NOVAGOLD RESOURCES INC quarterly report, Q1 FY2018

NOVAGOLD RESOURCES INC. — Q1 2018 Form 10-Q

Reporting period: Three months ended February 28, 2018; amounts are in U.S. dollars unless stated otherwise. NOVAGOLD is an exploration and development company with no realized revenue from its planned principal business. Its principal assets are 50% interests in Donlin Gold in Alaska and Galore Creek in British Columbia.

Financial performance and position

Metric	Q1 2018	Q1 2017 / comparator
Revenue	None	None
Operating loss	$6.8 million	$9.0 million
Net loss	$8.2 million; $0.03 per share	$10.1 million; $0.03 per share
Operating cash used	$4.6 million	$4.2 million
Investing cash used	$2.4 million	$7.7 million

• At February 28, 2018, cash and cash equivalents were $20.9 million and term deposits were $56.0 million, totaling $76.9 million. Cash declined $7.0 million from November 30, 2017; term deposits were unchanged.
• Total assets were $394.0 million, total liabilities $114.4 million, and equity $279.5 million. Current assets were $77.8 million and current liabilities $1.4 million.
• The Barrick promissory note had a carrying value of $91.5 million, comprising $51.6 million principal and $40.0 million accrued interest. It bears interest at U.S. prime plus 2%; payment is tied to future Donlin production revenue or proceeds from reducing NOVAGOLD’s Donlin interest.
• Donlin and Galore Creek equity-method losses were $1.8 million and $0.3 million, respectively. No operating margin is meaningful because the company had no revenue.

Changes versus prior comparable period

• Operating loss narrowed by $2.2 million and net loss by $1.9 million, mainly reflecting lower general and administrative expense, particularly share-based compensation, and lower Donlin costs.
• General and administrative expense fell to $4.7 million from $6.7 million; share-based compensation declined to $1.9 million from $3.9 million. Management cited changes to equity award vesting and performance-multiplier terms.
• Lower operating costs were partly offset by a $0.3 million increase in promissory-note interest expense. Operating cash use increased by $0.4 million, primarily due to higher annual employee incentive payments.

Outlook, projects and risks

• Management expected existing cash and term deposits to cover anticipated project funding and corporate costs through completion of Donlin permitting. It stated that additional capital would be needed if permits are obtained and the owners decide to proceed with engineering and construction; future construction financing may include debt, equity, project-specific debt or other means. There is no assurance financing will be available on favorable terms or at all.
• 2018 expected spending was approximately $28 million: $11 million for general and administrative costs, $14 million for NOVAGOLD’s Donlin share, and $3 million for Galore Creek. Donlin’s planned work included $9 million for permitting and $5 million for optimization; Galore Creek spending was primarily care and maintenance and community initiatives.
• Donlin permitting continued. The Army Corps had completed the final environmental impact statement and expected publication in Q2 2018; a Record of Decision was expected in the second half of 2018. Further permits, engineering, owner approval of a construction program and budget, and financing remain necessary before construction.
• Key risks include permitting delays or challenges, public opposition or litigation, project financing needs, commodity and cost uncertainty, joint-venture partner cooperation, and currency exposure. The company had not hedged currency risk; a $0.01 change in the Canadian dollar was estimated to affect comprehensive loss by approximately $3.8 million. A 1% change in U.S. prime was estimated to change annual accrued note interest by approximately $0.9 million.
• Galore Creek remained in care and maintenance; NOVAGOLD was open to monetizing all or part of its interest. The filing reported no material current, pending or threatened litigation and no material changes to the prior annual report’s risk factors.

Important facts for investors to verify

• Progress and timing of Donlin’s final EIS, Record of Decision, remaining permits, and any construction decision.
• Whether the $76.9 million of cash and term deposits remains sufficient through permitting and how much additional financing would be required for later project stages.
• Growth in the Barrick note balance and the terms governing repayment from future project revenues or a reduced Donlin interest.
• Actual 2018 project and corporate spending versus the approximately $28 million plan, and any developments affecting the potential sale or monetization of Galore Creek.