NOVAGOLD RESOURCES INC. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended May 31, 2017. Amounts below are U.S. dollars; financial statement figures are rounded to millions unless noted. NOVAGOLD is an exploration and development company with 50% interests in Donlin Gold in Alaska and Galore Creek in British Columbia. It had no realized revenue from its principal business and no production.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating loss | $7.6 million | $7.4 million | $16.5 million | $16.9 million |
| Net loss | $8.5 million | $9.1 million | $18.6 million | $19.1 million |
| Net loss per share | $0.03 | $0.03 | $0.06 | $0.06 |
| Cash used in operating activities | $1.5 million | $2.1 million | $6.0 million | $9.9 million |
| Cash funding for Donlin Gold and Galore Creek | $3.1 million | $3.1 million | $5.8 million | $5.2 million |
At May 31, 2017, cash and cash equivalents were $21.6 million and term deposits were $71.9 million, totaling $93.5 million. Total assets were $395.4 million; total liabilities were $109.4 million, including a $87.3 million Barrick promissory note. The note comprises $51.6 million principal and $35.8 million accrued interest, bears interest at U.S. prime plus 2%, and is payable from 85% of NOVAGOLD’s share of future Donlin revenue or qualifying proceeds from reducing its interest. Current liabilities were $2.0 million. No operating margin is meaningful because the company had no realized revenue.
Changes versus comparable periods
- Q2 operating loss increased by $0.2 million, primarily because of higher general and administrative expense, including share-based compensation. Six-month operating loss declined by $0.4 million, mainly reflecting lower general and administrative expense.
- Net loss improved by $0.7 million in Q2 and $0.5 million for the six months. Management attributed the improvement to foreign-exchange effects and, for the six-month period, lower operating costs; higher promissory-note interest partly offset the improvement.
- Operating cash use fell by $0.6 million in Q2 and $3.9 million for the six months. The six-month comparison benefited primarily from lower withholding taxes on vested performance share units after the company elected to deliver full shares to executives.
- Cash and cash equivalents declined $8.7 million from November 30, 2016, and term deposits declined $3.1 million. Total comprehensive loss for the six months was $20.0 million, including $1.4 million of other comprehensive loss, largely reflecting foreign currency translation.
Projects, outlook, and risks
- Donlin Gold: Permitting and environmental review continued. The U.S. Army Corps of Engineers’ final environmental impact statement was anticipated in early 2018; it is required before a decision on key federal permits. The owners approved an $8 million drilling program, of which NOVAGOLD’s share is $4 million, for data supporting project optimization. Additional permits, engineering, financing, and approval of a construction program and budget remain necessary.
- Galore Creek: Technical studies, care and maintenance, and community initiatives continued. NOVAGOLD remained open to monetizing all or part of its 50% interest to strengthen its balance sheet and potentially contribute to Donlin Gold.
- Spending and liquidity outlook: Management forecast approximately $27 million of fiscal 2017 spending: $11 million for general and administrative costs, $14 million for Donlin Gold, and $2 million for Galore Creek. Approximately $12 million had been spent by May 31. Management believed available cash and term deposits could cover anticipated funding and corporate costs through completion of Donlin permitting. Additional capital would be needed if the project advanced to engineering and construction; future financing was not assured.
- Principal risks: No assurance of permits, a construction decision, production, or financing; potential permitting delays, public opposition or litigation; development, infrastructure and cost risks; commodity-price uncertainty; and currency, credit, and interest-rate exposure. The company had not hedged currency exposure. Management estimated that a $0.01 change in the Canadian dollar would change consolidated comprehensive income or loss by approximately $3.8 million, and a 1% change in U.S. prime would change annual accrued note interest by approximately $0.9 million.
- The filing reported no material current, pending, or threatened litigation known to the company and no material changes to the risk factors in its 2016 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and timing of the Donlin Gold final environmental impact statement, required permits, further engineering, and any construction decision.
- Whether the company’s cash and term deposits remain sufficient for planned work, and the availability and terms of future financing if development advances.
- The promissory note’s accruing interest and repayment mechanics, together with its effect on NOVAGOLD’s future Donlin proceeds.
- Donlin Gold and Galore Creek work-program spending, optimization results, and any decision to monetize the Galore Creek interest.
- Potential effects of foreign exchange, interest rates, permitting delays, litigation, and other project risks on liquidity and asset values.