NOVAGOLD RESOURCES INC. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended August 31, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. NOVAGOLD is a gold exploration and development company with a 50% interest in the Donlin Gold project in Alaska. It reported no revenue from its planned principal business.
Financial results and liquidity
- Q3 loss: Operating loss was $10.9 million versus $7.2 million in Q3 2019; net loss was $12.7 million, or $0.04 per share, versus $8.1 million, or $0.02 per share.
- Nine-month loss: Operating loss was $25.3 million versus $19.3 million in 2019; net loss was $26.6 million, or $0.08 per share, versus $19.9 million, or $0.06 per share.
- Drivers: Higher Donlin Gold project costs, including drilling, and higher general and administrative expenses increased operating losses. Lower interest income and foreign-exchange movements also contributed to the higher net loss; lower promissory-note interest expense partially offset these effects.
- Cash flow: Nine-month operating cash outflow was $7.2 million versus $5.3 million in 2019. Investing cash outflow was $13.6 million, primarily Donlin funding; financing cash outflow was $1.7 million for withholding taxes on vested share units.
- Liquidity at August 31: Cash and cash equivalents were $45.3 million and term deposits were $81.0 million, unchanged from November 30, 2019 for term deposits. The combined balance declined $22.2 million over the nine months. Current assets were $200.1 million and current liabilities $3.2 million.
- Other assets and debt: Notes receivable totaled $95.2 million, including $72.6 million current and $22.6 million non-current. The Barrick promissory note was $108.4 million, comprising $51.6 million principal and $56.8 million accrued interest; it accrues interest at U.S. prime plus 2%. The note is payable from 85% of NOVAGOLD’s share of future mine revenue or proceeds from reducing its Donlin interest.
- Margins: Not meaningful because the company had no revenue. Total liabilities were $113.3 million and equity was $115.7 million at August 31, 2020.
Material developments and outlook
- Donlin Gold drilling resumed in late May after a COVID-19-related pause. The 2020 campaign was completed in September; assays were expected by early 2021. NOVAGOLD’s share of Donlin funding was $13.6 million in the first nine months.
- The company expected approximately $31 million of 2020 spending: $20 million for its share of Donlin expenditures and $11 million for general and administrative costs. Management said existing cash and term deposits were expected to cover anticipated project funding and corporate costs; additional capital would be needed if the project advances to engineering and construction.
- Donlin’s owners continued studies to improve project value and potentially reduce upfront capital. A construction decision requires further engineering, project-board approval, permits and financing; no construction timetable or production guidance was provided.
- Permitting remains a key uncertainty. Alaska reopened public comment on the pipeline right-of-way analysis in September 2020, with reissuance of the authorization offer expected in early 2021. An appeal concerning the state water-quality certification was proceeding through an adjudicatory hearing process, with a decision expected in late 2020 or early 2021.
- COVID-19 could affect workforce availability, travel, drilling and test-result timing. Other stated risks include financing access, commodity prices, project costs, permitting delays, litigation and community opposition. Management reported no material changes to previously disclosed risk factors.
- The company filed a defamation lawsuit against J Capital Research USA LLC seeking unspecified damages; NOVAGOLD said it did not consider the litigation material. It reported no other material current, pending or threatened litigation.
Most important facts to verify
- Whether Donlin drilling results and updated geological/resource work support further feasibility and engineering studies.
- The outcome and timing of the pipeline right-of-way reconsideration and water-quality certification appeal.
- Whether the stated $31 million 2020 spending outlook and available liquidity remain adequate if project costs, schedules or COVID-19 conditions change.
- The terms, timing and collectability of the Newmont notes receivable, including the contingent $75 million note for which no value was recorded.
- How the $108.4 million Barrick promissory note and its variable-rate interest will affect future project economics and funding needs.