NOVAGOLD RESOURCES INC. — Form 10-Q Summary
Reporting period: Quarter and nine months ended August 31, 2019. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. NOVAGOLD is a gold exploration and development company with no revenue from its principal business. Its primary asset is a 50% interest in the Donlin Gold project in Alaska, operated through a 50/50 joint venture with Barrick Gold Corporation.
Financial condition and results
- Revenue and margins: No operating revenue; profit margins are not applicable. The company reported operating expenses of $7.2 million for the quarter and $19.3 million for the nine months.
- Loss: Third-quarter net loss from continuing operations was $8.1 million, or $0.02 per share, compared with $8.0 million in third-quarter 2018. Nine-month continuing-operations loss was $19.9 million, or $0.06 per share, versus $25.2 million, or $0.08 per share, in 2018.
- Cash flow: Cash used in continuing operating activities was $0.4 million for the quarter and $5.3 million for the nine months. The company funded $7.6 million of Donlin Gold expenditures in the first nine months.
- Liquidity: At August 31, cash and cash equivalents were $53.9 million and term deposits were $99.0 million, totaling $152.9 million. Current assets were $154.7 million; current liabilities were $3.0 million.
- Debt and other obligations: The Barrick promissory note was $102.0 million, including $51.6 million principal and $50.5 million accrued interest. Interest accrues at U.S. prime plus 2%; repayment is tied to future mine revenue or proceeds from reducing NOVAGOLD’s Donlin interest. A 1% change in prime would change annual accrued interest by approximately $1.0 million.
- Assets and equity: Notes receivable from Newmont were carried at $91.9 million. Total assets were $249.9 million and total equity was $144.2 million.
Changes versus the prior comparable period
- Quarterly operating loss increased to $7.2 million from $6.9 million, as higher Donlin fieldwork costs more than offset lower general and administrative expenses. Continuing-operations net loss was nearly unchanged, with higher interest income and note accretion offsetting higher note interest and other effects.
- Nine-month operating loss improved to $19.3 million from $21.2 million, mainly due to lower general and administrative expense and reduced Donlin costs. Continuing-operations net loss narrowed to $19.9 million from $25.2 million.
- Reported 2018 net losses included discontinued Galore Creek operations and an approximately $80.0 million after-tax loss on the sale. NOVAGOLD completed the sale in July 2018 and has no remaining interest in Galore Creek.
- Cash and cash equivalents rose to $53.9 million from $21.0 million at November 30, 2018, while term deposits declined to $99.0 million from $146.0 million. Management said the third-quarter $40.0 million reduction in term deposits was transferred to interest-bearing savings accounts.
Outlook, developments, and risks
- Management expected 2019 spending of approximately $24 million: $13 million for NOVAGOLD’s share of Donlin Gold expenditures and $11 million for corporate general and administrative costs. Donlin spending was expected to increase in the fourth quarter.
- Management believed cash and term deposits were sufficient for anticipated Donlin funding and corporate costs, but additional capital would be required if engineering and construction proceed. Construction funding could involve debt, equity, project-specific debt, or other means; there is no assurance financing will be available on favorable terms or at all.
- Donlin advanced geotechnical fieldwork and engineering needed for Alaska Dam Safety certificates. The work was temporarily suspended for five weeks in July as a precaution during nearby wildfires; no damage to project structures or equipment was reported, and the camp reopened in September.
- Several state permits and approvals remained pending, with certain final decisions anticipated by year-end 2019. A second informal review of the project’s water quality certification and an administrative appeal of the reclamation and closure plan were also pending. The timing of permits, engineering, joint-venture approval, and financing may affect whether and when the project is developed.
- Donlin’s owners continued studies aimed at improving project value and reducing initial capital requirements. The joint-venture board must approve a construction program and budget before development can proceed.
- The company reported no material current, pending, or threatened litigation and no material changes to the risk factors in its 2018 Form 10-K. Key disclosed risks include financing and development uncertainty, permitting and regulatory outcomes, commodity prices, joint-venture cooperation, infrastructure, environmental and community concerns, and the variable-rate Barrick note.
Important facts for investors to verify
- Progress and timing of Donlin engineering, Alaska Dam Safety certificates, remaining permits, and pending administrative reviews or appeals.
- Whether NOVAGOLD and Barrick approve a construction program and budget, and the resulting project capital needs and financing plan.
- Cash burn and funding requirements against management’s 2019 spending outlook, including the impact of increased fourth-quarter Donlin fieldwork.
- Terms, timing, and collectability of the $100 million Newmont notes; the additional contingent $75 million note was assigned no value because construction approval was not considered probable.
- Growth in accrued interest on the $102.0 million Barrick note and sensitivity to U.S. prime-rate changes.