NOVAGOLD RESOURCES INC. 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 endedNovember 30, 2019 and 2018. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report. For a discussion of the years endedNovember 30, 2018 and 2017, see section Item 7., Management's Discussion and Analysis of Financial Condition and Results of Operations, on Registrant's Annual Report on Form 10-K for the year endedNovember 30, 2018 , filed with theSecurities and Exchange Commission onJanuary 23, 2019 . 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 2019, 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
ADNR's approval of the Alaska Dam Safety certificates for the tailings storage facility and water retention and diversion structures requires a thorough multi-year stepwise process to deliver a final construction package to ADNR. DuringJuly 2019 , Donlin Gold commenced a site investigation program in support of advancement of dam engineering from a feasibility level to a final construction package. The site investigation information will support a preliminary design package, detailed design package and ultimately the final construction package, each of which will be submitted to ADNR for final approval and issuance of the dam safety certificates. This program consists of geotechnical core drilling, test pits, overburden drilling, packer tests, hydrogeologic test well installation and pumping tests, and geophysical surveys. Safety training and camp preparations were completed in the third quarter. Due to wildfires that affected the project area, the program was temporarily suspended in July for a period of five weeks, as all personnel were safely moved as a precautionary measure and to accommodate firefighting operations. There was no damage to Donlin Gold structures and equipment and the camp reopened in September.ADNR's Division of Mining , Land, and Water (DMLW) issued the easement land leases, land use permits, and material site authorizations for the proposed transportation facilities, and easement for the fiber optic cable on State lands onJanuary 2, 2020 , following the issuance of the preliminary decisions onJanuary 28, 2019 and the close of the public comment period for these decisions inMarch 2019 .ADNR's Division of Oil and Gas (DOG), is finalizing the ROW authorizations for the natural gas pipeline, following the issuance of the preliminary decision inMarch 2019 . In 2018, Earthjustice, on behalf ofOrutsararmiut Native Council (ONC),Akiak Native Community IRA Council ,Organized Village of Kwethluk,Native Village of Kwigillingok,Chuloonawick Tribal Council , and theYukon-Kuskokwim River Alliance , requested an informal review of theState of Alaska's 401 certification (the "Certification") by the Director of theDivision of Water in theAlaska Department of Environmental Conservation (ADEC). InOctober 2018 , the Director responded to the request by deciding to conduct the informal review and reissued the Certification onApril 4, 2019 . OnApril 24, 2019 , Earthjustice requested a second informal review of the Certification and the request was granted by ADEC onMay 4, 2019 . A decision on the second informal review of the Certification is expected by the end of the first quarter of 2020. The final approvals of the Donlin Gold Reclamation and Closure Plan and final Waste Management Permit were issued onJanuary 18, 2019 . OnFebruary 7, 2019 , Earthjustice, on behalf of ONC,Akiak Native Community ,Chefornak Traditional Council ,Chevak Traditional Council ,Chuloonawick Native Village ,Native Village of Eek,Kasigluk Traditional Council ,Kongiganak Traditional Council , OrganizedVillage of Kwethluk ,Native Village of Kwigillingok,Native Village of Nightmute,Sleetmute Traditional Council ,Tuluksak Native Community , and NativeVillage of Tununak , filed an administrative appeal of the Reclamation and Closure Plan Approval. ADNR denied the appeal of the Donlin Gold Reclamation and Closure Plan onDecember 31, 2019 and affirmed DMLW's original decision. Additionally, Earthjustice, representing the same tribal entities in the appeal of the Reclamation and Closure Plan Approval, requested an informal review of the Waste Management Permit, which was completed byADEC's Division of Water onJune 25, 2019 with their original decision upheld and with no further appeal. 46
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NOVAGOLD RESOURCES INC. Donlin Gold LLC , with support from the project owners (NOVAGOLD and Barrick) are committed to growing strong and collaborative working relationships to preserve traditional lifestyles and support economic development for the benefit of Calista and TKC shareholders (owners of the mineral and surface rights, respectively) and the Yukon-Kuskokwim (Y-K) region.Donlin Gold LLC and ourNative Corporation partners held more than 200 engagement meetings in 2019 with individual stakeholders and community organizations and remained actively engaged in environmental sustainability projects in the Y-K region.The Donlin Gold LLC board must approve a construction program and budget before the Donlin Gold project can be developed. The timing of the required engineering work and theDonlin Gold LLC board's approval of a construction program and budget, the receipt of all required governmental permits and approvals, and the availability of financing, commodity price fluctuations, risks related to market events and general economic conditions among other factors, will affect the timing of and whether to develop the Donlin Gold project. Among other reasons, project delays could occur as a result of public opposition, litigation challenging permit decisions, requests for additional information or analysis, limitations in agency staff resources during regulatory review and permitting, or project changes made byDonlin Gold LLC . NOVAGOLD and Barrick continue to study ways to improve the project's value and to reduce initial capital outlays through enhanced project design and execution, engagement of third-party operators for certain activities, and potential for future financing of some capital-intensive infrastructure. To date, these additional studies have identified key areas that have the potential to add value and maximize the future opportunity and longevity of the project. In 2020,Donlin Gold LLC has envisioned a drilling program in the resource area to follow-up on recent drilling and technical work. NOVAGOLD and Barrick will take all this work into account before reaching a construction decision and will advance the Donlin Gold project in a financially-disciplined manner with a strong focus on environmental stewardship and social responsibility. Our share of funding for the Donlin Gold project in 2019 was$11.1 million for geotechnical fieldwork, permitting and community engagement efforts. Our share of the 2020 work program and budget totals$20 million , including$11 million for the drilling program and$9 million for permitting and community engagement to continue to advance the project. 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.
