July 29, 2011 / 1:37 PM / in 7 years

Novagold's Galore Creek study fails to impress

* Analysts concerned by higher cost projections on project

* Co says its assets are being undervalued by the market

* Co hires JPMorgan, RBC to help bridge the valuation gap (All figures in U.S. dollars, unless noted)

TORONTO, July 29 (Reuters) - Novagold’s (NG.TO) preliminary study on its Galore Creek copper-gold-silver project in British Columbia has raised concerns among analysts about increased cost projections and delays.

The project, jointly owned by Novagold and Teck Resources TCKb.TO, could become one of the largest copper mines in North America, but the prefeasibility study indicates that building the mine will cost $5.2 billion, or about 20 percent more than some prior estimates.

The study, released earlier this week, also indicates that commercial production from the project is unlikely to begin before late 2017, or early 2018.

“We have adjusted our model for the increased capex and the later production start date,” said Dahlman Rose & Co analyst Adam Graf in a note to clients. “We had previously modeled for production to ramp up in 2016.”

Galore Creek is projected to produce more than 320 million pounds of copper annually, more than 200,000 ounces of gold and more than 3 million ounces of silver over a 18-year mine life.

National Bank analyst Paolo Lostritto noted that while the proposed plant size at Galore Creek is in line with his own expectations, the reserves have been trimmed to focus on higher grades.

“The higher-than-expected capital costs have negative implications for other remote mega-projects currently being considered and reinforces our view that companies which have successfully locked in capital costs during 2008 to 2010 stand to benefit,” said Lostritto in a note to clients.

While the new study highlights the potential of the project, analysts say it also indicates that much more work needs to be done before a final construction decision is made.

Novagold, which also owns the Ambler copper-zinc-gold project in Alaska and a stake in the massive Donlin Creek gold project in Alaska, believes that its assets are being undervalued by the market.

The company said it has hired JPMorgan Securities and RBC Capital Markets to identify and explore various alternatives to help bridge the perceived valuation gap.


Novagold is just one of many Canadian miners that are now forecasting huge jumps in capital expenditure costs. In this week alone, Barrick Gold (ABX.TO), Goldcorp (G.TO) and Agnico Eagle (AEM.TO) warned that higher capital expenditures are becoming a growing concern. [ID:nN1E76R019]

Barrick said on Thursday it expects capital costs for its Pascua Lama project on the border of Chile and Argentina to be between $4.7 billion and $5 billion. The midpoint of this range is 40 percent higher than Barrick’s earlier estimate.

Goldcorp, which is partnering with Barrick on the Pueblo Viejo project in the Dominican Republic, said on Wednesday that the capital cost of the project is expected to rise nearly 10 percent to between $3.6 billion and $3.8 billion. [ID:nN1E76Q1O3]

“This rise in capital expenditures is definitely a trend we are seeing from all the miners that have reported so far,” said Morningstar analyst Joung Park, discussing the cost increases that gold miner Agnico outlined in its results announcement on Wednesday. [ID:nN1E76Q1YM] (Reporting by Euan Rocha; Editing by Frank McGurty)

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