NOVAGOLD RESOURCES INC. — FY2016 Form 10-K
Reporting period: Fiscal year ended November 30, 2016; filed January 25, 2017. All company financial amounts below are U.S. dollars unless noted. NOVAGOLD is an exploration and development company with 50% interests in Donlin Gold, Alaska, and Galore Creek, British Columbia. It had no production, operating revenue, or operating cash flow.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Revenue | None | None | No revenue from operations in the periods reported. |
| Loss from operations | $30.1 million | $31.7 million | Loss narrowed $1.6 million. |
| Net loss | $33.8 million | $32.0 million | Loss widened $1.9 million; loss per share was $0.11 versus $0.10. |
| Cash used in operating activities | $11.7 million | $11.4 million | Operating cash use increased $0.3 million. |
| Cash and cash equivalents | $30.3 million | $41.7 million | Down $11.5 million. |
| Term deposits | $75.0 million | $85.0 million | Down $10.0 million; combined cash and term deposits fell $21.5 million to $105.3 million. |
| Total assets | $408.3 million | $433.6 million | Down $25.3 million. |
| Total liabilities | $108.0 million | $104.3 million | Includes an $84.8 million Barrick promissory note and $20.1 million deferred tax liabilities. |
| Shareholders’ equity | $300.3 million | $329.3 million | Down $29.0 million. |
At year-end, current assets were $107.3 million and current liabilities were $3.1 million. The Barrick promissory note, including accrued interest, is payable from 85% of NOVAGOLD’s share of future Donlin production revenue or net proceeds from a reduction in its Donlin interest; it is not scheduled as a near-term cash payment. The balance grew from $80.3 million, with interest at U.S. prime plus 2%. A 1% prime-rate change would affect annual accrued interest by about $0.8 million.
Margins are not meaningful because the company has no operating revenue. FY2016 general and administrative expense was $20.2 million, including $10.3 million of share-based compensation. The company reported no dividends.
Material changes and fourth-quarter results
- Operating loss improved mainly because NOVAGOLD’s share of Donlin losses fell $2.2 million as activity focused on permitting. Galore Creek losses increased $0.8 million, partly because FY2015 included a gain on surplus equipment sales.
- Net loss increased despite lower operating loss: other expense was $3.4 million in FY2016 versus $0.1 million in FY2015. FY2015 included $4.8 million of foreign-exchange gains; FY2016 recorded only $0.2 million. Lower interest expense after the 2015 convertible-note repayment partly offset this comparison.
- Fourth-quarter FY2016 net loss was $7.35 million, compared with $7.17 million in fourth-quarter FY2015, primarily due to higher Donlin equity losses.
- Cash and term deposits declined $21.5 million, mainly reflecting $11.7 million of operating cash use and $9.7 million of funding for the two projects. There was no FY2016 financing cash flow. The remaining convertible notes were repaid in FY2015.
Projects, outlook and risks
- Donlin Gold: The Army Corps completed the six-month draft EIS public-comment period in May 2016, including 17 meetings. The Corps was reviewing comments and expected to publish a final EIS in early 2018. Further permits, engineering, financing, and approval of a construction budget are required before construction. NOVAGOLD funded $8.7 million of Donlin work in FY2016; its estimated 50% share of the 2017 work program is about $10 million.
- Galore Creek: Partners continued technical optimization studies, including access tunneling and mining, waste-rock and water-management plans. NOVAGOLD had received no acceptable offer for its 50% interest and continued to consider a sale or partial sale. Its estimated 2017 funding share is about $2 million.
- 2017 outlook: Management expected approximately $23 million in company spending: $11 million for general and administrative costs, $10 million for Donlin, and $2 million for Galore Creek, subject to additional Donlin study funding being determined. Management believed available cash and term deposits would fund planned work and corporate costs through Donlin’s expected remaining permitting process. Further capital would be needed if Donlin advances to engineering and construction; no assurance was given that financing will be available on acceptable terms.
- Project economics are dated and conditional: The 2011 Donlin feasibility study estimated $6.7 billion total capital cost, after-tax NPV at 5% of $547 million and IRR of 6.0% at $1,200/oz gold. The 2011 Galore Creek pre-feasibility study estimated C$5.2 billion initial capital, post-tax NPV at 7% of C$137 million and IRR of 7.4%. These are historical study estimates, not current guidance or a construction commitment.
- Resource disclosure caution: Donlin and Galore Creek reserve/resource estimates are based on Canadian NI 43-101 standards and have effective dates in 2011. The filing states both projects are without known reserves under SEC Industry Guide 7; Canadian resource and reserve categories may not be comparable to U.S. standards. Resources, especially inferred resources, are uncertain and do not establish economic mineability.
- Key risks: Permitting delays or denial, public and Indigenous stakeholder concerns, remote-site infrastructure requirements (including Donlin’s proposed 500-km gas pipeline and Galore’s access tunnel), high capital costs, commodity and foreign-exchange volatility, joint-venture partner alignment, reclamation obligations, and the need for future financing. Electrum and affiliates held 26.3% of shares as of January 17, 2017, giving them significant influence. The company disclosed no material pending legal proceeding.
Most important facts for investors to verify
- Current unrestricted cash, term-deposit maturity profile, spending rate, and whether planned permitting work remains funded.
- Status and schedule for Donlin’s final EIS, key permits, project engineering, and any construction decision; confirm whether cost and design estimates have been updated since 2011.
- Terms, accrued interest, and repayment implications of the $84.8 million Barrick note, including the production-revenue and disposition provisions.
- Any credible offer or transaction for NOVAGOLD’s Galore Creek interest, and the project’s updated economics, permitting requirements, and funding commitments.
- Current resource/reserve estimates and technical studies, with particular attention to their dates, assumptions, and the distinction between Canadian disclosure categories and SEC standards.
- Potential dilution from future financing: 321.5 million common shares were outstanding January 17, 2017, with up to 25.5 million additional shares issuable upon exercise or vesting of disclosed securities.
PwC issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management and the auditor reported controls were effective at November 30, 2016.