Case 1:08-cv-07041-DLC Document 74 Filed 06/05/2009 Page 1 of 79 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK X IN RE NOVAGOLD RESOURCES INC. : SECURITIES LITIGATION : : 08 Civ. 7041 (DLC) THIS DOCUMENT RELATES TO: : : OPINION AND ORDER All Actions : X Appearances: For Lead Plaintiff New Orleans Employees’ Retirement System: Joseph A. Fonti Benjamin D. Bianco Labaton Sucharow LLP 140 Broadway New York, NY 10005 For Defendants NovaGold Resources, Inc., Galore Creek Mining Corporation, Rick Van Nieuwenhuyse, Robert J. MacDonald, Douglas Brown, Peter Harris, George Brack, Michael H. Halvorson, Gerald J. McConnell, Clynton R. Nauman, and James L. Philip: Jack C. Auspitz Jamie A. Levitt Damion K. L. Stodola Hilary M. Williams Morrison & Foerster LLP 1290 Avenue of the Americas New York, NY 10104 For Defendants Hatch Ltd. and Bruce Rustad: Stephanie A. Nashban Lewis Brisbois Bisgaard & Smith LLP 199 Water Street, 25th Floor New York, NY 10038 For Defendants Citigroup Global Markets Inc., Citigroup Global Markets Canada Inc., Cormark Securities Inc., MGI Securities Inc., RBC Dominion Securities Inc., and Scotia Capital Inc.: Scott A. Edelman Case 1:08-cv-07041-DLC Document 74 Filed 06/05/2009 Page 2 of 79 Thomas A. Arena Richard E. Rosberger Milbank, Tweed, Hadley & McCloy LLP 1 Chase Manhattan Plaza New York, NY 10005 DENISE COTE, District Judge: This action concerns an ambitious copper-gold mining project in a remote area of British Columbia, Canada undertaken by defendant NovaGold Resources, Inc. (“NovaGold”). NovaGold’s decision to abandon the mining project because of spiraling capital costs, and the sharp decline in its stock price, have led to this putative securities class action lawsuit, which primarily challenges NovaGold’s disclosures regarding the anticipated costs and risks of the mining project. This Opinion addresses the motions to dismiss that three separate groups of defendants have filed. As explained below, the defendants’ motions to dismiss the claims filed under the Securities Act of 1933 (the “Securities Act”), are granted. As for the claims brought under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), only the claim against NovaGold survives. BACKGROUND The following allegations are taken from the corrected consolidated class action complaint (the “consolidated complaint”) and the documents on which it relies. NovaGold was founded as a mineral exploration company, but shifted its focus 2 Case 1:08-cv-07041-DLC Document 74 Filed 06/05/2009 Page 3 of 79 to mineral extraction and production in the late 1990s. As part of its foray into mineral extraction, NovaGold began investigating the untapped mineral reserves of Galore Creek in northern British Columbia in 2003, and acquired the mineral rights to 215,000 acres. Located in a mountainous area, the untapped Galore Creek -- initially accessible only by helicopter -- was believed to have large copper, silver, and gold deposits.' The minerals were to be extracted through an “open pit” mine, close to the surface, but spread out over a large area. A. Scoping the Project: Engineering Challenges and the Preliminary Feasibility Study Considerable engineering challenges accompanied the lucrative potential of the mine. Because the Galore Creek site was an open pit mine, extracting the minerals would require excavating the waste rock sitting on top of the minerals first. The excavated earth, which contained waste rock (the portion not containing valuable minerals) and tailings (the material left over from the process of separating the valuable minerals from the worthless portion of the ore) needed to be stored permanently elsewhere, usually in a structure known as a “tailings dam.” NovaGold initially intended to place the tailings dam in a valley where Galore Creek flowed, requiring ' The potential available mineral resources were reported to amount to 6.8 billion pounds of copper, 5.95 million ounces of gold, and 75.4 million ounces of silver. 3 Case 1:08-cv-07041-DLC Document 74 Filed 06/05/2009 Page 4 of 79 the creek to be directed for 4.7 miles around the tailings dam area. Heavy rains and snowfall in the winter of 2005-06 sharply increased the amount of surface water that NovaGold would need to divert. The remote location and large size of the mine only amplified these logistical difficulties. NovaGold undertook feasibility studies regarding the project in compliance with Canadian securities regulations imposing specific disclosure requirements on companies undertaking mineral exploration. These requirements include preparation of “feasibility studies” by independent experts that include sufficient detail to enable a financial institution to determine whether it should finance the development of a project. NovaGold retained defendant Hatch Ltd. (“Hatch”) in 2003 to perform a preliminary study of the feasibility of the Galore Creek mine (the “Project”). Defendant Rick Van Nieuwenhuyse, NovaGold’s CEO, announced the results of the preliminary study in October 2005, which included a capital cost estimate of US$ 1.1 billion (approximately 1.3 billion Canadian dollars (“C$”)), indicating the commercial viability of the Project. Hatch then began a final feasibility study, which was designed to estimate costs within 10-15% (the “Hatch Study”). NovaGold expected Hatch’s study to be complete in the second half of 2006. NovaGold subsequently raised US$ 165.3 million through an initial public offering (“IPO”) on January 24, 2006. 