Donlin co-owner NOVAGold issues rebuttal to short-sale report

  • An exploration drilling site is seen at the Donlin prospect in this courtesy photo. One of the prospect co-owners fired back at a company with a short position in NOVAGold stock that issued a scathing report about the mine’s economics last month. (Photo/Courtesy/Donlin Gold)

Investors will now decide who’s right and who’s wrong.

NOVAGold Resources Inc. responded sharply on June 8 to a short-sale report calling the company’s massive Donlin gold project “fool’s gold” and a “pipe dream,” in reference to the lengthy natural gas pipeline that is planned to help power what would be one of the largest open-pit gold mines on Earth.

Executives for NOVAGold said the May 28 short-sale report compiled by J Capital Research USA LLC is “error-ridden” and a “sucker punch” aimed at artificially degrading NOVAGold’s stock value.

“When I first read JCAP’s report, my first reaction was to chuckle because the piece was clearly so fallacious that I initially assumed it had been written by a child — cooped up kids have far too much time on their hands these days — or, more likely, a disgruntled short-seller,” Thomas Kaplan, chairman of Vancouver-based NOVAGold wrote in a 17-page personal rebuttal.

NOVAGold CEO Greg Lang said in a formal statement that the company has thoroughly reviewed the report and is evaluating its legal options against JCAP.

Leaders of JCAP acknowledge on the firm’s website that they hold a “short” position in NOVAGold stock, meaning they stand to profit if the mining company’s stock loses value, but insist their report is fact-based and lays out a compelling argument as to why Donlin is “the deposit that will never be mined.”

NOVAGold stock sold for $10.65 per share on the New York Stock Exchange at the close of trading May 27 before the short-sale report was released. It has since traded between $8 and $9 per share and closed trading June 23 at $8.77 per share.

The JCAP report largely hinges on a common and often accurate refrain for Alaska resource projects: that despite its size, the 33 million-ounce Donlin gold deposit is simply too remote and technically challenging to be economically viable.

“(NOVAGold) management’s game is clear: keep investors interested in the stock while they rake in huge salaries,” the JCAP report alleges. “Construction of the Donlin mine was originally expected to start in 2008. Now, 12 years later, management’s best guess is that construction may start in 2022 and production in 2028.”

Donlin Gold, the joint-venture project company owned 50-50 by NOVAGold and mining giant Barrick Gold Corp., received a record of decision approving the project’s environmental impact statement from the Army Corps of Engineers in August 2018.

Barrick Gold Corp. has not commented on the JCAP report.

Donlin officials for years have acknowledged the project will require strong gold prices to be profitable but have declined to specify what the market conditions must be to sanction the mine even as gold prices have risen steadily from about $1,400 per ounce to more than $1,700 per ounce over the past year. Gold peaked at nearly $1,900 per ounce in mid-2011.

According to the report, NOVAGold leaders “might have the cushiest job in mining” because CEO Lang has been paid approximately $8.3 million in cash and taken over 1.8 million shares in the company over the past five years despite leading a junior mining firm with no operating income. NOVAGold executives and directors have cumulatively netted about $35 million from share sales over that time as well.

About 70 percent of NOVAGold insider share sales have occurred in the past year while the company’s stock has increased in value by roughly 300 percent, according to JCAP figures. Over that time, Chief Financial Officer David Ottewell sold more than half his shares in NOVAGold and Lang reduced his position by 26 percent.

“Clearly, the insiders have voted with their feet,” the report concludes of the stock sales.

NOVAGold responded that management’s compensation is established by a committee of the company’s board of directors and is regularly measured against a group of peer companies.

NOVAGold held $59.7 million in cash and $108 million in total liabilities at the end of February, according to the company’s filings with the Securities and Exchange Commission.

JCAP fundamentally contends the 2011 capital cost estimate of $6.7 billion for Donlin was far too low at the time and only grown with inflation since.

NOVAGold leaders said in April that the company is working to update its feasibility study this year.

The report focuses on the 315-mile, 14-inch natural gas pipeline Donlin plans to build from the west side of Cook Inlet to the mine site near Crooked Creek in the upper Kuskowkim River drainage, which JCAP calls a “project killer.” It references a prior $1 billion cost estimate for the pipeline and asserts a more accurate cost considering inflation would be more than $3.8 billion.

According to the report, JCAP consulted with a pipeline expert who confirmed the traders’ rough calculations that the Donlin pipeline would cost 200 to 400 percent more than NOVAGold has stated.

“The proposed natural gas pipeline central to powering the project is dead on arrival. The terrain around the Donlin deposit is among the most inhospitable on the planet,” the report states of the pipeline that would cross the Alaska Range.

JCAP also discounts the option of barging diesel nearly 200 miles up the Kuskokwim as an alternative fuel source to the pipeline given the sheer volume of fuel that would be needed to power the mine facilities as also being a “bust.”

At its planned size to produce 1.1 million ounces of gold per year, Donlin would need more than 1 million liters, or about 264,000 gallons of diesel per day, but the project only has permits to barge a little more than half of that for mine vehicle fuel, according to the report.

“Under the most optimistic scenario, cutting production to half of what is now planned, the diesel barged in would be sufficient for at most seven months of operations per year, essentially reducing output to a quarter of what is now planned,” the report sates.

However, NOVAGold’s 40-page line-by-line rebuttal to JCAP calls the report’s conclusions on the pipeline simply “inaccurate,” noting references to anonymous engineers and pipeline experts also lack the individuals’ credentials.

NOVAGold stresses that the capital costs specified in the 2011 Donlin feasibility study were compiled in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, and the pipeline design and development costs were put together in 2013 by the international engineering firm CH2M Hill (now Jacobs Engineering).

NOVAGold management also discounted a comparison of the Donlin pipeline to the 750-mile, 30-inch Mackenzie River pipeline project in Canada that was stopped in 2017 with an estimated cost of $16 billion Canadian. Similar to several Alaska North Slope gasline proposals, the Mackenzie River pipeline was planned to move large quantities of gas from the river delta and near shore Beaufort Sea south to infrastructure and markets in Alberta.

“The Mackenzie pipeline project uses different materials in a different location with a different climate and environmental concerns. It is not an appropriate comparison,” states the NOVAGold rebuttal.

NOVAGold also insists the amount of diesel needed to run the entire operation could be supplied via the Kuskowkim if needed just by increasing the number of fuel barge tows beyond what is planned for the mine vehicles; but the company does not address the logistical and storage issues that would come with using solely diesel fuel during the months when the river is frozen.

Finally, NOVAGold leaders picked apart several inaccuracies in statements about Donlin’s 227-megawatt power plant.

The JCAP report asserts that the planned Donlin power plant would be the largest in Alaska, would increase power generation in the state by 40 percent and would produce enough electricity to power a city of 500,000 residents. However, the NOVAGold response notes that the Beluga power plant owned by Chugach Electric Association is 332 megawatts and average generation in Alaska is about 800 megawatts, meaning the 227-megawatt plant run full bore would instead increase statewide power generation by about 28 percent.

NOVAGold called the city comparison “exaggerated and irrelevant.”

Donlin officials have said the plant would average 153 megawatts of output, which would be about 20 percent of the power currently produced in the state.

Elwood Brehmer can be reached at [email protected].

06/23/2020 - 3:22pm