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Lest there be no misunderstanding regarding this last point: I do not believe that a black swan is necessary for gold to do well. In fact, as a parent and a citizen, I would hate for any black swan to alight. I’m simply more than persuaded that the fundamentals suggested by Economics 101 – namely, that of supply and demand – point to a new, far higher equilibrium price. Similarly, do we need a fall to $900 before gold surpasses $1,900? We do not. But that doesn’t mean that it cannot happen. Shake-outs before a blistering move higher are classic chart patterns. Think of a V-bottom and you may recall a few. Being that, once again, I’m of the prosaic view that if you take care of the downside, the upside will sort itself out – a discipline that has served me well in the
25 years I have been in this business – I have, again, found my salvation in NOVAGOLD.
The last part of this letter consists of an appraisal of one of the most frequently asked questions of us these days: How will the merger of Barrick with Randgold play out with regard to Donlin? At the very least, these thoughts will highlight and reaffirm the fine positioning of your company, albeit through a different, more kaleidoscopic, prism than those I have used previously.
I believe that the merger has only added to our good fortune. In fact, I call it our “white swan,” as a re-energized Barrick will only serve to put a new focus on Donlin – one way or the other. If we take it up the value chain together in preparation for higher gold prices, that will be great. If they choose to sell their 50% to someone more excited about what Donlin represents, also great. Of course we cannot speak for our partner and will not predict how our common project will shake out in their priorities, but I will say this: In terms of the investor analysis, it really doesn’t matter; I believe all scenarios are favorable for NOVAGOLD. How can that possibly be true? Let me explain – in a sequential fashion that paraphrases some of our exchanges when we discuss our approach to Donlin, and how Barrick might see their options:
When will you build Donlin? We have a strategy regarding our flagship asset’s future, which has been articulated many, many times: Donlin will be built when the gold price resumes its long-term uptrend and we can make not just an acceptable return, but a spectacular return.
So we’re clear: It is my belief that practically
no gold mine should be built during this twilight period, which I see as a midterm correction during
a long wave bull-market cycle. Those who say
you have to build as fast as possible to capture
a cycle, regardless of a market price for gold, are missing the plot. It’s actually a myth. Barring a few super high-grade freaks of nature, to my mind it is reckless speculating to build a gold project today,
and prudent investing to wait for higher prices. For there is truly no opportunity cost to taking one’s time. We are not in consumer goods or technology
or other industries in which there exists a first-mover advantage to get to market. It really doesn’t exist in gold. In fact, the opposite is true: It pays to be patient. Having bucked the 10,000:1 odds to find something really big, the question is not “How quickly can you go into production?” but rather “Why not wait?” Why build a mine and sell gold at $1,200 when you can do
the work necessary to optimize the operation while gold climbs back to $1,600 or $1,700? The pushback to this fundamentally optimistic assertion is “Yes, but how do you know gold will rise?” My response is that I don’t know for sure, but I strongly believe that it will surpass the old highs and that, if I am by chance wrong in my timing or fundamentals, then I pray to heaven not to be burdened with a producing mine, depleting my resources during a period of low or declining prices. Can the real way to make money in mining possibly be to sell your endowment at any price, or would it rather be to believe in gold mining enough to be paid appropriately for it? And if you aren’t going to be paid appropriately for it, should you want to build it at all?
I don’t have to add that, were the price of gold to actually go down before it makes new highs, the company building a mine could go out of business. This is, of course, the worst of all worlds: rushing to production at
  Donlin Gold’s upside value with higher gold prices.
Net Present Value (NPV) (US$ in billions)
NPV at 0%
19.2B 14.6B
$15.0 $20.0
NPV at 5%
           $2,500 $2,000 $1,700 $1,500 $1,300 $1,200
11.6B 8.2B
Donlin Gold estimates as per the second updated feasibility study effective November 18, 2011, as amended January 20, 2012. All dollar figures are in USD, represent 100% of the project of which NOVAGOLD’s share is 50%, and reflect after-tax net present value (at a 0% and 5% discount rates) of the Donlin Gold project using the feasibility study reference date of 1/1/2014 (start of Year -05) as the first year of discounting. Estimated project development costs of approximately $172M to be spent prior to the reference date are treated as sunk costs. At a 5% discount rate, the net present value is: $547M @ $1,200 gold; $1,465M @ $1,300 gold; $3,147M @ $1,500 gold; $4,581M @ $1,700 gold; $6,722M @ $2,000 gold; and $10,243M @ $2,500 gold. The project requires a gold price of approximately $902 per ounce to break even on a cash flow basis.
   Gold Price US$/oz

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