NOVAGOLD RESOURCES INC. — FY2019 Form 10-K
Reporting period: Fiscal year ended November 30, 2019. Amounts are in U.S. dollars unless stated otherwise. The filing was signed January 22, 2020. NOVAGOLD is a gold exploration and development company, not a producer; it reported no revenue from its planned principal business.
Business context and project status
- The company’s principal asset is a 50% interest in the Donlin Gold project in Alaska, jointly owned with Barrick Gold Corporation. The project is not under construction, and NOVAGOLD has no operating mines.
- Donlin Gold advanced permitting and engineering work. A multi-year field investigation began in 2019 to support dam-safety design and certification. State authorizations for transportation facilities were issued January 2, 2020; pipeline right-of-way authorizations were still being finalized.
- Donlin Gold’s final reclamation and closure plan and waste-management permit were issued in January 2019. An appeal of the reclamation plan was denied December 31, 2019; a further informal review of the state water-quality certification remained pending.
- The 2011 feasibility study reports 33.849 million ounces of proven and probable reserves under Canadian standards. NOVAGOLD expressly states it has no known reserves under SEC Industry Guide 7; Canadian resource and reserve estimates should not be treated as SEC-compliant reserves.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue from planned principal business | None | None |
| Operating loss | $26.8 million | $27.3 million |
| Net loss from continuing operations | $27.8 million; $0.09 per share | $31.5 million; $0.10 per share |
| Net loss, including discontinued operations | $27.8 million | $112.8 million |
| Cash used in continuing operating activities | $6.1 million | $10.4 million |
| Cash and term deposits at year-end | $148.5 million | $167.0 million |
| Total assets | $245.8 million | $260.9 million |
| Total liabilities | $107.9 million | $100.2 million |
| Shareholders’ equity | $138.0 million | $160.7 million |
- FY2019 cash and cash equivalents were $67.5 million and term deposits were $81.0 million. Management said these resources were sufficient for anticipated project funding and corporate costs over the next 12 months.
- Funding of Donlin Gold was $11.1 million in 2019, recorded as investing cash flow in the parent’s cash-flow statement. NOVAGOLD’s share of Donlin Gold’s equity loss was $10.5 million.
- The Barrick promissory note was $103.8 million, including $51.6 million principal and $52.2 million accrued interest. It bears interest at U.S. prime plus 2%; repayment is tied to future mine-production revenue or proceeds from reducing NOVAGOLD’s project interest.
- Newmont notes receivable had a carrying value of $92.7 million. The stated principal amounts are $75 million and $25 million, due upon specified Galore Creek study milestones or by 2021 and 2023, respectively. A further $75 million contingent note was assigned no value because project construction approval was not considered probable.
- No operating margin is meaningful because the company had no operating revenue. The filing does not provide a production-period cash flow or current project economics; the project economics discussed below come from the 2011 feasibility study.
Changes versus the prior comparable period
- Continuing-operations net loss narrowed by $3.7 million, from $31.5 million to $27.8 million. Lower general and administrative costs, higher interest income, and accretion of notes receivable more than offset higher Donlin Gold costs and interest expense on the Barrick note.
- General and administrative expense fell to $16.3 million from $18.5 million, mainly due to lower share-based compensation and salaries and benefits. Donlin Gold equity loss rose to $10.5 million from $8.8 million as dam-design fieldwork began.
- Cash and term deposits declined by $18.5 million. Operating cash use fell by $4.3 million, while Donlin Gold funding increased by $2.2 million.
- FY2018 net loss included an $81.3 million discontinued-operations loss, primarily the loss on sale of Galore Creek. NOVAGOLD sold its interests in Galore Creek in July 2018 and has no remaining interest; consequently, FY2019’s total net loss is not directly comparable without separating that prior-year item.
- Fourth-quarter 2019 net loss was $7.9 million, compared with $6.3 million in Q4 2018, primarily due to Donlin Gold fieldwork.
Outlook, commentary, risks and unusual items
- For 2020, NOVAGOLD expected total spending of approximately $31 million: $20 million for its share of Donlin Gold work and $11 million for general and administrative costs. The proposed Donlin program included $11 million for drilling and $9 million for permitting and community engagement.
- Management’s 2020 goals were to advance Donlin toward a construction/production decision, maintain a healthy balance sheet, and continue corporate social responsibility efforts. The Donlin owners were studying design and execution changes, third-party operators, and possible financing for capital-intensive infrastructure.
- Construction requires Donlin Gold LLC board approval, required permits, engineering, and financing. The owners had not made a construction decision. The project’s approximately $6.7 billion capital estimate is from the 2011 feasibility study and is not a current construction budget.
- That 2011 study estimated after-tax NPV at a 5% discount rate of $547 million and IRR of 6.0% at a $1,200/oz gold price, with estimated capital costs of $6.679 billion. It estimated a 27-year mine life. These are historical study estimates, rely on assumptions that may no longer be current, and are not company guidance or a commitment to build.
- Principal risks include the need for substantial external financing, gold-price and cost volatility, permitting and litigation risk, local and tribal opposition, infrastructure challenges at a remote Alaska site, weather and wildfire interruptions, reliance on Barrick as an equal joint-venture partner, and uncertainty in resource estimates and project economics. The 2019 field program was suspended for five weeks because of wildfires, with no reported damage.
- The company reported no material pending legal proceeding against it that management believed would materially affect its financial position, liquidity, or results. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting, and identified recognition of the contingent $75 million Galore Creek note as a critical audit matter because of management judgment about the likelihood of construction approval.
Most important facts for investors to verify
- Whether remaining permits and dam-safety certifications are obtained, and whether challenges to permits or opposition delay Donlin Gold.
- Whether NOVAGOLD and Barrick approve a construction program, and how updated engineering changes project capital costs, operating assumptions, schedule, and financing requirements.
- The company’s cash runway against actual spending, future Donlin funding obligations, and any need for additional financing or shareholder dilution.
- The terms, interest accrual, and future repayment source for the $103.8 million Barrick note, as well as timing and collectability of Newmont notes receivable.
- Whether resource and reserve estimates and the 2011 feasibility-study economics remain supportable under current gold prices, costs, engineering, and applicable disclosure standards.
- The contingent $75 million Galore Creek note remains unrecognized; monitor whether the project owners approve a construction plan and whether recognition criteria are met.