Thursday, December 24, 2009

NovaGold Leads Mining Group on Acquistion

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While gold has been struggling recently, NovaGold (NG) went up 15% on December 23rd. The previous day, the company purchased a 100% interest in the Ambler property in Alaska and this set off the rally. It is not the first time that NovaGold has lead the miners in the market. The stock is highly volatile and the company is a magnet for controversy. It is also one of the potentially biggest money makers among the mining stocks.

Like most of NovaGold's properties, Ambler is resource rich and remote. Its contains some of the largest and highest-grade known VMS (volcanogenic massive sulfide) deposits in the world, both in terms of total metal and value per tonne. The deposits consist of copper, zinc, gold and silver. Nova already had a 51% stake in the property and paid $29 million to obtain complete ownership. NovaGold also has a half interest in Donlin Creek, one of the largest untapped gold deposits globally, a half interest in Galore Creek and full ownership of Rock Creek, Big Hurrah, and Nome Gold.

How much you think NovaGold is worth depends on your view for the future prices of gold, silver, copper and other metals. If you think these prices will be going up significantly, and that has been my view for several years now, then NovaGold is one of the cheapest stocks in the market. If you think those prices will be going down in the future, then you are not as impressed with the stock because most of its assets are sitting in the ground and won't be mined for several years. As someone who thinks that there will be significant inflation and dollar devaluation in the next decade, I am quite happy with the company's current mining schedule.

Before the Ambler acquisition, NovaGold stated that it had 15.2 million ounces in proven and probable gold reserves. At $1000 an ounce those reserves are worth $15 billion and at $2000 an ounce they are worth $30 billion. The company also had 78 million ounces of measured and indicated silver reserves, worth over $1 billion at current prices and 5.2 billion ounces of copper reserves worth over $10 billion at current prices. Plug in your own estimates of future silver and copper prices to obtain a likely value of Nova's deposits. The market cap of NovaGold has been in the $1 billion range during December trading. So for $1 of stock, you are getting somewhere around $30 in gold, silver and copper assets at today's prices with the possibility of a much higher value in the future.

While the stock is cheap on a valuation basis, it is not without risk. Mining the substantial deposits in Nova's properties is not without its difficulties and this accounts for why its shares sell at a discount. Proponents argue that this discount is much too large however. Nova is also a favorite of day traders from both the long and the short side and this increases its volatility. While NovaGold has been trading in the $5 to $6 range in December, it sold for over $20 in late 2007. Its all-time high was over $50 in 1987. Nova doesn't have to go back to those levels though to make investors money.

Disclosure: Long NG and GDX.

NEXT: New Homes Reveal Old Problems with Government Statistics

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.