Two "Novas" - Gold & Copper

08/17/2016 8:00 am EST


Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

Kuen Chan recommends two stocks in the metals and mining sector; here, the contributing editor to The Complete Investor looks at a gold miner and copper outfit that was previously spun-off from the former company.

NovaCopper (NCQ) lost 1 cent per share in the second quarter. But profitability isn’t the point right now, since this world-class copper deposit isn’t near production.

What matters is whether there has been progress in advancing the mine and if funding can be obtained. The company reported $13 million on hand, enough to support activities through 2017.

It expects to spend $5.5 million this year to drill at its Alaskan Upper Kobuk Mineral deposit and to continue collecting the data needed for permits to proceed with the project.

Current estimates are that the mine has 334 million pounds of copper indicated and 5.7 billion pounds inferred (indicated carries a higher level of confidence).

The all-in cost of copper production is expected to be about $1.25 per pound. The initial capital cost is roughly $700 million, which NovaCopper doesn’t yet have.

One can’t help but draw a parallel between NovaCopper and NovaGold (NG), from which NovaCopper was spun off in 2012.

NovaGold’s Donlin Gold project has undisputed world-class potential, with an estimated 39 million ounces of gold in measured and indicated resources.

And with exceptionally high grades for an open pit mine, its production costs should be among the lowest around.

The main hurdle is the astronomical cost — estimated at $7 billion, half of which is NovaGold’s responsibility — of constructing the mine and surrounding infrastructure once permits are obtained.

Like NovaCopper, NovaGold currently doesn’t have the money. The good news is that gold has rallied above $1,300 an ounce, and NovaGold’s shares are back above $7.

Another positive is its improved relationship with its partner Barrick Gold (ABX) — each has a 50 percent stake in Donlin — under Barrick’s new CEO John Thornton.

All this should help NovaGold in raising cash. We see a reasonable chance Barrick will eventually buy out NovaGold’s 50 percent stake.

NovaCopper, by contrast, is on its own and isn’t ready to apply for the necessary permits. Unlike gold, copper hasn’t yet resurged, with prices as of early July still near their 52-week lows.

But if raising the necessary capital to develop the world-class copper project seems a tall order now, this could quickly change. After all, NovaGold’s Donlin had seemed like it could be a lost cause not long ago.

Both stocks remain buys. Treat high-risk, high-reward NovaCopper as a de facto perpetual call option on copper. Patience could pay off in a big way.

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By Kuen Chan, Contributing Editor to The Complete Investor

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