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Is Barrick trying to turn a Silk Purse into a Sow's Ear?

Bob Moriarty
August 7, 2006

On July 24th, Barrick announced an unsolicited cash offer for NovaGold. When I heard it, I wanted to weep. Are they kidding? If that isn't turning a Silk Purse into a Sow's Ear, I shall never see it.

I love NovaGold and the guys running it. We were just a tiny new gold site in August of 2001 when I first wrote them up. They had just five people and big vision. Gold was $273 and climbing. NovaGold believed the price of gold was going higher and had just concluded a joint venture deal with Placer Dumb that called for NovaGold to spend something like $10 million US within a 10 year period to earn a 70% interest in the Donlin Creek deposit of Placer Dome.

Barrick didn't think there was much of a future for gold and even when gold went down to $252, they were firm sellers. I couldn't help but think that the two companies were polar opposites. One obviously was going to be proven right and one was dead wrong. Only the future would tell the tale.

We soon forget the lessons of the past and I doubt many in the gold business want to remember back to 2000 and 2001. Companies were dropping projects right and left, many people left the business forever and keeping the doors open was considered a great victory. At one point in the mid-year of 2001, NovaGold dropped as low as $.13 Canadian and $.09 US and carried a market cap of about $2.5 million US. Jay Taylor thought he saw some value in them and he recommended them, I think, at about $.50 and Lawrence Roulston liked them about $.30 but they kept on dropping into the summer. I remember seeing the stock at $.13 and reading that they were going to earn $.13 a share that year and thinking that they were getting within range of safe buying.

I spent a good amount of time talking to Greg Johnson, one of their VPs (and remember, there were only five employees, Rick's wife was doing the books in the basement office of their home in Silicon Valley.) He actually believed they could conclude their exploration program at Donlin much earlier than Placer believed and by doing so might well create a hell of a problem for Placer.

The JV called for NovaGold to spend the $10 million within 10 years and then Placer had 5 years to exercise a back-in right by bringing the project to construction. NovaGold would own 70% but Placer could regain 40% of that 70% and NovaGold would retain a 30% ownership in the project. It's very important for you to understand that back-in clauses in these kinds of deals are tough, and I believed 5 years ago that given that Placer was a big company with big company type management, the possibility was very real that Placer would spend the money but couldn't accomplish all the other terms of the deal and NovaGold would keep that 70% ownership.

Time passed and no grass grew under NovaGold's feet. While other companies were trying desperately to keep the doors open, NovaGold was drilling at Donlin to beat the band. Actually they had a tremendous competitive advantage because no one else was doing anything. And every time the price of the stock went up, they did a series of modest financings. So that every time they needed money, they had it in the bank.

People who actually accomplish things attract more than their fair share of naysayers and NovaGold did from the gitgo. I remember some poster on Kitco who sneered that they were nothing more than an Alaskan gravel company.

But in 18 months they spent $12 million in the ground and earned their 70% by mid-November of 2002. Now the shoe was on the other foot as the clock tolled for Placer. The NovaGold team knew that for Placer to be successful in their back-in they had to hit the ground running so they wouldn't run out of time to do all the necessary work to earn the further 40% interest; hundreds of thousands of meters of drilling, detailed engineering to complete a bankable feasibility study and getting construction permits so their board of directors would approve the start of construction by early 2008.

Contrary to what they needed to do, Placer put the project on a back burner. I went to a gold show a year or 18 months ago and Placer actually had Donlin Creek as number three on their priority list behind a gold project in Chile and one in the Dominican Republic. Since then, they dropped the project in Chile and rumor control has it that the project in the DR isn't doing all that well. The fact that the construction manager for the Dominican Republic left Barrick to head up the construction team for NovaGold's Galore Creek project pretty much says it all.

Placer was one of those companies worth more dead than alive. Rob McEwan of Goldcorp was talking about doing a takeover and spinning off pieces of Placer years ago. He had his eyes set on the Campbell mine at Red Lake so he could achieve economies of scale at his Red Lake mine. In the end, Goldcorp and Barrick bought Placer and divvied up the pieces.

If there was another company I'd rather see broken into tiny pieces and chucked away, it would have to be Barrick. They have made the most of their political connections but as miners they basically suck. Some dimwit came up with the bright idea of selling gold forward and they dumped all the gold they could sell some 15 years in the future. Hint, when you sell futures 15 years in the future, you aren't hedging, you are speculating. Every farmer you have ever heard of hedges. It's just good common sense. But if you asked a wheat farmer what he thinks of selling his wheat 15 years in the future, he would look at you as if you just landed in a space ship. No one with a lick of sense would speculate 15 years in the future unless they were called Enron.