Maintained our strong financial position
Cash and term deposits decreased by
Outlook Our goals for 2020 include:
? Advance the Donlin Gold project toward a construction/production decision.
? Maintain a healthy balance sheet. ? Maintain an effective corporate social responsibility program. We do not currently generate operating cash flows. AtNovember 30, 2019 , we had cash and cash equivalents of$67.5 million and term deposits of$81.0 million . At present, we believe that these balances are sufficient to cover anticipated funding of the Donlin Gold project and corporate general and administrative costs. Additional capital will be necessary if a decision to commence engineering and construction is reached for the Donlin Gold project. Future financings to fund construction are anticipated through debt, equity, project specific debt, and/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 on terms favorable to us, or at all. For further information, see section Item 1A, Risk Factors - Our ability to continue the exploration, permitting, development, and construction of the Donlin Gold project, and to continue as a going concern, will depend in part on our ability to obtain suitable financing, above. In 2020, we expect to spend approximately$31 million , including$20 million to fund our share of expenditures at the Donlin Gold project and$11 million for general and administrative costs. 47 --------------------------------------------------------------------------------
NOVAGOLD RESOURCES INC.
Summary of Consolidated Financial Performance
Years ended November 30,
($ thousands, except per share) 2019 2018 2017
General and administrative $ (16,321 ) $ (18,493 ) $ (20,802 )
Equity loss - Donlin Gold (10,491 ) (8,798 ) (11,219 )
Loss from operations (26,812 ) $ (27,291 ) $ (32,021 )
Net loss from continuing operations (27,761 ) $ (31,466 ) $ (36,915 )
Net loss from discontinued operations, net of tax - (81,299 ) (2,101 )
Net loss $ (27,761 ) $
(112,765 )
Net loss per common share - basic and diluted Continuing operations$ (0.09 ) $ (0.10 ) $ (0.11 ) Discontinued operations - (0.25 ) (0.01 )$ (0.09 ) $ (0.35 ) $ (0.12 )
Results of Continuing Operations
General and administrative expense decreased from$18.5 million in 2018 to$16.3 million in 2019 primarily due to lower share-based compensation costs for stock options and performance share units (PSUs) compared to the prior year and lower salaries and benefits. The Company extended the vesting period for new stock option and PSU grants issued beginning in 2018 from two to three years and eliminated the individual performance multiplier in the formula for long-term equity compensation, which had the potential to increase long-term equity incentive grants above the target amount. Equity loss - Donlin Gold increased from$8.8 million in 2018 to$10.5 million in 2019 due to the commencement of fieldwork to support the design packages needed to advance Alaska Dam Safety certification applications, partially offset by a reduction in permitting activities.
Net loss from continuing operations decreased from
Results of Discontinued Operations
Net loss from discontinued operations, net of tax of$81.3 million ($0.25 per share) in 2018 resulted primarily from the loss on the sale ofGalore Creek , net of tax.
Liquidity, Capital Resources and Capital Requirements
At November 30,
($ thousands) 2019 2018 Change
Cash and cash equivalents $ 67,549 $ 21,004 $ 46,545
Term deposits 81,000 146,000 (65,000 )
$ 148,549 $ 167,004 $ (18,455 ) The
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NOVAGOLD RESOURCES INC.
The net changes in total Cash and cash equivalents and Term deposits resulted
from:
Years ended November 30,
($ thousands) 2019 2018 2017
Continuing operations
Operating activities $ (6,127 ) $ (10,392 ) $ (8,077 )
Funding of Donlin Gold (11,122 ) (8,907 ) (11,368 )
Withholding tax on share-based compensation (1,197 ) - (196 )
Other (9 ) (99 ) 124
(18,455 ) (19,398 ) (19,517 )
Discontinued operation
Galore Creek - 102,448 (1,803 )
$ (18,455 ) $ 83,050 $ (21,320 )
Net cash used in operating activities decreased by $4.3 million , primarily due
to higher interest income and lower salaries and benefits. Funding of Donlin
Gold increased by $2.2 million due to the commencement of geotechnical
fieldwork, partially offset by lower permitting costs. Withholding taxes were
paid on vested performance share units in the first quarter of 2019. No
performance share units vested in 2018.
