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NG > SEC Filings for NG > Form 10-Q on 9-Jul-2014All Recent SEC Filings

Show all filings for NOVAGOLD RESOURCES INC

Form 10-Q for NOVAGOLD RESOURCES INC


9-Jul-2014

Quarterly Report


Item 2. 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 three and six month periods ended May 31, 2014 and 2013. This discussion should be read in conjunction with the condensed consolidated interim 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.

Our goals for 2014 include:

Advance permitting of the Donlin Gold project.

Maintain a healthy balance sheet.

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

Evaluate opportunities to monetize the value of Galore Creek.

Maintain an effective corporate social responsibility program.

Second quarter highlights

Donlin Gold

In the second quarter of 2014, permitting activities continued at Donlin Gold and were mainly focused on the preliminary draft Environmental Impact Statement (EIS) expected to be completed around year-end. This document is comprised of four main sections.

An outline of the purpose and the need for the proposed mine. The management of Donlin Gold LLC and its Native Corporation partners, Calista Corporation and The Kuskokwim Corporation (TKC), jointly contributed to the preparation of this section which highlights the need for the development of the proposed mine and the benefit it would bring to its stakeholders.

The identification and analysis of a reasonable range of alternatives to the mine development proposed by Donlin Gold which comprise variations on certain mine site facility designs, local transportation options, and power supply options.

The preparation of an environmental analysis of the proposed action and reasonable alternatives (including a no action alternative), which identifies and characterizes the potential biological, social, and cultural impacts relative to the existing baseline conditions. This portion normally constitutes the most extensive part of the EIS.

The last section describes potential mitigation measures intended to reduce or eliminate the environmental impacts described in the impact analysis section.

During the quarter, the U.S. Army Corps of Engineers (the "Corps"), the lead agency for the Donlin Gold EIS, and cooperating agencies' completed the alternatives identification, establishing a reasonable range of alternatives to be evaluated in the EIS. Preparations of the remaining components of the preliminary draft EIS are well underway and expected to be completed over the next two quarters. This includes the alternatives development and the analysis of their potential environmental impacts. The Corps anticipates that all outstanding environmental baseline data required to complete the EIS will be compiled by the end of the third quarter.


In addition, Donlin Gold LLC and the appropriate permitting agencies are concurrently working on other major permits, such as air quality, water discharge and usage, gas pipeline, wetlands, rights-of-way, and dam safety. The EIS is required by the National Environmental Policy Act (NEPA), the act that governs the process by which most major projects in the United States are evaluated. The EIS is also, in large part, a determining factor in the overall permitting timeline which, for Donlin Gold, commenced in 2012 and is anticipated to take approximately four years to complete.

Beyond permitting, on June 9, 2014 we announced that Donlin Gold LLC and TKC reached an updated long term Surface Use Agreement for the Donlin Gold project. This agreement has been extended to coincide with the term of the Exploration and Mining Lease with the Calista Corporation and continues so long as production continues at the project. This agreement:

Provides direct compensation to TKC through payments for project milestones, annual surface use and mine operation.

Includes a coordinated and consultative approach between Donlin Gold and TKC regarding annual project planning, reclamation as well as preparation of a subsistence harvest plan for affected surface lands.

Gives preference to TKC for contracts, hiring and training TKC shareholders, as well as funding scholarships and working with federal, state and local entities to help create and fund a training facility in the region.

Commits to an exclusive contract with TKC for the construction and operations of an upriver port site.

Donlin Gold remains actively engaged in sponsorship activities at the community level, supporting local youth in leadership endeavors, visiting communities in the Yukon-Kuskokwim area and executing on the workforce development strategy in the region. During the second quarter, the Donlin Gold team:

Partnered with the Kuspuk School District, Alaska Construction Academies, and EXCEL Alaska in sponsoring a youth Academic and Trades Decathlon in Aniak. At this event, students competed individually in math, science, geography and keyboarding, and learned about trades from experts in several industries.

Continued its longstanding tradition in outreach, visiting 10 villages. Town Hall meetings were held in each village with a viewing of the Donlin Gold project video, narrated in both English and the local Yup'ik language.

