NOVAGOLD RESOURCES INC. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended May 31, 2020. Financial amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. NOVAGOLD is an exploration and development company with a 50% interest in the Donlin Gold project in Alaska, owned equally with Barrick. The company had no revenue from its planned principal business.
Financial performance and liquidity
| Metric | Three months 2020 | Three months 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| General and administrative expense | $4.387 million | $4.215 million | $9.101 million | $8.555 million |
| Equity loss — Donlin Gold | $3.700 million | $2.198 million | $5.268 million | $3.521 million |
| Loss from operations | $8.087 million | $6.413 million | $14.369 million | $12.076 million |
| Net loss | $7.233 million | $5.515 million | $13.828 million | $11.838 million |
| Basic and diluted loss per share | $0.02 | $0.02 | $0.04 | $0.04 |
| Cash used in operating activities | $1.834 million | $1.761 million | $5.331 million | $4.911 million |
Revenue and operating margins are not applicable because NOVAGOLD reported no operating revenue. For the quarter, lower interest income and higher operating losses were partly offset by lower promissory-note interest expense and foreign-exchange movements.
- Liquidity: At May 31, cash and cash equivalents were $53.329 million and term deposits were $81.000 million, totaling $134.329 million. Total assets were $235.031 million; total liabilities were $110.695 million.
- Cash use: In the first six months, cash and cash equivalents declined $14.220 million. Cash used included $5.331 million in operating activities, $6.890 million in Donlin funding and $1.652 million of withholding taxes on vested performance share units; foreign exchange reduced cash by $0.347 million.
- Debt: The Barrick promissory note had a carrying value of $106.947 million, including $51.576 million principal and $55.371 million accrued interest. It accrues interest at U.S. prime plus 2% and is payable from 85% of NOVAGOLD’s share of future Donlin mine revenue or from certain proceeds from reducing its Donlin interest. A 1% change in prime would change annual accrued interest by about $1.1 million, all else equal.
- Other significant asset: Notes receivable from Newmont had a $94.327 million carrying value, including accretion. A further contingent $75 million note was assigned no value because construction approval for Galore Creek was not considered probable.
Changes and operating developments
Compared with 2019, quarterly operating loss increased $1.674 million and net loss increased $1.718 million. For the six-month period, operating loss rose $2.293 million and net loss rose $1.990 million. Management attributed the increases mainly to higher Donlin costs from the 2020 drilling program and higher general and administrative costs; lower interest income also contributed to the net-loss increase. Donlin funding was $6.890 million in the first half, versus $3.806 million a year earlier.
COVID-19 precautions temporarily paused Donlin’s drill program and placed the site into care and maintenance from April until mid-May. Drilling restarted in late May, with four drills operating at the time of the filing. The company reported that its share of the 2020 Donlin work program and budget was $20 million, including $11 million for drilling.
Donlin received certain State of Alaska transportation-related permits and a pipeline right-of-way lease in early 2020. The pipeline lease was subsequently sent for reconsideration, including further analysis of cumulative effects. Separately, an appeal concerning the project’s water-quality certification proceeded to a conditionally granted adjudicatory hearing in June 2020. The filing also describes ongoing permitting work and administrative appeals concerning project approvals.
Outlook, risks and contingencies
- Management expected 2020 spending of approximately $31 million: $20 million for NOVAGOLD’s share of Donlin expenditures and $11 million for general and administrative costs. Management believed available cash and term deposits were sufficient for anticipated project funding and corporate costs.
- Additional capital would be required if Donlin proceeds to engineering and construction. The company has no operating cash flow and said continued operations depend on financing or future cash flows; construction funding was expected to require debt, equity, project-specific debt or other sources.
- A construction decision depends on further engineering, approval of a construction program and budget by the Donlin joint-venture board, permits, financing, commodity prices and other factors. COVID-19 could affect personnel, travel, drilling, testing and schedules.
- The filing identifies risks including permitting delays or litigation, public opposition, project development and financing uncertainty, commodity and market conditions, and COVID-19. Management reported no material current, pending or threatened litigation, while separately describing the Donlin permit-related proceedings.
- U.S. investors should note the disclosed potential PFIC tax status: the company believed it was not a PFIC for fiscal 2019 but said it may become one in future years, including depending on proposed IRS regulations.
Important facts for investors to verify
- Progress and timing of Donlin’s drilling, engineering, permitting proceedings and any joint-venture construction decision.
- Whether the $134.329 million of cash and term deposits remains adequate against spending needs, and the terms and availability of future construction financing.
- Changes in the Barrick note’s accrued interest and the company’s ability to fund Donlin without operating revenue.
- COVID-19 effects on project activity and the status of the water-quality certification and pipeline right-of-way reconsideration.
- Potential dilution: as of June 17, 2020, 329,597,770 common shares were outstanding, with a maximum 14,414,653 additional shares issuable upon exercise or payout of disclosed options and share units.