NOVAGOLD RESOURCES INC. — Q3 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended August 31, 2016. NOVAGOLD is a gold and copper exploration and development company with 50% interests in the Donlin Gold project in Alaska and the Galore Creek project in British Columbia. It had no operations or realized revenue from its planned principal business.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where shown.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating loss | $6.4 million | $6.6 million | $23.3 million | $25.1 million |
| Net loss | $7.4 million | $6.3 million | $26.5 million | $24.8 million |
| Net loss per share, basic and diluted | $0.02 | $0.02 | $0.08 | $0.08 |
| Cash used in operations | $0.5 million | $1.8 million | $10.4 million | $9.9 million |
| Funding of Donlin Gold and Galore Creek | $2.7 million | $2.8 million | $7.9 million | $9.2 million |
Revenue and operating margins are not applicable because the company reported no realized operating revenue. Q3 operating loss narrowed year over year, but net loss rose, mainly because the prior-year quarter included a $1.1 million foreign-exchange gain. For the nine months, operating loss improved while net loss increased, primarily because 2015 included a $4.4 million foreign-exchange gain; lower operating losses and interest expense partly offset that difference.
At August 31, 2016, cash and cash equivalents were $28.5 million and term deposits were $80.0 million, for combined cash and term deposits of $108.5 million. Compared with November 30, 2015, cash declined $13.3 million and term deposits declined $5.0 million. Total assets were $420.4 million, total liabilities $107.2 million, and equity $313.2 million. The $83.7 million promissory note payable to Barrick included $51.6 million principal and $32.1 million accrued interest; it bears interest at U.S. prime plus 2% and is payable from specified future Donlin Gold proceeds. The filing reports no repayment during the first nine months of 2016.
Donlin Gold and Galore Creek investments were carried at $1.8 million and $247.3 million, respectively. The Donlin carrying amount primarily reflects unused funds advanced; Galore Creek’s carrying amount also reflects the fair value recorded when Teck completed its earn-in. The filing provides no operating revenue or profitability metrics for these projects.
Projects, outlook, and risks
- Donlin Gold: Permitting and environmental review continued. The U.S. Army Corps of Engineers was reviewing comments on the draft environmental impact statement; the final EIS target date was still being established. The company said numerous permits, additional engineering, partner approval of a construction program and budget, and financing are required before construction. The air-quality permit was targeted for 2017. NOVAGOLD’s share of 2016 Donlin funding was expected to be approximately $9 million; $7.2 million had been funded in the first nine months.
- Galore Creek: Technical studies continued, including work on tunneling, mine planning, waste rock, and water management. NOVAGOLD remained open to monetizing all or part of its interest. Its expected 2016 share of project spending was approximately $1 million; $0.7 million had been funded in the first nine months.
- Spending and liquidity outlook: Management expected approximately $23 million of total spending for 2016, $2 million below its original forecast; $18 million had been spent through August 31. Management believed cash and term deposits were sufficient for operations over the next 12 months and anticipated project funding and corporate costs through completion of Donlin permitting. Additional capital may be needed for feasibility-study updates and engineering; construction would require further financing. The company has no operating cash flows and states that continued operations depend on financing or future cash flows.
- Key risks and contingencies: Project timing and value depend on permits, environmental review, engineering, partner decisions, construction financing, and community and stakeholder processes. Delays could result from opposition, agency requests for information, staffing constraints, or project changes. The company also faces commodity-price, currency, credit, and interest-rate risks and does not hedge currency exposure. A $0.01 change in the Canadian dollar against the U.S. dollar was estimated to affect comprehensive income or loss by approximately $3.0 million; a 1% change in U.S. prime was estimated to change annual accrued interest by approximately $0.8 million. No material litigation was reported, and management said there were no material changes to previously disclosed risk factors.
Unusual items and controls: Nine-month cash use included $4.3 million of withholding taxes paid on vested performance share units. Share-based compensation was $8.4 million for the nine months. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Donlin Gold EIS, permits, additional engineering, partner approvals, and financing progress on a timeline consistent with any eventual construction decision.
- Whether the reported $108.5 million of cash and term deposits remains adequate given ongoing operating and project-funding needs and the stated potential need for further capital.
- The promissory note’s accrued interest, variable-rate exposure, and repayment terms tied to future Donlin Gold proceeds or a reduction in the company’s project interest.
- Progress toward any Galore Creek monetization, and whether project studies or copper-price changes affect the investment’s value or impairment assessment.