NOVAGOLD RESOURCES INC. — Q1 2017 Form 10-Q
Reporting period: Three months ended February 28, 2017; comparative period ended February 29, 2016. Amounts below are U.S. dollars. The company explores and develops gold and copper properties, principally through 50% interests in the Donlin Gold project in Alaska and the Galore Creek project in British Columbia. It reported no realized revenue from its principal business.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | None | None |
| Operating loss | $9.0 million | $9.5 million |
| Net loss | $10.1 million | $10.0 million |
| Net loss per share, basic and diluted | $0.03 | $0.03 |
| Operating cash used | $4.4 million | $7.7 million |
| Cash and cash equivalents at period end | $18.2 million | $30.3 million at Nov. 30, 2016 |
| Term deposits at period end | $80.0 million | $75.0 million at Nov. 30, 2016 |
| Promissory note carrying value | $86.0 million | $84.8 million at Nov. 30, 2016 |
| Total assets / total equity | $405.3 million / $297.4 million | $408.3 million / $300.3 million at Nov. 30, 2016 |
Cash, cash equivalents and term deposits totaled $98.2 million at quarter-end, down $7.0 million from fiscal year-end. Current liabilities were $1.5 million. No operating margin is meaningful because the company had no revenue. The filing does not present a conventional operating cash-flow or margin outlook.
The note payable to Barrick consists of $51.6 million principal plus $34.4 million accrued interest. It bears interest at U.S. prime plus 2% and is payable from 85% of NOVAGOLD’s share of future Donlin production revenue or net proceeds from a reduction of its project interest.
Material changes and operating developments
- Operating loss narrowed by about $0.6 million year over year, mainly because general and administrative expense declined to $6.7 million from $7.3 million, including lower stock-option compensation.
- Net loss increased by about $0.2 million, as lower operating costs were more than offset by a $0.7 million adverse change in foreign-exchange gains and losses.
- Operating cash use fell by $3.3 million, primarily because less cash was paid for withholding taxes on vested performance share units. The company reported $7.7 million of net investing cash use, including $2.6 million of affiliate funding and a net $5.0 million purchase of term deposits.
- NOVAGOLD funded Donlin Gold with $2.4 million and Galore Creek with $0.2 million during the quarter. Their respective investment balances were $1.3 million and $244.2 million.
Outlook, risks and contingencies
- Management expects 2017 spending of approximately $23 million: $11 million for corporate and administrative costs, $10 million for Donlin Gold, and $2 million for Galore Creek. Management said current cash and term deposits should cover anticipated project funding and general and administrative costs through completion of Donlin permitting.
- Donlin permitting and environmental review continued. The Army Corps of Engineers’ final environmental impact statement was anticipated in early 2018; additional permits, engineering, a construction budget approval and financing remain necessary before development. NOVAGOLD’s share of Donlin’s 2017 work program was expected to be about $10 million.
- Galore Creek continued technical studies and care and maintenance. NOVAGOLD remains open to monetizing some or all of its 50% interest. Its expected 2017 contribution was about $2 million.
- Management said additional capital would be required if Donlin receives permits and proceeds to engineering and construction. Financing may depend on debt, equity, project financing or other sources; there is no assurance financing will be available on acceptable terms or at all.
- Key risks include permitting delays or denial, public opposition and litigation, project cost and financing uncertainty, commodity prices, dependence on joint-venture partners, and currency, credit and interest-rate exposure. A $0.01 change in the Canadian dollar was estimated to affect comprehensive income or loss by about $3.8 million; a 1% change in U.S. prime was estimated to change annual note interest by about $0.9 million.
- Operating lease commitments totaled $326,000 through 2020. The company reported no material current, pending or threatened litigation and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Progress and timing of Donlin’s final environmental impact statement, permits, engineering work and construction decision.
- Whether the stated $98.2 million of cash and term deposits remains sufficient as project spending and permitting needs evolve.
- Donlin financing requirements, the terms and accrued interest of the Barrick promissory note, and any proposed financing or asset monetization.
- Actual 2017 project and corporate spending versus management’s approximately $23 million outlook, including any additional joint Donlin studies.
- Project cost, permitting, currency and commodity-price assumptions underlying management’s forward-looking statements.