Legal and Ethical Actions of NovaGold Resources Inc - Term Paper Example

 Legal and Ethical Actions of NovaGold Resources Inc NovaGold is a company doing exploration activities in the field of precious metals and necessary development of mineral properties in Alaska, Canada, British Columbia and the United States. The Company spearheads its operations through wholly owned subsidiaries, partnerships and joint ventures. On January 8, 2009, the Company sold its holdings in Alexco Resource Corp. On January 7, 2010, NovaGold and its wholly owned subsidiary, Alaska Gold Company, took over the Ambler property in northern Alaska. Legal and Ethical Actions The Company was facing a class action lawsuit in the district court of New York for violation of security laws. Similar class action lawsuits were also filed in the Supreme Court of British Columbia and in the Ontario Superior Court of justice in Canada. The $28.0 million settlement was covered by insurance companies and the company did not have to payout from own resources under the terms and conditions. (Marketwire 2011) NovaGold commenced environmental studies in 1996, which consisted of Meteorology, wetlands delineation related to mineral resource estimates, aquatic studies in the main drainages, water quality studies, and some waste rock characterization. This was further expanded to terrestrial wildlife and avian surveys, detailed aquatic studies, ambient air monitoring and cultural site surveys. NovaGold is equipped fully to overcome any challenges, even though it may require more time and with the progress of work, it will start showing in the share price. NovaGold clearly understand its community responsibilities and following all environmental norms would work to get all necessary permits to make the project most successful and only one of its kind in the world. (Safehaven 2010) Stocks of NovaGold are traded on NASDAQ, AMEX, and New York Stock Exchange. Revenue and Income From the latest results available for the year ended Nov 30, 2010 of NovaGold Resources Inc., it is seen that revenue has fallen to C$0.6M. Surprisingly, cost of goods sold has not gone down proportionately and it has remained at C$46.3M. Losses have gone up to the tune of C$-203.5M. (NovaGold Financials 2010) Basic Financial Ratios & Industrial Comparison Return on Assets: Net Income/ Total Assets stands negative at -5.17%, on industrial comparison it stands as 60-80th percentile. A. Return on Capital: Given as after-tax operating income by the book value of invested capital and that comes to -5.55%, on industrial comparison it stands as 60-80th percentile. B. Return on Equity: Net Income/Shareholder's Equity stands at -34.48%, on industrial comparison it stands as 40-60th percentile. Credit Ratios: A. Current Ratio: given by Current Assets/Current Liabilities stands at 5.3 times; on industrial comparison it stands as 60-80th percentile. B. Quick Ratio: given as Current Assets-Inventory/Current Liabilities stands at 5.1 times; on industrial comparison it stands as 60-80th percentile. Margin Ratios: A. Gross Margin: given as Revenue-Cost of goods sold/Revenue that stands at -7631.22%, on industrial comparison it stands as 0-20th percentile. B. EBITDA Margin: -9295.16%, on industrial comparison it stands as 0-20th percentile. Debt-Equity Ratio: Total Debt/ Total Equity stands at 20.5, on industrial comparison it stands as 60-80th percentile. Total Liabilities/Total Assets: 23.8, on industrial comparison it stands as 60-80th percentile. (NovaGold Resources) Sales Forecast: NovaGold is a company doing exploration activities in the field of precious metals and necessary development of mineral properties in Alaska, Canada, British Columbia and the United States. The Company spearheads its operations through wholly owned subsidiaries, partnerships and joint ventures. The company has prominent projects in Donlin Creek, and Galore Creek. It has also Ambler copper-gold-silver deposit. NovaGold’s mines are situated in Alaska, and British Columbia, a region known for government support to harness its mining potentials. The Donlin Creek The Donlin Creek mine, which is going to be a flagship mine and is likely to be only of its kind worldwide that, is capable of producing more than a million ounces of gold per year. Donlin Creek mine is jointly owned by NovaGold and Barrick Gold on a 50/50 basis. NovaGold carried out the feasibility study in April 2009 to assess the production and economic estimates from the Donlin Creek asset. Reserve base is estimated at 33.6 million ounce. The mine life is estimated approximately 25 years. Gold production is expected to average around 1.5 million ounces. This is likely to make Donlin Creek as most promising gold producing mines in the world. This is likely to come into production once permits are received. The feasibility study was done when ruling international price of gold was $825/ounce. The aim of the company management is to use natural gas to reduce operating costs. The feasibility work will get completed by the second half of 2011. Based on this, board will submit a permit application incorporating natural gas that will eliminate diesel as a fuel. The board of the company will then allocate fresh budget for the construction. (Gold Stocks Daily) Galore Creek This is one of the world's most promising and largest copper-gold-silver deposits. It has highest grade gold silver deposits. NovaGold and Teck Resources each have an equal interest in the project. Ever since NovaGold initiated the project of Galore Creek, it received a support from local communities, British Columbia, and Alaska Government. NovaGold received the Environmental Assessment Certificate in February 2007, and after they received the federal and local authorizations, the construction work went ahead smoothly; however, owing to increased capital expenditures construction activities was suspended and Board initiated optimization studies to find out some alternative strategies for the project. With buoyancy in gold and copper markets, NovaGold and its partner Teck are reviewing more aggressive strategies after having optimization studies which ask for modified approaches to the project allowing a shorter construction and relocation of the facilities along the access road to have easier construction and thus lowering the risks associated with construction and operations. Some of the actions aim at following. 