How Much Metal Do NovaGold Resources and Seabridge Gold Have_ - Barron's.pdf

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There's (Possibly) Gold in Them Thar HillsJunior mining outfits such as NovaGold and Seabridge have rallied even more than the price of gold. But they're good investments only iftheir estimates of their gold resources and the cost of extraction prove out.

Updated Feb. 15, 2010 12:01 a.m. ET

Table: Precarious Balancing Act

GOLD PRICES HAVE TREBLED IN RECENT YEARS. The big returns, however, have

been in little gold stocks -- exploration outfits known as "juniors." These are the

ever-hopeful speculations built upon the drill cores and inferences of a small number of

hired geologists. During gold's ascent to $1,218 an ounce, for example, shares of major

producers like Newmont Mining (ticker: NEM) went nowhere. But the stocks of two of

the biggest juniors, NovaGold Resources (NG) and Seabridge Gold (SA), rocketed

tenfold to valuations of about $1 billion apiece, as the companies' consultants expanded

their estimates of the quantity of gold hidden underground.

Unburdened by gold sales or profits, the

billion-dollar valuations of stocks like

NovaGold and Seabridge depend mainlyon how many million ounces of gold the

companies think lie in their properties. And

that tally comes from the technical experts

who extrapolate from drilling samples to

estimate the unseen gold resource and its

recovery cost.

Seabridge and NovaGold have used some

of the same key experts to support their estimates. When junior miners' resource and

cost estimates have proven overly optimistic in the past, they've buried shareholders.

That's the lesson NovaGold investors learned in November 2007, when the company

lost half its share value in a day, as it retracted the experts' estimates of what could be

profitably mined at a gold project called Galore Creek. Two of the lead experts in that

NovaGold disaster are now consulting for Seabridge.

Bulls argue that Seabridge and NovaGold look cheap at respective share prices of 25

and 6, which represent about $14 and $49 for each ounce of gold the companies claim

they've got underground. Other junior gold explorers have been acquired by gold

majors at upward of $100 an ounce.

But NovaGold and Seabridge are bargains only if the gold estimates prove out. The

gold industry's recent decades have featured many disappointments in ore grade,

tonnage and processing cost. At Seabridge and NovaGold, the track records of

important technical experts, managers and controlling shareholders raise worries about

whether the mines will meet expectations.

"It is very difficult to make precise

Martin Kozlowski for Barron's

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estimates," concedes Michael J. Lechner, the geologist who certified the since-revised

timate for NovaGold's Galore Creek and who now oversees the audit of

Seabridge's gold estimates.

"It isn't like counting washers in a jar," allows Lechner, who has consulted for successful

majors like Barrick Gold (ABX) as well as for disappointments like Esperanza Silver

(ESPZF) and GLR Resources (GLRAF), which haven't delivered the bonanzas

suggested by his resource estimates. "It is subjective as all get-out," he says.

Forecasting the costs of Seabridge's mine is James H. Gray, the consultant who signed

off on NovaGold's disavowed estimates of Galore Creek gold reserves and mining

costs. Gray's firm has worked for big outfits like Teck Resources (TCK) and penny-stock

juniors like Canarc Resource (CRCUF). In November, the British Columbia Securities

Commission told Canarc that Gray's economic assessment report failed to comply with

Canadian disclosure standards. "The work that we do are estimates," Gray says.

"That's it."

GOLD MINERS ATTRACT INVESTORS as leveraged plays on the metal, because

company profits can rise faster than the commodity's price, once fixed costs are

covered. And gold has risen fabulously for reasons that most readers know: smaller

mined supply, government deficits, financial turmoil. For a 40-year stretch that ended

fairly recently, central bankers were selling gold reserves. But now bankers of Asia's

developing economies want to diversify their sovereign reserves away from U.S.

Treasuries, says Albert Friedberg, a currency and commodities expert often quoted in

Barron's over the years. The prospect of China and India boosting their gold reserves is

what inspired the Toronto-based hedge-fund manager to take a controlling stake in

Seabridge, with 23% of Seabridge shares now held by Friedberg's family-owned firms.

"Sovereign buying is the one single bullish case for gold," Friedberg says. "That's the

bid under the market and it's going to be there permanently."

Supply-demand imbalances and economic turbulence have created a "perfect s torm"

that won't soon abate, says William Natbony, the chief executive at Electrum Strategic

Resources, a vehicle of investor Thomas S. Kaplan. Electrum controls NovaGold with a

28% stake and warrants for 14% more.

