NOVAGOLD RESOURCES INC. — Q1 2023 Form 10-Q
Business context and period: The unaudited quarter covered the three months ended February 28, 2023; financial amounts below are U.S. dollars in millions unless stated otherwise. NOVAGOLD is a gold exploration and development company with no realized revenue from its planned principal business. Its principal asset is a 50% interest in the Donlin Gold project in Alaska, jointly owned with Barrick.
Key financial results
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | None | None |
| General and administrative expense | $5.607 | $5.177 |
| Equity loss — Donlin Gold | $4.475 | $4.040 |
| Operating loss | $10.082 | $9.217 |
| Net loss | $10.659 | $9.995 |
| Net loss per share, basic and diluted | $0.03 | $0.03 |
| Cash used in operating activities | $4.493 | $6.003 |
| Cash used in investing activities | $5.188 | $5.936 |
| Cash and cash equivalents, period-end | $54.161 | $63.882 at November 30, 2022 |
Liquidity and debt: At February 28, cash and cash equivalents were $54.161 million and term deposits were $62.000 million. Current assets were $143.206 million and current liabilities were $2.474 million. Total assets were $151.361 million; total liabilities were $130.057 million. The Barrick promissory note was $126.629 million, including $51.576 million principal and $75.053 million accrued interest at U.S. prime plus 2%. It is payable from 85% of NOVAGOLD’s share of future Donlin production revenue or proceeds from a reduction of its project interest. No operating margins are reported because the company has no revenue.
Changes and notable items
- Net loss increased by $0.664 million year over year, primarily due to higher promissory-note interest expense, Donlin permitting costs, and corporate legal expenses; higher interest income and other income partly offset the increase.
- Promissory-note interest expense rose to $2.944 million from $1.512 million. Other income was $2.225 million, including $1.329 million interest and dividend income, a $0.556 million gain on sale of the Minas San Roque interest, and a $0.299 million fair-value gain on marketable securities.
- Cash declined $9.721 million during the quarter, mainly to fund Donlin and corporate costs. The company funded Donlin with $5.744 million during the period.
- At February 28, the company’s Donlin investment carrying value was $5.117 million. Its 50% share of Donlin LLC’s net assets was $37.117 million; these are distinct reported measures.
Outlook, risks, and contingencies
- Management expects fiscal 2023 expenditures of approximately $31 million: $17 million for Donlin, $13 million for corporate general and administrative costs, and $1 million for working capital and other items. The expected Donlin contribution includes $8 million for external affairs, permitting, environmental, land, and legal activities and $9 million for planning and fieldwork.
- Management believes available working capital can cover anticipated costs for at least three years and through completion of an updated Donlin feasibility study. Substantial additional capital will be needed for project engineering and construction; financing availability and terms are uncertain.
- Donlin work includes updating geological and resource models, evaluating project design and assumptions, advancing permits, and gathering geotechnical and hydrological information. A new feasibility study is subject to Donlin LLC board approval. The company reported expected 2023 completion of dam-safety fieldwork and anticipated dam-safety certificates in 2026.
- Permitting remains subject to appeals and agency processes. Decisions on the Section 401 water-quality certification and state pipeline right-of-way appeals were expected in 2023; a water-rights appeal decision was expected within the next year. Tribes also asked federal agencies to consider a supplemental environmental impact statement and other Clean Water Act actions. The company described the outcomes and timing as uncertain.
- Management cited development, permitting, financing, commodity-price, infrastructure, regulatory, litigation, stakeholder, and co-owner risks, among others. A 1% change in U.S. prime would change annual interest accrued on the Barrick note by approximately $1.3 million, assuming other factors remain constant.
- A separate $75 million Galore Creek note is contingent on approval of a construction plan and was assigned no value. The $25 million Galore Creek note receivable had a $24.638 million carrying value; the filing gives inconsistent July 2023 maturity dates in different sections.
- Management reported no material changes to the risk factors in the 2022 Form 10-K and concluded disclosure controls were effective. It reported no material current, pending, or threatened litigation, while separately describing the Donlin permit appeals.
Important facts for investors to verify
- Progress and outcomes of the Donlin permit appeals, federal agency requests, and remaining state permits.
- Timing and approval of an updated feasibility study, any construction decision, and the project’s future funding requirements.
- Liquidity relative to planned spending, and the availability and cost of financing needed beyond the feasibility-study stage.
- Growth in the Barrick note balance as interest accrues, and the exact maturity date and collection status of the $25 million Galore Creek note.
- Assumptions supporting management’s view that working capital covers at least three years of anticipated costs.