Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NG > SEC Filings for NG > Form 10-K on 12-Feb-2014All Recent SEC Filings

Show all filings for NOVAGOLD RESOURCES INC

Form 10-K for NOVAGOLD RESOURCES INC


12-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations constitutes management's review of the factors that affected our financial and operating performance for the years ended November 30, 2013, 2012 and 2011. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report.

Overview

Our operations primarily relate to the delivery of project milestones, including the achievement of various technical, environmental, sustainable development, economic and legal objectives, obtaining necessary permits, completion of feasibility studies, preparation of engineering designs and the financing to fund these objectives.

In 2013, we successfully delivered on the key goals established at the beginning of the year. Highlights of our accomplishments include:

Advancement of the Donlin Gold project

Permitting of the Donlin Gold project continued to advance:

ˇ The Notice of Intent to prepare an EIS was published by the Corps in the Federal Register in December 2012, commencing the public scoping process.

ˇ Public scoping meetings were held in 13 villages and communities in Western Alaska and in Anchorage to provide information and insight about the project.

ˇ A data gap analysis to address questions and concerns that arose from the scoping meetings was prepared.

ˇ EIS Scoping Summary report completed and made available to the public (www.donlingoldeis.com).

ˇ Strong working relationships were maintained with the agencies and we continue to provide input throughout the permitting process.

ˇ Ongoing baseline data review was conducted including:

° follow-up technical workshops highlighting core components of baseline environmental and social studies; and

° completion of 2013 supplemental field studies.

ˇ EIS Alternatives Development occurred, including:

° reasonable range of alternatives that are feasible, practicable and permittable to address key issues (i.e.: power - gas pipeline vs. diesel) has been defined; and

° the initial screening of potential alternatives has been completed.

ˇ Preliminary Draft EIS preparation was commenced, initial draft chapters are in review by the Cooperating Agencies.

ˇ A strong safety record was maintained.

ˇ Several villages were engaged in work force development planning.

ˇ Donlin Gold was named "Employer of the Year" by the National Association of State Workforce Agencies.

Galore Creek project

The 2013 drilling program was completed under budget and exceeded program objectives with 11,600 meters drilled:

ˇ Significant intercepts encountered on follow-up drilling from the Legacy zone discovery in 2012, a 700-meter long mineralized zone, adjacent to the Central Pit.

ˇ Extensions of the Legacy zone mineralization were identified to the south, west and at depth and provided information that will be useful to assess its impact on future mine design.


ˇ Results from the 2012 and 2013 drilling programs will be incorporated into a capital efficient work plan for 2014 that will advance the project.

Strengthened our financial position

ˇ Reduced cash flow used in continuing operations to $19.5 million in 2013 from $28.6 million in 2012.

ˇ Our cash used in operations and funding of the Donlin Gold and Galore Creek projects totaled $38.3 million, $2.7 million lower than our budget of $41 million.

ˇ Received proceeds of $54.4 million upon exercise of the remainder of our outstanding warrants.

ˇ Completed a tender offer for our Notes and subsequently purchased additional Notes

° Reduced the principal obligation of the Notes from $95.0 million to $15.8 million.

° Reduced associated interest expense.

ˇ We have sufficient cash available to repay the remaining $15.8 million of the outstanding Notes due in May 2015 and to advance the Donlin Gold project through the remaining expected permitting process.

Outlook

Our goals for 2014 include:

ˇ Advance permitting of the Donlin Gold project.

ˇ Maintain a healthy balance sheet.

ˇ Undertake Galore Creek technical studies to build on successful 2012 and 2013 drill results.

ˇ Evaluate opportunities to monetize the value of Galore Creek.

ˇ Maintain an effective corporate social responsibility program.

