Complications and Conflicts
However, the Donlin Creek property faces substantial headwinds from the permitting process. Although the formal application process began in early 2012, Barrick has expressed reservations about fast-tracking the property’s approval. Under normal circumstances, it can take three to five years to obtain a gold mining permit in the United States. However, the legal and financial heft that Barrick brings to the table could expedite the process somewhat.
Understandably, Barrick’s apparent reticence to expedite the development of the Donlin Creek property has shaken confidence in NovaGold’s prospects. The company lost 25 percent of its value on the back of Barrick’s announcement and continued to decline during the subsequent months. At this point, it appears probable that the Barrick announcement was the result of a poor earnings report rather than a permanent change in its corporate strategy. However, further negative news could send NovaGold’s shares lower. Alternatively, news that the permitting process is moving along could signal the start of a long-term uptrend in its stock price.
Long-Term Prospects, Likely Outcomes and Potential Returns
On its face, NovaGold represents a speculative bet that could pay off in spectacular fashion. This is not a traditional arbitrage opportunity: While there is a good chance that Donlin Creek will eventually receive its permit, there is a possibility that it will be denied. In this way, NovaGold represents an “option” on the Donlin play. Although further delays or an ultimate denial would crimp Barrick’s bottom line, such events would not represent existential threats to the multinational mining giant. By contrast, NovaGold might not be able to recover from a major setback.
It should be noted that several prominent investors have opened large positions in NovaGold. For instance, Seth Klarman bought a large tranche of NovaGold’s stock in November of 2012. The “smart money” appears to be making a major bet on Donlin Creek’s approval. From its current share price near $4.25, NovaGold could appreciate by 300 percent or more on the back of a permit deal. In time, the company could challenge its all-time high above $20 per share.
In theory, NovaGold might also be attractive as a takeover target. The most obvious suitor would be Barrick. In fact, the mining giant launched a failed takeover bid for the company in 2006. Barrick’s management team may be hoping for a drawn-out approval process that weakens NovaGold’s resolve and leaves it vulnerable to a buyout.
At the moment, experienced investors with relatively long time horizons may have little to lose by opening measured positions in NovaGold at these levels. Since any post-approval updraft is liable to be sudden, there may be no better chance to get in on this Donlin Creek option.
The article Interesting Gold Play That Seth Klarman Likes originally appeared on Fool.com and is written by Mike Thiessen.
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