NOVAGOLD RESOURCES INC. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended May 31, 2018. Dollar amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
NOVAGOLD is a gold and copper exploration and development company with 50% interests in the Donlin Gold project in Alaska and the Galore Creek project in British Columbia. It reported no revenue from its planned principal business. Its results primarily reflect corporate costs and its share of project expenses.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating loss | $8.20 | $7.56 | $14.97 | $16.52 |
| Net loss | $9.63 | $8.46 | $17.85 | $18.61 |
| Net loss per share | $0.03 | $0.03 | $0.06 | $0.06 |
| Cash used in operating activities | $1.85 | $1.54 | $6.49 | $5.76 |
- At May 31, 2018, cash and cash equivalents were $18.5 million and term deposits were $52.0 million, compared with $28.0 million and $56.0 million, respectively, at November 30, 2017.
- Total assets were $385.1 million, total liabilities $116.6 million, and equity $268.5 million. There was no revenue, so revenue-based margins are not meaningful.
- The Barrick promissory note totaled $93.1 million, including $51.6 million principal and $41.6 million accrued interest. It bears interest at U.S. prime plus 2% and is payable from specified future Donlin production revenue or proceeds from reducing NOVAGOLD’s Donlin interest.
- Six-month investing cash use was $3.0 million, including $6.9 million of affiliate funding, partly offset by net term-deposit activity. Cash and cash equivalents declined $9.5 million from year-end.
Changes versus the prior comparable period
- Q2 operating loss increased to $8.2 million from $7.6 million, reflecting higher Donlin and Galore Creek project expenses and higher general and administrative costs. Q2 net loss rose to $9.6 million from $8.5 million, also affected by higher note interest, lower interest income, and foreign exchange movements.
- For the first six months, operating loss improved to $15.0 million from $16.5 million, and net loss improved to $17.8 million from $18.6 million. Lower share-based compensation drove much of the improvement, partly offset by higher project expenses and $0.5 million more promissory-note interest.
- General and administrative expense for the six months fell to $9.6 million from $11.5 million, primarily because of lower share-based compensation. The company changed vesting terms and removed an individual performance multiplier for new long-term equity awards.
Outlook, developments, and risks
- Management said available cash and term deposits should fund anticipated project spending and corporate costs through completion of Donlin permitting. It expects approximately $28 million of full-year 2018 spending: $11 million for general and administrative costs, $14 million for Donlin, and $3 million for Galore Creek. Additional capital would be needed if Donlin advances to engineering and construction; future construction financing is expected to require debt, equity, project financing, or other sources.
- Donlin’s final environmental impact statement was completed and made available during Q2. A federal Record of Decision was expected in the second half of 2018; further permits, detailed engineering, board approval, and financing remain necessary before construction. Alaska issued the project’s APDES water discharge permit on May 24, effective July 1, 2018, and a federal pipeline special permit was issued June 5.
- Donlin and its owners continued project optimization and community engagement. Galore Creek completed database consolidation and optimization and planned summer care-and-maintenance and asset-preservation work.
- NOVAGOLD remained open to selling all or part of its 50% Galore Creek interest and 40% Copper Canyon interest. A sale may not occur or may be below carrying value, and retaining the interests could increase future funding needs.
- Key risks include permitting delays or denials, financing availability, gold and other commodity prices, project costs, currency movements, and the proposed Alaska Salmon First ballot measure or related legislation, which management said could affect Donlin’s ability to obtain fish-habitat permits. The company reported no material current, pending, or threatened litigation.
- Market-risk sensitivities: a $0.01 change in the Canadian dollar versus the U.S. dollar would affect comprehensive income or loss by approximately $3.8 million; a 1% change in U.S. prime would change annual accrued note interest by approximately $0.9 million. The company had not hedged currency exposure.
Important facts for investors to verify
- Whether Donlin receives the federal Record of Decision and all remaining permits, and whether any Salmon First measure or related legislation affects permitting.
- Whether the stated $70.5 million of cash and term deposits remains adequate against project spending and the timing of any additional financing requirement.
- The status and carrying value implications of potential Galore Creek and Copper Canyon dispositions.
- The growth of accrued interest and total obligations under the Barrick promissory note.
- Actual 2018 spending versus the $28 million forecast, and progress toward a Donlin engineering or construction decision.