How much would you pay for a company with only one real asset which it does not own outright and no operations? Currently, the answer is over $2.4 billion and rising. Right about now, you are probably thinking that I am talking about some new tech company in Silicon Valley, but you would be wrong. It's actually a mining company named NOVAGOLD RESOURCES (NG 3.21%), and its one asset is a 50% stake in Donlin Gold LLC and the Donlin Gold project.
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The Donlin Gold Project
The Donlin Gold project is a yet-to-be constructed gold mine in western Alaska. In an interview on Real Vision, Thomas Kaplan, the chairman of NOVAGOLD, said that it would be "the largest single pure gold producing mine in the world". The mine is expected to contain 39 million ounces of gold, and Kaplan stated that that gold would be "drawn from only three kilometers of an eight kilometer mineralized belt...moreover, that eight kilometers is only on less than 5% of the total land package."
In late 2011, the results of a feasibility study were released showing that the mine had an expected operational life of 27 years. And assuming a price of $1,200 per ounce for gold, the mine's net cash flows would be almost $6.2 billion after the first five years of operation. Kaplan said that at $1900 per ounce, the projects' net present value would be $20 billion.
This $20 billion would be split between NOVAGOLD and its partner in this project, Barrick Gold (GOLD 1.33%), which owns the other 50% of Donlin Gold LLC. Barrick is one of the largest gold miners in the world. Barrick's influence on this project is extensive considering the CEO of NOVAGOLD and the General Manager of Donlin Gold LLC were both Barrick executives prior to their current positions.
Status of the Project
Currently, everyone is just waiting for the price to be right. Kaplan explained that it all depends on the price of gold. He doesn't believe that either NOVAGOLD or Barrick want to rush anything. He stated that, "I've always had an aversion to building things at prices, which I think are too low in order to subsidize Indian and Chinese consumption." He continued by saying that, "We have almost a quarter of a billion dollars' worth of cash and receivables at a time when we have a permitted mine and the money is just being spent on additional studies to optimize it." Given that the cash used by the company's continuing operations has been about $10 million a year for the last three years, the company is in no hurry.
What does all this mean for investors?
Investors of NOVAGOLD are not buying a typical company with net income and positive cash flows. And it is not an investment that should be expected to perform immediately. However, what it is, is a bet on gold and a bet that this mine will become one of the largest gold mines ever. Kaplan finished the interview by saying that NOVAGOLD "is the best option, the safest option, and it's an option on what is likely to be only a fraction of the true asset base because my chief geologist who found San Cristobal believes that there's another Donlin to be found at Donlin."
