NOVAGOLD RESOURCES INC. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended August 31, 2017. Financial amounts below are U.S. dollars; financial statement figures are in millions unless noted. NOVAGOLD is an exploration and development company with 50% interests in the Donlin Gold project in Alaska and the Galore Creek project in British Columbia. It reported no revenue from its planned principal business.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating loss | $8.4m | $6.4m | $24.9m | $23.3m |
| Net loss | $10.4m | $7.4m | $29.0m | $26.5m |
| Net loss per share | $0.03 | $0.02 | $0.09 | $0.08 |
| Cash used in operating activities | $1.7m | $0.5m | $7.6m | $10.4m |
| Cash funded to project affiliates | $3.5m | $2.7m | $9.3m | $7.9m |
- At August 31, cash and cash equivalents were $21.6m and term deposits were $66.9m, totaling $88.5m in cash and deposits. Current assets were $90.1m versus current liabilities of $2.7m.
- Total assets were $413.3m, total liabilities $113.0m, and equity $300.3m. The balance sheet included an $88.7m promissory note payable to Barrick, comprising $51.6m principal and $37.1m accrued interest. It bears interest at U.S. prime plus 2%; payment is due from 85% of NOVAGOLD’s share of future Donlin revenue or proceeds from reducing its Donlin interest.
- There is no meaningful operating margin to report because the company has no operating revenue. Q3 comprehensive income was $12.2m despite the net loss, primarily reflecting $22.5m of foreign currency translation gains; nine-month comprehensive loss was $7.9m.
Changes versus comparable periods
- Q3 operating loss rose $2.0m year over year, mainly due to Donlin’s drill program ($1.2m), higher Galore Creek care and maintenance ($0.4m), and increased general and administrative expense.
- Q3 net loss increased $3.0m, also reflecting a $0.9m unfavorable change in foreign exchange and higher promissory-note interest expense. Nine-month net loss increased $2.5m, with operating costs, foreign exchange and interest contributing.
- Cash and term deposits declined by $8.6m and $8.1m, respectively, from November 30, 2016. The company reported $17m of expenditures in the first nine months. Operating cash use was lower year over year in the nine-month period, primarily because less withholding tax was paid on vested performance share units.
Outlook, projects and risks
- Management said available cash and term deposits were expected to cover anticipated Donlin and Galore Creek funding and corporate costs through completion of Donlin permitting. It cautioned that additional capital would be needed if permits are obtained and the company decides to proceed with engineering and construction. Future construction funding could involve debt, equity, project-specific debt or other means; success and terms are not assured.
- 2017 spending was estimated at approximately $27m: $11m corporate general and administrative costs, $14m for NOVAGOLD’s Donlin share and $2m for Galore Creek.
- Donlin permitting continued. The Corps anticipated publication of the final environmental impact statement in early 2018 and a record of decision in mid-2018. The final air permit was issued in June 2017; other permits, engineering, board approval and financing remain prerequisites to construction. NOVAGOLD and Barrick began an $8m drill program, of which NOVAGOLD’s share was $4m.
- Galore Creek activity focused on care and maintenance and technical studies. NOVAGOLD remained open to monetizing all or part of its 50% interest.
- Key exposures include permitting and development delays, financing availability, commodity prices, project costs, infrastructure, regulatory and environmental requirements, community opposition and litigation, and uncertainty that either project will ever produce. A C$0.01 change against the U.S. dollar was estimated to change comprehensive income by about $3.8m; a 1% change in U.S. prime was estimated to change annual accrued note interest by about $0.9m. The company had not hedged currency exposure.
- No material changes to previously disclosed risk factors or material current, pending or threatened litigation were reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Donlin’s anticipated permitting milestones were achieved, and what approvals, engineering, budget decisions and financing are still required before construction.
- Whether projected funding needs and management’s liquidity runway remain adequate given project spending and the absence of operating cash revenue.
- Terms and accrued balance of the Barrick promissory note, including the effect of variable-rate interest and its future-revenue repayment mechanism.
- Progress and potential proceeds from any proposed Galore Creek monetization, and the effect of Canadian-dollar movements on reported results and asset values.