Net cash provided from discontinued operations of $102.4 million in 2018
included the receipt of $99.3 million in net cash proceeds on the sale of Galore
Creek and $4.6 million of refunded cash deposits for Galore Creek reclamation
bonding, partially offset by $1.5 million of Galore Creek project funding prior
to the sale.
Total Donlin Gold funding of $11.1 million was $1.9 million lower than our
original outlook of $13 million primarily due to the temporary suspension of
geotechnical fieldwork as a result of summer wildfires in the project area.
General and administrative spending of $10.1 million was lower than our original
outlook of $11 million due to lower salaries and benefits.
We have sufficient working capital available for the next twelve-month period to
cover anticipated funding of the Donlin Gold project and corporate general and
administrative costs.
Contractual Obligations
Our contractual obligations as of
More than 5
($ thousands) Total Less than 1 year 1-3 years 3-5 years years
Remediation $ 182 $ 182 $ - $ - $ -
Office and equipment leases 1,301 302 682 294 23
Promissory note 103,787 - - - 103,787
$ 105,270 $ 484 $ 682 $ 294 $ 103,810 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 ofJanuary 15, 2020 , the Company had 328,330,519 common shares issued and outstanding. Also as ofJanuary 15, 2020 , the Company had: i) a total of 13,564,882 stock options outstanding; 9,069,250 of those stock options with a weighted-average exercise price of$4.51 and the remaining 4,495,632 with a weighted-average exercise price ofC$5.31 ; and ii) 1,684,000 PSUs and 264,588 deferred share units (DSUs) outstanding. Upon exercise of the foregoing convertible securities, the Company would be required to issue a maximum of 16,355,470 common shares. Related party transactions
The Company provided technical services to
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As of
Fourth quarter results During the fourth quarter of 2019, we incurred a net loss of$7.9 million compared to a net loss of$6.3 million for the comparable period in 2018. The increase in net loss primarily resulted from Donlin Gold fieldwork to support the design packages needed to advance the application for Alaska Dam Safety certifications. 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, or expense being reported.
Contingent note receivable As a portion of the proceeds on the sale ofGalore Creek to Newmont, the Company received a contingent note for$75,000 receivable upon the approval of aGalore Creek project construction plan by the owner(s). The Company has not assigned a value to the contingent note receivable as management determined thatGalore Creek project construction approval was not probable as of the closing of theGalore Creek sale and the assessment did not change as ofNovember 30, 2019 . The contingent note will be recognized only when, in management's judgement, payment is probable, and the amount recorded will not reverse in future periods. Investment in affiliates Investments in unconsolidated ventures over which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity method and include the Company's investment in the Donlin Gold project. We identifiedDonlin Gold LLC as a Variable Interest Entity (VIE) as the entity is dependent on funding from its owners. All funding, ownership, voting rights and power to exercise control is shared equally on a 50/50 basis between the owners of the VIE. Therefore, the Company has determined that it is not the primary beneficiary of the VIE. The Company's maximum exposure to loss is its investment inDonlin Gold LLC .Donlin Gold LLC is a non-publicly traded equity investee holding exploration and development projects. The Company reviews and evaluates its investment in affiliates for other than temporary impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Events that could indicate impairment of an investment in affiliates include a significant decrease in long-term expected gold price, a significant increase in expected operating or capital costs, unfavorable exploration results or technical studies, a significant decrease in reserves, a loss of significant mineral claims or a change in the development plan or strategy for the project. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. If the underlying assets are not recoverable, an impairment loss is measured and recorded based on the difference between the carrying amount of the investee and its estimated fair value which may be determined using a discounted cash flow model. 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 grant share-based compensation awards in exchange for employee services, including a stock option plan and a PSU plan. The fair value of awards granted under the plans are recognized in the Consolidated Statements of Loss over the related service period. The fair values of stock options are estimated at the time of each grant using a BlackScholes option pricing model, and the fair values of PSUs are measured at each grant date using aMonte Carlo valuation model. The fair value estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, the Company's performance and the Company's performance in relation to its peers. 50
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NOVAGOLD RESOURCES INC. We grant members of our board of directors 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 the Consolidated Statements of Loss over the related service period. As ofNovember 30, 2019 , we had$2.2 million of unrecognized compensation cost related to 4.883 million non-vested stock options expected to be recognized and vest over a period of approximately two years. Also, as ofNovember 30, 2019 , we had 1.644 million non-vested PSU awards outstanding of which 0.432 million were fully expensed and vested inDecember 2019 with a multiplier of 150%. The remaining 1.232 million non-vested PSU awards with$2.5 million of unrecognized compensation cost will be expensed and vest over a period of approximately two years. 51
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