This Gold Stock Has Yet to Truly Shine

Gold has had a nice run up since late last week, giving us reason to take another look at gold equities. However, the Market Vectors Gold Miners ETF (NYSE: GDX), comprised primarily of major gold mining companies, declined 16.3% in 2011. GDX has been quite volatile and is currently hovering around the ~$50 mark. The Market Vectors Junior Gold Miner ETF (NYSE: GDXJ), which is the benchmark for the development-stage and junior gold mining companies, fared even worse last year. GDXJ finished the year down 38.1%, likely over investor concerns that development-stage companies would have difficulty securing funding due to a tight financing environment. Billionaires John Paulson and George Soros remain bullish on gold.

Many investors have been perplexed by the underperformance of gold stocks relative to gold. Likely explanations include concerns that gold prices may decline from current levels in future years and that costs may rise more quickly than revenues. On the back of strong financial performance in the industry, we remain bullish on select gold equities like NovaGold and AngloGold (NYSE: AU) (see Why John Paulson Loves AngloGold).

NovaGold Resources Inc. (USA) (NG)

NovaGold (NYSE: NG) is a company we like with some potentially “world class” projects currently under development. Even though the company made significant headway on its three main projects— Donlin Creek, Galore Creek, and Ambler—shares of the stock declined 40.6% last year. We suspect issues surrounding funding were likely the cause since Galore Creek and Donlin Creek will both rack up capex budgets in the billions of dollars. Both Teck Resources (NYSE: TCK) and Barrick (NYSE: ABX) have publicly endorsed Galore Creek and Donlin Creek.

During 2011 NovaGold and its partner ABX completed a feasibility study for the Donlin Creek project in Alaska. This project hosts one of the largest undeveloped gold deposits in the world, with estimated reserves of 34 million ounces, and is expected to produce 1.1 million ounces of gold annually. We agree with many analysts that the Donlin venture has the potential to be a first-in-class asset but as with most mining developments, patience is required as production is still several years away. Environmental permitting alone will take 18-24 months.

Galore Creek, the joint venture between NovaGold and Teck Resources, is a copper-gold project in British Columbia with a feasibility study underway. When developed, Galore Creek will produce 325 million pounds of copper and over 200,000 ounces of gold annually. The Canadian federal government and British Columbia government have agreed to build a high-capacity transmission line in the northwest region, which will provide an adequate power supply. This is often a cause of delay in mining, so it is positive that the government is supportive and assisting to secure a power source. In the upcoming quarters, management plans to complete the Enhanced Plan, which is required for permitting and for a feasibility decision. Again, development of this asset will take some time; once the feasibility study is complete, we budget a few years for permitting and another few years for construction provided there are minimal delays and/or cost overruns. 2018 is probably the golden year for both Donlin Creek and Galore Creek in terms of starting production. NovaGold has intentions to sell its 50% stake in the Galore Creek project, which we see as another phase of the company’s restructuring plan.

Management has responded to lackluster stock performance by planning a strategic restructuring that will involve the spin-out of the Ambler project into a new public company called NovaCopper and the aforementioned sale of its stake in Galore Creek. Investors of NG should receive shares of NovaCopper on a 1:6 with NovaCopper listed on the Toronto Stock Exchange and American Stock Exchange in April (shareholder vote is this Wednesday). The Ambler asset in Alaska is polymetallic (gold, silver, zinc, copper, and lead) and initial valuation puts it around $400 million. Further drill results on the deposit should come out in the first quarter.

We believe that the restructuring efforts and feasibility study results will serve as catalysts for the stock. There has been speculation of NovaGold as a takeover candidate. And while we do not think that is a likely scenario, we do see a lot of potential in the Galore Creek and the Donlin Gold assets. Keep in mind though, that the final decision on when to develop these projects will be made alongside ABX and TCK, which adds an element of uncertainty. All in all, NovaGold has some great assets with enormous upside potential farther down the line. Naturally, valuation will change based on the outcome of the feasibility studies but with the stock trading around ~$7 and the NovaCopper asset set to spin-out next month, we think now is a good time to start building a position.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!