Gold production at the new Rock Creek mine near Nome has been suspended indefinitely while its Canadian owner struggles to overcome mounting debts and other major setbacks.
NovaGold Resources Inc. announced the open-pit mine has suffered from unexpected mechanical problems, including an electrical failure that shut down its mill. The company said it was concerned that the mine might not meet all of the environmental conditions imposed by state and federal regulators for it to continue operating.
"Though this has been a difficult decision with Rock Creek, based on the current economic conditions, and the challenges associated with meeting environmental requirements compounded by working through the arctic winter, we believe these actions are in the best interest of the company at this time," said Rick Van Nieuwenhuyse, NovaGold's president.
He did not elaborate on several key issues, including: how many employees would be laid off; how it planned to manage the gold mine during the suspension; and how long it expected the suspension to last.
Nome Mayor Denise Michels said she talked to Van Nieuwenhuyse on Monday and wants to work with him to get the mine back on line again. She said the city has benefited from increased sales-tax revenue from mine employees spending their money in town. The city now has a wind-energy project that was facilitated by a new road built for the mine, she said.
At least 150 people were working at the mine until now, according to state officials and Nome business leaders.
Michels said she learned on Monday that some workers will remain on payroll at the mine to keep it secure, but she worries about the ones who lost their jobs Monday. It's not good timing, she said, noting the holiday season.
But, she added, "We're a mining community. We've gone through this before."
In the worst-case future scenario -- the company abandons the mine -- state regulators said they have secured a $6.8 million line of credit from Nova to pay for its closure, cleanup and any other costs.
The company said Monday that "the regulatory consequences of a suspension are uncertain" and the value of Rock Creek may have to be written down.
MONEY WOES
Nova's financial hopes have long been tied to the small mine in Nome.
The company's first mine, Rock Creek was expected to produce about 100,000 ounces of gold annually and generate $25 million to $35 million in annual cash flow, company officials said in September.
Nova planned to use the cash flow from Rock Creek to finance its work at two major mineral exploration projects in Alaska and Canada.
But, instead, the mine was plagued with start-up problems and it was at least $20 million over budget this winter, company officials said.
Nova said it has been "actively seeking additional financing" to pay a $20 million bridge loan it secured in September, due on Dec. 29.
The junior mining company's shares fell to their lowest level in years on the stock market Monday -- plunging 66 percent to 58 cents -- after the company announced it has been unable to raise new money. Those shares were trading at $20 a year ago.
"If NovaGold is not able to raise additional cash in December, it will not have sufficient cash to meet its obligations," the company stated.
MINE WOES
Rock Creek's woes have proliferated in the past two years:
• A key federal permit for the mine was temporarily suspended when environmentalists sued unsuccessfully, claiming the company's plans to fill in wetlands were illegal.
• Two construction workers died in an accident at the mine last year. Federal investigators fined a contractor involved for inadequate training and unsafe equipment operation.
• Building the mine cost at least $40 million more than expected.
• The mine repeatedly violated state rules for the amount of sediment in storm-water erosion from the construction site this year.
• On Monday, the company told investors that federal and state regulators notified it that the mine had not met certain conditions in its permits. If Rock Creek didn't fix those problems, fines and more regulatory requirements could have resulted, the company said.
A state regulator said Monday that Rock Creek was on track for meeting those permit conditions, though some additional work was needed. The company's storm-water violations had been resolved, he added.
The state doesn't agree with the view that regulators played much of a role at all in the mine's suspension, said Jack DiMarchi, a mining coordinator for the Alaska Department of Natural Resources.
FUTURE PLANS
Nova said Monday it will focus its efforts on its Donlin Creek gold prospect in Western Alaska "while continuing to seek sources of cash and to take steps to reduce costs."
The company said it will pay $3.9 million due this week on the Donlin project, a joint venture with Barrick Gold, the world's largest gold mining company.
But it does not plan to pay $1.9 million that was due Monday on its Galore Creek mine exploration venture in Canada but near the Southeast Alaska town of Wrangell. The company said it wants to negotiate a new agreement with Teck Cominco, its partner in the stalled copper-silver-gold project.
Greg Waller, Teck's vice president of investor relations, said his company will discuss alternatives with Nova.
"This shouldn't influence our plans for how we progress with studies for the project," Waller said in an e-mail to The Canadian Press on Monday.
Teck is expected to decide soon if it will go ahead with Galore Creek, halted last year after its projected costs more than doubled to about $5 billion.
A new plan is expected to be released soon aimed at curbing project expenses.
TWO STEPS BACK
"This is definitely two steps back for NovaGold," Vancouver-based Salman Partners analyst Haytham Hodaly said of Monday's announcements.
"Its only option right now to not default on the bridge loan is to do some asset sales."
Hodaly said Galore Creek is not considered a strong asset because of the price of copper, which has fallen almost 50 percent in recent months.
Also, Nova's partner Teck has its own debt problems after its $14 billion takeover of Fording Canadian Coal Trust, which closed last month.
Nova's only viable asset is Donlin Creek, Hodaly said.
"The question now is what is NovaGold's portion worth and can they sell before they default?"
A feasibility study for Donlin Creek is expected early next year with construction targeted for 2012. The project is expected to operate for 25 to 30 years and produce potentially 1 million to 1.5 million ounces of gold annually.
Elizabeth Bluemink can be found at adn.com/contact/ebluemink or 257-4317. The Associated Press contributed to this article.
By ELIZABETH BLUEMINK
ebluemink@adn.com