NOVAGOLD RESOURCES INC. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended August 31, 2022. Amounts are in U.S. dollars unless stated otherwise. NOVAGOLD is an exploration and development company whose principal asset is a 50% interest in the Donlin Gold project in Alaska; it reports no realized revenue from its planned principal business.
Financial highlights
| Metric | Q3 2022 / Aug. 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Revenue | No realized revenue | Not applicable |
| Net loss, three months | $16.1 million | $11.8 million in Q3 2021 |
| Net loss, nine months | $41.1 million | $30.3 million in 2021 |
| Loss per share, basic and diluted | $0.05 for Q3; $0.12 for nine months | $0.04 and $0.09, respectively |
| Operating cash flow | $1.6 million used in Q3; $10.0 million used in nine months | $1.9 million and $8.1 million used, respectively |
| Cash and cash equivalents | $61.9 million | $91.1 million at Nov. 30, 2021 |
| Term deposits | $70.0 million | $78.0 million at Nov. 30, 2021 |
| Total assets / equity | $166.6 million / $40.9 million | $198.9 million / $78.3 million at Nov. 30, 2021 |
| Promissory note payable to Barrick | $121.1 million, including $69.5 million accrued interest | $115.7 million at Nov. 30, 2021 |
Margins are not meaningful because the company has no realized revenue. Current assets were $157.1 million and current liabilities $3.5 million at quarter-end. Cash plus term deposits totaled $131.9 million. The Barrick note bears interest at U.S. prime plus 2% and is payable from 85% of NOVAGOLD’s share of future Donlin production revenue or from net proceeds of a reduction in its project interest; it is not described as ordinary current debt.
Changes versus prior comparable periods
- Q3 net loss increased $4.3 million year over year; nine-month net loss increased $10.8 million.
- Management attributed the larger losses principally to expanded Donlin Gold activity and higher interest expense on the Barrick note. Lower accretion income and changes in marketable-security values also affected results; higher interest income partly offset these factors.
- Nine-month Donlin Gold equity losses rose to $21.9 million from $12.9 million. NOVAGOLD funded $24.9 million of the project during the nine months, versus $15.0 million a year earlier.
- Cash and cash equivalents declined $29.2 million during the nine months. Investing cash use was $16.9 million, principally reflecting Donlin funding, partly offset by net term-deposit proceeds; the prior-year period included $75.0 million received on a Newmont note.
Outlook, project developments and risks
- Management expected fiscal 2022 expenditures of approximately $48 million: $32 million for Donlin Gold, $13 million for corporate general and administrative costs, $2 million for share-based compensation withholding taxes, and $1 million for working capital and other items. The Donlin funding estimate includes $23 million for drilling, camp improvements and studies, and $9 million for permitting, community engagement and administration.
- The Donlin Gold board approved increasing the 2022 drilling program to approximately 42,000 meters. About 42,300 meters were drilled by September; assay results were expected in early 2023. Owners were undertaking technical and engineering work to inform whether to update the feasibility study. No construction decision or timetable is provided.
- Management said available working capital should cover anticipated project funding and corporate costs until the Donlin board decides whether to commence engineering and construction. Substantial additional capital would be needed for construction; future financing could involve debt, equity, project-specific debt or other means, with no assurance it will be available on favorable terms or at all.
- Key permitting matters remained under appeal or review: the 401 water-quality certification adjudicatory review, state pipeline right-of-way appeals, and appeals concerning water rights. The filing anticipated further proceedings and court decisions in late 2022 through 2023. Existing 401 certification remained in effect during remand. Air-permit renewal and other project approvals were also in progress.
- Other material risks include the possibility Donlin never enters production, uncertain project costs and economics, commodity-price and financing risk, permitting delays, litigation, infrastructure and development risks, and reliance on Barrick and other project partners. A 1% change in U.S. prime rate would change annual interest accrued on the Barrick note by approximately $1.2 million, all else equal.
- The company reported no material changes to the risk factors in its 2021 Form 10-K and said it was not aware of material current, pending or threatened litigation. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress and outcomes of the 401 certification, right-of-way and water-rights appeals, and the status of required permit renewals.
- Donlin drilling assay results, updated resource or feasibility-study plans, project budget and any construction decision.
- Whether cash, term deposits and the Newmont note receivable can support the stated near-term plans, and the financing strategy and terms required for construction.
- Growth in the Barrick promissory note from variable-rate accrued interest and its eventual repayment terms.
- The status and conditions of the $25 million Galore Creek note receivable, carried at $24.2 million, and the separate $75 million contingent note, to which NOVAGOLD assigned no value because construction approval was not considered probable.