Since 1998, NovaGold has assembled a handful of properties in Alaska and Canada

with promising deposits of copper, silver and gold. NovaGold shares were

recommended by pundit Marc Faber at the recent Barron's Roundtable ("A Few Good

Ideas," Jan. 25). The Vancouver, British Columbia-based company has interests in two

of the world's largest undeveloped gold resources: Galore Creek, a remote mountain

spot in northwest British Columbia, and Donlin Creek, in southwest Alaska.

"We are feeling very good about our future," says Chief Executive Rick Van

Nieuwenhuyse. Soon after raising $165 million in a 2006 stock offering, NovaGold

found itself the target of a hostile tender offer by Barrick Gold. In urging shareholders to

reject Barrick's $1.5 billion bid, NovaGold released a technical report assembled by the

engineering firm Hatch Ltd., which said the Galore Creek project was worth almost $14

billion -- promising 17 million ounces of gold, 19 billion pounds of copper and 270

million ounces of silver after a total capital cost of $1.9 billion. Those metal tallies were

endorsed by the experts Lechner and Gray (both brought in through Hatch), with Gray

also blessing the cost estimate. Shareholders rejected Barrick's $16 a share bid.

Touting the forecasts, NovaGold conducted another stock offering for $194 million and

secured Teck Resources as Galore Creek's partner.

Six months after Teck jumped

into Galore Creek, the two

companies said they were

suspending work on the

project. The prior year's

engineering report was "not to

be relied upon," according

NovaGold's securities filings.

A new team of experts

estimated that the project

would cost $4.4 billion -- more

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The Bottom Line

Shares of NovaGold Resources and Seabridge

Gold could be vulnerable if the companies don't

eventually meet their experts' estimates of their

gold resources.

than double what NovaGold

had been advertising. The 17

million ounces of gold now

looked more like 11 million,

none of it recoverable at a

profit. In a day, NovaGold

shares fell from 20 to 9.

Ensuing class-action lawsuits alleged that Van Nieuwenhuyse and his NovaGold

colleagues had concealed Galore Creek's spiraling costs in order to sell stock, fight off

a Barrick takeover and hook Teck as a partner. In Manhattan's federal distr ict court lastJune, Judge Denise Cote dismissed the engineering report's authors from the fraud

suit, noting that experts clearly warn that their forecasts are estimates. But the judge is

allowing a trial on whether NovaGold's management misled investors about Galore

Creek's economics. The NovaGold defendants say they acted in good faith and made

no material misstatements. Lechner and Gray were not sued. Each says his work on

Galore Creek hasn't been questioned.

With the subsequent rise in gold's price, NovaGold and Teck are working on a new

mining plan that they hope to complete near the end of the first quarter.

NovaGold settled its differences with Barrick and they agreed to a 50/50 partnership on

Donlin Creek. NovaGold estimates its half-interest at 20 million ounces of gold.

NovaGold's experts certified 15 million of those ounces as "reserves," which means

they are profitably 'mineable,' in the parlance of Canadian disclosure rules. The

remaining five million ounces were "resources," a category for less densely sampled

minerals whose economics -- or existence -- are less certain.

But Barrick's resource estimates for Donlin Creek are different. The miner shows none

of the Donlin Creek gold as mineable reserves, instead putting its 20 million ounces in

the less bankable category of resources. Asked about the discrepant presentations,

Van Nieuwenhuyse says, "What's material to NovaGold is different from what's material

to Barrick." At Barrick, spokesman Vince Borg says, "We are conservative in reporting

reserves."

NovaGold's fans are undeterred by the Galore Creek mishap. "Management made its

errors and learned from its errors," says Natbony, who acts as a spokesman for investor

Kaplan, a boldface name in New York's society pages who heads the board of the 92nd

Street Y, a well-known cultural institution. "We have taken a very close look at Donlin

Creek," says Natbony. "Our conclusion is that the resources are accurately described

and the potential for discovering additional resources is tremendous."

Kaplan's firm acquired its controlling stake in NovaGold about a year ago. Natbony says

his boss has a proven skill in natural-resource investing. Among Kaplan's big

successes, says Natbony, were Apex Silver -- a miner that Kaplan promoted into a

billion-dollar market cap -- and Leor Energy, a natural-gas venture that Kaplan sold to

EnCana (ECA) a couple of years ago for $2.5 billion.

Apex Silver collapsed from its billion-dollar

height after consuming $740 million from

investors, without producing a profit. By

January 2009, it was in bankruptcy court.