We do not currently generate operating cash flows. At November 30, 2013, we had cash and cash equivalents of $81.3 million and term deposits of $110.0 million. At present, we believe that these balances are sufficient to cover the anticipated funding at the Donlin Gold and Galore Creek projects in addition to general and administrative costs through completion of permitting at the Donlin Gold project. Additional capital will be necessary if permits are received at the Donlin Gold project and a decision to commence construction is reached. Future financings to fund construction are anticipated through debt financing, equity financing, project specific debt, or other means. Our continued operations are dependent on our ability to obtain additional financing or to generate future cash flows. However, there can be no assurance that we will be successful in our efforts to raise additional capital. For further information, see section Item 1A, Risk Factors - Our ability to continue the exploration, permitting, development, and construction of the Donlin Gold and Galore Creek projects, and to continue as a going concern, will depend in part on our ability to obtain suitable financing, above. In 2014, we expect to spend approximately $15 million to fund our share of expenditures at the Donlin Gold and Galore Creek projects and $15 million for general and administrative costs, interest, working capital and other corporate purposes.

Summary of Consolidated Financial Performance

                                                        Years ended November 30,
($ thousands, except per share)                    2013          2012           2011
Loss from operations                             $ (55,776 )   $ (79,942 )   $ (115,996 )
Income (loss) from continuing operations         $ (62,760 )   $  (7,586 )   $   78,235
Net income (loss) attributable to shareholders   $ (62,760 )   $ (11,829 )   $   64,767
Net income (loss) per common share
Basic                                            $   (0.20 )   $   (0.05 )   $     0.19
Diluted                                          $   (0.20 )   $   (0.05 )   $     0.07


Results of Operations

2013 compared to 2012

Loss from operations decreased 30% from $79.9 million in 2012 to $55.8 million in 2013. The decrease resulted from lower general and administrative expenses and a lower share of losses from equity investments in the Donlin Gold and Galore Creek projects. General and administrative expenses decreased 30% due to the corporate reorganization costs that were incurred in 2012 for severance and recruiting. Our share of losses at the Donlin Gold project decreased by $2.3 million, as 2013 activities were focused primarily on permitting. At the Galore Creek project, our share of losses decreased by $10.0 million due to a smaller drilling program that focused on the 2012 Legacy zone discovery.

Net loss attributable to shareholders increased from $11.8 million ($0.05 per share - basic) in 2012 to $62.7 million ($0.20 per share - basic) in 2013. In 2012, the fair value of U.S. dollar denominated warrants and the Notes decreased and we recorded a gain of $76.2 million compared to a gain of $1.4 million in 2013, partially offset by the $24.1 million reduction in the loss from operations in 2013 compared to 2012. We also had a $3.9 million tax expense in 2013 compared to a $7.7 million income tax recovery and a $4.2 million net loss from discontinued operations in 2012.

2012 compared to 2011

In 2011, the results of operations and presentation in the financial statements were impacted by the deconsolidation of the Galore Creek project. Teck earned its 50% interest in the Galore Creek project upon completion of its funding commitment of C$373.3 million in June 2011 (the "Reconsideration Event"). The Reconsideration Event resulted in a loss of our primary beneficiary status upon Teck completing its earn-in obligations under the Partnership Agreement. Prior to the completion of its earn-in, if Teck had failed to meet their obligations, we would have had the power to exercise control over the Partnership. Following the Reconsideration Event, we share joint control of the Galore Creek Partnership with Teck, costs are funded equally between the partners and we equity account for our investment.

We determined the fair value of the Partnership at the reconsideration date, deconsolidated the Galore Creek Partnership and subsequently equity accounted for our share of the investment. We determined that the fair value of the Galore Creek project was $354.4 million at May 31, 2011 using estimated discounted future cash flows. As a result, we recognized a gain of $154.2 million for the excess value over the book value of $200.2 million. The determination of the estimated fair value of the equity investment in the Galore Creek Partnership required management to make estimates and assumptions of future events. These estimates and assumptions affect the reported amount of the investment and the reported amount of the gain recognized upon fair valuing the equity investment in the Galore Creek Partnership. Significant assumptions included gold, copper and silver prices of $1,100 per ounce, $2.66 per pound, and $18.50 per ounce, respectively, and a 7% discount rate. Other estimates included future foreign exchange rates, various operational assumptions and metal recovery rates. Actual results could differ materially from those reported.

