Page 9 - NG2020AR

if macro factors play out as they can. With the market cap of the entire precious metals sector amounting to not much more than the daily fluctuations in any of the new Nifty Fifty, it will not take much more than the flapping of a butterfly’s wings to cause the miners to revert to their historical golden mean in valuation.
ON TO THE BEST PART
Were I to be even fractionally right on my outlook for the metals, the surge will not be ephemeral. For it will coincide with that perfect storm of supply-demand fundamentals of which I am convinced even more so now, and that ultimately argues for an epic higher revaluation of the metals – and their equitized proxies especially. Moreover, unlike crypto, the miners enjoy some highly favorable differentiators. Here are a few to get the juices flowing and realize why I believe it’s game over for the precious
metals bears:
f Gold is a hard business, literally and figuratively. A new cryptocurrency essentially requires an algorithm – no small feat, of course – but putting aside the benefits to being
a first-mover, a new and improved version of the coin
can always be created if one wills it. Gold is uniform in its chemical composition, what one might call its algorithm. There is only one kind of Au. I do not have to imagine what kind of regulation gold may face that can harm its thriving
– I already know what those scenarios are and can live with the consequences. However, I can be quite sure that many governments are looking at how to manage or even compete with crypto. Suffice to say that, while there exist a multiplicity
DONLIN GOLD’S UPSIDE VALUE WITH HIGHER GOLD PRICES
of cryptocurrencies (and I suspect that the true winners are not even named yet, other than perhaps in Chinese), there is still only one kind of gold and one kind of silver, history’s time-tested monetary metals. And as we all know so well, both are genuinely hard to find and exploit. For once one has bucked the roughly 1,000-10,000:1 odds against finding something new through exploration, it will then take on average 15-25 years to develop, permit, and build the mine itself. As we also appreciate, the industry has not generated new discoveries for years. And grade is plunging – by half over just the last decade. If anything, production is slated to decline for years.
f Let me also remind the reader that gold is not like hydrocarbons, with vast reservoirs or resources ready to be switched on quickly should prices rise, or unlocked simply
by new technologies such as horizontal drilling or fracking. The mining industry does not enjoy the luxury of 3D seismic, and deposits can take decades to go from prospect to mine. Peak gold really is peak gold. Barrick recently estimated that gold production will decline by 5 percent a year for years going forward. I believe that’s about right. If anything, it will likely prove to be a conservative forecast as jurisdictions once thought investible are no longer so, and declining grades mean higher costs with less output. What an incredible story. That’s why I often claim that, as far as supply is concerned, the horse has already left the barn.
f The future market darlings, gold miners – even the majors
– are all pretty much small caps today. Those that remain are healthier than they have been in years. If I am remotely right in my thinking, gold and silver companies that operate in jurisdictions where one is allowed to keep the fruits of
all this leverage will potentially offer the biggest dividend potential in the investment world. And not just for equity investors looking at yield-generating stocks, but also for fixed-income investors looking for alternatives to bonds in the low-yield environment we find ourselves in – and which
is likely to remain in place for the foreseeable future. The dividend streams from precious metals equities should attract a huge wall of yield-seeking money from the fixed-income market, which at the moment wouldn’t see crypto as a viable option. As such, for those who want real leverage to the
New Monetary Theology, the miners deserve a really hard look. The pent-up buying power of that observation is good enough for me. As Michael Oakeshott, the late London School of Economics political philosopher put it so elegantly, “a true conservative is one who prefers...present laughter to
utopian bliss.”
Gold Price US$/oz
$2,500 $2,000 $1,700 $1,500 $1,300
Net Present Value (NPV) (US$ in billions)
NPV at 0%
19.2B
$20.0
NPV at 5%
27.0B
$25.0 $30.0
14.6B 11.6B
$5.0
8.2B
$10.0
$15.0
Donlin Gold estimates as per the Second Updated Feasibility Study, effective November 18, 2011, amended January 20, 2012. All dollar figures are in USD, represent 100% of the project of which NOVAGOLD’s share is 50%, and reflect after-tax net present value (at 0% and 5% discount rates) of the Donlin Gold project using the feasibility study reference date of 1/1/2014 (start of Year -05) as the first year of discounting. Estimated project development costs of approximately $172M to be spent prior to the reference date are treated as sunk costs. At a 5% discount rate, the net present value is: $1,465M @ $1,300 gold; $3,147M @ $1,500 gold; $4,581M @ $1,700 gold; $6,722M @ $2,000 gold; and $10,243M @ $2,500 gold. The project requires a gold price of approximately $902 per ounce to break even on a cash flow basis. See “Cautionary Note Concerning Reserve & Resource Estimates” and “Mineral Reserves & Mineral Resources” and associated information on page 50. Wood Canada Limited (“Wood” formerly AMEC Americas Limited) is currently updating all sections of the Second Updated Feasibility Study with updated costs, economic assessment, permitting information, and technical information related to permitting, generated on the Donlin Gold project since 2011, which is anticipated to be finalized and filed during 2021. Based on that cost review, Wood determined that updating the Second Updated Feasibility Study using 2020 costs and new gold price guidance results in no material change to the mineral resources or mineral reserves. The economic assessment in the updated study may be materially different than in the 2011 study.
CHAIRMAN’S MESSAGE 7