NOVAGOLD RESOURCES INC. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended May 31, 2015; balance-sheet comparisons are to November 30, 2014. Amounts are U.S. dollars in millions unless otherwise indicated. NOVAGOLD is an exploration and development company with 50% interests in the Donlin Gold project in Alaska and Galore Creek in British Columbia. It reported no operating revenue.
Financial performance and position
- Q2: Operating loss was $7.2 million, net loss was $9.2 million, and basic and diluted loss per share was $0.03. For the first six months, operating loss was $18.5 million, net loss was $18.5 million, and loss per share was $0.06.
- Year-over-year: Q2 net loss narrowed from $10.7 million to $9.2 million; six-month net loss narrowed from $21.4 million to $18.5 million. Lower G&A and foreign-exchange effects contributed; a $0.4 million investment write-down partly offset improvement.
- Cash flow: Operating activities used $2.5 million in Q2 and $8.2 million in the first half, compared with $0.5 million and $5.7 million in the comparable 2014 periods. Investing activities provided $1.1 million in Q2 and $3.5 million in the first half, mainly reflecting term-deposit movements. Financing activities used $15.8 million in the first half to repay convertible notes.
- Liquidity: Cash and cash equivalents were $49.7 million and current term deposits were $85.0 million, totaling $134.7 million in cash and short-term deposits. Current assets were $137.9 million versus current liabilities of $2.7 million.
- Debt: Total debt was $78.2 million, all classified as long-term. The remaining $15.8 million principal on convertible notes was repaid May 1, 2015. The remaining debt is a promissory note to Barrick; its reported balance includes $51.6 million principal and $26.6 million accrued interest. Scheduled minimum repayments are nil through 2019, with $78.2 million thereafter.
- Other metrics: Total assets were $464.8 million, investment in affiliates was $262.1 million, and equity was $361.9 million. Q2 foreign-currency translation income was $1.5 million, but the six-month translation loss was $30.2 million; six-month comprehensive loss was $48.5 million.
Material changes and unusual items
- Cash and cash equivalents fell $20.6 million from November 30, 2014, while term deposits declined $10.0 million. The company attributed the cash decline mainly to note repayment, operating costs and project funding.
- Q2 G&A included a non-cash $1.0 million out-of-period adjustment reducing stock-option expense after an overstatement in Q1. Management cited this adjustment and favorable currency translation as reasons for lower Q2 G&A.
- The company recorded a $0.4 million other-than-temporary write-down of marketable equity securities in Q2; their carrying value was $0.6 million at May 31.
- Six-month foreign-exchange gains were $3.2 million, primarily reflecting the stronger U.S. dollar against the Canadian dollar, partly offset by losses related to convertible notes.
Outlook, projects and risks
- Management expected 2015 spending of approximately $44.8 million, including the $15.8 million note repayment, $14.2 million for the company’s share of Donlin Gold and Galore Creek costs, $1.5 million for joint Donlin studies with Barrick, and $13.3 million for G&A, interest, working capital and other corporate purposes. Approximately $30.6 million had been spent by May 31.
- Expected 2015 funding was approximately $12.6 million for Donlin Gold and $1.6 million for Galore Creek. Donlin work focused largely on permitting; the company anticipated publication of the draft EIS around year-end 2015 and a final EIS in early 2017. Galore Creek work focused on mine planning, design, waste rock and water management, monitoring and care and maintenance.
- Management said available cash and term deposits were expected to cover anticipated project funding and corporate costs through completion of Donlin permitting. Construction would require additional capital, and future financing could involve debt, equity, project-specific debt or other means. The filing cautions there is no assurance of obtaining financing.
- The company remained open to monetizing all or part of Galore Creek. A sustained decline in long-term copper prices could trigger impairment testing of its Galore Creek investment and Copper Canyon property.
- Principal risks include permitting and environmental approvals, project development and infrastructure costs, commodity prices, financing needs, joint-venture partner cooperation, foreign exchange, interest rates, and uncertainty over whether projects will ever reach production. The company does not hedge currency exposure; a C$0.01 currency movement was estimated to change comprehensive income or loss by about $3.0 million. A 1% change in U.S. prime was estimated to change annual accrued interest on the Barrick note by about $0.8 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material current, pending or threatened litigation and no material changes to previously disclosed risk factors.
Key investor verification points
- Confirm the timing and outcome of Donlin Gold permitting, including EIS milestones and required permits.
- Track cash, term deposits, project expenditures and the company’s ability to fund operations through permitting and any later construction decision.
- Review the Barrick promissory note balance, variable-rate exposure and repayment terms.
- Assess copper-price trends and any resulting impairment indicators for Galore Creek and Copper Canyon.
- Evaluate the effects of foreign-exchange movements, joint-venture funding requirements and the stated 2015 spending outlook.