Earnings Call Transcript - NG Q1 2021

Operator, Conference Operator

Thank you for standing by. This is the conference operator. Welcome to the NovaGold First Quarter 2021 Financial Results Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Melanie Hennessey, Vice President, Corporate Communications. Please go ahead.

Melanie Hennessey, Vice President, Corporate Communications

Thank you, Operator. Good morning, everyone. We are pleased that you have joined us for NovaGold’s 2021 first quarter financial results and for an update on the Donlin Gold project. On today’s call, we have Dr. Thomas Kaplan, NovaGold’s Chairman; Greg Lang, NovaGold’s President and CEO; and David Ottewell, NovaGold’s Vice President and CFO. At the end of the webcast, we will take questions both by phone and by text. I would like to remind our webcast and call participants that, as stated on slide three, any statements made today may contain forward-looking information such as projections and goals, which are likely to involve risk detailed in our various filings and forward-looking disclaimers included in this presentation. I now have the pleasure of turning over the presentation to our President and CEO, Greg Lang. Greg?

Greg Lang, President and CEO

Thank you, Melanie, and good morning, everyone. Our Donlin Gold project is in the western part of Alaska. Donlin is a 50-50 partnership with Barrick Gold. Mining has always been an important part of the Alaskan economy and it is becoming even more important to state revenues with the decline in oil prices and tourism. As shown on the map, there are six producing mines and numerous exploration and development projects in the state. In terms of scale, quality, and exploration potential, Donlin Gold’s attributes far exceed any other gold development project on the horizon. When combined with our longstanding native corporation partnerships and the exponential leverage to rising gold prices, strong cash position, key federal and state permits in hand, and an experienced management team and board, as well as supportive long-term shareholders, NovaGold is in a league of its own. Slide five highlights the 2021 achievements. NovaGold and Barrick jointly released the remaining assay drill results in March from the 85-hole program we completed last year, which yielded higher drilled grade thicknesses than predicted by previous modeling and has improved interpretation of gold mineralization controls. These results have bolstered our confidence in the recent geologic modeling concepts and confirmed multiple high-grade extensions in both the intrusives and sedimentary rocks. Importantly, many of these are near surface. For permitting, in November 2020, Alaska published an additional public notice comment period for the water rights applications for the mine site and transportation facilities, which closed in December 2020. Water rights are for local surface water sources and groundwater to be used for process water, dust control, fire control, and other mining activities. In March 2021, with Donlin Gold's support, Alaska introduced a second public notice period, which closed on March 26th. We anticipate the Department of Natural Resources will issue final decisions on the water rights applications in the first half of 2021. Donlin Gold, working with its native partners, continues to support the State of Alaska to advance other permits and certificates needed for the project. The image on slide 6 shows the top 10 intervals from the 2020 drill program with core hole locations in both the ACMA and Lewis deposits. With Barrick, we jointly issued the final set of assay results last week. The program totaled over 23,000 meters and successfully increased our confidence in the modeling concepts and was the largest program at Donlin in over 12 years. Results exceeded expectations with higher grades over narrower intervals, primarily in the sedimentary rocks. The program has improved our geologic interpretations. Additional confirmation and high-grade extension drilling is planned for 2021 to further test the ore body continuity, structural controls, and gather geotechnical and geometallurgical data for analysis. As noted on slide seven, federal permits are in hand and additional key state permits and approvals have also been obtained, while we continue to progress on the remaining state permits. There are three primary state permitting areas that are outstanding, none of which are on the critical path for the project’s development. The Division of Oil and Gas has reconsidered its decision for the State Right-of-Way agreement and lease authorization for the gas pipeline under reconsideration. Alaska has issued a revised comment document for additional public input. The document further describes how Alaska is considering previous public input that was solicited in the Right-of-Way review, primarily on how cumulative impacts are addressed in the decision. The comment period