NovaGold: Inflationary Pressures And Weakening Gold Is Not A Good Combination (NYSE:NG)

Introduction

NovaGold Resources (NYSE:NG) owns 50% of a gold project in Western Alaska called the Donlin Gold Project. The joint venture is shared with Barrick Gold. Here is an excerpt of the last 10-Q filing.

The Donlin Gold project is owned and operated by Donlin Gold LLC (“Donlin Gold”), a limited liability company that is owned equally by wholly-owned subsidiaries of NOVAGOLD and Barrick Gold Corporation (“Barrick”).

The Company released its third-quarter results on October 4, 2022, ending 08/31/2022.

Note: This article is an update of my article published on June 6, 2022. I have followed NovaGold Resources since 2019.

1 – Presentation and 3Q22 Results Snapshot

Reminder: NovaGold Resources and Barrick Gold USA – a subsidiary of Barrick Gold (GOLD) – are developing the Donlin Creek open-pit gold project in Alaska under a 50-50 joint-venture (“JV”) partnership called Donlin Gold (2007).

The Company filed its 10-Q for the third quarter of 2022 on August 4, 2022.

With 39 Moz of gold resources, it is a unique project. Furthermore, it is located in Alaska, offering extra safety, which is extremely important now. On the not-so-remarkable side, we have a project with a cut-off grade of 0.58 G/T.

NovaGold spent a large amount of Cash on CapEx. The Company indicated 42,334 meters of core drilling in the third quarter.

The joint release issued by NOVAGOLD, Barrick and Donlin Gold on July 28, 2022 reported further encouraging assays, with more high-grade gold intercepts that demonstrated good grade continuity. Additional results will be issued in the coming weeks. (press release)

The Federal and State permitting are now completed. Only the State Dam Safety permit is still pending.

On July 14, 2022, the Alaska Department of Environmental Conservation (“ADEC”)’s Commissioner granted the request for an adjudicatory hearing review on the State’s Clean Water Act Section 401 certification of the Federal CWA Section 404 permit. The briefing process is underway, and we expect the hearing process to be completed in the next six months.(press release)

The only issue is the cost necessary to bring this project to production. Inflationary pressures are here to stay and will considerably inflate an already ballooning CapEx, which threatens the project’s feasibility, one of the world’s biggest.

2 – Stock Performance and commentary

NG has dropped 26% on a one-year basis. If we compare NG to GOLD, we can see that NG is continuously underperforming GOLD this year.

3 – Investment Thesis

I see Donlin Project as an excellent opportunity to invest long-term. The recent drop in stock price should be considered a good opportunity for a patient investor.

However, it is crucial to be cautious and prudent with gold projects that are getting more expensive to build and could become too costly to complete as the gold price weakens.

On the bright side, the Donlin Project is an exceptional prospect, and the fact that Barrick Gold owns 50% makes it more valuable and secure. Furthermore, NG has substantial institutional shareholders representing 65.8% of outstanding shares.

However, as I said in my preceding article, we are years away from a final investment decision even if NG has a comfortable treasury to advance the Donlin Gold project.

Therefore, as I regularly recommend to my subscribers in my marketplace, “The Gold and Oil Corner,” trade short-term LIFO by using about 70% of your NG position. I also recommend building a core long-term investment that you keep and grow until the project’s final investment decision.

Note: Trading LIFO is only allowed in the USA but not Europe or Canada. However, it is possible to trade NG and keep a long-term position while trading the short-term using two separate accounts. Please read my final note about it at the end of my article.

NovaGold Resources 3Q22 (August 31, 2022) – The Raw Numbers:

Note: The Company is not generating revenues and is in development.

NovaGold Resources	3Q21	4Q21	1Q22	2Q22	3Q22
Net Income in $ Million	-11.79	-10.27	-10.00	-14.97	-16.12
EBITDA $ Million	-10.17	-8.74	-8.48	-13.29	-13.93
EPS diluted in $/share	-0.04	-0.03	-0.03	-0.04	-0.05
Operating Cash Flow in $ Million	-1.88	-1.72	-6,00	-2.32	-1.64
Total Cash $ Million	173.34	169.12	155.13	142.29	131.93
Long-term Debt in $ Million	114.22	115.72	117.24	118.92	121.17
Shares outstanding (diluted) in Million	331.64	331.86	332.94	333.23	333.34

Click to enlarge

Source: NovaGold Resources 10-Q

* In the 10-Q: As of September 27, 2022, the Company had 333,390,237 Common Shares, no par value, outstanding. The 333.34 million are as of August 31, 2022.