Loss from operations decreased 31% from $116.0 million in 2011 to $79.9 million in 2012. The decrease was primarily due to $39.6 million in write-downs related to power transmission rights and mobile equipment at the Galore Creek project. General and administrative costs increased by $12.9 million in 2012 as a result of the corporate reorganization which included severance and recruiting costs. Our share of losses at the Donlin Gold project decreased by $4.7 million as permitting activities commenced. At the Galore Creek project, our share of losses increased by $6.0 million due to an expanded drilling program which resulted in the Legacy zone discovery.

Net loss from discontinued operations in 2012 and 2011, includes the financial results associated with NovaCopper Inc. and the Ambler assets, and the former operations of Alaska Gold Company LLC (AGC) and the Rock Creek project. On April 30, 2012, we completed a plan of arrangement under the Companies Act (Nova Scotia) pursuant to which we spun-out NovaCopper Inc., a wholly-owned subsidiary of the Company which held the Ambler assets in Alaska, to our shareholders. On November 1, 2012, we completed the sale of our wholly owned subsidiary, AGC, which owns the Rock Creek project and other assets in and around Nome, Alaska to Bering Straits Native Corporation. The loss decreased from $33.1 million in 2011 to $4.2 million in 2012, primarily due to a partial year of expenses at Ambler due to the spin-out of NovaCopper Inc. and a write-down of inventory and reclamation expense at Rock Creek in 2011.

Net income attributable to shareholders decreased from $64.8 million ($0.19 per share - basic) in 2011 to a loss of $11.8 million ($0.05 per share - basic) in 2012. The decrease was due to the gain recognized in 2011 on deconsolidation of the Galore Creek Partnership, partially offset by the decrease in Loss from operations, the decrease in Net loss from discontinued operations and a $7.7 million deferred income tax recovery in 2012 compared to an expense of $15.4 million in 2011.


Liquidity, Capital Resources and Capital Requirements

                                                            Years ended November 30,
($ thousands)                                           2013          2012          2011
Cash used in continuing operations                   $  (19,491 )   $ (28,570 )   $ (27,731 )
Cash used in investing activities of continuing
operations                                           $ (128,846 )   $ (34,842 )   $ (41,279 )
Cash provided from (used in) financing activities
of continuing operations                             $  (24,812 )   $ 323,585     $  21,565



                              As of November 30,
($ thousands)                 2013          2012
Cash and cash equivalents   $  81,262     $ 254,667
Term deposits               $ 110,000     $       -

Cash and cash equivalents decreased by $173.4 million to $81.3 million at November 30, 2013 compared to $254.7 million at November 30, 2012. The decrease in cash is primarily related to the investment of $110.0 million in term deposits, $19.5 million used in operating activities, $18.8 million to fund Donlin Gold and Galore Creek and $79.2 million to repurchase Notes, partially offset by proceeds of $54.4 million from warrants exercised. We have sufficient working capital available to repay the remaining $15.8 million of outstanding Notes due in May 2015 and to advance the Donlin Gold project through the expected remaining permitting process.

2013 compared to 2012

Cash used in continuing operations decreased from $28.6 million in 2012, to $19.5 million in 2013. The decrease resulted from the successful reorganization of the Company in 2012 encompassing the spin-out of NovaCopper Inc., the sale of AGC, which included Rock Creek, as well as a reduction in corporate overhead and administrative costs. Interest payments were lower due to the $79.2 million repurchase of Notes in 2013. Cash used in discontinued operations in 2012 included $25.5 million in 2012 to fund the operations of NovaCopper Inc. and the Rock Creek project.

Cash used in investing activities of continuing operations in 2013 included an investment of $110.0 million in term deposits with original terms of six to nine months to earn a higher return while maintaining adequate liquidity. The U.S. dollar denominated term deposits are held at two major Canadian financial institutions. Cash funding of investments in affiliates decreased by $14.1 million due to lower project activity during permitting at the Donlin Gold project and a reduced exploration program at the Galore Creek project.

