NOVAGOLD RESOURCES INC. — Q1 2016 Form 10-Q
Business context and reporting period. The unaudited quarter covers the three months ended February 29, 2016; balance-sheet figures are as of that date. NOVAGOLD is an 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 operations or realized revenue from its planned principal business.
Financial performance and condition
| Metric (US$ millions unless stated) | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Revenue | No realized revenue | No realized revenue |
| Operating loss | 9.5 | 11.3 |
| Net loss | 10.0 | 9.3 |
| Net loss per share | $0.03 | $0.03 |
| Cash used in operations | 7.7 | 5.6 |
| Cash and cash equivalents | 36.9 | 41.7 at Nov. 30, 2015 |
| Term deposits | 80.0 | 85.0 at Nov. 30, 2015 |
| Total assets | 419.1 | 433.6 at Nov. 30, 2015 |
| Total liabilities | 103.3 | 104.3 at Nov. 30, 2015 |
| Promissory note payable to Barrick | 81.4 | 80.3 at Nov. 30, 2015 |
General and administrative expense was $7.3 million, down from $8.5 million, mainly due to lower share-based compensation. Equity losses were $2.2 million at Donlin Gold and $0.2 million at Galore Creek. The company reported no meaningful operating margins because it has no revenue-generating operations.
Cash and term deposits totaled $116.9 million at quarter-end. Current assets were $119.6 million and current liabilities were $1.7 million. Cash and term deposits declined by $9.8 million during the quarter. Investing activities provided $2.9 million, principally reflecting term-deposit maturities net of purchases; financing activities used no cash.
The Barrick promissory note comprises $51.6 million principal and $29.8 million accrued interest, with interest at U.S. prime plus 2%. Principal and interest are payable from 85% of NOVAGOLD’s share of future Donlin Gold revenue or from net proceeds of a reduction in its project interest.
Material changes and project developments
- Operating loss improved by $1.8 million year over year, reflecting lower G&A and Donlin Gold costs. Net loss nevertheless increased by $0.7 million, primarily because foreign-exchange gains were lower: other income/expense shifted from $2.0 million income to $0.4 million expense.
- Operating cash use increased by $2.1 million, primarily because cash withholding taxes on vested performance share units rose to $4.3 million from $0.8 million.
- Donlin Gold permitting continued, including work on the Clean Water Act permit application and the draft environmental impact statement (EIS). The Corps’ draft EIS was issued in November 2015; the comment period was expected to close at the end of April 2016, and a final EIS was anticipated in 2017.
- Galore Creek continued technical studies and mine planning. NOVAGOLD remained open to monetizing some or all of its interest.
Outlook, risks and contingencies
Management expected 2016 spending of approximately $25 million: about $10 million for the company’s share of Donlin Gold and Galore Creek expenditures, $1 million for joint Donlin Gold studies with Barrick, $12 million for G&A, and $2 million for working capital and other corporate purposes. Management believed available cash and term deposits would cover anticipated project funding and corporate costs through completion of Donlin Gold permitting. Additional capital would be needed if permits are obtained and construction is approved; future financing is uncertain. Management also stated that current funding needs depend on project progress and that continued operations depend on financing or future cash flows.
Construction at Donlin Gold depends on additional engineering, project and budget approvals, permits, financing, and other factors; delays could result from public opposition, agency resource constraints, or project changes. The company identified currency, credit, and interest-rate exposures and did not hedge currency risk. A $0.01 change in the Canadian dollar against the U.S. dollar was estimated to change comprehensive income or loss by approximately $3.0 million; a 1% change in U.S. prime was estimated to change annual interest accrued on the note by approximately $0.8 million.
Operating leases required future minimum payments totaling $656,000 through 2018. NOVAGOLD reported no material current, pending, or threatened litigation and no material changes to the risk factors in its 2015 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Donlin Gold permitting milestones, EIS timing, required approvals, and the project’s remaining engineering and financing needs.
- Whether the company’s stated cash runway and 2016 spending expectations remain adequate as project and corporate costs evolve.
- The terms, accrued interest, and future-revenue repayment mechanism of the Barrick promissory note.
- Galore Creek valuation and any impairment indicators, including copper prices and foreign-exchange movements.
- Share dilution: 319,703,227 common shares were outstanding on March 28, 2016; outstanding options, performance share units, and deferred share units could require issuance of up to 24,741,384 additional shares.