Question

How does Novagold use their global scanning capability, rationalization, and integration?

Answer 1

DESCRIPTION OF THE BUSINESS

• General Donlin Gold Project, Alaska

Donlin Gold is an advanced-stage gold project held by Donlin Gold LLC, a limited liability company that is owned 50% by the Company’s wholly-owned subsidiary, NOVAGOLD Resources Alaska, Inc. and 50% by Barrick’s wholly-owned subsidiary, Barrick Gold U.S. Inc. Donlin Gold is located on private, Alaskan Native-owned land and Alaska state mining claims, the 81,361 acre (32,926 hectare) property hosts a gold deposit currently estimated at 33.8 million ounces of proven and probable reserves averaging 2.09 grams per tonne gold, 5.2 million ounces of measured and indicated resources and an additional 6.0 million ounces of inferred resources. This reserve estimate represents a 15% increase over the 29.3 million ounce gold reserve estimate outlined in the 2009 Feasibility Study, and is based on the inclusion of additional drilling and a US$250/oz increase in long-term gold price assumptions from that used in 2009. On July 14, 2001, the Company, through its wholly-owned subsidiary NOVAGOLD Resources Alaska, Inc., entered into an exploration and development option agreement with Placer Dome (acquired by Barrick in January 2006), granting the Company the right to earn up to a 70% interest in the Donlin Gold property (“Option Agreement”). Funding is currently shared by both parties on a 50/50 basis. On December 5, 2011, NOVAGOLD announced the results of an updated feasibility study for the Donlin Gold project. The Donlin Gold FS revises the 2009 Feasibility Study with updated mineral reserves and resources, capital costs and operating cost estimates. The feasibility study also utilizes natural gas as the primary power source for the project rather than the original diesel option. Based on the Donlin Gold FS, the project is expected to be a conventional truck-and-shovel open-pit operation. The mine life is estimated to be 27 years based on a nominal processing rate of 53,500 tonnes per day. During the first five years, expected production averages 1.46 million ounces of gold production in each year of its first five years of operation at an average cash cost of US$409/oz and an average of 1.13 million ounces of gold per year over its projected 27 year mine life with an average cash cost of US$585/oz. The property has estimated proven and probable mineral reserves of 505 million tonnes grading 2.09 grams per tonne gold for 33.85 million ounces of gold. This represents an approximate 15% increase from the mineral reserve estimate outlined in the 2009 Feasibility Study and is broadly comparable to the March 2010 mineral reserve and resource update released by NOVAGOLD. The property hosts estimated measured and indicated mineral resources (inclusive of mineral reserves) of 541 million tonnes grading 2.24 grams per tonne gold for 39 million ounces of gold and inferred mineral resources of 92 million tonnes grading 2.02 grams per tonne gold for 6.0 million ounces of gold. NOVAGOLD’s 50% interest totals 16.9 million ounces of gold reserves, with an additional 2.6 million ounces of measured and indicated gold resources and 3.0 million ounces of inferred gold resources. The Donlin Gold reserve/resource estimate incorporates results from 62 new drill holes totaling 25,000 meters for total drilling in the reserve/resource model of 1,740 drill holes totaling 370,000 meters. Mineral Reserves have been estimated using a long-term gold price assumption of US$975/oz. Mineral resources are based on a Whittle™ pit optimized for all Measured, Indicated, and Inferred blocks assuming a gold selling price of US$1,200/oz and are inclusive of reserves. Mineral resources have been classified using criteria appropriate under the CIM Definition Standards by application of a net smelter return based cut-off grade which incorporated mining and recovery parameters, and constraint of the resources to a pit shell based on commodity prices. Mineral reserves were estimated based on a series of LerchsGrossmann pit shells, established following a number of throughput rationalization studies. The pit shell considered measured and indicated resources only.

