NOVAGold files lawsuit against authors of short sale report

A co-owner of the massive Donlin gold project is back on the offensive, this time with a lawsuit against a New York firm that issued a report claiming the mine is not viable and encouraging investors to dump shares in the company.

NOVAGold Resources filed the complaint against J Capital Research in New York Federal District Court June 29, which alleges J Capital’s 22-page May 28 short-sale report lied to investors on multiple fronts and led to NOVAGold losing a significant share of its market capitalization in the weeks that followed.

Shares in Vancouver-based NOVAGold lost 22 percent of their value in the two weeks following the release of the J Capital report. NOVAGold stock traded at $8.42 per share on the New York Stock Exchange at the close of trading July 14, down from a pre-report price of $10.65 per share at closing May 27. The company had a market capitalization of nearly $2.8 billion as of July 14.

J Capital Research founder Tim Murray authored the report and acknowledged in it that the company held a short position in NOVAGold, meaning J Capital stood to profit if NOVAGold lost value.

NOVAGold claims in the complaint that J Capital’s first mistake was to step outside its lane.

J Capital has previously focused its research on Chinese technology companies, according to the complaint, an assertion supported by information on the financial firm’s website, which also advertised the firm as “Making short work of over-valued companies.”

“Neither its inexperience nor the ready availability of actual facts deterred JCAP. It did not care. Truth was not the goal,” the complaint states.

According to the complaint, the report falsely insisted that NOVAGold management has mislead the company’s investors by claiming the $6.7 billion-plus project is economically feasible; Murray and J Capital flatly contend it isn’t.

The complaint also accuses J Capital of mischaracterizing Donlin as a project “that is not feasible to put into production at any gold price” largely because of its technically challenging size and remote Western Alaska location.

NOVAGold is a 50 percent owner of Donlin Gold LLC, the joint venture project company, along with mining industry giant Barrick Gold Corp.

As proposed, the open-pit Donlin mine in the upper Kuskokwim River drainage would be one of the world’s largest, producing more than 33 million ounces of gold over an initial 27-year life. A 315-mile natural gas pipeline from the west side of Cook Inlet would fuel a power plant at the mine and fuel storage tanks would be built at Dutch Harbor, in addition to the very large-scale operation at the mine site.

Attorneys for NOVAGold pointed to Barrick’s status as a 50 percent partner in Donlin Gold and its generally well-regarded status in the industry as evidence to the viability of the project.

J Capital stressed in its report that NOVAGold continues to rely on a $6.7 billion cost estimate for the project from the last feasibility study done in early 2012. The short sellers contend the cost should be $8 billion or more, but NOVAGold notes the $8 billion figure cited in the 2012 study included the project’s all-in operating costs to comply with U.S. general accepted accounting principles, commonly known as GAAP.

“These statements are false, misleading, defamatory, and they are designed to create panic,” the complaint states about J Capital’s referenced to Donlin’s cost. “NOVAGold has clearly and consistently communicated to investors that the estimated initial capital required for the project is $6.7 billion.”

NOVAGold executives said shortly before the short-sale report that they are working to update the feasibility study.

Attorneys for NOVAGold also highlighted several inaccurate characterizations of the planned power plant at the mine site as being illustrative of the overall nature of the J Capital report.

The 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 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.

“In moving rapidly from one falsehood to the next, JCAP’s strategy is death by a thousand cuts. The report lobs lie after lie — both big and small — attacking the feasibility of the Donlin gold project in an effort to chip away, bit by bit, at investors’ confidence in the Donlin gold project,” the complaint states. “The resulting damage to NOVAGold’s reputation occasioned by JCAP’s false statements was inevitable and is substantial.”

J Capital co-founder Anne Stevenson-Yang wrote via email that she learned of the allegations on Twitter and she doesn’t believe the complaint warrants a comment in response.

“As to what (NOVAGold Chairman) Thomas Kaplan says about me/us on the company website, even I do not have the patience to read it all, so it’s hard to imagine that normal investors read this stuff,” Stevenson-Yang wrote.

Kaplan issued his own 17-page response to J Capital’s report in early June, in addition to NOVAGold’s lengthy official corporate rebuttal, which included a line-by-line analysis of J Capital’s assertions.

NOVAGold did not specify in the complaint what it is seeking other than requesting damages that “compensate NOVAGold for the harm incurred.”

J Capital has until July 21 to submit a formal answer, according to a court summons issued June 30.

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Elwood Brehmer can be reached at [email protected].

Updated: 
07/15/2020 - 9:33am