NOVAGOLD RESOURCES INC. — Q1 2019 Form 10-Q
Reporting period: Three months ended February 28, 2019. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and financial performance
NOVAGOLD is an 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, held through a 50/50 joint venture with Barrick Gold. The company sold its Galore Creek interests in July 2018; those operations are presented as discontinued operations.
- Revenue and margins: No operating revenue; profit margins are not meaningful for the period.
- Operating loss: $5.7 million, versus $6.5 million in Q1 2018. General and administrative expense was $4.3 million, down from $4.7 million; Donlin Gold equity losses were $1.3 million, down from $1.8 million.
- Net loss: $6.3 million, or $0.02 per share, compared with $8.2 million, or $0.03 per share. The prior-period loss included $0.3 million from discontinued operations.
- Other income and expense: Net expense was $0.3 million versus $1.4 million. Increased interest income and $0.8 million of accretion on Newmont notes receivable partly offset higher promissory-note interest and foreign-exchange losses.
- Cash flows: Continuing-operations operating cash use was $3.2 million, compared with $4.6 million. Investing activities provided $6.1 million, largely reflecting net term-deposit maturities and purchases; $0.9 million was funded to Donlin Gold. Financing activities used $1.2 million for withholding taxes on vested performance share units.
Liquidity, debt and balance sheet
- At February 28, 2019, cash and cash equivalents were $22.8 million and term deposits were $139.0 million, down a combined $5.2 million from November 30, 2018. Management said available balances were sufficient for anticipated project funding and corporate costs.
- Current assets were $163.5 million and current liabilities $1.7 million. Total assets were $255.5 million; total liabilities were $100.2 million.
- The $98.3 million promissory note payable to Barrick comprised $51.6 million principal and $46.7 million accrued interest. It bears interest at U.S. prime plus 2% and is payable from 85% of NOVAGOLD’s share of future Donlin Gold revenue or certain proceeds from reducing its project interest. A 1% change in prime would change annual accrued interest by approximately $1.0 million, all else equal.
- Notes receivable from Newmont had a carrying value of $90.3 million. A further contingent $75 million note tied to approval of a Galore Creek construction plan was assigned no value because approval was not considered probable.
Changes, outlook and risks
- Management attributed the lower operating loss mainly to reduced general and administrative costs, including share-based compensation, and lower Donlin permitting and optimization activity.
- Management forecast approximately $24 million of spending for fiscal 2019: $13 million for NOVAGOLD’s share of Donlin Gold expenditures and $11 million for general and administrative costs. First-quarter Donlin funding was $0.9 million.
- Donlin Gold received final approval of its Reclamation and Closure Plan and final Waste Management Permit in January 2019. Additional land-use and pipeline authorizations remained in process; further dam-safety engineering and fieldwork were planned. A construction program and budget require approval by the Donlin Gold LLC board, and construction would require substantial additional financing.
- Management stated that financing would be needed if the project advances to engineering and construction, and that future financing is not assured. Key uncertainties include permitting and appeals, project financing and costs, gold prices, infrastructure, and opposition from some regional organizations and village councils. Appeals and permit reviews were expected to receive decisions in the second half of 2019.
- The filing reported no material changes to the prior annual report’s risk factors and no material current, pending or threatened litigation known to the company. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Donlin’s remaining permits, dam-safety approvals, engineering work and board decisions proceed on the anticipated timetable.
- Whether the stated $24 million fiscal-year budget and $13 million Donlin funding share remain current, and how subsequent spending affects cash and term deposits.
- The promissory note’s accrued interest, prime-rate exposure and repayment terms, alongside the assumptions and timing for Newmont note receipts.
- Developments in permit appeals, community opposition, and any resulting effects on project timing, costs or financing requirements.