• Donlin Gold – Property Description and Location

The Donlin Gold property is an advanced-stage gold project located in southwestern Alaska and the largest known undeveloped gold deposit in the world. The property is under lease for subsurface and surface rights from Calista Corporation (“Calista”) and The Kuskokwim Corporation (“TKC”), two Native Alaskan corporations. Calista is one of 13 regional Alaska Native corporations established as part of the Alaska Native Claims Settlement Act (“ANCSA”) of 1971 and under ANCSA has title to the subsurface estate in the region. TKC was formed in 1977 when the ANCSA village corporations of Lower Kalskag, Upper Kalskag, Aniak, Chuathbaluk, Napaimute, Crooked Creek, Red Devil, Georgetown, Sleetmute and Stony River, which are located along the middle region of the Kuskokwim River, merged. Under ANCSA, TKC has title to extensive surface estate in the region, including most of the project lands. In March 2010, Donlin Gold LLC renegotiated its lease with Calista, securing additional land to allow for future expansion and extending the lease to 2031. In addition to the 49,671 acres (20,101 hectares) leased from Calista, Donlin Gold LLC holds 242 Alaska State mining claims comprising 31,760 acres (12,852 hectares), bringing the total land package to 81,431 acres (32,954 hectares). The existing lease covers the subsurface rights for the entire Donlin Gold mineral reserves and resources. Among other things, amendments to the renegotiated lease provide for (i) the lease of certain additional lands that may be required for the development of the property, (ii) an extension of the term of the lease to April 30, 2031 and automatically year to year thereafter, so long as either mining or processing operations are carried out on or with respect to the property in good faith on a continuous basis in such year, or Donlin Gold LLC pays to Calista an advanced minimum royalty of US$3.0 million (subject to adjustment for increases in the Consumer Price Index) for such year, (iii) the elimination of Calista’s option to acquire a 5% to - 14 - 15% participating operating interest in the project and replacement with the payment to Calista of a net proceeds royalty equal to 8% of the net proceeds realized by Donlin Gold LLC at the project after deducting certain capital and operating expenses (including an overhead charge, actual interest expenses incurred on borrowed funds and a 10% per annum deemed interest rate on investments not made with borrowed funds), and (iv) an increase in the advanced minimum royalties payable to Calista under the lease to US$0.5 million for the year ending April 30, 2010, increasing on an annual basis thereafter until reaching US$1.0 million for each of the years 2015 to 2024 inclusive and US$2.0 million for each of the years 2025 to 2030 inclusive. All advance minimum royalties paid to Calista continue to be recoverable as a credit against Calista’s existing net smelter royalty under the lease agreement, which remains unchanged. Donlin Gold LLC, through native lease agreements, holds a significant portion of the surface rights that will be required to support mining operations in the proposed mining area. Donlin Gold is negotiating a restructuring of the TKC agreement to, among other things, add additional lands and extend the term, which currently expires in June 2015 unless certain lease conditions are met. The surface use agreement provides TKC with payments for lands used and protection of subsistence activities.

• Donlin Gold – Mineral Tenure

The following information regarding mineral tenure at the Donlin Gold project was compiled by the Company and is not included in the Donlin Gold FS. Most of the rights (surface and subsurface) are governed by ANCSA. Section 12(a) of ANCSA entitled each village corporation to select surface estate land from an area proximal to the village in an amount established by its population size. Calista receives conveyance of the subsurface when the surface estate in those lands is conveyed to the village corporation. Section 12(b) of ANCSA allocated a smaller entitlement to the regional corporations with the requirement they reallocate it to their villages as they choose. Calista receives subsurface estate when its villages receive 12(b) lands. Calista reallocated its 12(b) entitlement in 1999 according to a formula based on original village corporation enrolments. The Donlin Gold exploration and mining lease currently includes lands leased from Calista, which holds the subsurface (mineral) estate for Native-owned lands in the region. The leased land is believed to contain 20,101 hectares (49,671 acres). Calista owns the surface estate on a portion of these lands. A separate Surface Use Agreement with TKC, which owns the surface estate of the remaining lands, grants non-exclusive surface use rights to Donlin Gold LLC. All of the lands subject to the leases have been conveyed to Calista/TKC by the Federal Government. Donlin Gold LLC has entered into negotiations with TKC regarding amendments to the TKC Surface Use Agreement.

• Donlin Gold – Permits Donlin

Gold LLC has maintained all of the necessary permits for exploration, camp facilities, and related activities. These permits are active with the Alaska Department of Natural Resources (hard rock exploration, temporary water use), the Army Corps of Engineers (individual 404 and nationwide 26), U.S. Bureau of Land Management (rightsof-way), Alaska State Department of Conservation (wastewater, drinking water, food handling), the Alaska Department of Fish and Game (title 16 – fish), Federal Aviation Administration (airport), and other State, Federal and private entities. Current permits have allowed exploration and associated feasibility study supporting test work to be conducted under appropriate State and Federal laws. Development of Donlin Gold will require a considerable number of additional permits and authorizations from both Federal and State agencies. Much of the groundwork to support a successful permitting effort was undertaken prior to the submission of permit applications, and included identification and resolution of issues related to the baseline data supporting the project and familiarizing regulators and stakeholders with the proposed project. Extensive baseline environmental information has been used to support scientific analysis and project engineering design which will be used to support the approximately 100 permit applications required for the project. Donlin Gold LLC and its predecessors have invested significant money, resources and time acquiring this information over a period of 16 years.

