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Q+A
WHY IS THE STATE OF THE GOLD INDUSTRY A PLUS FOR NOVAGOLD IN WAYS THAT ARE PERHAPS EVEN DISTINCT FROM MOST OF OUR PEERS?
The answer is both qualitative and quantitative. Over the last decade, as mentioned earlier, the average grade of gold mines has collapsed – and I suspect that it will ultimately fall below a gram per tonne. Donlin’s grade is multiples of that. So much for making the case for the quality (and thus also the concomitantly lower operating cost) side of the equation for Donlin. For a large-scale open-pit project located in a safe jurisdiction, Donlin’s grade
is about as magnificent as one could ask for. Even so, the drill results from both of our recent campaigns exceeded our modeled targets, delivering some of the best results we’ve ever seen for an open-pit deposit – and thus further accentuating Donlin’s relative advantages. As we say, Donlin is a gift that keeps on giving.
From the quantitative side of our relative advantages, our superNOVA shines ever brighter. With no real discoveries of significant size as well as the declining grades – and the years, if not decades, it takes to put these discoveries into reserves and mine them – the majors are burning through their reserves faster than they can be replaced. This phenomenon is unlikely to change. Barrick has stated that the industry’s production is likely to fall by
5 percent annually for years to come. This is huge and yet, to my mind, maybe even optimistic. According to Citi Research, existing mine production of 26 of the world’s largest miners is forecasted
to decline 13 percent by 2022 and 47 percent by 2027.22 In addition, according to S&P Global Market Intelligence, from 135 assets not yet in production, only 30 have greater than 10 million ounces of gold in reserves and resources, and only nine of these assets have a grade of one gram per tonne or greater.23 The industry simply can’t find the additional gold. Over the past 10 years, only 25 new gold deposits have been identified, totaling some 150 million ounces of gold, which represents only 7 percent of what has been discovered in 30 years. Crucially, no major discoveries have been made in the last few years.24
Long-life category-killer projects such as Donlin Gold are therefore rare and extremely valuable. When compared to the existing 15 other development-stage projects in the Americas, Donlin Gold’s resource is more than four times larger than the
peer group’s average.25 Yet we can see much more resource upside
22 Citi Research, Global Gold Project Book “$130bn capex needed to sustain production”, May 16, 2018; reserve and production profiles of the 26 companies under Citi Research coverage, which represent ~38% of 2018 global mine production.
23 S&P Global Market Intelligence, “A decade of underperformance for gold discoveries”, May 5, 2020. Gold contained in reserves, resources and past production, as calculated by S&P Global Market Intelligence. Grade refers to combined Reserves and Resources.
24 Ibid.
25 Peer group data based on company documents, public filings and websites as of March 29, 2021.
Comparison group of 15 projects based on large (2Moz Proven and Probable cut off ), North/ South American gold-focused development projects with >75% projected revenues from gold.
– something that is quite important to our investors, who want to know that one can grow organically and not have to do deals to add reserves. Just to provide an “Exhibit A” to our leverage to really low-hanging fruit, Donlin Gold effectively enjoys six million ounces of inferred mineral resources26 – two-thirds of which are immediately within the reserve pit. That amount of gold alone would represent a major discovery in its own right these days! And we believe there is likely much, much more beyond.
I happened to be in the hydrocarbons business as well as mining. Their respective profiles could not be more different. There really is such a thing as “peak gold.” In contrast to the case with peak oil, the supply/demand dynamics of the gold industry suffer from none of the supply variables that have rocked the hydrocarbon markets. Even if this were not the case, it wouldn’t matter: There are simply no known vast, shale-like, trapped resources to be tapped with new technologies such as fracking
or horizontal drilling. That very realization is a major reason why I actually sold my energy company in 2007 – when oil was over $100 a barrel – to pivot to gold when it still had a $600 handle.
Again, the gold industry can barely find the gold. Part of the reason lies in the technology it uses, which is rather primitive. The mining industry doesn’t possess exploration tools characterized by anything approaching the accuracy of 3D seismic. If a discovery is to be made, it’s still more likely to be by prospectors on donkeys (or, perhaps only slightly more probable now, 4-wheel drives). And if those estimated 1,000-10,000:1 odds of navigating a prospect to a mine are successfully bucked, it could still take 15-20 years – let me repeat: 15-20 years – to take the project up the value chain from prospect to first pour. In effect, from a mine supply standpoint, the horse has already left the barn and the barn door has been
firmly shut.
The next bull market in gold therefore will not be met by a tsunami of mine supply. Quite the opposite, in fact. People will
be shocked by how little mine supply is available. The developing world is unlikely to fill the pipeline. For with the “go where the gold is” mentality fairly crippled, and perhaps mortally so, it is quite possible that the risky jurisdictions shall prove to be uninvestable and unfinanceable in light of the various factors we discussed in extenso above. Hence the virtue of Donlin not just being a Tier One asset,27 but of being so in a Tier One jurisdiction.28
26 Donlin Gold data as per the Second Updated Feasibility Study (as defined herein). Donlin Gold inferred mineral resources of approximately 92 Mt grading 2.02 g/t. Represents 100% of inferred mineral resources, of which NOVAGOLD’s share is 50%. See “Cautionary Note Concerning Reserve and Resource Estimates” and “Mineral Reserves & Mineral Resources” table on page 50. Inferred mineral resources are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that they will be realized.
27 NOVAGOLD defines a Tier One gold development project as one with a projected production life of at least 10 years, annual projected production of at least 500,000 ounces of gold, and average projected cash costs over the production life that are in the lower half of the industry cost curve.
28 NOVAGOLD considers Tier One jurisdictions to be any in the top 10 rank by the Investment Attractiveness Index in the Fraser Institute’s Annual Survey of Mining Companies, 2020. Alaska is ranked number 5.
QUESTIONS AND ANSWERS 19