ended in November 2020, and we expect Alaska to reissue the Right-of-Way agreement and lease authorizations in the first half of 2021. Alaska published an initial notice period for comment on the water rights applications and transportation facilities. Water rights are key for mining activities. Alaska introduced a second public notice period which closed last week. We anticipate they will issue final decisions on the water rights applications in the first half of 2021. The Dam Safety certifications process is a multiyear commitment to gather additional geologic information to advance the final engineering work on the tailings facilities and water retention structures from a feasibility level to a final construction package, which is required for the project’s Dam Safety certification. This fieldwork will resume later this year. We are proud to say that the 2020 drill program was safely and successfully completed, and this achievement was done with no COVID cases at the project site. For the past year, policies were implemented to reduce risk and ensure the safety and well-being of all employees and contractors. Alaska is a leader among the states in COVID-19 vaccination availability, with Governor Dunleavy announcing earlier in March that vaccinations are now available to everyone 16 and older. Much of the success of the vaccination program in the Y-K region can be credited to the leadership of the Yukon Kuskokwim Health Corporation and native health partners, who made home visits in remote communities and used extensive medical clinics and even offered vaccinations outside of grocery stores. Donlin Gold's stringent safety measures and on-the-ground support allowed us to safely operate four rigs last summer for the program, with careful collaboration with our native partners as well as tribal groups in the Y-K region that were key to a successful field season. The protocol we established last year will be followed for the 2021 field season. Donlin Gold is committed to supporting the needs of community partners, and first quarter community engagement highlights can be seen on slide nine. In partnership with TKC, the village of Crooked Creek, and the Paiute Tribe, Donlin was again the lead sponsor of a project to construct and maintain the upper sections of an ice road on the Kuskokwim River. Donlin also provided technical data to assist the road builder, including aerial photographs and ice measurements. It improves safety and access to nearby communities for the residents in these remote locations. At its completion in February, the ice road was almost 200 miles long. In January, the village of Tuluksak’s water purification plant was destroyed by fire, creating a health and safety crisis for the community. Donlin worked closely with their tribal administrator and tribal council to assess how Donlin could best help and coordinate efforts. Donlin, as well as several other community organizations and companies, stepped in to assist with much-needed water and supplies. To date, Donlin has signed Friendship Agreements with six villages in the Y-K region that formalize current engagement practices with local communities. These agreements expand upon our long-term relations already well-established with these communities and address specific community needs such as water, sewer, landfill projects, as well as other social programs. We support our native partners, Turista and TKC, and their mandates established through the 1971 Alaska Native Claims Act. We are helping them develop their land for the economic benefit of the region and all of their stakeholders. Donlin is fortunate to have time-tested partnerships with Turista and TKC, the owners of the mineral and surface rights. The project’s location on private land specifically designated for mining activities is a key attribute that distinguishes it from other mining assets in Alaska. With a long history of mining and a skilled workforce in Alaska, Donlin Gold offers the opportunity of a future with good-paying year-round jobs and training for young people so that they can live closer to home. About 80% of our local workforce on the drill program were Alaska natives, and we are proud to provide significant economic and social benefits to the Y-K region and are thankful for the long-term support and commitment to the project and its continued success. Over the past 25 years, Donlin Gold has worked closely with Turista and TKC, along with other representatives of the communities, to effectively respond to their needs and concerns. On slide 11, you can see quotes from the leadership of our native corporation partners. These partnerships and the activities and programs we undertake together are illustrative of our commitment to the sustainable and responsible development of the Donlin Gold project for the benefit of all stakeholders. And with that, I will turn the call over to our Chief Financial Officer, David Ottewell. Dave?