Continued its partnership with the State of Alaska and the Yukon-Kuskokwim Health Corporation on the Kids Don't Float Campaign. Donlin Gold supports the lifesaving message of this campaign by distributing personal flotation devices (lifejackets) to kids along the river and updating safety messages at boat launches. Donlin Gold also continued its exemplary site safety record entering its ninth consecutive year without a lost time incident.

Continued its support for both the Iron Dog snow machine race and the Iditarod sled dog race, sponsoring two racers in each event. The Donlin Gold camp staff volunteered at the Cripple checkpoint, spending four nights assisting the race crew and mushers as they made their way north to Nome.

Our share of funding for Donlin Gold was $5.0 million in the second quarter of 2014, $7.7 million year-to-date. For the full year, we continue to expect to spend approximately $12 million to fund our share of Donlin Gold activities, primarily for continued permitting and community development.

We record our interest in the Donlin Gold project as an equity investment, which results in our 50% share of Donlin Gold's expenses being recorded in the income statement as an operating loss. The investment amount recorded on the balance sheet primarily represents unused funds advanced to Donlin Gold.

Galore Creek

In the first quarter of 2014, we announced drill results for Galore Creek's 2013 campaign which identified extensions to the copper-gold mineralization into, as well as adjacent to, the newly-discovered Legacy zone. The drilling results from the 2012 and 2013 programs are being incorporated into a model to advance mine planning and project design. During the quarter, we conducted workshops aimed at initiating a review process to evaluate an integrated plan for mining, waste disposal and water management to strengthen the economics of the Galore Creek project. We expect this effort to further improve the value and marketability of the Galore Creek project, which we continue to work on monetizing, in whole or in part, to strengthen our balance sheet and focus primarily on the permitting of Donlin Gold.


Our share of funding for the Galore Creek partnership was $0.5 million in the second quarter of 2014, $1.4 million year-to-date, primarily for technical studies, community commitments, environmental monitoring, severance as well as site care and maintenance. For the full year, we continue to expect to spend approximately $2.5 million to fund our share of Galore Creek's activities.

We record our interest in the Galore Creek partnership as an equity investment, which results in our 50% share of expenses being recorded in the income statement as an operating loss. The investment amount recorded on the balance sheet primarily represents the fair value of the Company's investment in the Galore Creek partnership in 2011, recorded upon Teck's completion of their earn-in, and unused funds advanced to the partnership.

Outlook

We do not currently generate operating cash flows. At May 31, 2014, we had cash and cash equivalents of $71.3 million and term deposits of $105.0 million. At present, we believe that these balances are sufficient to cover the anticipated funding at the Donlin Gold and Galore Creek projects, general and administrative costs through completion of permitting at the Donlin Gold project, and repayment of the unsecured senior convertible notes due on May 1, 2015. In 2014, we continue to 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.

Additional capital will be necessary if permits are received for 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 the risk factors in our Annual Report on Form 10-K for the year ended November 30, 2013, as filed with the SEC and the Canadian Securities Regulators on February 12, 2014.

Summary of Consolidated Financial Performance

                             Three months ended May 31,                 Six months ended May 31,
($ thousands, except
per share)                   2014                  2013                2014                  2013
Loss from operations    $        (8,264 )     $       (12,225 )   $       (19,597 )     $      (26,734 )
Net loss                $       (10,681 )     $        (9,833 )   $       (21,372 )     $      (23,609 )

Net loss per common
share
Basic and diluted       $         (0.03 )     $         (0.03 )   $         (0.07 )     $        (0.08 )

Results of Operations

Second quarter 2014 compared to 2013

Loss from operations decreased 32% from $12.2 million in 2013 to $8.3 million in 2014. The decrease resulted from lower general and administrative expense and lower losses from equity investments in the Donlin Gold and Galore Creek projects. General and administrative expense decreased by $1.3 million due to lower office rent, professional fees and share-based compensation, partially offset by higher salary costs due to personnel additions in 2013. Our share of losses at the Donlin Gold project decreased by $0.4 million, as 2014 activities continued to focus primarily on permitting. At the Galore Creek project, our share of losses decreased by $2.2 million due to reduced camp activity and mobile equipment being fully depreciated in 2013.