• Donlin Gold – Accessibility and Climate

The Donlin Gold property is located in southwestern Alaska, approximately 20 km north of the village of Crooked Creek on the Kuskokwim River. The Kuskokwim River is a regional transportation route and is serviced by commercial barge lines. A 25 km long winter road, designated as an Alaska State Highway route and transportation corridor, accesses the property from the barge site at the village of Crooked Creek. The Project has an all-season, soft-sided camp with facilities to house up to 150 people. An adjacent 1,500 m long airstrip is capable of handling aircraft as large as C-130 Hercules (42,000 lb or 19,050 kg), allowing efficient shipment of personnel, some heavy equipment, and supplies. Donlin Gold can be serviced directly by charter air facilities out of both Anchorage, 450 km to the east and Aniak, 80 km to the west. The project area is one of low topographic relief on the western flank of the Kuskokwim Mountains. Elevations range from 150 meters to 640 meters. Ridges are well rounded and easily accessible by all-terrain vehicle. Hillsides are forested with black spruce, tamarack, alder, birch and larch. Soft muskeg and discontinuous permafrost are common in poorly drained areas at lower elevations. The area has a relatively dry interior continental climate with typically less than 50 cm (20") total annual precipitation. Summer temperatures are relatively warm and may reach nearly 30°C (83°F). Minimum temperatures may fall to well below -42°C (-45°F) during the cold winter months. The project is currently isolated from power and other public infrastructure. Studies were undertaken in 2008 to consider potential power line access to the project. Sufficient space is available to house the various facilities, including personnel housing, stockpiles and processing plants. Ample water supply is available from surface and subsurface sources.

• Donlin Gold – Proposed Tailings Storage

The tailings storage facility in the Anaconda Creek basin will be a fully lined impoundment with cross valley dams at both the upstream (“upper dam,” comprising upper north and upper south) and downstream (“main” dam) ends. All tailings dams will be constructed of compacted rock fill using the downstream method with a composite liner on the upstream face. The tailings impoundment footprint will be lined with a linear low density polyethylene liner over a layer of broadly graded silty sand and gravel acting as low permeability bedding material and providing secondary containment. Material for construction will be sourced from the plant site and fuel farm during initial construction and from the open pit for the later raises during operations. The starter dam is sized to store one year of tailings plus the 200-year return period snowmelt, 24-hour probable maximum precipitation rainfall event, excess water accumulation under average conditions in the site water balance, and emergency freeboard. To meet these requirements, the starter and ultimate dam will be 54.0 m and 141.5 m high, respectively, as measured from the crest to the downstream toe. The ultimate capacity of the lined tailings impoundment will be 412.35 Mm3 . Construction of the tailings facility will need to be scheduled with special allowances for seasonal constraints and effects on earthworks and liner placement productivity. Construction will take at least two years and will commence no later than two years before mill commissioning, starting in a winter construction period, assumed to be from November to March. The summer construction period is from May to October. The month of April is assumed to be non trafficable as the ground thaws. November is also likely to be a transition month from summer to winter, but the trafficability is expected to be adequate to maintain some construction activities.

• Donlin Gold – Geological Setting

1. Regional Geology - The Kuskokwim region of southwestern Alaska is predominately underlain by rocks of the Upper Cretaceous Kuskokwim Group that filled a subsided northeast-trending strike-slip basin between a series of amalgamated terranes. Intermediate composition volcano-plutonic complexes intrude and overlie Kuskokwim Group rocks throughout the region.
2. Local Geology The Donlin Gold deposits lie between two regional, northeast-trending, right lateral faults, in an area that contains numerous northeast to east–northeast- and northwest to west–northwest-trending lineaments that probably represent steeply-dipping strike-slip faults. Undivided Kuskokwim Group sedimentary rocks and granite porphyry complexes are the main rock units.
3. Property Geology Greywacke is dominant in the northern part of the area (“northern resource area” comprising Lewis, Queen, Rochelieu, and Akivik), while shale-rich units are common in the southern part of the area (“southern resource area” comprising South Lewis and ACMA). Overall, sedimentary structure in the northern resource area is monoclinal, whereas sedimentary rocks in the southern resource area display open easterly-trending folds.

