Almost as soon as I posted my update to our teaser solution about Stephen Leeb’s big copper pitch last week, the questions started coming in about his other mining ad that’s been popping up with gold’s rise — the ad is for The Complete Investor, his entry-level newsletter over at Investing Daily ($39/yr), and the ad starts out with that “tiny $9 comany” headline and a pretty photo of a creek flowing through a misty valley.
And of that photo, Leeb says that…
“The Amazing Discovery Behind This Hill Could Be Worth $100 Billion….
“And early investors in the tiny $9 company that holds the key to unearthing it could see their stake surge by as much as 20-times.”
So what’s the “tiny $9 company?” That’s what we’ll endeavor to find out, time to take a wee look at the clues…
“Now, to most people, this just looks like any old tree-covered hill.
“However, there’s something currently hidden from view behind this hill and beneath the forest floor…
“A massive mineral deposit.
“Possibly, one of the largest ever discovered.”
OK, so some kind of big gold discovery. What else? Here’s a little more from the ad:
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“… why hasn’t it been dug up?
“And why aren’t there giant excavators and rock trucks swarming all over it?
“Well, first, it’s located just below the Arctic Circle.
“That means much of the ground lies frozen almost year-round… and it has remained so for centuries.
“Second, and more importantly…
“The location of this massive treasure trove has been so cold, that few people have been willing – or able – to live near this remote location year-round.
“In fact, some days the temperature drops to -37 degrees.”
And apparently the shifting climate is going to open this deposit up, and make it easier to get this mine developed. In Leeb’s words:
“Warming Temperatures and Melting Ice Here Could Hand You LIFE-CHANGING Profits….
“… right now, the latest geological estimates are that there are over 33 million ounces – just waiting to be unearthed.
That’s over 1,000 TONS of gold….
“that’s over 1/3rd of all the gold that was mined throughout the entire world last year.”
OK, so comparing “possible reserves in the ground” to “how much gold was produced” is not terribly useful… but I guess it gives some perspective. And no, I should not have used the word “reserves” there, that word is reserved for gold that has meen identified through drilling and is very likely to be not just available underground to be dug up, but economically viable to produce. Before you define your reserves you start with a “resource,” which doesn’t care about the economics and just tries to estimate with some precision how much gold is there… and before you have resources you have “a little guessing fueled by initial drilling results.”
Which are we dealing with here? They don’t say, so let’s see what other clues we get…
“One of these factors I pay very close attention to is the executives who are running the show.
“From what I’ve seen – the management team running the miner that’s sitting on the ‘mother lode’ of gold deposits – is one of the best I’ve seen in this sector of the market.”
OK, so what hints does he drop about that management team?
“… the billionaire executive that’s getting this massive mineral deposit ready to be mined has a track record second to none….
“He and his team discovered and financed one of the largest deposits of silver and zinc in the world.
“He founded a natural gas exploration company that became the fastest-growing privately held hydrocarbon exploration and production company in the US.
“And today, he currently holds significant financial interests in the companies that own several of the largest proven gold deposits in the world.”
And they try to make this idea seem urgent…
“As I write this, the stock price is hovering right around $9.
“But I suspect it won’t be for long…
“As gold prices rise, investors pay more attention to gold mining companies.”
Nothing in there about how many ounces have been identified at this site, or how big the company is, or why it’s a particularly good idea to buy it now (other than the intimation that Leeb thinks gold will hit new all-time highs at some point, presumably in the near future, and that the central banks buying up gold in recent years is a good indicator)… but we do get a few clues to feed to the Thinkolator, so what’s the story?
