NOVAGOLD RESOURCES INC. — FY2020 Form 10-K
Reporting period: Fiscal year ended November 30, 2020. The filing also reports fourth-quarter results. NOVAGOLD is a pre-revenue gold exploration and development company; its principal asset is a 50% interest in the Donlin Gold project in Alaska, jointly owned with Barrick. It does not produce gold or generate operating revenue.
Financial and operating highlights
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue from principal business | None | None |
| Loss from operations | $33.2 million | $26.8 million |
| Net loss | $33.6 million; $0.10 per share | $27.8 million; $0.09 per share |
| Net cash used in operating activities | $10.0 million | $6.1 million |
| Cash and cash equivalents | $60.9 million | $67.5 million |
| Term deposits | $61.0 million | $81.0 million |
| Total assets | $224.4 million | $245.8 million |
| Promissory note payable to Barrick | $109.8 million | $103.8 million |
- Cash and term deposits together totaled $121.9 million at year-end, down $26.6 million from 2019. NOVAGOLD funded its Donlin Gold share with $15.3 million in 2020.
- Liquidity is supported by $96.0 million in recorded Newmont notes receivable: a $75 million note due upon completion of a Galore Creek pre-feasibility study or July 27, 2021, and a $25 million note due upon completion of a feasibility study or July 27, 2023. A further $75 million contingent note is unvalued because construction approval was not considered probable.
- The Barrick note comprises $51.6 million principal and $58.2 million accrued interest, bears interest at U.S. prime plus 2%, and is payable from 85% of NOVAGOLD’s share of future Donlin production revenue or from certain proceeds if its interest is reduced. There is no current gold production, so operating margins are not applicable.
- At the Donlin project level, 2020 operating loss was $29.0 million versus $21.0 million in 2019; drilling, studies and engineering costs rose to $17.6 million from $9.4 million.
Changes and fourth-quarter results
- Annual operating loss widened by $6.4 million, mainly from higher general and administrative costs and Donlin Gold expenses. G&A increased to $18.7 million from $16.3 million, including higher share-based compensation and professional fees; Donlin Gold equity loss increased to $14.5 million from $10.5 million, reflecting the 2020 drilling program.
- Net loss from continuing operations increased to $33.6 million from $27.8 million. Lower interest income contributed; a $0.8 million income tax recovery and lower interest expense partly offset the increase.
- Fourth-quarter net loss was $7.0 million, compared with $7.9 million in the prior-year quarter, primarily due to the income tax recovery.
Donlin Gold: outlook, risks and unusual items
- Donlin completed 85 holes totaling approximately 23,400 meters in 2020. Early assays showed higher grades over thinner intervals than prior modeling predicted, particularly in sedimentary rocks. Follow-up drilling and studies were planned for 2021; results were still being integrated into an interim model.
- NOVAGOLD expected to contribute $18–$22 million to Donlin Gold in 2021, including follow-up drilling, camp improvements, studies, permitting and community engagement. Total anticipated 2021 corporate and project expenditures were $31–$35 million. Management said available working capital was sufficient for the next 12 months, assuming expected funding and receipts.
- The Donlin feasibility study’s economics remain based on a 2011 study. It estimated total initial project capital of about $6.7 billion on a 100% basis, a 27-year mine life, after-tax NPV at 5% of $547 million and IRR of 6.0% at a $1,200/oz gold price. The company engaged Wood to update costs, economics, permitting and technical information, with a report intended for 2021; the update did not yet include ongoing optimization work.
- Donlin’s stated 33.849 million ounces of proven and probable reserves are estimated under Canadian NI 43-101 standards. The filing says the project has no known reserves under SEC Industry Guide 7; resource and reserve estimates are uncertain and are not assurance of economic extraction.
- Permitting remains subject to outstanding matters, including state water-right decisions, reconsideration of the state pipeline right-of-way authorization, and an appeal concerning the state water-quality certification. Decisions were expected in the first half of 2021. Some village councils oppose the project, and permitting and related litigation could delay or prevent development.
- Other major risks include the project’s remote location and substantial infrastructure needs, future construction financing, gold-price and cost changes, dependence on Barrick and joint-venture approvals, COVID-19 disruptions, reclamation obligations, and the possibility that exploration or development will not lead to profitable production. The 2021 program and construction timing are plans, not commitments to build.
- The company reported it believed it was a passive foreign investment company (PFIC) for U.S. tax purposes in FY2020 and might remain one. It paid no dividends. The financial-statement auditor gave unqualified opinions on the statements and internal controls; recognition of the unvalued contingent Newmont note was identified as a critical audit matter.
Most important facts for investors to verify
- Whether the expected $75 million Newmont note receipt occurs by July 2021 and whether the second note remains collectible on its stated terms.
- The updated Donlin feasibility study’s capital and operating costs, project economics, mine plan and timing, and how subsequent drilling changes resource modeling.
- Final outcomes and timing of outstanding Donlin permits, water-right applications, appeals and pipeline right-of-way review.
- Donlin’s 2021 spending, continued cost-sharing and decision-making with Barrick, and the financing required if engineering or construction advances.
- Changes in cash runway, the Barrick note balance and interest accrual, and any dilution from future equity financing or share-based awards.
- U.S. investors’ PFIC status and related tax reporting implications; consult a tax adviser.