Located in Alaska, the Donlin Gold Project is an impressive mine-in-development. When shovel-ready, it would be one of the biggest, if not the single biggest, gold mine in the entire Americas and even among the top mines globally. On top of a yearly output of more than 1 mn. ounces, an incredible mine life of almost 30 years is envisioned. Donlin is owned half-half by Barrick Gold and the much smaller NovaGold Resources. The latter has a market cap of 1.1 bn. USD while at current gold prices the mine could have a net present value of an incredible 40 bn. USD! Is this an overlooked multi-bagger?
Summary and key takeaways from today’s Weekly
– The Donlin Gold Project in Alaska is an incredible gold deposit, by any means.
– It could be America’s biggest gold mine, once production starts.
– But costs, financing and even permitting are uncertain, making this a pass for me.
Buying stocks of gold miners, respectively any miner, is a strange thing.
While it is “common knowledge” that miners theoretically offer leverage to the underlying commodity, in practice it is not as simple as it sounds. My longer-time readers know exactly that mining stocks, respectively commodity stocks in general, need to bring more to the table than just participating in a resource.
Mine life, production costs, capital management or the balance sheet, just to name some of the key aspects, play a crucial role in the success or failure of a mining stock.
It is not just “gold up, gold miner up several times”.
Just compare the long-term chart of Barrick Gold (ISIN: CA0679011084, Ticker: GOLD) with the price of gold. Since its high in 2011, the stock of Barrick is still down by 65% (!) while spot gold is up by two-thirds, having risen from 1,800 USD to 3,000 USD per ounce. In the past, I wrote about this topic in detail (see here) and also critically looked at Barrick (see here).
During my research, I have dug out a gigantic gold project with incredible numbers – where ironically Barrick owns 50% of the rights (I absolutely don’t like Barrick).
NovaGold Resources (ISIN: CA66987E2069, Ticker: NG) owns the other 50% in Donlin Gold, a mine that possibly will be the single biggest gold mine in the entire Americas and among the top five worldwide, measured by yearly output.
At current gold prices, the project is said to have a net present value (NPV) of 40 bn. USD. NovaGold has a market cap of just 1.1 bn. USD against their share of 20 bn. USD.
A no-brainer that catches up soon with this disparity?
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Donlin Gold – joining an exclusive club, making NovaGold shareholders rich?
The top ten mines globally all throw out at least half a million gold ounces yearly.
There are not many gold mines with a yearly output of at least one million ounces of gold, though. And I mean real gold, not gold equivalents, converted from silver or copper. Only three currently are in this exclusive club:
- state-owned Muruntau (~3 mn. ounces, Uzbekistan)
- Grasberg (1.8 mn. ounces, Indonesia, FreePort McMoran (ISIN: US35671D8570, Ticker: FCX)
- Olimpiada (1.5 mn. ounces, Russia, Polyus (ISIN: RU000A0JNAA8, Ticker: PLZL)
There are a few aspirants to join soon.
One that comes instantly to my mind is Agnico Eagle Mines‘ (ISIN: CA0084741085, Ticker: AEM) Canadian mine Detour Lake which it obtained with the acquisition of Kirkland Lake Gold, one of the best gold mining stocks I have ever actively observed (in an open secret, I am on the hunt for the next Kirkland Lake). At the moment, Detour is producing close to 700k ounces.
Another candidate to cross a million, though more or less from the get-go, is the Donlin Gold Project, today’s center of focus. The project is located in Alaska, the second largest gold producing state of the USA after Nevada and a Tier-1 jurisdiction in which already five major mines are producing.
Not even taking into account any further exploration upside, the project as is states an incredible gold reserve (proved and probable) of ~34 mn. ounces. That is currently almost 7x the entire annual US gold production and even 3x of the world’s biggest gold producing country, which is China!
Adding the less secure resources, the number is even almost 45 mn. ounces.
These are the numbers for the entire project. NovaGold’s share is in both cases 50%, which does not make it less spectacular by any means.
Spread over an expected 27-year mine life, the average annual production is planned to be a bit more than 1.1 mn. ounces. In the first five years the target is even 1.5 mn. ounces which would rank it on par with the current number three worldwide (assuming Polyus doesn’t increase its output).
The great news don’t stop here.
With a high and above industry-average gold grade of 2.2g per tonne of rock, Donlin makes for a very interesting project worth to be watched. It is not the highest grade, there are projects closer to and even above 10 grams, but certainly very high-level.
Everything above one gram is great already.
The reason to have this name on the radar is that the higher-grade a mine, the less hard, useless rock (or waste) needs to be moved. Usually, this positively influences production costs.
As my longer-time readers know, low production costs are crucial for me (see here).
Speaking of production costs, NovaGold is giving “in the second quartile” as a range and the figure of 635 USD per ounce for “operating costs”. By any means, this numbers sounds low, even decisively world-class.
But keep in mind that operating costs are not all-in sustaining costs (AISCs) which include capital expenditures to keep the mine running. Any further growth and exploration additionally comes on top for the true all-in costs (which by the way most miners don’t even publish).
Another thing is that the report is from 2021, likely with most data from 2020 or even before. This is crucial to understand, because this was shortly prior to the big inflationary surge which hiked production costs for most miners. In a first reaction, despite higher gold and silver prices, many miners went into free fall as their production costs climbed faster than their sales through higher metals prices.