1. There is a planned 40% increase in throughput from the original design. 2. Tunnel and access road are being realigned. 3. The processing facility is being realigned to allow for the future expansion Prefeasibility study will finish by the second quarter of 2011. Outlook NovaGold is currently focused on Donlin Creek and Galore Creek properties. The company is organizing and completing the feasibility study to install natural gas pipe line, and preparing for the permit requests for the project. Primary power source of the project will be natural gas rather than diesel and will be updating capital requirements and cash flow estimates. The feasibility study will get completed in the second half of 2011 and accordingly, Donlin Creek LLC will be proceeding to submit permit applications for the project. (Safehaven 2010) Expected Return Donlin Creek Project The project is likely to provide Gold production of about 1.5 million ounces per year at an average cost of $444/oz. Total gold recovery is likely to be 89.5% through the various processes of crushing, and milling. These processes are further followed by flotation, and pressure oxidation. Average annual cash flow: Base $1000/oz First 5 years: 944 M First 10 years: 805M Average annual Cash Flow Cash flow in $M First Full 5 years 944 Cumulative Net Cash Flow After-Tax undiscounted 5,876 IRR Pre-tax in % 12.3 IRR After-tax in 10.2 Payback 5 years Source: Donlin Creek Feasibility Study Donlin Creek has yet not commenced construction. NovaGold and Barrick are exploring the ways to cut down on cost. Capital Structure: NovaGold’s authorized share capital is 1,000,000,000 common shares and 10,000,000 preferred shares. The company’s long term debt is within normalcy and stands at $120M. Current Valuation The estimated yearly production of gold to the tune of 2.5 million ounces could get a market cap of 35 billion US dollar based on the present valuation of $1400/ounce. The market cap of NovaGold currently is only $3.3 billion US dollar. NovaGold doesn’t have any operations; however, there are some important statistics: Presently, the company has 233 million shares outstanding; The company’s debt stands at $120 million; and the company has $152 million in cash (Gold Stocks daily) Dividend: In absence of any surplus and no operations, the company has refrained from declaring any dividend. It is unlikely that the company will declare any dividend until company’s operations are in full swing. Shareholders of the company will have to wait for a couple of years for a maiden dividend. Valuation of the NovaGold Stock: The company has not yet commenced any operations and therefore no model of stock valuation can be applied. The only model that can be applied is based on expected future cash flows based on current price of gold, which is ruling at $1400/ounce and available reserves in company’s dominant site namely Donlin Creek and Galore Creek. Conclusion: Uncertainty on environmental clearance is definitely a big issue and likely to take considerable time. The silver lining or for that matter gold lining to the company is rising prices of gold, silver and copper. If the company can reduce the construction cost of the mines, get all environmental clearance by the end of this year then project offers huge promise to the shareholders; however, currently, the company is passing through a lot of uncertainties for many analysts are of the view that company is unlikely to get required environmental clearance. NovaGold has always been banking on Donlin Creek project and construction cost is huge to the tune of $4-$5 billion. It will be an uphill task to finance such a big project. As an option, they can also be sold off to Barrick Gold and as for another option the company board may think of further expansion of equity with debt to finance the construction of Donlin Creek. In that event, stock of NovaGold will have down ward pressure and so stock does not offer any immediate promise for investment and it will be better to wait for further development with regard to environmental clearance and feasibility study that is likely to be available by second quarter of 2011. References: 1. Marketwire 2011. 27 March 2011 http://www.marketwire.com/press-release/NovaGold-Year-end-Financial-Results-and-Projects-Update-TSX-NG-1400036.htm 2. Safehaven 2010. 27 March 2011 http://www.safehaven.com/article/19028/novagold-resources 3. Business week 2011 27 March 2011 http://investing.businessweek.com/businessweek/research/stocks/financials/ratios.asp?ticker=NG:CN 4. Donlin Creek Feasibility Study 2009. 27 March 2011 http://www.novagold.com/section.asp?pageid=11071 5. Gold Stocks Daily 2010. 27 March 2011 http://goldstocksdaily.com/2010/06/15/novagold/ 6. NovaGold Financials 2010. 27 March 2011 http://www.novagold.com/upload/financials/NovaGold_Q4-2010FinancialsMDA.pdf Read More