I remember back in 1999 and again in 2001 when the price of gold seemed stuck between $252 and $260 on a permanent basis and wondering why the guys who sold forward at $450 didn't think it worth covering their shorts. I know Barrick has 50 different reasons why, "This time it's different" but when I hear that, I want to gag. Like the US government, Barrick is essentially bankrupt. If and when they mark their books to market, they are cooked like a Thanksgiving turkey.

Someone there was wise enough to realize they did have a problem with the timing of the 5 year back-in at Donlin and Barrick has discussed changing the time line with NovaGold. NovaGold management did a great job of negotiating the deal in 2001 and it clearly favors them. But Placer signed it and Barrick is stuck with it. But instead of sitting down at the table with NovaGold about the deal, Barrick comes back with this absurd takeover offer.

I've probably told more people to use NovaGold as a trading stock than any stock I can think of. If you bought at the May-June low every year and sold at the Dec-Jan high, I suspect you could have doubled your money every year. Ignore the move from $.13 to over $20, the guys who bought in cheap are all going to retire on what they made from that incredible move. But every year you could double your money.

Barrick can read charts and they wait until the yearly low and come in with an offer a giant 24% over the previous day's market price and way below the high for the year.. Wow, I'm impressed. They are willing to pay what the market said the company was worth in mid-May during the correction. Be still my beating heart.

The market clearly sees what a monkey could figure out with a calculator and an old Wall Street Journal given five minutes to work it out. NovaGold is worth a hell of a lot more than $14.50 (the current price is around 17.) I'd be very interested in meeting the two or three people who have tendered their shares, I rarely meet people that stupid. Anyone that dumb has probably already sent all their ready cash to Nigeria to help that poor woman who has cancer transfer her inheritance to the US.

There is a good side to this offer even if it doesn't stand a snowball's chance in hell of succeeding, finally the naysayers have been shut up permanently. If Barrick is willing to pay more than $1.5 billion for Donlin Creek and Galore Creek, they have to be worth something real.

Barrick's done a good job of confusing the issue, they always count Donlin Creek as 30% owned by NovaGold. Well, folks, it just ain't so. NovaGold owns 70% of Donlin's 28 million ounces of gold, 40% more than the numbers used by most "analysts" and Barrick. And there isn't a way in the world for Barrick to complete their feasibility study and arrange construction permits by November of 2007. Ain't gonna happen.

The numbers don't work no matter what slight of hand Barrick uses. I'd consider $30 a share US to be chump change and I would be happy to tell anyone in sight to hold on tight to their shares. Barrick is busy drilling at Donlin and you may rest assured that there is a lot more gold there than 28 million ounces and they aren't about to tell you or me or even their partner in the project, NovaGold, just how much more there is. You would need to be thinking something like $40 to $50 a share before giving away NovaGold.

If (and that's a giant IF) Barrick raises their bid dramatically and somehow get their claws into NovaGold, it will be a crime. Rick Van Nieuwenhuyse and Greg Johnson and all the other members of their incredible team have built way more than $1.5 billion dollars of value, that's real wealth, put into the hands of their loyal shareholders.

These are some of the best and brightest people in the industry, they are not going down without a fight. Their official response to Barrick should come out in the next week or so. Stay tuned folks, things are going to get interesting. I'd expect we will hear NovaGold's view on the hugh potential at Donlin and Galore. And based on their track record, there probably will be a few surprises.

If Barrick somehow managed to take them over in order to cover up their own stupidity, there would be something dreadfully wrong with the world. I suspect the Toronto analyst lapdogs currently singing Barrick's tune about what a wonderful deal this is for Barrick have again missed what NovaGold is all about. The NovaGold guys are new generation and Bay Street never got it.

Luckily no one is dumb enough to fall for it. At the end of the day, NovaGold will either come out stronger or go for a price no one can imagine right now. Regardless, they will retain their credibility and reputation and Barrick will still be trying to buy either credibility or a reputation. If I was a betting man, I know what I'd bet on.

The race isn't always to the swift, nor the battle to the strong, but that's the way to bet.

NovaGold Resources
NG-T $19.33 Canadian (August 4, 2006)
NG-Amex $16.89 US (August 4, 2006)
88.9 million shares outstanding

Bob Moriarty
President: 321gold

321gold Inc