After receiving lavish compensation as

CEO from 1996 to 2002 and boardchairman through 2004 -- as Apex cumulatively lost almost $100 million -- Kaplan

stepped down before the implosion. The successor firm to Apex, called Golden

Minerals, says the Justice Department is investigating bribes that the company admits

were paid in 2003 and 2004 to government officials in South America. The SEC warned

the company last year that the agency plans an antifraud suit over the matter. Barron's

asked repeatedly to speak with Kaplan, without success. Natbony says that Apex's

financial problems arose after Kaplan left and that no action has been brought against

Apex officers.

Kaplan's Leor Energy bonanza is itself the subject of lawsuits in which his nephew,

Guma Aguiar, alleges that Kaplan and attorney Natbony swindled Aguiar out of his

half-interest in the venture; while Kaplan alleges that Aguiar committed embezzlement.


12-06-2016 1



Natbony says the dispute will be decided in Kaplan's favor.

Gold has gotten major companies like Barrick and Teck to venture on

projects, Seabridge Gold has no partner yet for its KSM gold project on British

Columbia's border. The KSM deposit holds almost 50 million ounces of gold, according

to the technical reports of Lechner. None of the deposit has been classified as reserves.

Seabridge Chief Executive Rudi Fronk says his Toronto company is developing

estimates of mining costs -- with the help of Gray, also a Seabridge consultant -- to

merit moving some of those ounces from resources to reserves.

"The largest guys would rather buy reserves," Fronk says. "Especially if you have the

right technical people making the estimate." Lechner is the right person, says Fronk,

claiming that when Barrick wants an outsider to audit its resource estimates it hires

Lechner. Barrick spokesman Borg confirmed that the miner used Lechner at times in

the past. "But the fundamental question in assessing a project," says Borg, "is whether

it's economic or not."

Seabridge has never mined an ounce of metal; it would rather spend its cash to acquire

and explore mineral claims. Fronk says he developed this philosophy after he ran a

Central American miner called Greenstone Resources in the 1990s. Fronk touted

Greenstone to a billion-dollar market cap and raised $300 million in financing on

promises of seven million ounces in gold reserves and 600,000 ounces in annual

production. Within a year and half of Fronk's announcement of a "super" mine,

Greenstone collapsed. Fronk blames a hurricane, a drop in gold prices and

expropriation by the Honduran government.

Friedberg, Seabridge's controlling shareholder, says his investment was a "top-down"

bet on gold. "I know as much about mining as you do," the hedge-fund manager tells a

reporter. "I am really a commodities person."

The folks involved with Seabridge might not have sold any gold yet, but they've sold

stock. SEC filings show that Friedberg's hedge fund sold a half-million shares in the

past few months, at prices averaging above 25 bucks a share. Friedberg says he did it

for ethical reasons, after concluding that his hedge fund shouldn't trade a stock in which

he has a large personal holding. Fronk and other Seabridge insiders also have taken

$36 million off the table through stock sales in the past four years. The Seabridge chief

defends these transactions by saying he regrets not having sold stock before

Greenstone collapsed.

Seabridge recently filed a shelf registration to raise $100 million, while NovaGold's filedto raise $500 million. These filings might signal that the junior miners don't soon expect

cash infusions from a big firm. For that, they need to move more ounces of gold -- on

paper, at least -- from the resource to reserve category.

Geostatistician Mike Lechner says such classifications are highly subjective, and he

retells an industry joke in which a mine manager asks employees to add 2 plus 2. The

geologist answers, "It's a number between 3 and 5." The engineer says, "4.000."

The geostatistician closes the door and asks, "What do you want it to be?"

E-mail comments to [email protected]

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1 PERSON LISTENING

Feb 15, 2010J. Calby

Some additional good info (some several year old more background type material) on these two companies

neither which I am long nor short or ever have been can be found under company profile section via John

Kaiser's subscription based Bottom Fishing Report http://www.bottomfish.com

I am long Copper Canyon, CPY.V via Eagle Plains spinoff, which in my opinion is far more speculative than

NG.T who has a jv with NovaGold @ Galore Creek, respect NovaGold's management for being tough,

hanging in their through some very rough times when many would walk away, they stood their ground,

fought hard to get where they are, and am patiently waiting their first or second quarter report re Galore

Creek as are many others.

I was long and made nice money from Pioneer/UEX which Pioneer held the Grace claims with NG.T aftertime, trouble, and expense did get from Barrick Gold in 2007.

Putting a Mine in actual production is not easy work, its not flipping hamburgers @ McDonald's, and if

Galore Creek could get into production it might create a lot of jobs for British Columbia.

We shall see...

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