321gold: One Man's Tailing Pile is Another Man's Treasure Moriarty 08/30/01

321gold.com

One Man's Tailing Pile is Another Man's Treasure

Bob Moriarty
321gold
August 30, 2001

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