NOVAGOLD RESOURCES INC. — FY2018 Form 10-K
Reporting period: Fiscal year ended November 30, 2018; filed January 23, 2019. This is an annual report, not a standalone quarterly filing. Amounts are U.S. dollars unless otherwise stated.
Business context
NOVAGOLD is a pre-production gold exploration and development company. It reported no mineral production, operating revenue, or operating cash flow. Its principal remaining asset is a 50% interest in the Donlin Gold project in Alaska, jointly owned with Barrick. NOVAGOLD sold its Galore Creek interests to Newmont on July 27, 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | None from planned principal business | None |
| Loss from operations | $27.3 million | $32.0 million |
| Net loss from continuing operations | $31.5 million | $36.9 million |
| Net loss from discontinued operations | $81.3 million | $2.1 million |
| Net loss | $112.8 million | $39.0 million |
| Basic and diluted loss per share | $0.35 | $0.12 |
| Cash used in continuing operating activities | $10.4 million | $8.1 million |
The FY2018 total loss includes an $80.1 million after-tax loss on the Galore Creek sale. Continuing-operation loss improved year over year, principally due to lower Donlin project and general and administrative costs. No operating margins are meaningful because the company had no operating revenue.
At year-end, cash and cash equivalents were $21.0 million and term deposits were $146.0 million, totaling $167.0 million, up $83.1 million year over year. Current assets were $169.4 million and current liabilities $3.7 million. Total assets were $260.9 million; total liabilities were $100.2 million. The $96.5 million Barrick promissory note is payable from 85% of NOVAGOLD’s share of future Donlin production revenue or from proceeds of a reduction in its project interest. It bears interest at U.S. prime plus 2%; a 1 percentage-point rate change would affect annual accrued interest by about $1.0 million.
Continuing operating cash use was $10.4 million. Investing cash flows included movements in term deposits; the Galore Creek sale generated $99.3 million of net cash proceeds, and the company also received a $4.6 million reclamation-deposit refund. The sale proceeds also included notes receivable initially valued at $88.4 million: $75 million due on an earlier specified study milestone or by July 2021, and $25 million on a study milestone or by July 2023. A further $75 million is contingent on approval of a Galore Creek construction plan and was assigned no value.
Material changes and unusual items
- Galore Creek was sold for $100 million cash at closing, two deferred notes with a combined face value of $100 million, and a contingent $75 million note. The sale drove most of the year’s discontinued-operations loss.
- Operating loss fell to $27.3 million from $32.0 million: Donlin expenses declined with lower permitting costs and no 2018 drill program; general and administrative expense declined by $2.3 million, largely from lower share-based compensation.
- Fourth-quarter 2018 net loss was $6.1 million, versus $10.0 million in fourth-quarter 2017, mainly reflecting lower Donlin equity losses and permitting activity.
- Total assets declined to $260.9 million from $398.7 million, principally reflecting the Galore Creek disposal and reclassification of assets held for sale. Shareholders’ equity was $160.7 million at year-end.
Donlin project, outlook, and risks
During 2018, federal environmental review reached a Record of Decision and several major federal and Alaska permits were issued. Final state approval of the reclamation and closure plan and the final waste management permit followed on January 18, 2019. The state pipeline right-of-way and other land-use approvals were still expected to enter public comment in the first half of 2019; dam-safety certificates require further engineering and multi-year work. The Donlin owners must approve a construction program and budget before development proceeds.
Management’s 2019 goals included advancing Donlin toward a construction/production decision and maintaining liquidity. NOVAGOLD expected approximately $24 million of 2019 spending, including $13 million for its share of Donlin work and $11 million for corporate general and administrative costs. Management said year-end cash and term deposits were sufficient for anticipated near-term project funding and corporate costs, but construction would require substantial additional financing. No construction decision or production start date was provided.
The filing cites a 2011 Donlin feasibility study: estimated total project capital cost of about $6.7 billion on a 100% basis; after-tax NPV at a 5% discount rate of $547 million and IRR of 6.0% at a $1,200/oz gold-price assumption; and a 27-year modeled mine life. These are historic study estimates, not current guidance or a commitment to build. The filing reports Canadian-standard reserves and resources, but explicitly states Donlin has no known reserves under SEC Industry Guide 7. Estimates are based on the 2011 study and are subject to uncertainty.
Principal risks include the need for partner and board approval, substantial project financing, remaining permits and engineering, possible litigation or permit challenges, opposition by some local and tribal groups, remote-site infrastructure and logistics, volatile gold prices, cost escalation, and the possibility that the project never enters production. NOVAGOLD also depends on Barrick as equal project partner. The company reported no material pending legal proceedings and said its internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements and controls.
Most important facts for investors to verify
- Whether remaining state approvals, dam-safety work, any permit reviews or litigation, and community opposition affect Donlin’s schedule or scope.
- Whether Barrick and NOVAGOLD approve an updated feasibility study, engineering program, construction budget, and funding plan; the 2011 capital and economic estimates may no longer reflect current costs or conditions.
- Liquidity runway and financing needs if Donlin advances, including potential dilution, and the terms and timing of repayment of the Barrick note.
- Collectability and timing of the $100 million face-value Newmont notes, and the conditions for any contingent $75 million payment.
- Resource and reserve classifications, assumptions, and the distinction between Canadian reporting categories and SEC Industry Guide 7; the company cautions that resources may not become economically mineable reserves.