NOVAGOLD Resources Inc. — Q3 2014 Form 10-Q
Business context and period. The unaudited quarterly report covers the three and nine months ended August 31, 2014. 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 had no operating revenue from its planned principal business.
Financial performance and position
All amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
- Q3 results: Operating loss was $10.8 million, versus $15.9 million in Q3 2013. Net loss was $12.0 million, or $0.04 per share, versus $20.0 million, or $0.06 per share.
- Nine-month results: Operating loss was $30.4 million, versus $42.6 million in 2013. Net loss was $33.4 million, or $0.11 per share, versus $43.6 million, or $0.14 per share. With no operating revenue, revenue margins are not applicable.
- Cash flow: Cash used in operations was $7.4 million for the nine months, compared with $14.3 million in 2013. Investing activities used $3.0 million, including $13.0 million in funding to affiliates, partly offset by net term-deposit redemptions. Cash and cash equivalents declined $10.4 million over the nine months.
- Liquidity: At August 31, cash and cash equivalents were $70.8 million and current term deposits were $100.0 million. Current assets were $174.1 million and current liabilities $18.5 million.
- Debt: Total carrying debt was $89.9 million, including $14.7 million of convertible notes classified as current and a $75.2 million promissory note to Barrick. The remaining $15.829 million principal on the convertible notes is due May 1, 2015. The promissory note bears interest at U.S. prime plus 2%; accrued interest was $23.6 million.
- Other comprehensive loss: $43.1 million for the nine months, including $9.9 million of foreign currency translation losses. A C$0.01 movement against the U.S. dollar was estimated to change comprehensive income or loss by approximately $3.3 million.
Material changes versus the prior comparable period
- Lower G&A and lower affiliate losses reduced operating loss. For Q3, lower Galore Creek losses more than offset increased Donlin Gold losses; the filing attributes the Galore Creek decrease mainly to reduced camp activity and equipment being fully depreciated in 2013.
- Nine-month G&A fell $2.9 million, while affiliate losses fell $8.9 million, primarily due to lower Galore Creek losses. Donlin Gold’s nine-month share of losses increased $0.3 million.
- Net loss also benefited from lower interest expense and the absence of the $2.6 million marketable-securities write-down recorded in Q3 2013. For the nine months, a lower foreign-exchange gain partly offset these improvements.
- Cash used in operations decreased year over year, reflecting reduced interest expense and corporate overhead. Cash and term deposits together were $170.8 million at August 31, 2014, versus $191.3 million at November 30, 2013.
Outlook, commentary and risks
- Management expected 2014 spending of approximately $12 million for NOVAGOLD’s share of Donlin Gold and $2.5 million for Galore Creek; total project funding was estimated at approximately $15 million. It also expected approximately $15 million for G&A, interest, working capital and other corporate purposes.
- Management believed available cash and term deposits were sufficient for anticipated project funding, corporate costs through completion of Donlin permitting, and repayment of the convertible notes due in May 2015. The company does not generate operating cash flow and states that continued operations depend on financing or future cash flows.
- Donlin permitting continued, with the draft Environmental Impact Statement scheduled for public comment in 2015. The overall permitting process, begun in 2012, was anticipated to take approximately four years. Additional capital would be needed if permits were obtained and construction proceeded.
- At Galore Creek, technical work was intended to refine mine planning and project design. NOVAGOLD continued to evaluate monetizing all or part of its interest to strengthen its balance sheet and focus on Donlin.
- Key risks include permitting and environmental review, project development and financing, commodity and foreign-exchange exposure, reliance on joint-venture partners, and uncertainty over whether either project will reach production. The company did not hedge currency exposure. A 1% change in U.S. prime was estimated to change annual interest accrued on the Barrick note by about $0.8 million.
- The filing reported no material changes to the prior annual report’s risk factors and no material current, pending or threatened litigation known to the company. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Donlin permitting remains on schedule, including the EIS timeline and associated project costs.
- Whether NOVAGOLD can repay or refinance the $15.829 million convertible-note principal due May 1, 2015, and how the Barrick promissory note accrues and is ultimately settled.
- Actual cash use and affiliate funding relative to management’s 2014 spending estimates, and the resulting liquidity runway.
- Progress on Galore Creek technical studies and any transaction or monetization plans.
- Project financing requirements, permitting outcomes, and the potential effect of Canadian-dollar movements and U.S. prime-rate changes.