Page 13 - NG_2018-AR.indd

case with all investments, but it pretty much sums up my attitude when I like what management is doing, the projects are diligently making their way up the value chain, and no evidence exists to contradict my thesis on the investment.
If anything, in the case of NOVAGOLD, my sentiment has been mightily reinforced by the state of the gold industry. Let’s review some of the reasons why:
f Over the last decade, the average grade of gold mines has collapsed by half – and I suspect that it will fall below a gram per tonne. Donlin is multiples of that. So much for the quality (and hence lower operating cost) side of the equation.
f During the same period, there have been fewer gold discoveries of any size (by that I mean more than
5 million ounces) than in recent memory. Donlin Gold has 6 million ounces of inferred mineral resources!* Unlike with hydrocarbons, the mining industry doesn’t possess tools such as 3D seismic. If a discovery is to be made, it’s usually by prospectors on donkeys (or perhaps only slightly more likely now, 4-wheel drives). And if those 1,000:1-10,000:1 odds are successfully bucked, it could take 20-plus years to take the project up the value chain from discovery to first pour.
f It is thus no accident that megamergers are happening in the gold space. Whether it’s Barrick with Randgold or, most recently, Newmont and Goldcorp, the big guys simply have no choice but to merge and buy assets. They don’t necessarily want to; they have to. With no real discoveries of size and the years if not decades it takes to put them into reserves, the majors are burning through their reserves faster than they can replace them. Unlike with peak oil, the peak gold that Goldcorp’s Chairman, Ian Telfer, has spoken about is not an illusion. The gold industry has none of the variables that have so rocked the hydrocarbon markets. No new technologies have emerged, such as fracking or horizontal drilling, to effect game-changing productivity. Even if there were, it wouldn’t matter: There are simply no known vast shale-like resources to be tapped. In many ways, the horse has not only already left the barn, the barn door has been closed.
f Jurisdictional risk has gone from being regarded as an occasional nuisance to an existential threat. Were I to name the jurisdictions that have been struck off my investible list, it would hurt to hear it. Projects that were slated to go on line won’t – and some that did have been subjected to mine closure due to social disruption or political fiat. Where allowed to continue, some companies have been extorted (at times
with the threat of violence) out of most, if not all, of the financial rewards due to them for their risk-taking and value enhancement – what I call “stealth nationalization.” In an increasing number of places, the brazenness of the confiscatory policies is such that “stealth” would constitute a charming euphemism. Because it is politically impossible for neighboring countries to hold an investor-friendly line, there will assuredly be more such offences in the future. This wave, after all, is occurring during relatively good times. As I have come to know most of our investors and consider them kindred spirits, I feel compelled to share yet another dire observation – posed as a question: What are the odds that the governments of gold-producing countries – which are often dependent on the price of multiple raw materials – will let the precious metals miners keep the windfall that may come if we have another severe economic crisis and gold powers higher while most commodities collapse? It’s not so difficult to imagine. That dichotomy actually happened during the last financial crisis. Gold – a currency – held its own or went up while much more economically sensitive commodities fell.
f While miners can’t find gold, and governments are continually seeking for ways to debase their currencies, central banks themselves have reportedly gone from sellers of gold to net buyers. As what was for decades a source of supply has reversed to become a new source of demand, this pivot by the official sector is momentous. Central bankers, quite cognizant of the fragility of their paper reserves, are less likely to sell when gold prices resume their long-term uptrend. Human nature is to not take a career risk in a rising price environment. If anything, it’s to add more. This is especially so as the People’s Bank of China continues to buy. The uncharted waters in which monetary and now fiscal policy have veered make for fascinating scenarios. Consider this to be but one of the dozens of black swans darkening our skies.
* Donlin Gold project estimates as per the second updated feasibility study effective November 18, 2011 and amended January 20, 2012. Represents 100% of inferred mineral resources, of which NOVAGOLD’s share represents 50%. Inferred mineral resources total 92.2M tonnes grading 2.02 g/t Au. See “Cautionary Note Concerning Reserve & Resource Estimates” on page 39.
11