NOVAGOLD RESOURCES INC. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended May 31, 2014. Unless otherwise noted, amounts below are in U.S. dollars; financial amounts are in millions.
Business context
NOVAGOLD is a pre-revenue gold and copper exploration and development company. Its principal assets are 50% interests in the Donlin Gold project in Alaska and the Galore Creek project in British Columbia. The company reported no operating revenue and does not currently generate operating cash flow.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Loss from operations | $(8.264) | $(12.225) | $(19.597) | $(26.734) |
| Net loss | $(10.681) | $(9.833) | $(21.372) | $(23.609) |
| Basic and diluted loss per share | $(0.03) | $(0.03) | $(0.07) | $(0.08) |
| Cash used in operations | $(0.474) | $(6.212) | $(5.688) | $(12.092) |
| Cash used in investing | $(0.569) | $(5.872) | $(4.213) | $(8.965) |
There is no meaningful revenue or operating margin to report. At May 31, cash and cash equivalents were $71.329 million and term deposits were $105.000 million. Current assets were $180.098 million against current liabilities of $17.033 million. Total assets were $555.224 million and equity was $441.607 million.
Total debt carrying value was $88.483 million: $14.309 million of convertible notes classified as current and $74.174 million due to Barrick under a promissory note. The remaining convertible-note principal is $15.829 million, due May 1, 2015. The Barrick note bears interest at U.S. prime plus 2%; accrued interest was $22.574 million.
Changes versus prior comparable periods
- Q2 operating loss narrowed 32%, principally because general and administrative costs and equity losses from the projects were lower. However, net loss increased from $9.833 million to $10.681 million, mainly due to a foreign-exchange loss in 2014 versus a gain in 2013, and a smaller derivative-valuation gain.
- For the first six months, operating loss narrowed 27% and net loss improved to $21.372 million from $23.609 million. Lower operating losses and interest expense contributed; the foreign-exchange gain was substantially lower than in 2013.
- Cash declined $9.933 million in the first six months. Cash used in operations fell year over year, while investment in term deposits and project funding affected investing cash flows. No financing cash flows were reported in 2014; 2013 included convertible-note repayments and warrant-exercise proceeds.
Outlook, commentary and risks
- Management expected 2014 spending of approximately $12 million for NOVAGOLD’s share of Donlin Gold and $2.5 million for Galore Creek, and approximately $15 million for corporate costs, interest, working capital and other purposes. It considered cash and term deposits sufficient for anticipated project and corporate costs and repayment of the convertible notes due in 2015.
- Donlin permitting continued, with the preliminary draft environmental impact statement expected around year-end 2014. Management described permitting as a process that began in 2012 and was expected to take approximately four years. Other major permits were also in progress.
- On June 9, 2014, Donlin Gold LLC and TKC announced an updated long-term Surface Use Agreement, including milestone and operating payments, consultation and local hiring and contracting provisions, and an exclusive contract for an upriver port.
- Galore Creek technical studies continued, including work on integrated mine planning, waste disposal and water management. The company continued to evaluate monetizing some or all of its interest to strengthen its balance sheet.
- Management stated additional capital would be required if Donlin receives permits and construction proceeds; future funding could involve debt, equity, project-specific debt or other means, with no assurance financing will be available. Other key exposures include permitting and development uncertainty, commodity and currency fluctuations, and reliance on joint-venture partners. The company did not hedge currency exposure; a 1% Canadian-dollar movement was estimated to change consolidated income or loss by approximately $2.7 million.
- No material current, pending or threatened litigation was identified, and the filing reported no material change to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor facts to verify
- Whether Donlin’s permitting and EIS milestones remain on schedule, and what approvals and conditions remain outstanding.
- Whether available cash and term deposits remain adequate against expected spending and the $15.829 million convertible-note principal due May 1, 2015.
- Progress toward any Galore Creek monetization and the terms and likely timing of a transaction.
- Project funding requirements and financing availability if Donlin advances to construction, including the Barrick promissory note’s variable-rate exposure.
- Changes in joint-venture project costs, foreign-exchange exposure, and the company’s reported cash burn.