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Up the creek — and back — with a Canadian gold company

A Canadian gold stock was sold by a top U.S. advisory, and then bought back. This is the story of some of the world’s largest gold deposits.

In the tales of the Brothers Grimm, Rumpelstiltskin could spin straw into gold. Today he would be a very busy, and very confused, man.

Gold may be a secure haven in times of trouble, but the price of an ounce of gold can still bounce around crazily. There are endless opinions on where that price is going, and a seemingly endless stream of analysts to argue the point.

And even when gold has moved up, most of the companies that mine the stuff have notably failed to follow suit.

So when a leading U.S. investment advisory decides to highlight a Canadian gold firm that has had its troubles, we are bound to be intrigued.

The Complete Investor prides itself on its honesty, says Mr. Gregory Dorsey, “openly discussing our failures as well as our triumphs.” But not all failures are down for the count.

“This issue,” says this analyst, “we want to turn one of those failures into a success.”

The stock in question was sold in December. Now it has been re-bought for the advisory’s Small Cap Value Portfolio.

The stock is NovaGold Resources (TSX/AMEX-NG) and its story begins up a couple of creeks.

Galore Creek rings a bell

“Together, Donlin Creek and Galore Creek represent some of the world’s largest undeveloped gold deposits,” says Mr. Dorsey.

Galore Creek may ring a bell. NovaGold is the joint owner of this property with Canada’s biggest miner, Teck Cominco (TSX-TCK.B). Their decision to suspend this copper/gold project made headlines way back in November 2007.

It was one of the earliest and most conspicuous victims of spiralling costs on a commodity front that’s now littered with them.

But that was not the event that caused this advisory to issue a sell order. This project in northeastern British Columbia is due to produce 8.9 billion pounds of copper, 7.3 million ounces of gold and 123 million ounces of silver when it finally gets going, with the new due date in 2012.

Donlin Creek is another property with a bright future ahead of it.

This Alaskan property is jointly owned with another giant, Barrick Gold (TSX/NYSE-ABX). It is one of the “single largest undeveloped gold deposits in the world, with 31.7 million ounces of gold measured and indicated,” says the author. It should produce 1 million ounces annually when it starts operations.

But add in a third creek, and the company was left without a paddle.

A white knight

NovaGold’s Rock Creek mine had already been shuttered due to capital cost overruns. With that mine shut down, The Complete Investor further worried that “this asset-rich but cash-strapped company would be unable to get financing to meet its obligations.”

If it failed to secure a line of credit to pay off a bridge loan coming through, it would be in dire straits, Mr. Dorsey stated. That meant the additional capital needed for the future development of Galore and Donlin Creeks would be jeopardized.

Rather than wait for a white knight to ride in, the advisory cut its losses and sold the stock.

Then a white knight rode in.

Profitable at depressed prices

At the eleventh hour, Mr. Dorsey relates, a saviour did ride in to rescue NovaGold. The knight “was a privately held mining investment group with an excellent track record.”

This allowed NovaGold to raise $75 million and convert the balance of its bridge loan into equity. The rescuers now hold 27.8 per cent of the company’s outstanding shares.

And NovaGold has the capital to exploit the mammoth undeveloped reserves of Galore and Donlin Creek.

“That makes NovaGold the junior miner perhaps most leveraged to higher commodities prices,” says Mr. Dorsey.

In total, the company’s annual production from Galore, Donlin and a property in Nome, Alaska is expected to reach 1 million to 1.5 million ounces of gold, 4 million ounces of silver and 200 million pounds of copper.

It won’t be cheap to bring these remote mines into production, the author admits, with costs as high as $4 billion for each.

“But while the company still has quite a bit of work ahead to bring its metals to market, the mines will likely be profitable even at today’s depressed metals prices,” he adds.

“And if, as we expect, gold prices climb in the next few years, the stock will rise many times over.”

So this advisory has tucked this stock back into its portfolio and encouraged a group of U.S. investors to do the same.

This should be good news for Canadian shareholders. The venture is not without risk, but the company appears to be headed back up the creek with all the paddles it needs to get to its destination.