This has balanced out. But the production cost base is substantially higher now, even for the sector leading companies.
An updated report, the final feasibility study or bankable study as they write, will likely (my estimate) see costs jump decisively above 1,000 USD. With industry-average AISC being around 1,500 USD, my guess is we’ll see something around 1,200–1,400 USD which still would fit with the second quartile range. This would still be a great number – with spot gold at 3,000 USD, they’ll literally print money.
Reads like a great gold mining pick, doesn’t it?
Until here yes, but now come the not so nice things and risks to keep in mind. The first being estimated ramp-up costs or initial capital costs.
A whopping 7.4 bn. USD is the current estimate. Not only is this number quite a hard rock to move (assuming 50% or 3.7 bn. USD for each party), even for Barrick Gold which last year had 4.4 bn. USD in operating cash flow and 3.1 bn. USD in Capex investments, but this number is at risk of being revised substantially higher.
I would even not be surprised to see 9–10 bn. USD.
What is the money needed for?
Plenty of infrastructure needs to be build. It is not just the things directly tied to the mine, but also a 315-mile gas pipeline or energy / utility infrastructure (power plant) or process and port facilities.
From the technical report you can see that “mining” looks even like a rounding error of the whole undertaking.
The 7.4 bn. USD number was already revised up higher by 10% from the prior figure from 2011 which was after a period of barely any inflation (at least officially).
That’s why I think 10 bn. USD, as stretched as it sounds now, is realistic.
NovaGold with its 1.1 bn. USD market cap has currently 100 mn. USD in cash and no cash generative business. External financing will be necessary. Until today, the company already made use of equity raises and convertible debenture (potentially dilutive) to muddle through.
It is hard to imagine them raising 3 bn. USD without the stock taking a deep dive. Not to mention 5 bn. USD, if my estimated initial capital costs come true.
At current run-rate, the available cash should last for about two to two and a half years before new liquidity will be needed. This is only for current costs, permitting and exploration activities.
Construction comes on top.
As if this weren’t already enough, the second and potentially even more painful aspect is the permitting process.
Before workers at a mine can put the shovels in the ground, several federal and state permits need to be obtained. All federal boxes are checked.
But the state of Alaska has left some to-do’s open.
The Donlin Gold project has most of its key permits, like the 2018 decision from the U.S. Army Corps and Bureau of Land Management, and a 2021 water quality approval from Alaska. But local tribes and environmental groups, backed by Earthjustice, are holding things up with lawsuits. A September 2024 court ruling said the environmental study didn’t properly address a possible dam failure.
The tribes want the permits canceled, causing more delays. Potentially, the mine will not come online anytime soon. This is also possible.
Because of these issues – permits, lawsuits, and capital – production isn’t expected to be starting soon. If everything gets sorted out, optimistically construction maybe could start around 2027, with first gold coming out by 2030 or 2031.
This is just a vague guess, though, and depends on fixing these problems.
That’s why at the current stage an investment into NovaGold is way too risk for me.
What could make sense, though, is for Barrick Gold to acquire the company to secure the full rights. Even if they paid a seemingly lofty 2 bn. USD or almost a 100% premium to the current equity market cap, this could make sense – assuming the mine comes online.
With a gold price of 3,000 USD and assumed 1,500 USD AISCs, Barrick could be generating in the first years 1.5 mn. ounces * 1,500 USD per ounce margin = 2–2.25 bn. USD in operating cash flow (a very simplified back-the-envelope calculation).
So, even if construction consumes 10 bn. USD plus the 2 bn. USD in acquisition costs (they could also pay with own stock to save that money), at 3,000 USD the undertaking could break even after roughly five years. With a mine life of 27 years before any further exploration upside, this does not sound that bad.
But even Barrick does not seem fit enough to being able to shoulder this gigantic project on its own. Either, it would need to take on a massive debt load or another big partner like Agnico would need to join.
Much is uncertain at this stage and there’s even the risk that the mine doesn’t start production at all.
My approach is different.
As made clear on numerous occasions, I don’t like the acquirers. Instead, I want smaller companies with great execution, strong organic growth prospects, sound finances, low production costs and on top the optionality (but not depending on it) to be acquired some time in the future due to having world class operations.
What sounds like an unfulfillable dream (in German “Eierlegende Wollmilchsau” or egg-laying wool-milk sow in English, meaning everything best at once), is indeed the investment case for my Premium PLUS members.
Last year, I presented a gold mining company, operating solely in a safe Tier-1 jurisdiction with all the above features. Since my member-exclusive report came out, the stock is up by 68% – while the benchmark indices haven’t even crossed 10% during the same timeframe (not even the NASDAQ).
While the stock has ascended strongly, I think it is still not too late.
The company is in a strongly expansive mode and will over the next couple of years more than double its gold production.
The company already secured financing and has the money on the balance sheet.
On top, with its production costs being close to 1,000 USD per ounce, it is clearly a takeover target at some point in the future.
Management is highly aligned with shareholders, by holding 10% of equity.
Conclusion
The Donlin Gold Project in Alaska is an incredible gold deposit, by any means.
It could be America’s biggest gold mine, once production starts.
But costs, financing and even permitting are uncertain, making this a pass for me.
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