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Cash is Comfort

Bob Moriarty
March 28, 2002

I don't know about how other writers work, all I know is myself. But often when I write an article, once it gets posted, I pretty much forget it. If months later I actually go back to read it, it's as if I've forgotten that I wrote it in the first place. Or perhaps that's just one of the side effects of getting old, you can pick up a book you read only six months ago and it's fallen from your memory entirely.

This may sound a little strange but I enjoy re-reading my past material. On occasion I show a turn of phrase or come up with an especially interesting way of looking at things. When you write about stocks, however, re-reading what you have written in the past is a minefield strewn with danger at every step. You may have recommended some dog which only comes out of hibernation once a month to howl at the full moon.

And then there are the good calls, the ones in which you picked a sure winner, which did nothing but shoot straight up, making piles of money for all those wise enough to follow your sage advice.

I wrote my first piece about NovaGold in August. It went up and then up some more. Now it's four times what it was then. I did another piece in January. It continued climbing. The stock's up almost 100% in three months. I like that. Anyone who listened to me and invested, likes that.

In a bull market, everyone is a genius.

It's a bull market. It's been a bull market for the gold shares since the end of 2000 and I'm one of a few guys who actually have the balls to call it what it is. It's a bull market and if you buy the right gold stocks at the right time, you will make a heap of money. We are all as smart as whips in a bull market.

I love writing about NovaGold beyond the fact the stock acts like the Energizer Bunny on Cuban coffee and keeps climbing and climbing. I ponder over what I want to say about the company, do the research and post it. And forget it.

One of the most exciting things about writing about NovaGold is that they bring out some new and often unexpected facet to the company every six weeks or so. So I need to do another article to try and explain how the 'new' company is different. And better. This is one incredibly dynamic company

Earlier this week NovaGold announced they were raising $20 million Canadian to accelerate development at Donlin Creek in Alaska. If you aren't familiar with the stock and the project you may want to go read my other articles on the company first for background. I've posted links at the bottom of this page.

The private placement calls for NovaGold to issue up to 5.7 million new shares at C$3.50 per share primarily to mutual fund and other institutional investors. The purchase of each share brings with it a warrant to purchase half a share giving the participants in the placement the opportunity to buy up to a total of an additional 3.85 million shares at C$4.50 any time within the next eighteen months.

I immediately wondered why they were raising money now. So I picked up the phone and called them. After the call and some thinking, I began to see their strategy. Due to the seasonal nature of the company's gravel, land and gold leases in Nome, their cash flow doesn't really kick into high gear until late summer and fall. By completing the up to C$20 million (US$12.6 million) financing now, the company can accelerate the pre-feasibility program this spring and summer, making sure they more than meet the minimum earn-in requirements by the end of the year. I'll elaborate more on why this point is so important in just a bit, but first a little background.

The past three months have been remarkable, even by NovaGold standards where the extraordinary is all too commonplace. As I wrote in February, they released the eagerly-awaited scoping study in mid-March. Many individual investors wouldn't recognize the importance of a scoping study but the pros and mutual funds do. 

The scoping study is a key waypoint on the road to becoming a full-fledged mine. It's the first point where an outside firm reviews the data and begins to flesh out the direction they feel the company should take. Key to understanding the scoping study is to recognize it is not a product of NovaGold, it is financed by NovaGold but produced by an independent company.

According to independent engineering firm AMEC of Vancouver, B.C. the Donlin Creek project shows a dramatic improvement in project economics over previous studies. AMEC believes with additional work Donlin Creek could support production of 1 million ounces per year with a pretax rate of return of between 15.6 to 25.3%. To put that into context, although that rate of return would not be exceptionally high for a final feasibility level project, for a project at the first stage of development, where Donlin Creek is today, it's a strong start. In fact, the engineers from AMEC that worked on the study were very pleased, stating that the Donlin Creek results were significantly better than several projects they had previously worked on at the scoping study stage which later went on to become mines.

The next step calls for NovaGold to invest the proceeds from the C$20 million private placement into a three stage drill program beginning in mid-April. The first phase runs from mid-April to mid-May with a budget of $1 million to drill 20,000 feet. Last year's drill program was a similar size. The second phase runs June and July and the third August and September. The second and third drill programs will be king size, with $5 to $6 million dollars allocated for each program.

NovaGold's agreement with Placer Dome plays a key part in all their planning. Signed right at the very low for gold in March of 2001, it calls for NovaGold to spend $10 million US over a 10 year period to earn up to a 70% interest in Donlin Creek. NovaGold's share vests when they have spent a minimum of $10 million whereupon Placer Dome has 90 days to decide on one of three alternatives. Placer Dome (1) can remain at a 30% interest as a minority partner, (2) convert to a 5% Net Profit Interest (NPI) or (3) back-into the project to acquire a 70% interest as majority partner with NovaGold retaining 30% interest.

The back-in alternative gets real interesting for NovaGold. In my view as an investor, whether NovaGold runs the mine or Placer Dome does, I will see a dramatic increase in value. NovaGold is an excellent investment either way. But from a NovaGold management point of view, there is a significant benefit to completing the earn-in early and to being in a strong position to continue funding the exploration and development on the project beyond the US$10 million minimum.

