Dome is not prepared within the next 90 days to make its commitment to a 70% back-in right, that right will be extinguished and NovaGold will lock-in its 70% interest. In that event, we think the shares of NovaGold might immediately rise very dramatically since now the company would hold a 13.4 million ounce gold resource at Donlin Creek.
So what should we do with NovaGold. Again let me say, if you have a chance to take some profits or even better have your initial investment returned, please do so. But in my view, a decision by Placer Dome not to retain a 70% interest could give this company's shares a real boost in the next 90 days with or without a rising gold price. And of course, with the U.S. stock market and the U.S. dollar both positioned on the edge of "disaster city," we could see much higher gold prices at any time. Moreover, longer term, I have a high level of confidence that one or more of NovaGold's gold projects will turn into something big. The bottom line is that we think holding some NRI or acquiring some if you do not yet hold any, makes good sense over the longer term. Vist the company's web-site at www.novagold.net or call the company for additional information toll free at (866) 243-1059. |
