One Man's Tailing Pile is Another Man's Treasure
Writers find many words to describe mining companies. Vision
usually isn't one of them. We just don't think of using vision and mining
in the same sentence, they don't match up normally. But I found a company
recently, a gold mining company, with vision. That's plumb rare.
A company called the Alaska Gold Company dominated the
mining on the Seward Peninsula around Nome for most of the last 80 years
after combining all the small claims they could get their hands on during
the 1920's. The Guggenheim and Morgan families owned the company. Over the
period it threw off hundreds of millions of dollars in profits. Through
the Alaska Gold Company, they owned 15,000 acres of land around Nome and
also owned property and mines in Fairbanks and at Dawson Creek in the Yukon.
Over time, mining for the Alaska Gold Company became more
of a bean-counter type of business and less of an adventure. Alaska Gold
eventually found itself in the hands of Victor Posner at Sharon Steel. Posner
was one of the originators of financing the purchase of companies through
the use of junk bonds and other funny money and in the late 1980s, Sharon
Steel and Posner's stable of companies found themselves in Chapter 11.
Along came three guys who used to work for Placer Dome
back when gold didn't go down in price every single day. Now you may find
this hard to believe based on what some folks are saying lately but gold
used to be a valuable commodity. And big mining companies sent people out
in the field to find gold and figure out how to mine it and make a profit.
Believe me, this was a long time ago.
But working for a major mining company when gold does nothing
but go down and budgets are being cut left and right is tough. Rick Van
Nieuwenhuyse served as the Vice President of Exploration for Placer Dome
a few years back. He saw the handwriting on the wall and realized he would
be far better off as the head guy in a small outfit rather than one of 30
VPs in a big outfit. So he took over control of what was effectively a defunct
mining company called NovaGold with lots of debt and no real assets. At
this point, Rick's intent was to leverage his exploration experience to
do some good deals with major mining companies like Placer Dome and build
a new gold company.
Rick decided to focus the company on Alaska where he knew
the terrain well and hired two colleagues from Placer Dome to help run the
company, Greg Johnson to manage Corporate Development and Phil St George
to head up exploration.
This all took place in 1998 and 1999. NovaGold identified
some promising properties and began to conduct joint ventures with Placer
and other major mining companies. But everything NovaGold was involved in
was pretty much a long shot and like all the other mining companies in the
world, the three principals went home every night and prayed for the price
of gold to go up.
By 1999, the Alaska Gold Company had fallen on hard times.
So Rick and the crew at NovaGold offered to buy the Alaska Gold Company
at a rock bottom price. They didn't need to buy the company. In some ways,
it didn't even seem to fit in with the work NovaGold was involved with.
But they recognized that there was real value and felt they could make the
most of the company's assets.
But no one was real sure what the assets were. The company
had been around for 80 years and owned lots of property around Nome and
Fairbanks. But no one really knew what it was all worth. So Rick and his
team put together a deal and bought the Alaska Gold Company for about $5.5
million. To make it work they would need to sell off a bunch of the land
in Fairbanks just to pay for the deal. But pay for it they did, with the
sale of just a tiny bit of the assets of the company.
It's taken the best part of two years just to figure out
what the real assets of Alaska Gold were. Everyone in the company just laughs
when you try to get a straight answer about what they ended up buying, essentially
for free. All the people in the company laugh a lot.
In the process of mining millions of ounces of gold by
dredging the ancient beach gravels around Nome, the Alaska Gold Company
also created millions of cubic yards of tailings. Rick and his crew looked
at the miles of tailings and they didn't see tailings. They saw sand and
gravel for construction. One stack, already sorted out by size, in Nome
contains 26 million cubic yards. Guys drive up, load up with gravel or sand
and pay as they leave. The Alaska Gold Company (now NovaGold) does nothing
but collect the money.
The pile in Nome is worth $52 million dollars today. And
by spending time and money, NovaGold can recover a couple of million ounces
of gold at a profit and convert another 295 million cubic yards into sand
and gravel aggregate eventually. Worth $2 a yard. Figure that one out for
yourself and you will soon see why everyone in the company is happy. At
today's stock price, you could buy all of NovaGold stock in theory for about
$26 million dollars. But most of the stock is owned by the same insiders
doing the smiling. I wonder why?
And of course the value of the gravel doesn't take into
account the value of the 15,000 acres of land around Nome. It gets a little
confusing here. NovaGold values the land in two different ways. As mining
lands and as real estate lands. No one has yet determined the hard rock
source of the gold found on the Nome Beaches, 40 miles either side of Nome.
NovaGold figures it's on their lands somewhere so they aren't in any big
hurry to sell off the mining lands - which are about 13,500 acres of the
total. They have half a dozen or so small joint ventures going on their
lands mining gold and producing several thousand ounces of gold a year even
now. Naturally that figure would soar if the price of gold went up.
