NOVAGOLD RESOURCES INC. — Form 10-Q Summary
Reporting period: Three and six months ended May 31, 2019. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. NOVAGOLD is an exploration and development company, not a producing gold miner, and reported no revenue from its planned principal business. Its principal asset is a 50% interest in the Donlin Gold project in Alaska, jointly owned with Barrick.
Financial performance and position
| Metric | Three months ended May 31, 2019 | Six months ended May 31, 2019 |
|---|---|---|
| Revenue | None | None |
| Operating loss | $6.4 million | $12.1 million |
| Net loss | $5.5 million ($0.02 per share) | $11.8 million ($0.04 per share) |
| Comprehensive loss | $6.9 million | $12.7 million |
| Cash used in operating activities | $1.8 million | $4.9 million |
- At May 31, cash and cash equivalents were $18.0 million and term deposits were $139.0 million. Current assets totaled $159.0 million; current liabilities were $2.1 million. Total assets were $252.5 million and equity was $149.8 million.
- Notes receivable from Newmont related to the 2018 Galore Creek sale had a carrying value of $91.1 million. A separate contingent $75 million note, payable only if a construction plan is approved for Galore Creek, was assigned no value because approval was not considered probable.
- The promissory note payable to Barrick was $100.2 million, comprising $51.6 million principal and $48.6 million accrued interest. Interest accrues at U.S. prime plus 2%; repayment is tied to future Donlin production revenue or proceeds from a reduction in NOVAGOLD’s project interest.
- For the first six months, cash and term deposits declined by $9.9 million. Cash-flow investing activity included $3.8 million of Donlin funding; $1.2 million of cash was used for withholding taxes on vested performance share units. No operating margin is meaningful because the company had no revenue.
Changes versus the comparable period
- Second-quarter operating loss narrowed to $6.4 million from $7.8 million; first-half operating loss narrowed to $12.1 million from $14.3 million.
- Second-quarter net loss improved to $5.5 million from $9.6 million, and first-half net loss improved to $11.8 million from $17.8 million. The improvement reflected lower operating costs, higher interest income, accretion of Newmont notes receivable, and foreign-exchange movements, partly offset by higher interest expense on the Barrick note.
- General and administrative expense declined to $4.2 million for the quarter and $8.6 million for the half year, largely due to lower share-based compensation. Donlin’s share of project costs also fell, which management attributed primarily to reduced permitting activity.
- Prior-year results were revised to present Galore Creek as discontinued operations following its sale in July 2018. No discontinued-operation loss was recorded in the 2019 periods.
Outlook, commentary and risks
- Management forecast approximately $24 million of spending for fiscal 2019: $13 million for NOVAGOLD’s share of Donlin work and $11 million for corporate general and administrative costs. The company reported that existing cash and term deposits were sufficient for anticipated project funding and corporate costs, but that additional capital would be needed if Donlin advances to engineering and construction.
- Donlin’s 2019 work includes permitting, community engagement and technical studies. The site camp reopened in May; geotechnical and related fieldwork was expected to begin in July. Donlin LLC spending was expected to increase in the second half of the year.
- Final state approvals for certain transportation-corridor and pipeline permits, as well as decisions on administrative challenges to environmental and reclamation approvals, were anticipated by year-end 2019. These timings are expectations, not assured outcomes.
- Local organizations and village councils opposed the project; environmental permit reviews and an appeal of the reclamation and closure plan were ongoing. Development also depends on further engineering, approval of a construction program and budget by Donlin’s board, permits, and financing.
- Management cited financing availability, commodity prices, permitting, infrastructure, development costs, community opposition, and other mining and regulatory risks. The company does not generate operating cash flow and gave no assurance that future financing would be available on favorable terms or at all.
- A 1% change in the U.S. prime rate would change annual interest accrued on the Barrick promissory note by approximately $1.0 million, assuming other factors remain constant. Management reported no material changes to the risk factors in its latest Form 10-K and no material current, pending, or threatened litigation known to it.
Key facts for investors to verify
- Progress and timing of Donlin permits, outstanding administrative reviews and appeals, fieldwork, and any updated feasibility or engineering work.
- Whether the Donlin owners approve a construction program and budget, and the project’s eventual financing requirements and terms.
- Cash and term-deposit balances, actual spending against the 2019 forecast, and the company’s runway given the absence of operating revenue.
- Growth in accrued interest and repayment terms on the Barrick note, including sensitivity to U.S. prime rates.
- Collection timing and credit exposure for the Newmont notes, and the status of the contingent Galore Creek note.