Novagold on defensive after short seller shreds its Alaska project

Donlin Gold, Alaska. Image: Novagold

Novagold on Monday said it’s preparing a full response to a scathing report from J Capital Research that accuses managers of the Vancouver-based explorer of “systematically” misleading investors about its proposed Alaska gold mine over the last 15 years.

J Capital, a company founded in China a decade ago which usually targets overvalued media and tech companies for short-selling, says the Donlin Gold project, which is 50-50 owned by Novagold and Barrick, “will never be built” and “in short, this is a stock promote, not a mining plan.”

Shares in Novagold (NYSE: AMERICAN, TSX: NG) are down 15% since the publication of the report and 25% from the all-time high hit little over a month ago, pushing the company’s market value to just under $3 billion.  

Novagold says its formal response will be available within a week and calls the report a “catalogue of inaccuracies and falsehoods” and adds that it is “exploring exploring all of its legal options in various jurisdictions against J Capital Research and any other parties who may be complicit in any effort to manipulate Novagold’s share price.”

Novagold’s management “has a long history of over-promising” and the Galore Creek project, “once promoted as the company’s key asset, was quietly sold at a loss in 2018”

The Pipe dream

The report, titled The Pipe Dream, pulls no punches when it comes to Novagold management’s behavior, saying they are “treating this 12-person concept company like an ATM, awarding themselves base salaries that rival those of the CEOs at Newmont and Barrick and total compensation packages comparable with those at Rio and BHP.”

“If the information from the company’s feasibility studies were presented in a more honest light, investors would understand that the Donlin deposit, of which they own 50%, is not feasible to put into production at any gold price.

“Management deliberately misleads investors with custom metrics designed to deceive, directing investors to presentations which claim the deposit will require $6.7bn in capital, however, the feasibility study clearly shows this number is $8bn (already, we believe, far too low). 

“The proposed natural gas pipeline central to powering the project is dead on arrival. The terrain around the Donlin deposit is among the most inhospitable on the planet.” 

The icing on the cake? 

Taking advantage of renewed market enthusiasm due to higher gold prices by cashing equity to the tune of $35m, $25m of which was in the last 12 months

J Cap says “the costs of the pipeline (if someone were even to attempt to build it) are likely in excess of $3bn, two to four times higher than management’s previous forecast,” adding that Novagold’s “silver-tongued CEO is already preparing the ground for the inevitable pipeline failure by focusing investors on the potential for a higher-grade, smaller mine”:

“Management has drilled only 16 drill holes since 2011 and not even released the modeling results of the last, meager exploratory drill assays in 2017. If the grade had improved, they would be shouting it from the rooftops.”

“Unenthusiastic” Barrick

J Cap says Novagold’s management “has a long history of over-promising” and points out that the Galore Creek project, “once promoted as the company’s key asset, was quietly sold at a loss in 2018” after revised capital expenditure estimates increased by five times.

Management’s narrative hasn’t convinced everyone says J Cap: Barrick “is so unenthusiastic about the project that it hasn’t included Donlin in its new 10-year program, despite this year’s higher gold price”:

“Management’s game is clear: keep investors interested in the stock while they rake in huge salaries. Construction of the Donlin mine was originally expected to start in 2008. Now, 12 years later, management’s best guess is that construction may start in 2022 and production in 2028. 

The icing on the cake? 

Taking advantage of renewed market enthusiasm due to higher gold prices by cashing equity to the tune of $35m, $25m of which was in the last 12 months.

Novagold says Donlin “is regarded to be one of the largest, highest-grade, and most prospective known open pit gold deposits in the world” and once in production, is expected to produce an average of more than one million ounces per year over a 27-year mine life.

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