I pushed Tony Hayes, in charge of investor relations, for
a rough retail value of the lands around Nome which could be developed for
commercial and residential real estate. He came up with a figure of $32
million just for the non-mining lands. Not if you had to sell it next week
but over time. And talking to Tony Hayes made something else apparent. The
company is spread out. He's in Toronto, some of the people are in Nome,
some at Donlin Creek and the headquarters are in the heart of Silicon Valley.
But no matter who you talk to, they all work from the same play sheet. This
is a team and they do work together, no matter where they are located.
So the gravel they have on hand ready to ship is worth
$52 million dollars. And the real estate lands around Nome are worth another
$32 million. And if you took into account the gold recovery and value of
the other 295 million cubic yards of tailings, you start getting into the
half billion dollar range. All very real assets, for a company that the
stock market values today at only $26 million.
If you will notice very carefully, I haven't even mentioned
what NovaGold has been doing for the last two years. All the very real assets
the company possesses around Nome came from the original purchase of the
Alaska Gold Company. I haven't even talked about NovaGold yet as a gold
exploration and development company.
NovaGold and Rick Van Nieuwenhuyse have been doing exactly
what he set up the company for in the first place. Even as the major mining
companies have continued to cut back on their exploration spending, NovaGold
has been entering into creative joint venture agreements with them to explore
and advance NovaGold's own properties. In most of these deals, NovaGold
does the exploration work on the project but spends the big company's money.
This gives the major mining company a majority interest if a huge deposit
is found, and allows NovaGold to invest its money on things that will add
more near term value to the company.
With the cash flow from its real estate, gravel and gold
businesses, NovaGold is able to internally fund most of its own exploration
work. This avoids the trap of being completely dependent on investment capital
as most small gold companies find themselves these days. These revenues
($12 million over the past 3 years) have allowed NovaGold to avoid excessive
dilution while being able to take advantage of some exceptional opportunities.
NovaGold now has over 1/2 ounce of gold in the ground for
every share of stock, the highest of any exploration company I am familiar
with. And they have done most of this in just two years. Their 70% share
of Donlin Creek, recently concluded with Placer Dome brings in almost 9
million ounces of gold for NovaGold.
In the deal, Placer Dome requires that NovaGold spend $10
million over the next ten years. But Placer Dome has already spent $37 million
on the property. For NovaGold to spend $10 million to get the benefit of
70% of $47 million and get 9 million ounces is a pretty good play on their
part.
Their Rock Creek / Saddle deposit which is 100% owned by
NovaGold brings in another 1.1 million ounces. Their 100% owned Nome Gold
deposit contains 2.2 million ounces and the 100% owned Shotgun project south
of Donlin Creek contains another 1 million ounces of gold. Combined that's
over 13 million ounces of gold.
Trying to come up with a figure for the value of gold in
the ground is like throwing darts. Everyone has a different way of doing
it. But gold in the ground is worth anywhere from $5 an ounce to $40 an
ounce today. And should the price of gold ever go up, that figure could
skyrocket. NovaGold is selling for under $1.00 a share and each share is
backed by over 1/2 ounce of gold. That's under $2 an ounce just for their
gold.
I will never fall into the trap of predicting prices for
any stock. All investors want all analysts to predict price just as if they
could. Which they can't. So the analyst carefully ponders for a few moments
and comes up with a figure just as if he took the price off the tablet which
came down the mountain with Moses. I'm not going to do that. I can't predict
price and there isn't a single person I know who can. The price of stock
is based on what people are willing to buy it for and sell it at. People
are irrational and their behavior simply cannot be predicted. Sometimes
they get crazy and pay too little, sometimes they get crazy and pay too
much. The stock isn't as cheap as it was but it's a whole lot cheaper than
it's going to be.
But I will say, vision is one of those things which make
a stock and a company valuable. NovaGold is essentially a three year old
company run by a handful of very experienced guys. They have done a pretty
good job for the past couple of years in a tough market. They have a lot
of vision. And they should continue to add substantial value to NovaGold.
I know why all the people running the company smile a lot.
It's because they have something to be very cheerful over. If this is what
they can do in a couple of years in a bad market, I wonder what the company
will look like in a few more during a good one?
NovaGold Resources Inc (Trading under the symbol NRI on the Toronto Stock Exchange
and NVGLF on the US over-the-counter exchange) actually makes money today
and we all know how unusual that is for a gold company. As I write, the
stock is challenging new 52-week highs. And I doubt they are anywhere near
their high.
For more information, visit NovaGold
at http://www.novagold.net
Robert Moriarty
www.321gold.com
August 31, 2001
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