NovaGold (NG)

[New Waters]

NG - NovaGold Appears Poised To Outperform Peer Developing Gold Miners

August 31, 2012 - by Zvi Bar

Since bottoming during the first week of August, shares of Vancouver-based NovaGold Resources (NG) have appreciated by about 25 percent, vastly outperforming the broader gold miner industry as defined by both the Market Vectors Gold Miners ETF (GDX) and the Junior Gold Miners ETF (GDXJ), both of which appreciated by about 11 percent since NG bottomed. See a comparison chart: (click to enlarge)



But over the last several days, NG has begun to decline and considerably moreso than these ETFs comprised of its peers. See a performance comparison chart for the last 10 days: (click to enlarge)



NovaGold may very well be the most contrarian investment amongst gold miners, an industry that is considered by many to be wholly contrarian. Moreover, despite this recent outperformance within August, NG has been one of the worst performing gold miners, even among the non-producing, exploratory miners, though it owns a major interest in one of the largest known untapped domestic claims in the United States.

After a terrible start to 2012, along with its peers, NG suffered a steep selloff when Barrick Gold (ABX), the world's largest gold miner, reported its second quarter's earnings, disappointing Wall Street and indicating that it would lessen its expenses towards non-producing long term operation plans, including the Donlin Gold project in Alaska. Barrick and NovaGold share the mining rights and a joint venture in Donlin Gold. While ABX is a large gold miner, where Donlin is one of its many projects around the world, NG has morphed itself to be a pretty pure play on Donlin. Included in NG's endeavor to focus on the Donlin project, it spun off its copper assets into Nova Copper (NCQ) earlier this year.

Barrick did not disparage the Donlin asset, but instead merely made it clear that Donlin would not be producing for several years. The project is far from the point of production and it will still take about four years for Donlin to obtain the necessary permits before production would be theoretically permissible. It is for this very reason that it is likely that the market is over-reacted to Barrick's statement. The reaction at the end of July is visible on the 3-month chart, below: (click to enlarge)



Based upon Donlin's last geological survey, the site has approximately 39 million ounces of gold resources, but over time the estimated size of the find has increased. NovaGold filed Donlin's feasibility study in mid-January. The scope of the project is massive, carrying a $6.7 billion capital cost that will include an $834 million natural gas pipeline. Plans anticipate that Donlin will have a 27-year mine life and that it will produce 1.5 million ounces of gold per year for the first five years, at a cost of $409 per ounce.

Several large funds hold significant positions in NovaGold, including some of the best-known contrarian investors. One of the reasons NG fell so much in response to the statements out of Barrick may be because several substantial positions are long term holdings. This may have had the affect of creating reduced liquidity and increased volatility, due to the smaller supply of shares available for day-to-day trade between parties.

Major holders include John Paulson's Paulson & Co. held just under 32 million shares of NovaGold, or about 11.4 percent of the company, at the end of the first quarter of 2012. Paulson also increased its stake in NG during the second quarter of 2012 to 35,970,518 shares, or 12.86 percent of the company. Mr. Paulson is well known for betting against subprime mortgages before they collapsed, and buying banks after their collapse, and is largely viewed as a contrarian investor, but his funds have exceptionally underperformed the market in 2011 and so far in 2012.

It is possible that his Paulson & Co. might sustain significant customer redemption requests this year, which may require Paulson to divest itself of some of this position. Alternatively, Paulson may have acquired more NG shares already during the third quarter, or may do so during September. Paulson's funds also combine to hold a multi-billion dollar position in the SPDR Gold Shares ETF (GLD), and has been adding to it over time.

Beyond John Paulson, NovaGold has a few other noteworthy contrarian investors, including Seth Klarman's Baupost Group. Seth Klarman is a highly regarded value investor that has a multi-decade record of outperforming the market and most peer asset managers. Mr. Klarman's investment style has been compared to that of Warren Buffett, to the extent that he usually holds investments for a long time and

Baupost first started acquiring shares of NG in the third quarter of 2011, and has accumulated more shares each subsequent quarter. At the end of Q1, Baupost owned 10 million shares of NG, or about 3.58 percent of the company. Baupost continued to acquire shares of NG during the second quarter and 2012 and reported holding 16 million shares of NG at the end of Q2, or 5.72 percent of the company. Given Baupost's prior accumulation, it appears probable that the fund will acquire more shares this quarter, and at a lower. Based on the timing of the investments, Baupost likely paid an average price of 30-40 percent more per share than the price at which they now trade.

Other large holders of NovaGold include Tocqueville Asset Management, a contrarian investment advisory firm founded by François D. Sicart in 1985. Tocqueville holds several gold miner investments and last reported holding 5,575,390 shares in NG or about 1.99 percent of the company at the end of Q2, an increase of 378,250 shares from the end of Q1. Tocqueville's gold fund holds about three quarters of the asset manager's total position in NG, or about 1.51 percent of the company.

Another large holder of NG is Fidelity's Contrafund, a mutual fund powerhouse with assets totaling over $82 billion and managed by William Danoff since 1990. Though a somewhat small position in the enormity of the Contrafund, the fund last reported holding 9,640,577 shares of NG, or about 3.45 percent of the company.

Barrick Gold tried to acquire NovaGold a few years ago. On July 24, 2006, Barrick made an unsolicited bid for NovaGold Resources, valuing NG at $1.29 billion, which NG quickly insisted was undervaluing the assets. Barrick simultaneously made a bid for Pioneer Metals, a smaller miner with assets adjacent to several of NovaGold's, which Barrick acquired. In many ways, NG was aggravating to ABX, which may now be intentionally aggravating NG and/or possibly persuading the company to sell itself to ABX.

Despite substantially increasing during August, it appears that NovaGold remains one of the markets least respected developing gold investments, both on the domestic and international scene. Further, many highly regarded investors continue to accumulate large positions in NG. If gold and miners can sustain their current levels or rise, it appears that NovaGold should continue to catch up to the group and that NG has a strong potential to outperform most of its exploratory miner peers through the end of 2012.

Disclosure: I am long NG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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