NovaGold NG.TO says 1.5 million ounces/gold per year from Donlin!

One of the first thing any keen students of the market and investing should do is pick up the financial sections of the paper.

On Financial Post today we see a famous Canadian exploration company turned production - NovaGold (NG.TO on Toronto Stock Exchange TSX)

NovaGold says Donlin could yield 1.5M oz a year

http://www.financialpost.com/trading_desk/mining/story.html?id=577654

Let's take a second and absorb this. What's gold price today (refer to Kitco.com) - $870/ounce. (rounded up to make calculations easier...)


At 1,500,000 ounces that will be = 1,500,000 x 870/ounce =
$1,305,000,000

That's a lot of zeroes, no? What's the market cap of Novagold again? To find out we can check some of the popular sources for financial news and punch in NG.TO in the quote section.

Yahoo Finance
http://finance.yahoo.com/

Stockwatch
http://www.stockwatch.com

So for today NG closed at $7.75 and Yahoo!'s slightly outdated Market Cap provided us with $817 Million market cap.

Resource estimates will also have economic and feasibility studies as part of it - usually done as $/ounce (so to make comparisons easier when given gold prices per ounce).

For example if it costs them $200/ounce in terms of production cost (mine building, labor, transportation, etc) and gold sells for $870/ounce... that's a clean $670/ounce profit! It shouldn't take a rocket scientist to figure out that this is a good investment!

Now that NG has stated it wants to produce 1.5 Million ounces a year... how much gold is in them mines... it doesn't mean much if it only lasts a year right? Now we are asking for reserves numbers (or estimations)

Let's take a look at their recent news further.
http://finance.yahoo.com/marketupdate/inplay#ng

9:16AM NovaGold Resources announces feasibility study in Q1-2009 for Donlin Creek project; estimates 31.7 mln ounces of measured and indicated gold resources (NG) 8.60 : Co announces an update on the Donlin Creek gold project, including initial assay results from 2008 drilling, a resource estimate incorporating the remainder of 2007 drilling, and the decision that a feasibility study will be completed and approved by Q1-2009. The highlights include: Resource update estimates 31.7 mln ounces of measured and indicated gold resources with an additional 4.2 mln ounces of inferred gold resources; Initial drill results at East Acma highlight continued resource expansion; Preferred project design identified - feasibility study to be completed and approved by 1Q09.

Read the part in red carefully. That's 31.7 Million ounces measured Gold.

If you're an industry major (Barrick, Kinross, etc) that has a much larger market cap than NovaGold, this would be a great time to pull out the calculator and see how much premium it will cost you to buy NG out.

Doing the same simple calculation and assuming the measured reserve is correct (confidence level to be discussed later)

31,700,000 ounces gold at $870/ounce = $27,579,000,000
Compared to a market cap of only $817,000,000 Million, one would definitely say NovaGold is undervalued, wouldn't you?

The current market cap is less than 3% of the value of the gold estimated!! Not to mention NovaGold has several other projects like Shotgun near the infamous Pebble deposit! (largest gold-copper-porphyry in world - billions of ounces!!) Keep in mind This is gold that is converted to bullion that keeps the value and doesn't devalue like paper currency!



As you can see, the casefor juniors small-caps and micro-caps is definitely growing stronger by the day. It's this author's honest opinion that this severe lag of spiking commodity prices + declining reserves by the majors will only mean an eventual surge of buyouts (at a healthy premium to investors who took the initial risk)


Comments / criticisms - always welcomed.