NOVAGOLD RESOURCES INC. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2016. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
NOVAGOLD is an exploration and development-stage mining company with 50% interests in the Donlin Gold project in Alaska and the Galore Creek project in British Columbia. It had no operating revenue and no producing operations. Its results primarily reflect corporate costs and its share of project expenses.
Financial results and liquidity
| Metric | Three months ended May 31, 2016 | Six months ended May 31, 2016 |
|---|---|---|
| Revenue | None | None |
| Operating loss | $7.4 million | $16.9 million |
| Net loss | $9.1 million | $19.1 million |
| Net loss per share, basic and diluted | $0.03 | $0.06 |
| Cash used in operations | $2.1 million | $9.9 million |
| Funding of Donlin Gold and Galore Creek | $3.1 million | $5.2 million |
At May 31, cash and cash equivalents were $31.7 million and term deposits were $80.0 million, totaling $111.7 million in cash and deposits. Total assets were $424.1 million; current liabilities were $2.0 million. The company reported total liabilities of $105.4 million, including an $82.5 million Barrick promissory note. That note comprises $51.6 million principal and $30.9 million accrued interest, bears interest at U.S. prime plus 2%, and is payable from specified future Donlin revenue or proceeds from reducing its project interest. No revenue-based operating margin is available because the company had no revenue.
Changes versus prior comparable periods
- Q2 operating loss increased to $7.4 million from $7.2 million; net loss was slightly lower at $9.1 million versus $9.2 million. Lower Donlin expenses and interest costs were partly offset by higher foreign-exchange losses and general and administrative costs.
- For the six months, operating loss improved to $16.9 million from $18.5 million, mainly due to lower Donlin project expenses. Net loss increased to $19.1 million from $18.5 million, principally because foreign exchange moved from a $3.2 million gain in 2015 to a $0.3 million loss in 2016.
- Cash and cash equivalents declined $10.0 million from November 30, 2015, while term deposits declined $5.0 million. Cash used in operations rose to $9.9 million from $8.2 million, mainly reflecting $4.3 million of cash withholding taxes on vested performance share units; the prior period included convertible-note interest payments.
- Comprehensive income included $5.7 million of foreign-currency translation gains in the first half of 2016, compared with $30.2 million of translation losses in the prior-year period.
Outlook, risks and notable items
- Management expected 2016 spending of approximately $25 million: $10 million for its share of Donlin and Galore expenditures, $1 million for joint Donlin studies, $12 million for general and administrative costs, and $2 million for working capital and other corporate purposes. Approximately $15 million had been spent by May 31.
- Management said available cash and term deposits were expected to cover anticipated project funding and corporate costs through completion of Donlin permitting. Additional capital would be required if permits are obtained and construction is approved; potential funding sources include debt, equity, project-specific debt, or other means. There is no assurance financing will be available.
- Donlin permitting continued. The draft Environmental Impact Statement comment period closed May 31, 2016; the Army Corps of Engineers anticipated the final EIS in 2017. Further engineering, permits, financing, and approval of a construction program and budget remain prerequisites and may affect timing.
- Donlin’s 2016 work program was expected to require NOVAGOLD’s share of approximately $9 million; Galore’s expected share was approximately $1 million. Galore technical studies continued, and the company remained open to monetizing all or part of its interest.
- Key risks include permitting delays or denials, project financing and construction uncertainty, commodity prices, reliance on joint-venture partners, and currency exposure. The company had no currency hedges; a C$0.01 move against the U.S. dollar was estimated to change comprehensive income by approximately $3.0 million. A 1% change in U.S. prime was estimated to affect annual accrued interest on the Barrick note by approximately $0.8 million.
- Share-based compensation was $6.6 million for the first half. The 2015 comparison included a $1.0 million non-cash out-of-period adjustment reducing Q2 stock-option expense. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material current, pending, or threatened litigation and no material risk-factor changes from its 2015 Form 10-K.
Important facts for investors to verify
- Donlin permitting milestones, the final EIS timetable, remaining approvals, and the timing of additional engineering.
- Whether project partners approve budgets and a construction program, and whether the company can secure the substantial financing needed for development.
- Actual spending against the approximately $25 million 2016 plan and management’s stated estimate that current liquidity would cover costs through Donlin permitting.
- The accrued balance and terms of the Barrick promissory note, including its variable interest rate and payment sources.
- Exposure to Canadian-dollar movements and the assumptions behind the disclosed sensitivity estimate.