4 Case 1:08-cv-07041-DLC Document 74 Filed 06/05/2009 Page 5 of 79 A week later, it announced an agreement with the Native Canadian Tahltan First Nation, which resided on portions of the Galore Creek area (the “February 2006 Participation Agreement”). In June 2006, NovaGold reported to Canadian authorities that it had explored “all viable options” so that it could make a “reasonable decision” about planning the Project. B. Barrick’s Hostile Takeover Bid and the Release of the Hatch Study NovaGold had earlier begun discussions with global mining giant Barrick Gold Corp. (“Barrick”) regarding a potential joint venture to develop Galore Creek. On July 24, 2006, Barrick announced a hostile bid for NovaGold at US$ 14.50 per share, and NovaGold’s share price increased from US$ 11.67 to US$ 16.17 the following day. NovaGold issued a press release on July 25 condemning Barrick’s offer. While attempting to fight off the hostile bid, NovaGold also continued to learn more about the surface water issues caused by heavy precipitation, which drove up the costs of the Project further. By October 2006, NovaGold’s share price declined to $15.35, approaching the $14.50 offered by Barrick. NovaGold issued a press release on October 12 announcing that the Hatch Study would likely be released by the end of the quarter. Barrick responded on October 24 by raising its offer to US$ 16 per share. The next day, NovaGold announced the 5 Case 1:08-cv-07041-DLC Document 74 Filed 06/05/2009 Page 6 of 79 release of the Hatch Study in a press release (the “October 25, 2006 Press Release”), entitled “Final Feasibility Study Completed at NovaGold’s Galore Creek Project.” As described in the October 25, 2006 Press Release, the study confirmed the economic viability of the Project, stating that it was “one of the world’s largest undeveloped copper-gold-silver projects with one of the lowest cash costs in the industry,” and calculated capital costs at US$ 1.8 billion, or C$ 2.2 billion. The October 25, 2006 Press Release also explained that the study’s estimates reflected a +15%/-10% level of accuracy, and encompassed “all the direct and indirect costs and appropriate project estimating contingencies,” including “construction of all major civil earthworks for the dams and water diversion structures.” Analysts responded to the Hatch Study enthusiastically and advised investors to reject Barrick’s bid. NovaGold announced in an October 31 press release that, because of the strong projections in the study, its negotiations with potential joint venture partners had accelerated. It noted its recent “value- adding milestones,” including the release of the “independent Galore Creek Feasibility Study, confirming economics of the project and providing the Company’s first Proven and Probable Reserves.” 6 Case 1:08-cv-07041-DLC Document 74 Filed 06/05/2009 Page 7 of 79 The hostile takeover bid was overwhelmingly rejected on November 8, 2006, and NovaGold announced the same in a press release issued that day. It attributed the shareholders’ rejection of the bid to “milestones,” which included the “[c]ompleted final Feasibility Study at Galore Creek.” NovaGold also held a conference call on November 8 (the “November 8, 2006 Conference Call”), in which Van Nieuwenhuyse characterized the Hatch Study as “done” and informed the public that NovaGold was moving forward with construction: Final preparations are now being made . to basically take that feasibility study and implement that into a construction plan . having completed the feasibility study at Galore Creek, we can now speak about the reserves there. Also participating in the call, defendant Robert J. MacDonald, the CFO of NovaGold, described “significant interest from potential joint venture partners,” who had been awaiting “the completion of our feasibility study, which was just released two weeks ago.” MacDonald also repeated the Hatch Study’s cost figures: “based on the feasibility study . for Galore Creek, we have a total capital of about [US]$ 1.8 billion.” Van Nieuwenhuyse referred to the Project