Well, the photo is not really any help — it’s not actually a photo of the site, looks like it’s actually a stock photo that any one can download online, I found it at unsplash if you’re curious. It’s a nice picture, but that site indicates it was taken in Gasquet, California. Which even the most geographically challenged among us must know is nowhere near the arctic circle (though it is very far north in California, just a few miles from Oregon). Here’s that stock photo of the pretty valley, in case you missed the original ad:
Just to further tease you a little bit, here’s what the actual site looks like from the other side of the hill… dunno why Leeb didn’t use a real image, other than that this particular photo doesn’t show the melting water of the arctic thaw:
And here’s what the actual camp for the project looks like:
So yes, this is yet another tease from Stephen Leeb about the Donlin Gold mine that has been in permitting and development (or pre-development, I guess) for more than a decade — Leeb has touted this stock several times in the past, I think the first one we covered was in 2009.
Donlin Gold is a joint venture, split 50/50 between Barrick Gold (GOLD) and NovaGold (NG), but if you really like the potential of the project then NG is the obvious play on Donlin — NovaGold is fairly small, with a $2.7 billion market cap, and doesn’t really own anything else (they do have some cash, and some cash coming in as a result of their sale of Galore Creek, but it pales in comparison to the capital requirements of the Donlin Gold mine). And if built, it will indeed be a doozy — the resources were estimated at 33 million ounces a few years ago, though that’s now up to 39 ounces, and the last early-stage plan I saw was for a mine that would produce more than a million ounces of gold a year for 27 years.
But, of course, it’s also in Alaska — not quite as remote or as far north as the copper project being explored by Trinity Metals, the stock I wrote about on Friday, but pretty far… and quite devoid of infrastructure, so it will be very expensive.
The challenge for Donlin Gold, and the reason it has not been sped through to development, seems to be both in permitting and in investment — they have gotten most of their permits now, though the key permit for their big tailings dam is not in hand yet and getting that approved will be a key for 2020 (everyone’s worried about damaging fisheries or waterways in Alaska, and the reports of tailings dam collapses in other parts of the world probably bring more attention than this issue would have had 20 years ago).
And on financing, they have gotten the permits for the big projects that will make Donlin Gold possible… but they still have to decide whether or not to go ahead, since going ahead with this gold mine also means they’ll have to build, among other things, a 300 mile natural gas pipeline so they can fuel an on-site power plant for the mine. The capital cost for the project was estimated, way back in 2012, at $6.7 billion. I can’t imagine that number will have come down in the subsequent eight years, but even at a cost like that the long-term potential probably makes economic sense (they do think, per recent presentations, that they can reduce up-front capital costs by bringing in third parties to do things like build the pipeline, though that should, of course, also increase operating costs, all else being equal).
Which doesn’t mean that they’ll decide to build it next year, or that they’ll be able to raise the money — that will depend on a lot of factors, starting with the next update to the feasibility study (they haven’t updated it since 2012, as far as I can tell). They’re also apparently doing their largest drilling campaign in a dozen years in 2020 as they try to further delineate the reserves and find the highest-grade spots where they might begin mining, so the results of that drilling might move the shares as well, I suppose, but we already know that there’s a huge amount of gold there and a couple million ounces more or less won’t make a huge difference. what investors are really waiting for is the final permitting, final “go ahead” decision from Barrick and NovaGold, and final feasibility study that lays out the updated economics of the project.
And, of course, in the meantime we’ve got the price of gold to keep us busy and keep the stock moving around. If gold rises in the next year or two, that makes the feasibility study look that much better, and brings in that much investor attention. If you want a quick catch-up, you might start with their latest presentation, from the PDAC convention a few days ago.
That “billionaire businessman” teased as leading the charge is NovaGold Chairman Thomas Kaplan, in case you’re curious, and his Electrum Group is the largest shareholder (more than 25%). John Paulson’s hedge fund is also a big backer, and has been for a long time.
The challenging thing, in my mind, is that the numbers are still pretty iffy if gold doesn’t rise substantially. According to that presentation (slide 7), the calculated net present value of Donlin Gold, using the 2012 feasibility estimate and a 5% discount rate (which is low for a mining project, in my opinion), is just under $5 billion at a $1,700 gold price… and right around $10 billion at a $2,000 gold price. That’s a lot of money, but NovaGold owns only half of the project and already carries a market cap of $2.8 billion. So really, if you’re buying it now you really need the gold price to be above $1,700, the gold production to be higher or last longer, or the next feasibility study update to have better economics (and they could be worse, remember, though borrowing costs will have come down a lot so that might help, and they have identified more high-grade gold targets and are still drilling), because with these numbers at $1,700 gold NovaGold it really seems to me like NovaGold is just treading water.
