Page 29 - Demo

True.
This is happening now all over. And who needs it?
And it’s kind of monkey see, monkey do. I mean, if one country decides to get more of the economics, they’re all going to follow in.
If your neighbor has just changed the rules, whether
it’s windfall profit taxes or local ownership or outright nationalization, and you’re on the other side of the fence,
you have to follow suit, politically. It’s suicide not to. If you’re
a dictatorship, people will be saying, “He must be on the
take of the mining company.” If you’re a democracy, your constituents aren’t going to allow your national endowment to be plundered by foreigners. When on the other side, they’ve shown you can get away with getting more. So politically, regardless of your form of government, it’s unsustainable for other governments not to join in. I often say it’s like popcorn: Nobody ever eats one piece of popcorn. I think that that’s already begun. So if I’m right about that from an investor standpoint, it means that the premium multiples are going to be seen in those assets in safe places, which are immune from that kind of confiscatory trend.
Well, Tom, one of the things that we spent a lot of time obsessing about are costs. In fact, we’ve interviewed many different managements and one of the first questions is, What do you expect your all-in sustaining costs to be and where are the cost pressures coming from? And we’re finding that in many cases we’re talking about 6-7 percent. Of course, there’s no inflation. Of course, it’s transitory. But in my mind, it’s not. And, obviously that’s one of the arguments for gold as inflation has become embedded and there’s no way out, but when it comes to NOVAGOLD, we’re a long way away from producing. How do you think investors will look at the profile of costs and the structure of the costs in Donlin Gold when it starts producing?
First of all, as you said, we have the luxury of time, and it really is a luxury. My own experience in the space shows how being developers can give you such a long runway to have opportunities to make money. But we are quite a while away from being in a situation where cost pressures today are going to have an impact on our valuation. The most important aspect that goes into determining what your cost of production
is going to be is grade. So therefore, all things being equal, ceteris paribus, if you have a company that is extracting one gram of gold per tonne, rather than two grams – or in our
case, two-plus grams per tonne – their cost of production is going to be double what Donlin Gold’s would be. The grade profile of Donlin Gold as a large-scale open-pit mine gives
us tremendous advantages. It will place us at the low end of the cost curve. But let’s again enter into the exercise of what does it mean if we have five or six percent cost inflation in
gold mining by the time we’re in production? What does that mean for the price of gold? Do you really think that gold will
be at $1,700 or $1,800? One of the challenges that investors have – you don’t suffer from this issue – is that they make the
Net Present Value (NPV) (US$ in billions)
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0 8.8B
NPV at 0%
13.1B
$1,500
NPV at 5%
22.5B 17.5B
$1,700 $2,000
31.6B
$2,500
UPSIDE VALUE18
$5.0 $0.0
$1,300
Gold Price US$/oz
CHAIRMAN’S INTERVIEW 27