NOVAGOLD RESOURCES INC. — FY2017 Form 10-K
Reporting period: Fiscal year ended November 30, 2017. The filing was signed January 24, 2018. Although the request metadata references Q4, this is an annual report; fourth-quarter results are noted below. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
NOVAGOLD is an exploration and development company with no producing mines, operating revenue, or operating cash flow. Its principal assets are 50% interests in Donlin Gold in Alaska, jointly held with Barrick, and Galore Creek in British Columbia, jointly held with Teck. NOVAGOLD recorded the projects as equity-method investments and had 13 full-time employees at year-end.
Donlin permitting and project optimization were the principal 2017 activities. Galore Creek was on care and maintenance; NOVAGOLD continued to consider selling all or part of its interest. Neither project was in production or under construction.
Financial and operating highlights
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue from operations | None | None |
| Loss from operations | $33.7 million | $30.1 million |
| Net loss | $39.0 million | $33.8 million |
| Basic and diluted loss per share | $0.12 | $0.11 |
| Cash used in operating activities | $8.3 million | $7.4 million |
| Cash and cash equivalents | $28.0 million | $30.3 million |
| Term deposits | $56.0 million | $75.0 million |
| Total assets | $398.9 million | $408.3 million |
| Total liabilities | $114.8 million | $108.0 million |
| Shareholders’ equity | $284.0 million | $300.3 million |
Cash plus term deposits totaled $84.0 million, down $21.3 million year over year. Current assets were $84.8 million and current liabilities were $3.4 million. The company reported no operating revenue, so operating margins are not meaningful.
The $90.0 million Barrick promissory note comprises $51.6 million principal and $38.5 million accrued interest, bears interest at U.S. prime plus 2%, and is repayable from 85% of NOVAGOLD’s share of future Donlin production revenue or from net proceeds of a reduction in its Donlin interest. A 1% change in prime would change annual accrued interest by approximately $0.9 million, all else equal.
Donlin and Galore Creek funding in 2017 was $11.4 million and $1.6 million, respectively. Total 2017 spending for the projects and general and administrative costs was $23.5 million, below the company’s $27 million outlook, mainly because Donlin permitting and optimization spending was lower than expected.
Material changes versus prior comparable periods
- Annual operating loss increased $3.6 million. Higher Donlin drilling, Galore Creek care and maintenance, and general and administrative costs more than offset lower Donlin permitting costs.
- Net loss increased $5.2 million year over year, reflecting the higher operating loss and increased other expense, including higher Barrick-note interest, foreign-exchange losses, and deferred tax expense.
- Fourth-quarter 2017 net loss was $10.0 million, compared with $7.4 million in Q4 2016; the increase was primarily associated with Donlin drilling. Quarterly operating loss was $8.8 million versus $6.8 million.
- Cash and term deposits fell from $105.3 million to $84.0 million. The company’s annual operating cash use increased by $0.9 million; investing cash flow included $13.0 million of affiliate funding and substantial term-deposit maturities and purchases.
Guidance, outlook, risks, and unusual items
Management said year-end liquidity was sufficient for anticipated project funding and corporate costs through completion of Donlin permitting, but additional capital would be required if permits are obtained and the owners decide to advance engineering and construction. The company expects to spend approximately $28 million in FY2018: $11 million for general and administrative costs, $14 million for NOVAGOLD’s Donlin share of permitting and optimization, and $3 million for Galore Creek care and maintenance. Management’s 2018 priorities include advancing Donlin toward a construction/production decision, maintaining the balance sheet, advancing Galore Creek planning, and evaluating a Galore Creek sale.
The Corps anticipated publishing Donlin’s final environmental impact statement in early 2018 and issuing a record of decision in the second half of 2018. Further permits, detailed engineering, financing, and approval of a construction program and budget remain prerequisites to construction. The 2017 Donlin program included 16 core holes totaling 7,040 meters.
Project economics disclosed are from older studies, not updated FY2017 guidance. Donlin’s 2011 feasibility study estimated total project capital costs of approximately $6.7 billion on a 100% basis, after-tax NPV at a 5% discount rate of $547 million and IRR of 6.0% at $1,200/oz gold. Galore Creek’s 2011 pre-feasibility study estimated initial capital of C$5.2 billion, post-tax NPV at 7% of C$137 million, and IRR of 7.4%. The filing cautions that these estimates depend on assumptions and are not guarantees of project viability.
Key risks include failure or delay in permitting, especially Donlin’s outstanding federal and state approvals; financing needs and possible shareholder dilution; volatile metal prices, project costs, and exchange rates; dependence on Barrick and Teck as equal joint-venture partners; remote-site infrastructure requirements; environmental and community opposition; and uncertainty around resource estimates. The filing also describes Alaska’s proposed Stand for Salmon initiative and related legislation as potentially affecting Donlin fish-habitat permits. NOVAGOLD stated it believed it was not a PFIC for FY2017, but could be one in future years. Its 50% Galore Creek interest had not attracted an acceptable offer by year-end.
Canadian NI 43-101 reserve and resource disclosures are not equivalent to SEC Industry Guide 7 reserves. The company cautions U.S. investors not to assume that resources, particularly inferred resources, will become economically mineable reserves.
Other notable items: FY2017 included $10.3 million of share-based compensation and $10.3 million of foreign-currency translation gains in other comprehensive income. The company adopted guidance that reclassified share-based compensation withholding taxes from operating to financing cash flows; prior-period cash flows were revised accordingly. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Donlin’s final EIS, record of decision, and remaining permits were issued on the anticipated timetable, and what conditions or challenges followed.
- Updated Donlin and Galore Creek engineering, capital-cost, operating-cost, and economic studies; the disclosed project estimates date to 2011.
- Whether NOVAGOLD’s $84.0 million in cash and term deposits remains adequate for planned spending and what financing would be needed for the next project stage.
- The terms, interest accrual, and eventual repayment or settlement of the $90.0 million Barrick promissory note.
- Any Galore Creek sale, revised project plan, or changes to the company’s equal-partner funding obligations.
- Changes in resource or reserve estimates, permitting risks including Alaska fish-habitat rules, and the status of community and environmental matters.
- Share dilution from equity financing and outstanding awards, and the U.S. tax implications if the company is classified as a PFIC.