And to address the headline number, I suppose there’s some case you can make for the deposit being worth $100 billion at some point, but even if the mine does turn out to be much bigger than the latest estimates, that would require a really, really high gold price (yes, 40 million ounces of gold would sort of be “worth $100 billion” at $2,500/oz gold, that’s just math… but, of course, it’s not the raw “in the ground” asset value that matters, it’s how much can be extracted and what’s left over after paying to build and operate the mine).
That doesn’t mean the stock can’t go up, of course, but it means a lot of success is already priced in… and while we’re getting closer to potentially building the mine (and the pipeline) in the next couple years, it’s certainly not guaranteed, and if gold drops by 30% at the time that financing decisions have to be made things could quickly get a little bit ugly. That’s the risk of all mining projects, of course, but most of them aren’t nearly this big.
That sensitivity to higher gold prices isn’t all bad, though — it means that they really depend on high gold prices, so if gold goes a lot higher their potential profit margins will climb a lot faster than those at lower-cost mines. It’s not unusual for the biggest mining stock winners in a gold bull market, at least in the short term, to be the more marginally economic projects — those that are worth doing at $1,500 or $1,600 gold, say, but become dramatically more appealing at $2,000 gold. You can see some of that in the recent movement of the stock — I’m sure it’s also reacting to the positive statements about permitting wins over the past six months or so, including the pipeline and road access permits in January, but here’s what the price has done relative to gold:
Part of the “fun” of mining stocks is that yes, they are levered to the commodity — but they’re also stocks, and they are also move with investor sentiment about equities to some extent… especially when people are panicking and selling everything, or have to offload stocks to meet margin calls. You can see that the shares are moving with gold… but also that some days the leverage they show during drops in the price of gold is greater than the leverage they have on the upside, when gold rises. That’s sadly typical of mining stocks, they often soar when gold spikes higher… but they have a hard time keeping up with gold when there’s a longer and sustained rise in the price of the metal, probably because mining is a dirty and difficult business that sucks up a lot of capital.
So it’s probably useful to really think about opportunity cost when dealing with a very long-term project like building a massive mine — this story has been going on for a very long time, with their partner Barrick even offering to buy them out to get full control back in 2006 at $16 a share… and here’s what the company has returned to investors during those 13-1/2 years since that offer (NG shares in blue, gold in orange):
Of course, big ol’ Barrick didn’t fare that much better — let’s add them to the chart (in red):
Finally, let’s throw in the S&P 500 so you can see how that would have done, in green… a lot steadier, but, funny enough, the returns are almost identical to the movement in the price of gold for that time period.
I don’t know if we can draw definitive conclusions from all of that about what the future might hold, and I apologize for getting a little chart-happy there, but when it comes to significant allocations of capital to mining I’ll stick with the royalty businesses — they don’t rise as much as the best miners when things are good, but they also don’t go out of business or have to raise capital when things are bad. They can still stink for long periods of time, but these financiers generally hold up better than the miners.
OK, just one more chart — here’s what those past 12 years look like for Franco-Nevada (FNV), the blue chip gold royalty stock (in purple), compared to that group (couldn’t do 14 years, FNV went private for a few years and didn’t trade in 2006, but you get the point):
And with that, I’ll leave you to chew on your gold thoughts and spit out some comments and opinions for us — like the potential of NovaGold here? Prefer other projects? (Yes, I know someone’s going to yell out “Northern Dynasty!”, and feel free to make your case for that or any other miner you like)… our friendly little comment section below awaits your wisdom.
Disclosure: I currently own physical gold and some call options on Barrick Gold (GOLD). I won’t trade in any company covered for at least three days after publication, per Stock Gumshoe’s trading rules.