(CN) – Shareholders in Vancouver-based NovaGold Resources had all but one of their claims tossed in a class action against the mining company after it suspended construction of the massive Galore Creek mining project in British Columbia amid huge cost overruns.
NovaGold was in the midst of fighting off a hostile takeover bid by Barrack Gold while clamoring for investors to set up the Galore Creek silver, gold and copper mine in the northwest region of the sprawling Canadian province. The company raised capital through two offerings on the TSX and AMEX exchanges, in addition to a partnership with mining firm Teck Cominco.
The project faced huge obstacles being in such a remote area where significant infrastructure was needed in order for it to move forward. But the company managed to gain the approval of a first nations group who resided on part of the land and had a feasibility study done, which formed the basis of the firm’s disclosure materials. Production was to begin in 2012, but construction of the mine was suspended after cost overruns hampered its viability, prompting shareholders to launch lawsuits against NovaGold, its directors, underwriter Citigroup and Hatch Ltd., the firm that prepared the project’s feasibility study.
U.S. District Judge Denise Cote in Manhattan granted the defendants’ motions to dismiss under the Securities Act, finding that the plaintiffs’ claims were either time-barred or insufficient. The limitation period expired a month before the complaint was filed, because a company press release disclosing that NovaGold had initiated another feasibility study of the project had triggered a “duty of inquiry.”
The claims relied on the company’s registration statement touting a “final” feasibility study which, the company claimed, “confirmed” the project’s economic viability with a cost estimate of $1.8 billion. Internal company estimates, according to the plaintiffs’ confidential witnesses, had eventually ballooned to $4.4 billion, at which point the project became unviable.
Judge Cote dismissed other claims against certain NovaGold directors and underwriters, including Citigroup, because cost estimates suggesting the project’s economic viability were “forward-looking statements accompanied by cautionary language,” and protected by the Private Securities Litigation Reform Act’s safe-harbor provision. In addition, registration statements issued by NovaGold clearly warned investors that the company had “no history of producing precious metals from its mineral exploration properties and … no assurance that it will successfully establish mining operations or profitably produce precious metals.”
However, one claim under the Exchange Act survived. While Cote didn’t rule on the merits of the case, she allowed the case to move forward based on allegations that NovaGold “misrepresented the project’s cost estimate and viability.”