NOVAGOLD RESOURCES INC. — Q2 2021 Form 10-Q
Business context and period. The unaudited quarter and six months ended May 31, 2021. NOVAGOLD is a gold exploration and development company with no realized revenue from its planned principal business; its main asset is a 50% interest in the Donlin Gold project in Alaska, jointly owned with Barrick Gold. Dollar amounts below are U.S. dollars.
Financial performance and position
- Revenue and margins: No operating revenue; the company reported operating and net losses, so operating margins are not meaningful.
- Q2 results: Operating loss was $9.2 million, versus $8.1 million in Q2 2020. Net loss was $10.5 million, or $0.03 per share, versus $7.2 million, or $0.02 per share.
- Six-month results: Operating loss was $16.5 million, versus $14.4 million in 2020. Net loss was $18.5 million, or $0.06 per share, versus $13.8 million, or $0.04 per share.
- Cash flow: For the six months, operating cash use was $6.3 million, investing cash use was $2.9 million, and financing cash use was $0.7 million, primarily withholding taxes on vested performance share units. NOVAGOLD funded Donlin Gold with $8.1 million.
- Liquidity: At May 31, cash and cash equivalents were $51.8 million and term deposits were $55.8 million, totaling $107.6 million, down $14.3 million from November 30, 2020. Management said available working capital was sufficient for anticipated needs over the next 12 months.
- Debt and other obligations: The Barrick promissory note totaled $112.7 million, comprising $51.6 million principal and $61.1 million accrued interest, at U.S. prime plus 2%. It is payable from 85% of NOVAGOLD’s share of future mine revenue or certain proceeds from reducing its Donlin interest. Current liabilities were $2.1 million; total liabilities were $115.2 million.
- Other assets: Notes receivable from Newmont had a carrying value of $97.7 million, including accretion. NOVAGOLD expected to receive $75 million in July 2021 under the first note from the Galore Creek sale.
Changes versus the prior comparable period
Q2 and six-month losses increased year over year, mainly due to higher general and administrative costs and Donlin Gold expenses. Higher share-based compensation and legal costs contributed to increased corporate expenses. Donlin expenses also reflected drilling and completion of prior-season assay work; the 2020 drill program had paused from April to mid-May as a COVID-19 precaution. Lower interest income and foreign-exchange movements also weighed on net results; lower promissory-note interest expense partly offset the six-month increase in net loss.
Outlook, developments and risks
- Spending outlook: Management expected 2021 expenditures of $31–$35 million, including $18–$22 million for Donlin Gold and $13 million for corporate G&A. The Donlin estimate included $11 million for drilling, camp improvements and studies; $7 million for permitting, community engagement and administration; and up to $4 million for additional studies subject to both owners’ approval.
- Project progress: Four rigs were drilling at Donlin Gold; 28 of a planned 64 holes had been completed. The work was intended to inform updated mine plans, feasibility work and engineering ahead of any construction decision. Construction requires board approval, permits and financing; the filing does not give a construction decision date.
- Permitting and contingencies: Alaska’s commissioner upheld the project’s Clean Water Act Section 401 certification on May 27, 2021. The decision was appealed in Alaska Superior Court on June 28. State decisions on the pipeline right-of-way and water-right applications were expected in 2021. Permitting litigation or delay, public opposition, financing availability, commodity prices and COVID-19 impacts could affect project timing or viability.
- Financing and risk: Management said additional capital would be needed if Donlin advances to engineering and construction; future financing could involve debt, equity, project debt or other means, with no assurance it will be available on favorable terms or at all. The company has no operating cash flow and expects future losses. A 1% change in U.S. prime would change annual accrued interest on the Barrick note by approximately $1.1 million, all else equal.
- Operations and controls: COVID-19 protocols remained in place for employees and project personnel, with potential effects on workforce, travel, studies and fieldwork. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether the expected July 2021 $75 million Newmont note payment was received, and how subsequent liquidity compares with projected spending.
- The status and outcome of the June 28 appeal of the Section 401 certification and other outstanding Donlin permits.
- Actual Donlin drilling and study spending versus the $18–$22 million 2021 funding estimate, including approval of the contingent $4 million.
- Any Donlin construction decision, associated capital requirements and financing plan; no construction commitment or financing is disclosed here.
- The growth in the Barrick note’s accrued interest and the company’s ability to fund ongoing losses without operating revenue.