For Placer Dome to back-in, they must spend three times whatever NovaGold has already spent on the project. In March of 2001, that would have appeared to be a simple equation. NovaGold would spend US$10 million and Placer Dome would use the 90 days to determine which course of action to take. But NovaGold has an ace up their sleeve, maybe more like a whole deck of aces up their sleeve, which no one gives them credit for. That's their cash flow from the existing operations in Nome.

To make a short story long, a couple of years ago, NovaGold took over the Alaska Gold Company which had vast holdings of land and gravel in Nome and Fairbanks. The management at NovaGold sold off the excess property in Fairbanks to pay off what they borrowed to buy the Alaska Gold Company - leaving all the assets in Nome.

The company ended up with 26 million yards of sorted gravel in Nome and about 15,000 acres or 24 square miles of patented land around Nome - and a couple of million plus ounce gold deposits to boot. Just last year, NovaGold brought in over C$4 million from their land, gravel and gold leases in Nome.

With two major expansion projects in the works at the Port of Nome and the Nome airport scheduled for this year, NovaGold is striving to increase their revenue to about C$10 million. To a far greater extent than any other similar size exploration and development company, NovaGold's Nome operation creates an internal source of financing that is almost unheard of.

But what happens when NovaGold spends more than $10 million US on Donlin Creek? Actually it turns into an investment for the company because the terms of their agreement requires Placer Dome to spend three times what NovaGold spends to exercise their back-in right. So if NovaGold expends $15 million, Placer Dome must spend an additional $45 million towards a final feasibility study before NovaGold has to contribute a cent. With any other company, drilling and exploration costs are an expense which they hope to recover when they actually conduct mining. With Donlin Creek, NovaGold's expenditures become a form of savings account.

To date, NovaGold has spent about US$3 million out of the required US$10 million on Donlin Creek. With the revenue from Nome and the private placement, NovaGold plans to spend an additional US$10 to US$12 million for their 2002 drilling and development programs- $3 to $5 million over their minimum required to earn their 70% interest.

No article I have every read about NovaGold, including my own, fully cover all the aspects of NovaGold simply because the company has so many dimensions. Donlin Creek isn't their only gold project by a long shot. To my great surprise and pleasure, they are moving forward on other projects at the same time as they advance Donlin Creek by having other companies invest funds into their development. Around the middle of February, they announced an agreement with TNR Resources to develop two of their other million ounce deposits.

The key to the additional two deposits is that even while Donlin Creek occupies center stage with NovaGold, they remain smart enough managers to advance their other properties in anticipation of higher gold prices in the future. I continue to be amazed at their progress across such a wide front.

Some of the material being written about this little exploration company is simply remarkable. On March 25th, 2002, JP Morgan, of the $30 trillion dollar derivative positions fame, issued a upgrade on Placer Dome to a Buy. JP Morgan based its recommendation on Placer Dome's resource potential saying, "We feel the main story behind Placer is its resource potential."

But when they are calling for Placer Dome to be valued at $50 per ounce of resource, they were using Donlin Creek and the work done by NovaGold as the most significant portion of the improved resource. Since the recommendation was based on Donlin Creek, should NovaGold be worth any less than $50 per resource ounce? If we wish to value NovaGold in the same sense as JPM suggested for Placer Dome, NRI would hold a value of about $30 per share today.

There is something wonderfully ironic about JPM suggesting that Placer Dome is worth more because of the efforts of a tiny exploration company. But by signing the deal with NovaGold to continue the higher risk exploration work needed to advance the project, Placer Dome risked nothing as the management skills and hard work of personnel at NovaGold increased the value of Donlin Creek and thereby added additional value to Placer Dome. This is a win-win situation for both companies.

Eventually the market place will value those same resources belonging to NovaGold at the same rate they value Placer Dome's share of the resources. I want to be aboard then.

Investing in any gold stock should be based on appropriate due diligence and some estimate for what you believe the future will bring. I see a higher price for gold. I could be wrong, I could be right. The management at NovaGold is prepared for $275-$300 ounce gold and clearly they intend to bring Donlin Creek into production at that price or higher. And I know they, like me, believe even higher prices for gold are not far off.

NovaGold shares are a perpetual call on the price of gold. For around $3.50 Canadian, you are buying somewhere in the neighborhood of 1/2 to 2/3 of an ounce in the ground depending on the price of gold. As gold goes up, the resources which can be mined profitably will also climb. That's just for Donlin Creek, you can consider the other three million ounce plus deposits found money and think of the Nome land and gravel as being a giant piggy bank.

I like the management of NovaGold. They saw huge potential value in the Donlin project, applied good sense with hard work and added a great deal of value to their shares. As a shareholder in any company, I love stocks which keep going up. I love management who do good things for their shareholders and no NRI shareholders have any complaints. The mining business has been dreadful for the last couple of years and it took a team of industry veterans with courage and foresight to create the NovaGold of today. They deserve a lot of credit.

The private placement has put a solid floor of value under the price of NovaGold. I believe the POG (price of gold) could go much higher. Naturally NovaGold will appreciate along with gold. During the past year, the POG didn't affect the share price of NovaGold, the company climbed while gold remained more or less stagnant. I suspect the shares will now continue to show great leverage to the POG. I can't wait to see the next exciting thing from NovaGold. . . According to my calendar, that will probably be in about six weeks or so.

Robert Moriarty
March 28, 2002


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NovaGold trades on the Toronto Stock Exchange as NRI and NVGLF on the US OTC.

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