Gold deposits are associated with an extensive Late Cretaceous–Early Tertiary gold–arsenic–antimony–mercury hydrothermal system. Gold-bearing zones exhibit strong structural and host rock control along north–northeasttrending fracture zones and are best developed where those zones intersect relatively competent host rocks. Mineralized material is most abundant in the igneous rocks, but sedimentary rocks are also mineralized within strong fracture zones.

• Donlin Gold – Exploration

1. Grids and Surveys - Drill hole collar and trench locations were tied to a surveyed ground control net using conventional theodolite survey methods from 1988 through 1993. Drill hole collars were surveyed with Brunton compass and hip chain in 1995.

A Motorola GPS system was used in early 1996 to establish survey control monuments and to survey some drill collars.

Traditional survey methods were subsequently used to locate all 1995–1999 and 2001 drill collars and trenches. An Ashtech Promark2 GPS post-processed system that consists of a base unit and up to two roving units was introduced in 2002.

2. Geological Mapping - A number of geological mapping programs have been completed, using air photograph bases, at 1:20,000 and 1:10,000 regional scales. Mapping was primarily completed during the mid to late 1990s.

3. Geophysical Surveys - An airborne magnetic survey was flown on behalf of WestGold in 1988–1989. Subsequently, ground electromagnetic, resistivity and IP surveys were completed at regional and prospect scale to aid in drill targeting.

4. Geochemical Sampling - Geochemical sampling to support exploration-stage work programs has been undertaken as summarized in the table below. This work has been superseded by the drill programs completed on the property.

5. Trenching - Trenching programs were completed as part of exploration-stage activities. Trench data are used to construct the geological model.

Integration

NovaGold may experience problems integrating new acquisitions into existing operations, which could have a material adverse effect on NovaGold. The Company may make selected acquisitions in the future, with a focus on late-stage development projects. The Company’s success at completing any acquisitions will depend on a number of factors, including, but not limited to: • identifying acquisitions that fit NovaGold’s business strategy; • accurately assessing the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; • negotiating acceptable terms with the seller of the business or property to be acquired; and • obtaining approval from regulatory authorities in the jurisdictions of the business or property to be acquired. If the Company does make further acquisitions, any positive effect on the Company’s results will depend on a variety of factors, including, but not limited to: • assimilating the operations of an acquired business or property in a timely and efficient manner; • maintaining the Company’s financial and strategic focus while integrating the acquired business or property; • achieving identified and anticipated operating and financial synergies; • unanticipated costs; • diversion of management attention from existing business; • potential loss of key employees or key employees of any business acquired; • unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition; • decline in the value of acquired properties, companies or securities; • implementing uniform standards, controls, procedures and policies at the acquired business, as appropriate; and • to the extent that the Company makes an acquisition outside of markets in which it has previously operated, conducting and managing operations in a new operating environment. - 74 - Acquiring additional businesses or properties could place increased pressure on the Company’s cash flow if such acquisitions involve a cash consideration. The integration of the Company’s existing operations with any acquired business will require significant expenditures of time, attention and funds. Achievement of the benefits expected from consolidation would require the Company to incur significant costs in connection with, among other things, implementing financial and planning systems. The Company may not be able to integrate the operations of a recently acquired business or restructure the Company’s previously existing business operations without encountering difficulties and delays. In addition, this integration may require significant attention from the Company’s management team, which may detract attention from the Company’s day-to-day operations. Over the short-term, difficulties associated with integration could have a material adverse effect on the Company’s business, operating results, financial condition and the price of the Company’s common shares. In addition, the acquisition of mineral properties may subject the Company to unforeseen liabilities, including environmental liabilities, which could have a material adverse effect on NovaGold. There can be no assurance that any future acquisitions will be successfully integrated into NovaGold’s existing operations and such acquisition may result in a material adverse effect on the financial condition of the Company. In addition, the Company anticipates that as it brings its mineral properties into production and as the Company acquires additional mineral rights, the Company will experience significant growth in its operations. The Company expects this growth to create new positions and responsibilities for management and technical personnel and to increase demands on its operating and financial systems. There can be no assurance that the Company will successfully meet these demands and effectively attract and retain additional qualified personnel to manage its anticipated growth. The failure to attract such qualified personnel to manage growth effectively could have a material adverse effect on the Company’s business, financial condition and results of operations.