Cash used in financing activities of continuing operations in 2013 included the repurchase of $79.2 million of our Notes, partially offset by the receipt of $54.4 million in net proceeds from the exercise of all outstanding warrants. In 2012, we received net proceeds of $318.0 million from the completion of an equity financing of 35 million common shares at $9.50 per share and $5.6 million from the exercise of warrants. Cash used in financing activities of discontinued operations in 2012 included $40 million to fund the spin-out of NovaCopper Inc.

2012 compared to 2011

Cash used in continuing operations increased from $27.7 million in 2011, to $28.6 million in 2012. The increase resulted from reorganization costs including severance in 2012, partially offset by the inclusion of 100% of spending at the Galore Creek project in the first half of 2011, prior to deconsolidation. Cash used in discontinued operations increased from $22.0 million in 2011 to $25.5 million in 2012 to fund the operations of NovaCopper Inc. and the remediation of the Rock Creek project.

Cash used in investing activities of continuing operations in 2011 included $4.1 million for the acquisition of Copper Canyon. Cash funding of investments in affiliates increased by $1.7 million due to the expanded drilling program at the Galore Creek project that resulted in the discovery of the Legacy zone, partially offset by lower spending at the Donlin Gold project as permitting commenced in 2012. Cash provided from investing activities of discontinued operations resulted primarily from the sale of equipment at the Rock Creek project.

Cash used in financing activities of continuing operations in 2012 included net proceeds of $318.0 million from the completion of an equity financing and $5.6 million from the exercise of warrants and stock options. In 2011, we received proceeds of $14.2 million from the exercise of warrants and stock options and $7.4 million from Teck to fund the Galore Creek project prior to the completion of Teck's earn-in on the project. Cash used in financing of discontinued operations included $40 million to fund the spin-out of NovaCopper Inc. in 2012 and $24.0 million to repay the Ambler note in 2011.


Contractual Obligations

Our contractual obligations as of November 30, 2013 were as follows:

                                                                                                      More than 5
($ thousands)                       Total       Less than 1 year       1-3 years       3-5 years         years
Reclamation and remediation       $     861     $             861     $         -     $         -     $         -
Office and equipment leases           1,622                   440             846             336               -
Convertible notes - principal        15,829                     -          15,829               -               -
Convertible notes - interest          1,306                   871             435               -               -
Promissory note                      71,728                     -               -               -          71,728

Off-Balance Sheet Arrangements

The Company does not have any material off-balance sheet arrangements required to be disclosed in this Annual Report on Form 10-K.

Outstanding share data

As of February 6, 2014, we had 317,297,868 common shares issued and outstanding. As of February 6, 2014, we had 13,950,134 stock options with a weighted-average exercise price of $5.71, 2,281,692 restricted share units and 134,090 deferred share units outstanding. Following the Company's purchases of the Notes, $15,829 of the principal amount of the Notes remain outstanding and due on May 1, 2015 and 1,639,370 common shares remain issuable upon conversion.

Related party transactions

The Company provided exploration and management services to Donlin Gold for $258 in 2013, $236 in 2012 and $600 in 2011; office rental and services to Galore Creek for $423 in 2013, $796 in 2012 and $886 in 2011; and management and office administration services to NovaCopper Inc. for $168 in 2013 and $83 in 2012.

As of November 30, 2013, the Company has accounts receivable from Donlin Gold of $1,750 (2012: $nil) and from Galore Creek Galore Creek of $1,690 (2012: $138) included in other current assets and a receivable of $4,132 (2012: $4,417) from Galore Creek included in other long-term assets.

Fourth quarter results

During the fourth quarter of 2013, we incurred a net loss of $20.0 million compared to $30.2 milllion for the comparable period in 2012. The decrease in net loss in 2013 compared to 2012 was primarily due to a loss on derivative liabilities in 2012. We also incurred lower general and administrative expenses and interest expense in 2013, offset by increased defered income tax expense.

Accounting Developments

For a discussion of Recently Issued Accounting Pronouncements, see Note 2 to the Consolidated Financial Statements.

