Interesting Gold Play That Seth Klarman Likes: NovaGold Resources Inc. (USA) and More

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During the summer of 2012, shares of NovaGold Resources Inc. (USA) (NYSEMKT:NG) (NYSEMKT: NG) tumbled in the wake of an announcement that production at the Donlin Creek gold play would be delayed for several years. Like mining giant Barrick Gold Corporation (USA) (NYSE:ABX), NovaGold owns a 50 percent stake in the property’s potential proceeds. Obviously, a diversified miner like Barrick can afford to sit on Donlin Creek for far longer than a smaller firm like NovaGold. In fact, Barrick’s decision not to expedite the permitting process for the mine is the principal cause of the delay.

After spinning off its Novacopper Inc (NYSEMKT:NCQ) subsidiary earlier in the year, the company had morphed into a straight play on production at southwestern Alaska’s Donlin Creek property. NovaCopper lost half of its value since the spinoff.  NovaCopper is currently losing money so it has been beneficial to get NovaCopper off Nova Gold’s balance sheet.

NovaGold Resources Inc. (USA) (NG)About NovaGold Resources and Barrick Gold Corporation

Vancouver-based NovaGold Resources is a small exploratory miner that owns properties in the coastal mountains of British Columbia and Alaska. However, the Donlin Creek property represents its principal asset and will ultimately determine the company’s future. The property covers more than 80,000 acres to the east of Bethel, Alaska and is expected to produce over 1 million ounces of gold per year after coming online. Until recently, NovaGold also owned substantial copper-producing properties in northern Alaska.

Toronto-based Barrick Gold is one of the world’s largest publicly-traded mining companies. It operates an international portfolio of gold and copper properties as well as a small roster of proven oil and gas patches in various parts of Canada. Barrick’s most profitable mines are located in Africa, South America, North America and Australia. The company is heavily invested in exploration and is a significant force for innovation in the global mining industry. In 2012, Barrick earned $3.4 billion on $14.2 billion in gross revenues.

What Is at Stake

Most impartial experts agree that the Donlin Creek property has a tremendous amount of production potential. According to NovaGold, the property has between 33 and 39 million ounces of accessible gold and should be capable of producing at least 1.1 million ounces of gold annually. The mine’s average extraction costs would hover around $400 per ounce for the first five years of its operational life and rise to just under $600 per ounce for the remainder of its lifespan.

At gold’s current price of more than $1,600 per ounce, the mine would be wildly profitable. Although NovaGold and Barrick have land-lease agreements with the Alaska Native tribes that own the surface and subsurface land rights, these are not expected to cut into the property’s profit potential to a significant degree. The royalty payments that NovaGold and Barrick must forward to the tribes have been locked in on a long-term basis and should not introduce any uncertainty into the arrangement.

Assuming that the two companies continue their 50-50 arrangement, NovaGold stands to reap at least 16 million ounces of gold from the Donlin Creek property and remain in the black for two decades to come.

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