NovaGold 3Q16 Earnings Call Notes

NovaGold Resources’ (NG) CEO Greg Lang on Q3 2016 Results

Just a matter of time before we secure necessary permit

“There is a still a lot of work ahead prior to making a construction decision. But we can all see that it is just a matter of time before we can expect to have secured the necessary permit for Donlin Gold. This is a major achievement and an important step of project derisking as we work to unlock Donlin Gold’s ability to become a significant cash flow generator for many decades to come.”

We are getting close to the finish line

“We are getting close to the finish line.”

Few new issues ahead of final EIS

“Carefully reviewing the draft EIS comments is an important part of preparing a final EIS, and ensures that all technical issues are thoroughly considered and addressed in the analysis. Overall, few new issues were raised during the public comment period and most matters had already been addressed in the draft EIS. The Corps is working to release the target date for the final EIS, which will bring forward a record of decision on Donlin Gold’s Clean Water Act Section 404 (wetland) permit.

40m ounces of gold reserves

“‘ll briefly recap the attributes that makes the Donlin Gold project unique. We’ve got reserve and resources of almost 40 million ounces of gold and addition of 6 million ounces inferred material. Turning to Slide 12, when you compare Donlin to the other development stage projects throughout the industry, it is far and away the largest. When you look at the production profile of these emerging producers, Donlin Gold is better than twice the closest competitor. It will produce 1.5 million ounces a year at first five years followed by a life mine average of 1 million ounces a year.”

Final EIS should be in the next 10-16 months

“John, the corps of engineers is updating the work plan to get to the final EIS. Could be 10 months, could be 16 somewhere in that range. At this stage, we are not overly concerned about a month or two either way but will certainly update everyone when the corps publishes their final schedule.”

Construction decision will be made next year

“right now we are working with our partner on developing the plan of action for next year. That will really drive the schedule to a construction decision. And I’d expect we will provide you detail on that with our yearend news release.”

NovaGold 1Q15 Earnings Call Notes

$157 m in cash, expect to have $120 m at year end

“Turning to our cash flow on Slide 8, our total cash and term deposits decreased by $8.3 million as planned and similar to the prior year quarter. We ended the quarter with cash and term deposits totaling $157 million.

We expect to spend $45 million for the full year including the repayment of the remaining $15.8 million of convertible notes on May 1. We should end the year with approximately $120 million in cash and term deposits.”

39m ounces of gold at Dolin

“Our flagship Donlin Gold as shown on Slide 9 continues to retain all its important fundamentally positive attributes. With 39 million ounces of gold in resources at an average grade of 2.2 grams is one of the largest and highest grade undeveloped gold deposits in the world.’

Exploration upside

” Tremendous exploration upside exists at Donlin with multiple targets and areas that have not yet been fully explored.”

Unexpiring warrant

“One of the qualities most sought out by our investors is Donlin Gold excellent leverage as shown on Slide 13. They look at NovaGold, enhance Donlin Gold as an un-expiring warrant on an ounce of gold.”

In the US

“In addition to quantity and quality, Donlin Gold’s in the United States is a great location to be in. When we meet with investors and talk about the project, we say that the U.S. had a defined and rigorous permitting process. It’s a place where rural law is not a novelty. Once you get trick, you get to keep the fruits of your labor.

As shown on Slide 14, jurisdiction is an important issue in the resources sector. One of the key questions that investors will be asking in mining companies is where in the world are your assets located? You wouldn’t take your family there on vacation? Why would you want to invest there?

In recent months, we’ve seen coups, kidnappings, instability and changing geopolitics. The emerging markets are slowly deteriorating and have altered how investors look at opportunities. Investing in these regions carries risks well beyond what you find in North America.’

Permitting process in US is rightly rigorous

“The permitting process in the United States is rigorous and rightly so. It is the very reasonable price we pay for having security of tenure in one of the world’s safest jurisdictions. As mangers of a rich piece of real estate with a massive mineral endowment, we’re advocates for the government agencies for our counterparts in this process.”

Where Would Gold be if it Had Risen at The Same Pace as CPI?

Gold continues to slide today and it’s anyone’s guess as to where the metal finds a bottom.  Its lowest point in the last 20 years was in 1999 at around $250 per ounce.  Just for the sake of argument, if Gold had risen from that price at the same pace as the Consumer Price Index, it would be at ~$350 per ounce today.

I don’t think that I’d bet on gold to fall to that level, but it is one (extreme) measure of potential downside.

Gold Price Rising at CPI

Checking in on Fed Funds Futures

It’s been a long time since there was anything worth looking at in the Fed Funds market.  And there’s still no action, but as the environment seems to continue to normalize it’s worth checking back in on Fed Funds futures to get a sense of what the futures are forecasting for Fed action.