David Ottewell, Vice President and CFO

Thank you, Greg. Slide 12 highlights our first quarter operating performance. We reported a net loss of $8 million, an increase of $1.4 million from the prior year quarter, primarily due to higher G&P expenses and completion of assays from the 2020 drill program at Donlin. Lower interest rates led to lower interest income earned on cash and term deposits and lower interest expense incurred on the Barrick note. First quarter cash flows are highlighted on slide 13. We spent $7.7 million in the first quarter, slightly lower than the prior year quarter. Higher G&A spending and government funding was offset by a reduction in withholding taxes paid on vested PSUs. The company elected not to pay the withholding taxes on shares issued to the CEO and CFO to conserve cash. On slide 14, we note our robust treasury. We ended the first quarter with cash and term deposits of $114.2 million, and we also have $75 million due from Newmont in July this year and an additional $25 million in July 2023. We continue to anticipate spending $31 million to $35 million in 2021, including $18 million to $22 million to fund our share in Donlin and $13 million for our corporate G&A costs. And with that, I will turn the call back over to Greg.

Greg Lang, President and CEO

Thank you, Dave. As shown on the chart on slide 15, when you look at the resources at Donlin compared with 15 other large gold projects in the Americas, Donlin is the largest in its category with reserves that are almost four times greater than the average. A federally permitted project that’s got almost 40 million ounces of gold just to begin with is almost unheard of in a jurisdiction where the rule of law is not a novelty. Grade stands out as another central characteristic of any mineral deposit. Deposits with higher grades provide resilience through multiple commodity cycles, a key attribute to ensure the successful development of any great mining operation. As shown on slide 16, at 2.25 grams, Donlin has twice the global average grade for large open-pit deposits. Not only is global gold production decreasing for most of the majors, but average grades continue to climb over the past decade. There are only a few mines in the world that produced greater than 1 million ounces in 2020. Donlin would be in rare company as currently envisioned, the project would average 1.1 million ounces per year over its entire life as shown on slide 17. For the long-term investor, there is additional value that comes from our mine with a multiple decade lifespan. Looking at other comparable mining operations around the globe, both in production and in development, Donlin would rank among the top operations that we are producing today. Slide 18 shows some of the largest producing mines globally and the largest development stage projects. Only one development project has both global scale in a desirable mining jurisdiction, and only a few operations produced 1 million ounces, further illustrating that projects like Donlin are scarce and are needed to replenish the industry’s diminishing reserves. As shown on slide 19, the ACMA and Lewis pits occupy only 3 kilometers of an 8 kilometer mineralized belt. When the time is right, based on the known areas of mineralization, there is future exploration potential to significantly expand their current resource along strike and at depth. Slide 20 represents the life of mine diagram for a project like Donlin as one of the largest open-pit development projects. After years of exploration and resource enhancement, technical studies, environmental studies, and the receipt of our federal record of decision and key state permits, Donlin Gold has been substantially derisked and methodically and carefully brought up the value chain. It’s a solid foundation from which to advance this unique deposit. The time upfront invested to develop and responsibly sustainably move forward is critical to the project’s success. We believe investors’ patience will be rewarded. In 2021, we will integrate the drill program results into the geologic model. We will undertake additional confirmation and extension drilling to expand upon the recently obtained information into the continuity and structural controls of the higher grade mineralization that we encountered. We will then shift our focus to working with our partner to update the feasibility study, subject to formal approval by the Donlin Gold Board. NovaGold is thankful for the continued support and engagement with our shareholders, including Paulson & Co., Fidelity Investments, BlackRock, new shareholders, the Saudi Public Investment Fund, First Eagle, EXOR, and Van Eck, as noted on slide 21. This is especially noteworthy during a global pandemic. The strong relationships that we enjoy with everyone from our retail shareholders to our institutional shareholders have been deepened, and we are greatly appreciative. In summary, NovaGold’s 50% ownership at Donlin as a Tier 1 asset in a Tier 1 jurisdiction and a pure gold play on a unique project that we believe, when seen for its rare combination of attributes in terms of size, grade, potential, and partnerships, is a win-win scenario for all of our stakeholders. Additionally, as a transparent company that has consistently delivered on its strategy with a strong treasury, and getting stronger with additional funds from Newmont in July, we will provide sufficient funding until we make a construction decision on Donlin. Our key federal and state permits are in place and advancing, and we have a successful record of building and operating large mines. Thank you for your attention today. Operator, we will now open up for questions from the attendees.

