Page 9 - NG_AR_2015
P. 9

gold at some level eminently rational. For those with a more aggressive bent, the miners are providing leverage at historically low prices. The key, we at Electrum believe, is to build positions
in the few companies that have great assets in safe places, and ensure that they have the balance sheet to weather the current storm. For such assets, we are buyers here even if lower prices are yet to come. Whether or not we get lower prices that enable us to deploy our capital on an even more efficient basis is not within our control. That being said, the universe in which we’re engaged is already quite modest. In light of the gold industry having already passed a tipping point, we do not need to witness black swans landing on a pond to see significant upside and experience significant up-moves. The market is now so small that one could theoretically buy all of the world’s publicly-traded precious metals producers for the modest sum of ~$150 billion. Of course, at the first sign of a shift in sentiment, that market capitalization will multiply rapidly.
Our group’s vehicle of choice remains NOVAGOLD, of which
I am chairman, largest shareholder, and an unsubtle advocate. Natural resource assets have been my livelihood for over two decades. By focusing on the rare “category killers,” it has been a good living. When we entered NOVAGOLD as a white knight at the end of 2008, we felt Donlin Gold, the Alaskan gold deposit which the company shares with Barrick Gold, was likely the best single development asset in the world. To some, our investment may have seemed long-dated. Now, more than half-way through permitting, it doesn’t look long-dated any longer. Indeed, as other less attractive mining projects around the world have been cancelled at an accelerating rate, Donlin has continued progressing at its natural pace. We refer to this phenomenon
as “The Tortoise and the Hare.” The passage of time has only reinforced our appreciation for Donlin. We now believe that industry fundamentals are rendering it unique. Certainly, the superlatives are quite remarkable. Starting at nearly 1.5 million ounces per year, Donlin will be the largest single pure gold mine in the world when it begins production. Over a million ounces a year will be produced over a mine life that begins with 27 years of reserves. There is no other producer that has started with 39 million ounces of resources (inclusive of its 34 million ounces of reserves) ... and that is only from the 3-kilometer portion of an explored mineralized belt 8 kilometers long. This belt in itself is only a small portion of the property package. In other words, in an era of declining reserves and precious few new discoveries, Donlin’s size will very likely increase along strike as well as to depth ... perhaps significantly. In addition to quantity, there is
extraordinary quality. Though the project will begin by processing 2.5 grams of gold per tonne, the mine life average of 2.1 grams per tonne is over double the grade of other large open pit projects. Size and grade matter. The consequence of Donlin’s scale renders the economics unusually attractive, with life-of-mine cash costs
of $585 per ounce. In terms of Donlin’s combined attributes of size, grade, exploration upside, forecast production profile, mine life, low cost structure and community support, there’s really nothing like it anywhere ... and it is that rare “unicorn” that is located in a safe part of the world where an investor can tread without fear. As such, Donlin represents for us the optimal way to invest in the space: that is, to seek the maximum leverage to gold in a jurisdiction that will allow investors to keep the fruits of that leverage.
This safety premium creates an exceptional risk-to-reward ratio, based on the leverage to higher gold prices enjoyed by Donlin Gold. Its after-tax Net Present Value (“NPV”) using US$1,200 per ounce-gold and a 5% discount rate, was estimated in the Donlin Gold Second Updated Feasibility Study at US$547 million. This number rises to $6.2 billion if undiscounted. Importantly, the resultant NPV sensitivity analysis shows a more than eightfold increase in value to US$4.6 billion at US$1,700 per ounce of gold ($14.6 billion if undiscounted), and then nearly a 50% further increase in NPV to US$6.7 billion at US$2,000 per ounce of gold. At the zero discount rate at which we believe North American assets may once again be rated, as they were not so long ago, that number rises to more than $19 billion. And that is solely based on existing reserves.
In today’s market, NOVAGOLD is exceptional from a risk/ reward standpoint. Debt-free and laden with $127 million in
cash, it has a balance sheet that could last for a decade without additional capital. This attribute, rendering it the profile of an unexpiring call option not simply on its proven reserves, but also its larger resources, is accentuated by the fact that under CEO Greg Lang’s leadership, the stewards of NOVAGOLD’s fortunes are best-in-breed when it comes to management. They have their eye on the ball, manage the company’s money frugally, care deeply about their shareholders and their partnerships, and are not remotely tempted to do stupid stuff. Being Chairman
is such a pleasant gig that I give my remuneration to Donlin’s unique alliance with the National Fish and Wildlife Federation, an agency of the US federal government with which NOVAGOLD has a partnership in wildlife conservation in Alaska. When gold turns I fully expect a bull market in Donlin that will affect not only NOVAGOLD as a “pure play” on what will be the largest pure gold
7


































































































   7   8   9   10   11