The data below is the Fed Funds rate implied by 30 day Fed Fund futures at the CME (I didn’t factor in any time value of money or normalize the curve in any way).  The contracts settle based on the average Fed Funds rate in the month of the contract.  For example the February 2016 contract implies that the Fed Funds rate is projected to be 59 bps on average in that month (compared to ~13bps currently).  Right now the curve looks to be forecasting an increasing probability of higher rates starting in mid 2014.  That would roughly coincide with a 6.5% unemployment rate per the Fed’s current policy.

If Gold’s collapse this week is an indication that investors are not as fearful as they once were, it’s interesting that bonds have diverged and rates haven’t risen at all.  Obviously Fed Funds wouldn’t go anywhere until the Fed tells it to, but one might expect that the five year note might start to price in a similar sentiment.  After all a normalized environment includes normalized interest rates, doesn’t it?

Futures Implied Fed Funds Rate

Gold Peak 1980 vs. 2011

If 2011 proves to be the lasting peak for Gold prices, then it might be helpful to compare its decline over the last 18 months to its decline the last time it hit a multi-decade high in 1980.  Below is a a chart comparing the rise and fall of gold in the decade approaching the peak for 1980 and 2011 and the decade after for 1980.  The peak price is indexed to 100 to simplify comparison.

Gold declined ~60% in 1980 before settling into a longer term trading range.  That would imply a bottom somewhere in the 1100’s relative to the 2011 peak.  However, the 1970’s run appears to have followed a slightly steeper course than the run of the 2000’s.  Gold didn’t have a sustained rise again for another two decades.

Gold Peak 1980 vs. 2011

Gold Daily Declines of 2.5% or More

Gold’s near 4% decline today should serve as a reminder to investors that although gold may help defend a portfolio against a weakening currency, that certainly doesn’t mean it can’t trade with significant volatility.  Below is a chart showing the days since 2009 that Gold has declined by 2.5% or more.  There have been 18 such days over that timeframe.

Gold Daily Declines

To the extent that investing is about matching one’s future stream of liabilities (i.e. purchasing needs), Gold investors should be aware that they are actually taking a huge risk relative to their liabilities stream.  That’s because aside from the bitcoiners out there who are planning to make all their future purchases in Satoshies, the rest of Americans are likely to continue making future purchases in dollars.  It’s reasonable to take the view that these dollars will lose value over time (they always have) but owning gold is a highly concentrated bet on this idea.

When you invest in Gold you effectively disconnect yourself completely from the value of the dollar, which means that if you’re pricing Gold in dollars ($1500 per ounce) the value of the asset as expressed in dollars is likely to be highly variable.  All asset prices consist of two core components: 1) its value in relation to the unit of measurement (currency) and 2) its intrinsic hedonic/economic value.  By owning gold or any foreign assets for that matter the investor is implicitly taking risk on both fronts.  So it would follow that the ride could be a bumpy one.

By contrast a difference between owning Gold and a share of equity is that as long as US companies still conduct business in US dollars, an investor is at least still invested in an asset generating value that is somewhat attached to the value of the dollar and therefore not straying too far from their liabilities stream.  The upside is that even in the worst case scenario that global fiat regimes totally fall apart, there is nothing to say that Walmart can’t start doing business in Satoshies, Globals, or whatever other currency takes its place.

S&P 500 Getting Back to Parity with Gold

The ratio of the price of an ounce of gold and the level of the S&P 500 held near parity for a couple years coming out of the financial crisis.  In the summer of 2011 they diverged, and at its low point, the ratio was 0.6 ounces of gold to “one” S&P 500.  Since that time though, gold has moved sideways as the $SPX has risen and now the ratio is almost back at parity.

There’s nothing magical about the ratio, but it does give some indication of relative value.  Historically, the highest the ratio ever reached was 5.5 ounces per $SPX in 1999 and the lowest it ever reached was  0.13 ounces in 1980.

S&P Gold Ratio

Armchair Technicals to Give Gold Bulls a Reprieve

With QE in full force and gold ($GLD) falling, most gold bugs are probably scratching their heads as to why the metal is down 6.5% year to date.  After all, the gold thesis is that printing money devalues the currency, which causes the nominal price of gold to rise.  The fact that the monetary base is rising without gold following is a bit of a dent in the Gold bulls’ thesis.

Worry not though, beleaguered Gold bugs.  There is some reason to believe that the correlation hasn’t broken down entirely.  It might just be lagging.  The analysis below is hardly scientific, but it does appear that to some extent,peaks and troughs in the monetary base are followed by peaks and troughs in the Gold price after a lag of about 2-3 months.  If the relationship continues to hold, it would imply that this recent down move in the Gold price is the last one before the metal recovers along with the rising monetary base.

Gold and the Monetary Base