Operator, Conference Operator

Thank you. Our first question comes from Lucas Pipes of B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Hey. Good morning, everyone. Greg, I wanted to ask a little bit more about the updated feasibility study and specifically would it be possible at this point to provide maybe some color around timing, and then from that, I have maybe one or two more follow-ups? Thank you.

Greg Lang, President and CEO

All right. Lucas, good morning, and thank you for joining our call. As far as timing, over the next few months we will be incorporating the assays into our geologic model and we are planning a small follow-up program on some of the really high-grade zones we have encountered, which frankly some are just exceptional results. So we will be conducting the drill program in the next few months. At the same time, we will be reviewing many aspects of the project with our partner from tailings management, flow sheets, water controls, and so on. This technical work will provide the basis for the owners to lay out the criteria for the project that we are taking forward in terms of scale, throughput, and so on. The trade-off studies will take us through to September, at which time we would make the decision to embark on a new feasibility study, and that’s a process that we think will take about a year.

Lucas Pipes, Analyst

Very helpful. I really appreciate that detail there. And then maybe it’s a bit premature, but you touched on it a little bit just now. But in terms of the key points that would be revisited in an updated feasibility study, where would you say could the market be looking for some really key updates? Thank you.

Greg Lang, President and CEO

I think the real key update that we will be providing when we embark on a feasibility study is the general approach to the project. I think as most people are aware, we have been evaluating various staged development scenarios to reduce the upfront capital requirement. So part of the studies that we will be undertaking in the next few months as the geologic models are updated is what is the final throughput that we want to target for Stage 1 and other significant parts of the project— the gas pipeline, third-party participation, and so on. We want to get all of those issues really laid to rest and then we will embark on the new study.

Lucas Pipes, Analyst

That’s very helpful. Greg, the team really appreciates all the details. Continued best of luck. I will turn it over.

Greg Lang, President and CEO

Okay. Thank you, Lucas.

Operator, Conference Operator

Our next question comes from John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos, Analyst

Thank you very much. When will the 2020 drill program be completed and all the results, and are the results interesting enough that there might be an additional drill program to follow up on those results prior to the updated feasibility study?

Greg Lang, President and CEO

All right. Well, good morning, John. Working with Barrick, we have released all of the assay results from the 85 holes that we completed last year and some really compelling results. And what you will note in our results we had areas of 10 plus grams that came in some 3 meters below the surface. So a lot of the work that we are planning this year is obviously to follow up on those near-surface high-grade intervals that would be mined early in the project’s life. So that will be the big focus of the program. And I would anticipate that last year we drilled 85 holes; I don’t think it will be that extensive of a program this year. But we are working with Barrick to finalize the drill hole locations, and we are expecting to start sometime later in April. We have got the camp open now and we are mobilizing food and supplies ready to begin drilling.

John Tumazos, Analyst

Do you think that the priority on updating the feasibility study is such that even if you get some great new results, there won’t be a third drill campaign and that you will just stop and do the feasibility study, or is it too early to make that call?

Greg Lang, President and CEO

John, I think that the drilling we did last year, which was the most extensive in over 12 years, and the drilling that we are contemplating this year will conclude the drill programs in and around the ACMA and Lewis deposits. That will position us to move forward with the new feasibility study. There will be additional drilling required, such as geotechnical drilling, hydrological water wells, and so on, but the drilling to define the ore body, I expect that to be largely wrapped up this season.

John Tumazos, Analyst

Thank you and good luck.

Greg Lang, President and CEO

Thank you, John.

Melanie Hennessey, Vice President, Corporate Communications

We have a question coming by text that I will read out. Given the extensive amount of drilling at Donlin, what did the latest results represent and what did they mean for the future of the project?

