NOVAGOLD Resources Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended February 29, 2020; comparative period ended February 28, 2019. Amounts below are in U.S. dollars. NOVAGOLD is an exploration and development company with no revenue from its planned principal business. Its principal asset is a 50% interest in the Donlin Gold project in Alaska, jointly owned with Barrick.
Financial performance and position
- Revenue and margins: No operating revenue; operating margins are not meaningful.
- Expenses and loss: General and administrative expense was $4.714 million, up from $4.340 million. Donlin Gold equity loss was $1.568 million, up from $1.323 million. Operating loss was $6.282 million versus $5.663 million; net loss was $6.595 million versus $6.323 million. Basic and diluted loss per share was $0.02 in both periods.
- Cash flow: Operating cash use was $3.497 million versus $3.150 million. Donlin funding used $2.600 million. Financing cash use was $1.652 million, primarily withholding taxes on vested performance share units. Cash and cash equivalents fell $7.850 million to $59.699 million.
- Liquidity and assets: Cash plus term deposits totaled $140.699 million at February 29, 2020; term deposits were $81.000 million. Total assets were $239.816 million and total liabilities were $108.803 million.
- Debt and receivables: The Barrick promissory note was $105.547 million, including $51.576 million principal and $53.971 million accrued interest. It bears interest at U.S. prime plus 2% and is payable from 85% of NOVAGOLD’s future share of mine revenue or from net proceeds of a reduction in its Donlin interest. Notes receivable from Newmont had a carrying value of $93.503 million. A further contingent $75 million note receivable was assigned no value.
Changes, outlook, and key developments
- Compared with Q1 2019, G&A increased mainly due to higher share-based compensation and regulatory costs; Donlin equity loss rose due to preparation for the 2020 drilling program. Interest income declined to $0.517 million from $1.042 million; foreign exchange moved from a $0.386 million loss to a $0.378 million gain.
- Management expected 2020 spending of approximately $31 million: $20 million for NOVAGOLD’s share of Donlin expenditures and $11 million for G&A. It stated that available cash and term deposits were sufficient for anticipated project funding and corporate costs, but project engineering or construction would require additional capital. No assurance was given that future financing would be available on favorable terms or at all.
- Donlin’s 2020 program included an 80-hole, 22,000-meter drill program. After the quarter, Donlin Gold LLC planned to pause drilling and place the site into care and maintenance in April because of COVID-19; work was to resume when travel restrictions and other measures eased and it was safe to return. COVID-19 could also affect staffing, travel, costs, testing, and project timing.
- Permitting and litigation remain important uncertainties. Alaska issued specified land-use and transportation authorizations and a pipeline right-of-way lease in January 2020. An appeal challenging the denial of reconsideration of that lease was filed in Alaska Superior Court on March 19, 2020. A separate review of the project’s water-quality certification was pending, with a decision expected in the first half of 2020. Donlin’s construction decision also depends on engineering, approvals, financing, and board approval.
- Other risks include the project’s development and financing uncertainty, commodity prices, permitting and opposition, and potential U.S. passive foreign investment company (PFIC) status. The company said it believed it was not a PFIC for fiscal 2019 but might be one in future years. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19 delays or changes Donlin’s drilling, permitting, engineering plans, or the timing of a construction decision.
- Progress and outcomes of the pipeline right-of-way appeal and water-quality certification review, and the status of other required permits.
- Whether the $140.7 million of cash and term deposits remains adequate against actual spending and any future project funding needs.
- The growth and terms of the Barrick promissory note, including its variable-rate interest, and the timing and collectability of Newmont notes receivable.
- Any updated financing, project spending, or PFIC disclosures; the filing provides no production guidance or operating revenue forecast.