NOVAGOLD RESOURCES INC annual report, FY2013

Business context and reporting period

NOVAGOLD RESOURCES INC. filed its first Form 10-K for the fiscal year ended November 30, 2013; fourth-quarter data are for the three months ended that date. The company is an exploration- and development-stage mineral company with no production, operating revenue, or operating cash flow. Its principal assets are 50% interests in the Donlin Gold project in Alaska, jointly held with Barrick, and the Galore Creek copper-gold-silver project in British Columbia, jointly held with Teck. The company is pursuing Donlin permitting and evaluating a sale of all or part of its Galore Creek interest.

Financial statements are in U.S. dollars and prepared under U.S. GAAP; comparative periods were restated from IFRS/Canadian GAAP. Effective December 1, 2013, NOVAGOLD ceased to be a foreign private issuer and became subject to U.S. domestic issuer reporting rules.

Financial and operating highlights

Margins are not meaningful because the company reported no continuing-operation revenue. Fourth-quarter 2013 net loss was $19.2 million in the quarterly table, compared with $30.2 million in Q4 2012; management described the 2013 figure as approximately $20.0 million.

2013 net loss widened despite the lower operating loss. The main year-over-year factor was a much smaller non-cash gain on derivative liabilities ($1.4 million in 2013 versus $76.2 million in 2012), alongside a $3.9 million income-tax expense versus a $7.7 million tax recovery in 2012. Operating loss improved with lower general and administrative costs and lower equity-method losses from both projects. The company also recorded a $3.2 million write-down of marketable securities and a $0.8 million asset write-down.

Investing cash outflow was $128.8 million, including $110.0 million placed in short-term term deposits and $18.8 million contributed to project affiliates. Financing cash outflow was $24.8 million: $79.2 million was spent repurchasing convertible notes, partly offset by $54.4 million of warrant-exercise proceeds. Cash plus term deposits totaled $191.3 million at year-end. Current assets were $196.8 million and current liabilities were $4.4 million.

Reported debt was $85.3 million, comprising a $13.6 million carrying value for the convertible notes and a $71.7 million Barrick promissory note. The notes’ remaining principal was $15.8 million, due May 1, 2015; the company repurchased $79.2 million principal during 2013, reducing future note interest payments. The Barrick note relates to prior Donlin expenditures, accrues at U.S. prime plus 2%, and is payable from NOVAGOLD’s share of future mine-production cash flow. There were no material off-balance-sheet arrangements.

Projects, outlook, risks, and unusual items

• Donlin Gold: Permitting and environmental review advanced; the filing projected a preliminary draft EIS for agency review in late 2014 and a public draft EIS in 2015. The company’s 2013 funding share was $12.2 million; its share of the approved 2014 project budget was approximately $12 million. Substantial additional permits, engineering, partner approval, and financing are required before construction. The feasibility study estimated total project capital of approximately $6.7 billion, after-tax NPV at 5% of $547 million and IRR of 6.0% at a $1,200-per-ounce gold assumption. These are project-study estimates, not company guidance, and are highly sensitive to prices and costs. The study’s proposed 2020 start-up schedule depends on permitting and construction timing.
• Galore Creek: The 2013 drilling program identified extensions of the Legacy zone; the company funded $6.6 million of project costs. Its 2014 share of the approved work program was approximately $2.5 million, focused on technical studies and mine planning, with no 2014 drilling planned. The company continued to seek opportunities to monetize its interest; no offer had been received by year-end. The 2011 pre-feasibility study estimated project capital costs of C$5.2 billion and post-tax NPV at 7% of C$137 million, using stated base-case commodity prices. Construction had been suspended in 2007 after cost and schedule estimates rose; a revised design may require a new environmental assessment and permits.
• Company outlook: Management expected 2014 spending of approximately $15 million for its share of project expenditures and $15 million for general and administrative costs, interest, working capital, and other corporate purposes. It said year-end liquidity was expected to fund project work and corporate costs through Donlin permitting and repay the remaining notes, but construction would require substantial additional capital. Continued operations depend on financing or future cash flows.
• Key risks: No property is producing or under construction; financing needs, permitting delays, gold and copper price volatility, remote-site infrastructure, environmental obligations, community opposition and unsettled Indigenous rights, joint-venture partner decisions, resource-estimate uncertainty, and possible project cost escalation could materially affect outcomes. Electrum and its affiliate held approximately 27.2% of shares, giving them significant influence. The company does not hedge currency exposure; management estimated a 1% Canadian-dollar move would change comprehensive income or loss by about $3.5 million. Management believed NOVAGOLD was likely a passive foreign investment company (PFIC) for U.S. tax purposes.
• Unusual and governance items: All outstanding warrants were exercised during 2013, producing $54.4 million in proceeds and increasing shares outstanding. Management concluded internal control over financial reporting was effective; PwC issued an unqualified opinion on the financial statements and controls. Management reported no pending or threatened legal proceeding expected to have a material adverse effect.

Important facts for investors to verify

• Confirm the company’s latest unrestricted cash, term deposits, spending run rate, and ability to fund Donlin permitting and corporate costs without new financing.
• Track remaining convertible-note principal and maturity, and clarify the terms and eventual settlement of the Barrick promissory note.
• Check actual Donlin EIS and permit milestones, partner approvals, engineering commitments, construction decision, and updated capital requirements.
• Review whether Galore Creek attracts a sale or partnership offer and whether updated studies change its economics, permitting requirements, or funding burden.
• Assess the basis and currency of the project reserve/resource figures: the filing cautions that its NI 43-101 reserve and resource disclosures are not equivalent to SEC Industry Guide 7 reserves; resources, especially inferred resources, may not be economically recoverable.
• Reconcile the annual loss drivers, including derivative fair-value movements, deferred taxes, foreign-exchange effects, and project equity-method losses; these materially affected reported earnings.