Critical Accounting Policies

We believe the following accounting policies are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported.

Investment in affiliates

Our investments in the Donlin Gold project and the Galore Creek project are accounted for using the equity method. The equity method is a basis of accounting for investments whereby the investment is initially recorded at cost and the carrying value is adjusted thereafter to include the investor's pro rata share of post-acquisition earnings or losses of the investee, as computed by the consolidation method. Cash funding increases the carrying value of the investment. Profit distributions received or receivable from an investee reduce the carrying value of the investment.

These investments are non-publicly traded equity investees in advanced exploration projects. Therefore, we assess whether there has been a potential impairment triggering event for other-than-temporary impairment by testing the underlying assets of the equity investee for recoverability and assessing whether there has been a change in the development plan or strategy for the project. If we determine underlying assets are recoverable and no other potential impairment conditions are identified, then our investment in the equity investee is carried at cost. If the other underlying assets are not recoverable, we record an impairment charge equal to the difference between the carrying amount of the investee and its fair value. We determined fair value based on the present value of future cash flows expected to be generated by the project. If reliable cash flow information is not available, we determine fair value using a market comparable approach.


Mineral properties and exploration and evaluation expenditures

Mineral property acquisition costs, including directly related costs, are capitalized when incurred, and mineral property exploration and evaluation costs are expensed as incurred. Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body and the removal of overburden to initially expose an ore body at open pit surface mines. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves as defined by SEC Industry Guide 7. Capitalized costs will be amortized using the units-of-production method over the estimated life of the proven and probable reserves. If mineral properties are subsequently abandoned or impaired, any unamortized costs will be charged to loss in that period.

The recoverability of the carrying values of our mineral properties is dependent upon economic reserves being discovered or developed on the properties, permitting, financing, start-up, and commercial production from, or the sale/lease of, or other strategic transactions related to these properties.

Income taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the asset and liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.

Share-based compensation

We operate a stock option plan and a performance share unit plan, under which the entity receives services from employees as consideration for equity instruments (options or shares) of the Company. The fair value for the options and share units are recognized in earnings over the related service period. The total amount to be expensed related to options is determined by reference to the fair value of the options granted including any market performance conditions and the impact of any non-vesting conditions; and excluding the impact of any service and non-market performance vesting conditions.

The fair value of stock options is estimated at the time of grant using the Black­Scholes option pricing model, and the fair value of the PSUs is measured at the grant date using a Monte Carlo simulation, which takes into account, as of the grant date, the fair market value of the shares, expected volatility, expected dividend yield and the risk­free interest rate over the life of the PSU, to generate potential outcomes for stock prices which are used to estimate the probability of the PSUs vesting at the end of the performance measurement period.

We grant our board members deferred share units (DSUs), whereby each DSU entitles the directors to receive one common share of the Company when they retire from service with the Company. The fair value of the DSUs is measured at the date of the grant in amounts ranging from 50% to 100% of directors' annual retainers at the election of the directors. The fair value is recognized in consolidated statement of income (loss) over the related service period.

Derivative Instruments

All financial instruments that meet the definition of a derivative are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in the consolidated statements of income. Management applies judgment in estimating the fair value of instruments that are highly sensitive to assumptions regarding market volatilities, foreign currency exchange rates and interest rates. Variations in these factors could materially affect amounts credited or charged to earnings to reflect the changes in fair value of derivatives.


Net income (loss) per common share

Basic and diluted income (loss) per share is presented for Net income (loss) and for Income (loss) from continuing operations. Basic income (loss) per share is computed by dividing Net income (loss) or Income (loss) from continuing operations by the weighted-average number of outstanding common shares for the period, including the warrants and the convertible notes. Diluted income per share reflects the potential dilution that could occur if securities or other contracts that may require the issuance of common shares in the future were converted. Diluted income per share is computed by increasing the weighted-average number of outstanding common shares to include the additional common shares that would be outstanding after conversion and adjusting net income for changes that would result from the conversion. Only those securities or other contracts that result in a reduction in earnings per share are included in the calculation.


  Add NG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NG - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.