Greg Lang, President and CEO

Well, I think that there has been a lot of drilling at Donlin over the years. I think we are now approaching some 1,500 holes, primarily core holes, and the new results support our appreciation that as we looked at this staged development with smaller equipment, the higher grade intrusive structures, which still carry the lion’s share of the gold, these structures were thick enough and continuous enough to be mined separately. The goal of this program is to have a smaller higher-grade project in the initial stage. Some of the results, with multiple intercepts of 10-plus grams, 30 grams, 40 grams, and good thick intervals, support our view that we can separately mine the high-grade and enhance the mill feed, and have a smaller project, which still has a very significant production profile.

Operator, Conference Operator

[Operator Instructions] Our next question comes from David Lasenky, a private investor. Please go ahead.

Unidentified Analyst, Private Investor

Good morning, gentlemen and ladies. Just a couple of questions. The fact that the drilling has been completed for the 2020 assay program, do you expect to raise proven reserves as a result of that drilling?

Greg Lang, President and CEO

They would clearly— the results exceeded our expectations and we are incorporating the data into the geologic model there. I never like to get ahead of any modeling efforts and let the work speak for itself. But I am very positive on the outcome, just really based on it, across the board we encountered higher grades, although thinner, higher-grade intervals and for an overall increase in the grade thickness of what we had previously modeled. Certainly, a very positive how much of that translates ultimately into reserves, we don’t know, which is why we are doing the update, but certainly, some great results that can only help our understanding of the ore body.

Unidentified Analyst, Private Investor

And the final question is, have any of the royalty trusts shown interest in financing in a future like Franco-Nevada or Silver Wheaton or companies like that?

Greg Lang, President and CEO

Certainly, there is interest by streaming and royalty companies, and they follow our activities. I think our focus right now is wrapping up the new geological model and proceeding with the feasibility study. As far as financing options, there are many out there to consider; streaming is on the list. My personal preference is to do as much of the financing as we can with debt or other non-open-ended instruments. But our big focus right now is the feasibility study, and as we get further advanced with that, we will turn our attention to the financing options.

Unidentified Analyst, Private Investor

Well, just a personal opinion, I think that the longer you wait, the better off you will be in terms of royalty trust, because I am anticipating by the end of the year $2,500 gold and by the end of next year $3,000 gold, so just my personal opinion and thank you for answering the questions.

Greg Lang, President and CEO

Well, thank you. I share your view, and we are bullish on the gold price ourselves.

Operator, Conference Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Greg Lang for any closing remarks.

Greg Lang, President and CEO

Well, everyone, thank you for taking the time to get an update on our activities. Dr. Kaplan, do you have any closing remarks?