As shown in the table above, the outstanding diluted and the long-term Debt are kept at the same level, and the total cash is down slightly again to $131.93 million at the end of 3Q22.

An additional payment from Newmont Corporation (NEM) of $25 million comes due in 2023 related to the sale of NovaGold’s 50% interest in the Galore Creek project in 2018. Also, NG owns a note receivable for $75 million contingent upon the owner’s approval of a Galore Creek project construction plan.

The financial position is solid, supporting the 2022 CapEx estimated at $60 million. Furthermore, on an optimistic note, the Company reaffirmed that the cash position is sufficient to cover the expected funding of the Donlin Gold Project.

The increase in cash used in the third quarter of 2022 compared to 2021 was primarily due to the expanded Donlin Gold work program in 2022.

Donlin Gold – An Impressive Open-pit Project (updated from September presentation)

1 – Mineral reserves are indicated in the table below. They are unchanged from the preceding quarter.

NovaGold Resources’ share of the mineral reserve proven and probable is 16.925 Moz, with an additional 2.997 Moz in M&I and inferred. The basics have not changed since the preceding article.

• The mineral reserves, P1 and P2, are 33,849K Au Oz with a cut-off grade of 0.57g/t gold related to reserves, and the total grade is 2.09 g/t with a LOM of 27+ years. The Company expects to produce 1.5 M Au Oz per year in the first five years.
• The initial CapEx for Donlin Gold is $7,402 million. Because of the location, barging will be used as the main transport for goods.
• 2022 proposed overall CapEx is expected to be $64 million*, equally shared with Barrick. 2022 Donlin Gold Drill Program is the largest in more than a decade, focused on advancing preparation for feasibility work.
• Long-term debt represents a promissory note payable to Barrick Gold of $121.17 million.

* With this additional drilling, the Donlin Gold 2022 expenditures are now anticipated to stand at $64 million (of which NOVAGOLD’s portion is 50%). The budget also supports the advancement of numerous environmental activities and finances community and external affairs efforts. (press release)

2 – Donlin Gold: The 2022 budget is now $64 million

NovaGold Resources expects to spend about $48 million in 2022, or an increase of $2 million sequentially, including $13 million for corporate general and administrative costs, $3 million for withholding taxes on PSUs and other working capital, and $32 million to fund their share of expenditures at the Donlin Gold project.

About $19 million of the $30 million CapEx at the Donlin Project will go to the 2022 drilling program. Also, $9 million will be spent on external affairs, permitting, environmental, land, and legal activities, and finally, $4 million is earmarked for project planning and fieldwork.

The main objective for NovaGold was indicated in the 10-Q:

NOVAGOLD’s primary goals in 2022 are to continue to advance the Donlin Gold project toward a construction decision; maintain or increase support for Donlin Gold among the project’s stakeholders; promote a strong safety, sustainability, and environmental culture; maintain a peer-leading reputation for NOVAGOLD, its governance practices and its project among shareholders; and manage the Company treasury effectively and efficiently.

Technical Analysis and Commentary

NG forms an ascending triangle pattern with resistance at $5.25 and support at $4.4. Ascending triangle patterns are generally bullish formations that anticipate an upside breakout.

As I have recommended in my preceding article, the trading strategy I suggest is selling LIFO 50% between $5.25 and $5.50 with possible higher resistance at $6 and waiting for a retracement to buy back at or below support at $4.40 with potential lower support at $4.

Note: RSI is now considered nearly overbought at $65 and could signal a possible top soon.

The gold price is now trading above $1,720 per ounce, and NG has been trending up the past few days after dropping to a multi-year low as the project’s feasibility turns uncertain due to inflationary pressures and lower gold price. Thus, investing only a tiny part of your available cash is crucial until the Company can reach a construction decision.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS). However, it is allowed in the United States due to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long-term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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