NovaGold lands new major investor to kick start activity in 2009

Jan 16, 2009 (Alaska Journal of Commerce - McClatchy-Tribune Information Services via COMTEX) -- NG | Quote | Chart | News | PowerRating -- Following a run of tough luck starting up its new hard rock gold mine near Nome and related negative financial news in the later part of 2008, NovaGold Resources rang in the New Year in a celebratory way, landing a substantial new investor to support the junior explorer.

NovaGold announced Jan. 2 that the Vancouver-based exploration company entered into a definitive agreement with Electrum Strategic Resources LLC, a New York-based private metals investment company, to sell Electrum 46.1 million units of NovaGold at $1.30 for each share.

Upon closing, NovaGold will receive gross proceeds of roughly $60 million, and Electrum will become NovaGold's largest shareholder, owning approximately 30 percent of the issued and outstanding common shares of the company.

The purchase price for each unit also allows Electrum to acquire additional common shares of NovaGold for $1.50 for each unit within four years. If fully exercised, Electrum would own approximately 46 percent of NovaGold.

"This is a strategic investment by a group that has a long term view," Rick Van Nieuwenhuyse, NovaGold Resources president and CEO, said in a telephone interview Jan. 6.

Also on Jan. 6, NovaGold said several other institutional investors agreed to purchase units with the same terms and price as Electrum, adding another $15 million to the financing secured by NovaGold.

"This investment allows us to demonstrate to the market that we can maintain our interest in Donlin Creek and Galore Creek, and we have the option of putting Rock Creek back into operation, providing the economics are there and we can receive workable permits from the government," Van Nieuwenhuyse said.

The equity financing comes at a time when stock prices for junior exploration companies have plummeted, in some cases, much more dramatically than other publicly traded companies suffering from the recent global economic meltdown.

Mining and exploration stocks began falling earlier in 2008, as metal prices began to decline and investor dollars dried up. Among that sector's freefall was NovaGold, which reached a peak price of slightly more than $20 per share in November 2007, shortly before the beginning of a string of negative news from the junior explorer, which is heavily invested in Alaska and northwestern British Columbia.

At its low several weeks ago, NovaGold was trading at about 50 cents per share. Following the news about the Electrum investment, the stock price bounced back to over $2 per share.

"It's a tough market out there and a challenging place to raise money," he said. "Obviously our share price has responded well, which is a good indication that the market liked the deal."

During the last few weeks of 2008, he and other top executives at NovaGold were weighing a number of different options. The company in late November announced financial difficulties and the suspension of operations at the Rock Creek gold mine near Nome.

"We certainly had a variety of financial options thrown at us, most of which were not really palatable for existing shareholders," Van Nieuwenhuyse said. "If anything, we had too many different options to sort through. It took a while to get the kind of financing we're looking for ... we felt that a straight equity deal was the best for the company.

"We had a positive move in the gold price that helped us specifically, as we're so highly leveraged in gold with Donlin Creek. That helped us achieve a financing that would be best for shareholders," he added.

NovaGold's financial woes came to light Nov. 24. Then, the company announced it was seeking additional financing to repay a $20 million bridge loan due Dec. 29, as well as to maintain its cash payments due to its 50-50 partnerships in the Donlin Creek gold project in Southwest Alaska and the Galore Creek project in northwestern British Columbia.

Cash flow from gold produced at Rock Creek was originally planned to help NovaGold fund those ongoing operations. In addition, the company was negotiating with a couple of international banks to put in place a multi-year credit line, Van Nieuwenhuyse said. When the global credit markets seized up, that ended that potential source of financing, he said.

Some unanticipated operational issues at Rock Creek, combined with complications in fully complying with regulatory requirements, resulted in NovaGold's decision to shut down the recently constructed mill and mine.

The mine's workforce, consisting of 150 employees and some remaining contractors on site, were laid off in late November and December. About 20 people currently remain at the mine as part of a security and maintenance team, Van Nieuwenhuyse said.

In mid-December, NovaGold announced it was able to extend the maturity date on the Rock Creek bridge loan to March 13, 2009. Since then, financing secured from Electrum and other investors will allow NovaGold to pay off that bridge loan, and to have funds to reactivate Rock Creek, if warranted.

Two issues must be resolved for Rock Creek to restart gold production: a technical issue with the crushing circuit and the issuance of workable permits to operate the mine, Van Nieuwenhuyse said.

The crusher circuit needs a new piece of equipment that must be barged to Nome, which will have to wait until summer. Testing of the crusher circuit last summer was conducted with waste material, or non-mineralized rock. Ore at Rock Creek contains more clay, resulting in different requirements to pulverize the gold-laden rock, Van Nieuwenhuyse said.

Regulatory oversight must be worked out with state and federal agencies, Van Nieuwenhuyse said.

"We're not pleased with the permitting process and we need to see if we can get workable permits that make sense for kind of operation we've got," he said. "We need to be assured we can operate this mine as it was originally designed and permitted."

He declined to identify specific problems, but said some areas "need to be streamlined," adding that the operator "needs to be given very clear direction about what expectations are for permit requirements, and then to allow us to develop a plan to meet those requirements."

Van Nieuwenhuyse was planning to meet with regulatory agencies in Alaska in January to discuss these issues.

"We hope to arrive at a solution," he said. "We've invested $200 million in this mine, so we have a lot of stick in the game. We want to demonstrate that we can build and operate this mine in Alaska."

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