Dr. Thomas Kaplan, Chairman

Thank you, Greg. Are you able to hear me all right? I would conclude by simply saying that the results speak for themselves. The assays from the time that we started to deliver upon them to the final 30% from tip to tail exceeded our expectations. As someone who’s been in the mining business now for almost three decades, I can’t count on one hand the times that the most expansive and aggressive drill program undertaken in the last 10 years or 12 years of any project has yielded the kind of upside delights that the Donlin drilling delivered for Barrick and for ourselves. I think that what you are seeing is that Donlin is, as we have often said, the gift that keeps on giving. I have to highlight the fact that we are only focused right now on that gold, which would be in the mine plan, the first phase of the mine plan. The 3 kilometers that’s been drilled are only 3 kilometers out of 8 kilometers of mineralization. There are deep targets, deep high-grade targets, laterally across the entirety of the mineralized belt, and that 8 kilometers itself represents only 5% of the land package. It’s a forward-looking statement, take it for what it is. But those of you who know me know that my track record has been built through the drill bit, and I am never happy if drill rigs aren’t moving somewhere. But what I can say is this: I feel very strongly—and this feeling has only been reinforced over the last year—that the next Donlin could very well be a Donlin. It’s my expectation that you are going to see enormous value unlocked for Barrick shareholders, as well as NovaGold shareholders from Donlin. In my mind, it is the new Nevada. It is the new Carlin. And like Nevada, it’s located in the safest jurisdiction in the world, which is at a premium. Donlin is really something that checks the boxes on so many levels. In an era of asset scarcity—Donlin is right up there with the very best in the world, but it’s just located in the best part of the world. To me, this is the definition of a way to make a killing in mining. So my comments, which is why I just stood aside to see if anyone wants to talk about the macros. But my comments are simply that those people who are participating in the Donlin story have seen that, over the decades since Greg came on board as CEO and I joined him as Chairman, every single promise that we have made has been fulfilled. Every pact has been kept. We have done it without compromising, we have done it without cutting corners. We have done it in a way that has only made the company more friends, both in the industrial sphere and at least as importantly, more importantly with our native corporation partners. Our shareholders, I think, have a lot to be proud of. I have been in the story for 12 years, and I can tell you that I am more excited now than I have ever been. The feelings that I get when I see those drill results are the absolute opposite of deal fatigue. If I had my way, I would permanently have five to 10 drill rigs on this target, as I do with other privately owned assets. We will get there. I have a feeling that as jurisdictional risk rises to the fore as gold prices rise, and shareholders want to see things being built, Donlin will be at the top of everybody’s list. I have zero doubt that in a bull market in gold, NovaGold, as a pure play on the new Nevada, will achieve absolutely record highs. I have no doubt about this. I also have no doubt that as Barrick shareholders understand that within the Barrick portfolio—without having to make expensive acquisitions—they have an opportunity to have a Tier 1 asset, I think one or two phases will be producing over a million ounces a year. There’s nothing like that in the world other than potentially Polyus Sukhoi Log, which I jokingly call the analog. We think we are on the right side of those straits. But the reality is that Mother Nature has given us an extraordinary story in Donlin, and it’s located in a place where shareholders, if you want to go visit, you can incorporate whale watching or fishing into the equation. More importantly, it falls into that category that I have increasingly called the getting a good night’s sleep story, which is to say that when you go to sleep at night, when you wake up in the morning, what you thought you owned you still own. So here you have a federally permitted, massive deposit —the negative surprises that usually come in mining have been completely handled with Donlin. Some of our shareholders who have been with us for a long time will know we have called this the story of the tortoise and the hare. People would say, ‘Yeah, yeah, yeah, well, that’s going to take years,’ and our attitude was what? This is Aesop’s Fable, and we will win the race. I can tell you how many projects that people thought were going to be built either fell by the wayside because of technical issues or social issues or simply political risk. We have none of them. Technically, we are getting better and better. Socially, we have the best possible partners. From the standpoint of political risk, I know the developing world as well as anyone in the mining industry, and I am telling you—you want to be in a place where the rule of law is not a novelty and where property rights mean something and where you have exploration upside and leverage in a jurisdiction where, when you want to ring the cash register, you will be allowed to keep the fruits of your leverage. That’s really the name of the game. If I am right—and if I weren’t right, I would put NovaGold into play and pivot to something that would give me more joy in terms of leverage or safety, whatever—it just doesn’t exist. Donlin is unique when you look at the attributes of the size, the grade, the production profile, the mine life, and the cost structure because of the grade, the exploration potential, which is arguably the best in the gold space, maybe Sukhoi Log. I don’t know. But I can tell you those drill results would have been the best drill results in any major mining company, any major mining company. I have no doubt that when silver and gold perk up again, NovaGold will be seen as the go-to stock in the development space, and we have just added a high-grade exclamation mark to this thesis. So from an investor standpoint, as someone who is 90%, 95% on the institutional investor side of the table, it’s really as good as it gets. I love cats, and this is catnip. Brother Greg, back to you, my friend.

Greg Lang, President and CEO

Thank you, Tom, and everyone, thank you again for joining our call. We will keep you updated and look forward to the next quarter. Take care, everyone. Stay safe.

Dr. Thomas Kaplan, Chairman

Thank you.

Operator, Conference Operator

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.