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August 17, 2006

Novagold or Novacopper?
by Roland Watson

Amidst the recent debate about the Barrick takeover bid for Novagold, one fact emerged that for me changed my perception of this company. The question was whether Novagold should be renamed Novacopper? Or to be more precise, should Novagold be classed primarily as a gold or copper producer? Now this needs some qualification because at this point in time Novagold are not producing any metals in commercial quantities. What we have just now are various projects which are due to come online this year and increasingly so over the next few years. So for the sake of answering the question we need to look at predictions rather than actual product reaching the markets.

If we look at the stated resources of the company and take into account partial ownership of certain sites, Novagold has the following resources with their current market values if extracted today:

• COPPER 13.39 billion pounds giving $46.73 billion at a price of $3.49 per lb
• GOLD 37.24 million ounces giving $23.41 billion at a price of $628.60 per ounce
• SILVER 181.5 million ounces giving $2.23 billion at a price of $12.27 per ounce
• ZINC 2.24 billion pounds giving $3.4 billion at a price of $1.52 per lb

TOTAL resource value = $75.77 billion

At these stated prices, copper constitutes 61.6% of total value while gold is 30.9%, silver 2.9% and zinc 4.5%. We have excluded any other metals from this analysis which form less than 1% of total value. Okay, but what about production levels? Since annual revenue is what really counts, what kind of numbers can we anticipate from Novagold's main mines? Helpfully, Novagold have stated the following expectations for annual production by 2010 to 2011:

• COPPER 200 million pounds giving $698 million at a price of $3.49 per lb
• GOLD 700,000 ounces giving $440 million at a price of $628.60 per ounce
• SILVER 2 million ounces giving $24.5 million at a price of $12.27 per ounce

Their website did not state a figure for zinc but using the average resource/production ratio of the other three metals gave us this estimate:

• ZINC 33 million pounds giving $51 million at a price of $1.52 per lb

TOTAL production value = $1.21 billion

At these stated prices, copper constitutes 57.5% of total value while gold is 36.3%, silver 2% and zinc 4.2%. So, clearly from the numbers, Novagold is primarily a copper producer with gold second. So the first question is answered and this leads us to the second question of whether this matters to gold stock investors? This somewhat begs the question. Who says this stock is being purely driven by the price of gold or held only by gold bulls? If the truth be told, copper has had a similar price pattern to gold since the metals bull market began so comparing the price charts of Novagold against gold and copper would be inconclusive.

Indeed, if we believe in efficient markets, we must assume that the value of Novagold's copper resource is priced into the current share value. If not then it would appear that Novagold is undervalued because investors have focussed more on the gold assets rather than the more lucrative copper assets. Sometimes owning stock is as much down to owner perception as the reality of the situation. In the case of Novagold, the top ownership as of March 31st was as follows:

• Novagold management - 10% (including options)
• Neuberger Berman, LLC 11.03%
• Sprott Asset Management INC 4.65%
• Snyder Capital Management, LP 3.78%
• Royce & Associates, INC 3.09%
• NWQ Investment Management Company, LLC 3.04%
• Wells Fargo & Company 2.61%
• Citadel Limited Partnership 2.06%
• Blackrock INC 1.81%
• Barclays Global Investors UK Holdings LTD 1.71%
• Salem Investment Counselors, INC 1.56%

TOTAL 45.34%

We can be sure that the Novagold management knows the full potential of all their resources plus we can be confident that institutional holders will have done a thorough analysis of what makes Novagold worthy of investment. However, just because an investment company holds Novagold does not tell you per se whether they are holding it primarily because of gold, copper or both. One possible place to ascertain that is the top mutual fund holders. According to Yahoo! Finance, they are:

• Neuberger & Berman Genesis Fund 4.89%
• Royce Lower Priced Stock Fund 1.28%
• American Century Global Gold Fund 0.92%
• Evergreen Precious Metals Fund 0.86%
• Blackrock Funds-Global Resources Portfolio 0.78%
• Royce Micro-Cap Fund 0.75%
• Oppenheimer Gold & Special Minerals Fund, Inc 0.66%
• Royce Value Plus Fund 0.61%
• Nuveen NWQ Multi-Cap Value Fund 0.53%
• Wells Fargo Advantage Small Company Growth Fd 0.53%

From this list we see funds which concentrate on small cap stocks, precious metals, growth companies and commodities. Apart from the three gold funds and unless we see each report by each mutual fund on why they included Novagold in their portfolio, we are just guessing. This brings us to the conclusion of the matter. If gold and copper continue to both go up, Novagold is a buy. If gold goes up but copper goes down, Novagold is a sell. If copper goes up and gold goes down, Novagold is a hold. Once again, these are contingent on Novagold's copper resources being already priced into the company's stock.

• When would gold and copper both go up? When economies are expanding and stockpiles are continually strained.
• When would gold go up and copper go down? When governments experience a monetary crisis leading to economic chaos.
• When would copper go up and gold go down? Realistically, nothing I can think of. But you may have your own scenarios.

In this light, gold and copper stock investors should rebalance their portfolios accordingly.

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to http://www.newerainvestor.com/ and click on the "View Sample Issue Here" link to the right.

Comments are invited by emailing the author at newerainvestor@yahoo.co.uk.

Roland Watson
http://silveranalyst.blogspot.com

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