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A capex blow-out, which more than doubled the estimated project cost of NovaGold Resources' Galore Creek project, is the subject of a shareholder class action lawsuit filed Thursday against the Vancouver junior gold miner.

The lawsuit was filed in the U.S. District Court for the Southern District of New York on behalf of plaintiff Rudolph T. Textor and all purchasers of securities of NovaGold Resources from October 25, 2006, through November 23, 2007.

Named as defendant in the lawsuit were NovaGold Resources, NovaGold President and CEO Rick Van Nieuwenhuyse, Senior Vice President and CFO Don MacDonald, and NovaGold Senior Vice President and COO Peter W. Harris.

In a brief statement issued early Friday morning, NovaGold said, "The Company believes it has substantial and meritorious legal and factual defenses, which the Company intends to pursue vigorously."

Last November, construction at the Galore Creek copper and gold project in British Columbia was halted and the project put on a care-and-maintenance basis pending a further engineering study to determine a less costly construction plan after the estimated capex rose from $2.2 billion to $5 billion.  At least one billion dollars of that increase was attributed to the tailings dam and water diversion structures, which were originally underestimated in terms of time and labor.

Nevertheless, project joint venture partner Teck Cominco insists that Galore Creek is one of the largest undeveloped copper-gold projects in the world. Galore Creek was projected to produce 423 million pounds of copper, 341,000 ounces of gold and 4 million ounces of silver per year during the first five years of what is hoped to be a 20-year mine life.

However, attorneys for the law firms of Brodsky & Smith and Schifrin Barrowed Topaz & Kessler claimed that the defendants "falsely portrayed NovaGold as a rapidly growing company on the verge of moving from a mid-tier exploration and development company to a mid-tier gold and copper production company by issuing a series of false and misleading statements regarding the costs, progress and viability of its multi-billion Galore Creek project."

The plaintiffs noted that NovaGold issued a press release on October 25, 2006, "touting the results of a feasibility study performed by Hatch Ltd. that "purportedly ‘confirmed' the economic viability of the Galore Creek project. ...The Feasibility Study estimated the capital costs for Galore Creek to be Cdn$2.2 billion."

"The Hatch Feasibility Study allowed the company to successfully fend off a hostile takeover bid by mining giant Barrick Gold by maintaining the price of the company's shares above Barrick Gold's $16 per share tend offer," the plaintiffs claimed. "Moreover, the Hatch Feasibility Study allowed the company to raise hundreds of millions of dollars in an April 2007 secondary stock offering, thus providing the defendants to misrepresent the Hatch Feasibility Study as a bankable study. Throughout the Class Period, the company regularly and systematically assured the investing public that the construction of the Galore Creek project was on schedule and on budget."

The lawsuit says that "On November 26, 2007, the Company shocked investors when it announced that it would suspend activities at Galore Creek based on the results of an updated feasibility study, which estimated the capital costs for the Galore Creek project to be $5 billion-approximately 127 percent greater than Hatch had estimated in October 2006."

"The announcement caught the market completely by surprise," the plaintiffs declared. "As stated by Citigroup metals analysts John Hill and Graham Wark, ‘the magnitude of underestimation is shocking to us...' and by Dorothy Kosich, ‘Citigroup calls for NovaGold sale after Galore Creek ‘mining disaster,' Mineweb, November 30, 2007. The company's shares have not recovered and continue to trade under $10 per share."

"The complaint alleges that, throughout the Class Period, Defendants failed to disclose materially adverse facts about the company's operations and prospects. Specifically, Defendants failed to disclose that:

(1)     Contrary to the Defendants' representations, the Company had failed to make reasonable estimates as to capital expenditures necessary to mine Galore Creek, which were underestimated by more than $3 billion.

(2)     The development of Galore Creek was not proceeding on schedule and was a year and a half to two years behind schedule; 

(3)     The results of the Hatch Feasibility Study announced on October 25, 2006 materially understated the capital costs and construction schedule required to successfully mine the Galore Creek site;

(4)     Defendants knew but failed to disclose that the Hatch Feasibility Study was not a ‘Bankable Feasibility Study.' 

(5)     NovaGold used its Hatch feasibility Study as a marketing tool to fend off Barrick Gold's takeover bid and to artificially support its stock price when Defendants knew or were reckless in disregarding that the Hatch Feasibility Study failed to: (i) use reasonable discount rate assumptions that reflected the Company's true cost of capital; (ii) evaluate and discount the major risks associated with development of the Galore Creek project; and (iii) failed to use realistic timeliness for permitting and construction of the project;

(6)     The Company lacked adequate internal controls; 

(7)     As a result of the foregoing, the Company's disclosures in, inter alia, its SEC filings were materially false and misleading at all relevant times; and

(8)     As a result of the foregoing, the Company's statement about its operations and future business prospects were lacking any reasonable basis when made."

The Plaintiff and other class members asserted that they have suffered significant losses and damages.