Net loss increased from $9.8 million ($0.03 per share) in 2013 to $10.7 million ($0.03 per share) in 2014 primarily due to a foreign exchange loss in 2014 compared to a gain in 2013 and a gain on the valuation of derivative liabilities in 2013, partially offset by the reduction in the loss from operations discussed above and lower interest expense.

First six months 2014 compared to 2013

Loss from operations decreased 27% from $26.7 million in 2013 to $19.6 million in 2014. The decrease resulted from lower general and administrative expense and lower losses from equity investments in the Donlin Gold and Galore Creek projects. General and administrative expense decreased $2.7 million due to lower office rent, professional fees and share-based compensation, partially offset by higher salary costs due to personnel additions in 2013. Our share of losses at the Donlin Gold project decreased by $0.5 million, as 2014 activities continued to focus primarily on permitting. At the Galore Creek project, our share of losses decreased by $3.9 million due to reduced camp activity and mobile equipment being fully depreciated in 2013.


Net loss decreased from $23.6 million ($0.08 per share) in 2013 to $21.4 million ($0.07 per share) in 2014 primarily due to the reduction in the loss from operations discussed above. Lower interest expense and loss on derivatives were offset by a lower foreign exchange gain in 2014 compared to 2013.

Liquidity, Capital Resources and Capital Requirements

                              Three months ended May 31,                 Six months ended May 31,
($ thousands)                2014                   2013                2014                  2013
Cash used in
operations              $          (474 )     $         (6,212 )   $        (5,688 )     $       (12,092 )
Cash used in
investing activities    $          (569 )     $         (5,872 )   $        (4,213 )     $        (8,965 )
Cash used in
financing activities    $             -       $        (72,821 )   $             -       $       (18,462 )




($ thousands)                At May 31,       At November 30,
                                2014               2013
Cash and cash equivalents   $     71,329     $          81,262
Term deposits               $    105,000     $         110,000

Second quarter 2014 compared to 2013

Cash and cash equivalents decreased by $1.0 million and term deposits decreased by $5.0 million during the second quarter of 2014. The decrease in cash was primarily related to $0.5 million used in operating activities for administrative costs net of reductions in accounts receivable and $5.6 million to fund our share of the Donlin Gold and Galore Creek projects, partially offset by a $5.0 million reduction in term deposits.

Cash used in operations decreased from $6.2 million in 2013, to $0.6 million in 2014. The decrease resulted from a reduction in corporate overhead and administrative costs, convertible notes interest and a reduction in accounts receivable. Cash used in investing activities in 2014 included $5.0 million from a net reduction in term deposits. The term deposits are denominated in U.S. dollars and are held at two major Canadian financial institutions. Cash used in financing activities in 2013 included the repayment of $72.8 million of the convertible notes.

First six months 2014 compared to 2013

Cash and cash equivalents decreased by $9.9 million and term deposits decreased by $5.0 million during the first six months of 2014. The decrease in cash was primarily related to $5.7 million used in operating activities for administrative costs and reductions in accounts payable and $9.2 million to fund our share of the Donlin Gold and Galore Creek projects, partially offset by a $5.0 million net reduction in term deposits.

Cash used in operations decreased from $12.1 million in 2013, to $5.7 million in 2014. The decrease resulted from a reduction in interest expense as well as corporate overhead and administrative costs. Cash used in investing activities decreased from $9.0 million in 2013 to $4.2 million in 2014, primarily due to a $5.0 million net reduction in term deposits. Cash used in financing activities in 2013 included the repayment of $72.8 million of the convertible notes, partially offset by the receipt of $54.4 million in net proceeds from the exercise of all outstanding warrants.

Outstanding share data

As of July 7, 2014, the Company had 317,288,472 common shares issued and outstanding. Also as of July 7, 2014, the Company had outstanding 15,295,217 stock options with a weighted-average exercise price of C$5.48, 2,445,350 Performance Share Units and 167,295 Deferred Share Units.


Accounting Developments

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

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