NG - NovaGold

[rwmcpar]

Didnt see a thread for Novagold. 

I see it as a good way to get a leveraged return on the price of gold. They have a 50% interest with Barrick in one of the largest known gold deposits, Donlin, AK. Basically they estimate that there is 40mm(20mm to nova) ounces and are not willing to mine it until gold gets higher than it is today….so maybe like $2000 per ounce. Now…why the sudden interest in gold?I just feel like its a good low cost hedge. First against inflation, i.e. the central banks printing money like its their job. Second against a correction in the market…like 2007 type of correction. I feel like Its cheeper than rolling options on shorting an index until the market drops because who knows how long we go up. So in a way gold goes up if we have an expansion in money and it still goes up if we have a contraction or recession. Also i feel like its better leverage than any of the ETFs especially when the miner is so beat up.

The problem is that it could be a while before this gets realized. The markets can be crazy for a long time also it takes a while to permit and get operations geared up. They do have $200mm in cash and are burning it at about $40mm a year. The also have another stake in a mine in Galore Creek, British columbia which can be used to further "stay alive."

I don't see too many risks other than they run out of cash honestly.

[ItsAValueTrap]

Barrick isn't interested in turning the property into a mine right now, which suggests that the deposit is marginally uneconomic.  If gold prices rise enough then it could make sense to build a mine.

In general, I don't see mining stocks as being shareholder-oriented.  The junior explorers are worse than airlines, and the senior gold miners should have made a lot more money in a bull market for gold (e.g. physical gold has outperformed many gold miners).

[stahleyp]

Anyone have a position in this? With all the hate for gold stocks, this seems like an decent look. Klarman also has a stake and bought at much higher prices.

[boilermaker75]

From a quick look, NG has negative FCF every year. As a consequence they issue more stock each year.

[ItsAValueTrap]

They are an exploration/development-stage company.  It makes sense for them to have negative FCF every year.

It also makes sense for them to issue stock.  If you go explore for gold and find something, you will need money to further develop the project.
Usually, each successive stage costs more than the previous one.  This is because you want to commit as little capital as possible upfront.  Exploration usually doesn't work out.

If NG's flagship project goes forward, both NG and Barrick need to come up with the money for the mine (at least several hundred million... I haven't checked what the company is saying about this).

Basically... they have very legitimate reasons to raise money and to have negative FCF.  (Of course, there are many junior explorers who raise money even though they aren't going to make money for shareholders.)

[moore_capital54]

NG is the best gold equity out there on a pound for pound basis. With almost $300mm in cash on the balance sheet, Tom Kaplan has done a superb job of positioning for the current gold price environment. Very happy to see someone else on the board pick up on that.

Buying NG here is a no brainer.

[boilermaker75]

They are an exploration/development-stage company.  It makes sense for them to have negative FCF every year.

It also makes sense for them to issue stock.  If you go explore for gold and find something, you will need money to further develop the project.
Usually, each successive stage costs more than the previous one.  This is because you want to commit as little capital as possible upfront.  Exploration usually doesn't work out.

If NG's flagship project goes forward, both NG and Barrick need to come up with the money for the mine (at least several hundred million... I haven't checked what the company is saying about this).

Basically... they have very legitimate reasons to raise money and to have negative FCF.  (Of course, there are many junior explorers who raise money even though they aren't going to make money for shareholders.)

I want to preface this by saying I am not trying to be flippant, just to understand, since I know nothing about mining companies.

NG has had negative cash flow for the last ten years and has needed to raise cash by selling more shares to stay solvent. (I have not looked beyond the past ten years because it doesn’t matter.)  Over the past 10 years this has resulted in an increase in outstanding shares from 49 million to 286 million.

Ten years ago NG was trading at around $5, today NG is trading at around $2.  (The chart of share price over these 10 years looks like the Cascades.) Thinking as a value investor with just this amount of information I would stay away from NG. You say it is an exploratory/developmental company. But after what time frame do you decide it will always be an exploratory/developmental company? What am I missing?

[ItsAValueTrap]

The point is to build a mine right?  So a mine would take a huge amount of capex (I haven't check but it is likely a few billion dollars * 50%).  After the mine starts up, it will take some time to ramp up mill capacity.  Once that's done and they've worked out all the kinks, the mine should have positive free cash flow.

Most mining projects don't pan out.  They may discover things during the metallurgical studies and realize that the ore is expensive enough to process that the mine isn't economic at current prices (or any number of other things).  But few juniors will admit to that unfortunately.

2- It would make sense for these guys to merge with a small exploration company that needs financing for their mine.  I'm not even sure if NG should be advancing their permitting.

3- The spinoff was probably to mine the capital markets.  Because now NG is sitting on a hoard of cash that it should not be deploying on an uneconomic mine.  I don't know if the NovaCopper project is any good; but if it is, it would need financing.

[meiroy]

The point is to build a mine right?  So a mine would take a huge amount of capex (I haven't check but it is likely a few billion dollars * 50%).  After the mine starts up, it will take some time to ramp up mill capacity.  Once that's done and they've worked out all the kinks, the mine should have positive free cash flow.

Most mining projects don't pan out.  They may discover things during the metallurgical studies and realize that the ore is expensive enough to process that the mine isn't economic at current prices (or any number of other things).  But few juniors will admit to that unfortunately.

2- It would make sense for these guys to merge with a small exploration company that needs financing for their mine.  I'm not even sure if NG should be advancing their permitting.

3- The spinoff was probably to mine the capital markets.  Because now NG is sitting on a hoard of cash that it should not be deploying on an uneconomic mine.  I don't know if the NovaCopper project is any good; but if it is, it would need financing.

To me it sounds like it's a speculation that 1. They will startup the mine 2. Everything will be OK. 3. It will provide good FCF 4. They will not use this FCF to expand the mine or build another mine or take the money for themselves somehow and they will not continue to dilute shareholders. 5. Gold will not catch-up to commodities and drop to 1000 or less. 6. This falling knife will amazingly immediately stop its high velocity flight, because...

To match the above, perhaps it can be considered via an options play due to the risk:reward but I wouldn't touch the common. Than again what do I know.

[JRM]

This is a fun little short report: https://www.jcapitalresearch.com/uploads/2/0/0/3/20032477/2020_05_28_ng.pdf

It stuck out to me because the short thesis is hinged on the cost to construct a natural gas pipeline to a proposed power plant for this potential mine.  The cost to construct a pipeline is definitely higher now than 7-10 years ago, especially in rocky terrain like that.  I don't think its as impossible as they make it sound, but it would definitely be expensive.