UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16
OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of October, 2012
Commission File Number: 001-31913
NOVAGOLD RESOURCES INC.
(Translation of registrant's name into English)
Suite 2300 – 200 Granville Street, PO Box 24
Vancouver, BC Canada V6C 1S4
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
[ ] Form 20-F [ x ] Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
SUBMITTED HEREWITH
Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NovaGold Resources Inc. | ||
(Registrant) | ||
Date: October 11, 2012 | By: | /s/ Elaine Sanders |
Elaine Sanders | ||
Title: | Officer |
NOVAGOLD RESOURCES INC.
Third Quarter
2012
Interim
Condensed Consolidated Financial Statements
August 31, 2012
(Unaudited)
Table of Contents
2 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Consolidated Balance Sheets Unaudited
in thousands of Canadian dollars | |||||||||
August 31, 2012 | November 30, 2011 | December 1, 2010 | |||||||
$ | $ | $ | |||||||
Assets | |||||||||
Current assets | |||||||||
Cash and cash equivalents (note 7) | 267,437 | 60,572 | 150,167 | ||||||
Trade and other receivables (note 8) | 858 | 13,973 | 525 | ||||||
Deposits and prepaid amounts | 606 | 1,637 | 1,702 | ||||||
Inventories | - | 491 | 7,690 | ||||||
Assets held for sale Rock Creek project (note 6) | 19,982 | - | - | ||||||
288,883 | 76,673 | 160,084 | |||||||
Non current assets | |||||||||
Other receivables (note 8) | 4,137 | 4,137 | 4,262 | ||||||
Property, plant and equipment (note 9) | 368 | 1,610 | 1,607 | ||||||
Mineral properties (note 10) | 510 | 510 | 27,366 | ||||||
Assets held for distribution to the shareholders (note 5) | - | 31,034 | - | ||||||
Equity investment Donlin Gold (note 3) | 4,655 | 2,596 | 1,889 | ||||||
Equity investment Galore Creek (note 4) | 381,052 | 386,525 | 364,839 | ||||||
Investments (note 11) | 2,683 | 4,525 | 5,683 | ||||||
Investment tax credits | 3,221 | 3,221 | 3,271 | ||||||
Reclamation deposits | 2,186 | 8,900 | 8,944 | ||||||
Total assets | 687,695 | 519,731 | 577,945 | ||||||
Liabilities | |||||||||
Current liabilities | |||||||||
Trade and other payables | 14,478 | 14,802 | 7,523 | ||||||
Liabilities directly associated with assets classified as held for sale Rock Creek (note 6) | 16,634 | - | - | ||||||
Current portion of decommissioning liabilities (note 14) | 1,035 | 26,574 | 7,110 | ||||||
Current portion of other liabilities | - | - | 12,245 | ||||||
Convertible notes (note 12) | 69,621 | - | - | ||||||
Embedded derivative liability convertible notes (note 12) | 7,682 | - | - | ||||||
109,450 | 41,376 | 26,878 | |||||||
Non current liabilities | |||||||||
Convertible notes (note 12) | - | 66,880 | 61,313 | ||||||
Embedded derivative liability convertible notes (note 12) | - | 58,660 | 90,465 | ||||||
Decommissioning liabilities (note 14) | - | 2,602 | 2,326 | ||||||
Deferred liability | - | 4,030 | - | ||||||
Derivative liability warrants (note 13) | 16,183 | 54,818 | 658,841 | ||||||
Promissory note (note 3) | 66,270 | 65,979 | 63,034 | ||||||
Deferred income tax | 2,401 | 6,887 | 16,752 | ||||||
Other liabilities | 117 | 153 | 11,594 | ||||||
Total liabilities | 194,421 | 301,385 | 931,203 | ||||||
Shareholders equity | |||||||||
Share capital (note 15) | 1,518,153 | 1,288,917 | 1,117,870 | ||||||
Contributed surplus | 7,935 | 8,629 | 8,629 | ||||||
Warrants (note 15) | 391,574 | 440,221 | - | ||||||
Share-based payments (note 15) | 51,876 | 38,013 | 31,453 | ||||||
Deficit | (1,529,289 | ) | (1,618,839 | ) | (1,512,662 | ) | |||
Accumulated other comprehensive income | 53,025 | 61,405 | 1,452 | ||||||
Total equity | 493,274 | 218,346 | (353,258 | ) | |||||
Total liabilities and equity | 687,695 | 519,731 | 577,945 | ||||||
Nature of operations (note 1) | |||||||||
Commitments (notes 3, 4 and 17) |
(See accompanying notes to condensed consolidated financial statements)
These consolidated financial statements are authorized for issue by the Board of Directors on October 9, 2012. They are signed on the Companys behalf by:
/s/ Gregory A. Lang, Director | /s/ Anthony Walsh, Director | |
Approved by the Board of Directors |
NOVAGOLD Resources Inc. | 3 | |
Q3 2012 |
Consolidated Statements of Comprehensive Income Unaudited
in thousands of Canadian dollars, | ||||||||||||
except for per share and share amounts | ||||||||||||
Three months | Three months | Nine months | Nine months | |||||||||
ended | ended | ended | ended | |||||||||
August 31, 2012 | August 31, 2011 | August 31, 2012 | August 31, 2011 | |||||||||
$ | $ | $ | $ | |||||||||
Decommissioning (recovery) expense (note 14) | (3,090 | ) | 20,572 | 764 | 20,572 | |||||||
Corporate development and communication | 375 | 87 | 611 | 403 | ||||||||
Foreign exchange (gain) loss | 8,422 | 5,382 | (10,188 | ) | (21,464 | ) | ||||||
General and administrative | 1,067 | 1,213 | 5,022 | 3,568 | ||||||||
Mineral property expenses | 93 | 4,912 | 1,737 | 7,373 | ||||||||
Professional fees | 721 | 1,525 | 2,884 | 3,386 | ||||||||
Project care and maintenance | 1,790 | 3,831 | 6,704 | 8,714 | ||||||||
Salaries and severance | 4,717 | 2,442 | 11,113 | 6,986 | ||||||||
Salaries share-based payments (note 15) | 2,936 | 1,664 | 15,493 | 7,203 | ||||||||
Share of losses Donlin Gold (note 3) | 5,020 | 6,590 | 13,319 | 16,772 | ||||||||
Share of losses Galore Creek (note 4) | 9,513 | 7,578 | 17,865 | 30,198 | ||||||||
Other gain | (179 | ) | (25 | ) | (230 | ) | (129 | ) | ||||
Operating loss | 31,385 | 55,771 | 65,094 | 83,582 | ||||||||
Finance income (note 19) | (168 | ) | (601 | ) | (1,339 | ) | (1,316 | ) | ||||
Finance expense (note 19) | 3,994 | 4,035 | 11,614 | 11,319 | ||||||||
Finance costs net | 3,826 | 3,434 | 10,275 | 10,003 | ||||||||
Gain on sale of inventory | (1,216 | ) | - | (1,216 | ) | - | ||||||
Gain on sale of land and equipment | - | (1,090 | ) | - | (17,200 | ) | ||||||
Gain on derivative liability (note 13) | (5,321 | ) | (1,582 | ) | (37,560 | ) | (36,572 | ) | ||||
Gain on embedded derivative liability (note 12) | (4,844 | ) | (9,356 | ) | (50,043 | ) | (32,461 | ) | ||||
Gain on transfer of assets (note 5) | - | - | (71,641 | ) | - | |||||||
Inventory write down | - | 6,933 | - | 6,933 | ||||||||
Income (loss) for the period before income taxes | (23,830 | ) | (54,110 | ) | 85,091 | (14,285 | ) | |||||
Income tax recovery | 2,373 | 2,006 | 4,459 | 7,621 | ||||||||
Income (loss) for the period | (21,457 | ) | (52,104 | ) | 89,550 | (6,664 | ) | |||||
Other comprehensive income (loss) | ||||||||||||
Unrealized loss on available-for-sale investments (note 11) | (509 | ) | (641 | ) | (1,843 | ) | (723 | ) | ||||
Exchange gain (loss) on translating foreign subsidiaries | 3,190 | 5,114 | (6,565 | ) | 8,291 | |||||||
Income tax recovery | 2 | (99 | ) | 28 | (59 | ) | ||||||
Other comprehensive income (loss) for the period | 2,683 | 4,374 | (8,380 | ) | 7,509 | |||||||
Total comprehensive income (loss) for the period | (18,774 | ) | (47,730 | ) | 81,170 | 845 | ||||||
Income (loss) per share | ||||||||||||
Basic | (0.08 | ) | (0.22 | ) | 0.33 | (0.03 | ) | |||||
Diluted | (0.08 | ) | (0.22 | ) | 0.17 | (0.03 | ) | |||||
Basic weighted average number of shares (thousands) | 279,715 | 238,577 | 269,553 | 234,906 | ||||||||
Diluted weighted average number of shares (thousands) | 279,715 | 238,577 | 302,125 | 234,906 |
(See accompanying notes to condensed consolidated financial statements)
4 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Consolidated Statements of Changes in Shareholders Equity - Unaudited
in thousands of Canadian dollars, | ||||||||||||||||||||||||
except share amounts | ||||||||||||||||||||||||
Share capital | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Share - | other | |||||||||||||||||||||||
Contributed | based | Accumulated | comprehensive | |||||||||||||||||||||
Shares | Amount | surplus | Warrants | payments | deficit | income | Total | |||||||||||||||||
(thousands) | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Balance, December 1, 2010 | 225,992 | 1,117,870 | 8,629 | - | 31,453 | (1,512,662 | ) | 1,452 | (353,258 | ) | ||||||||||||||
Loss for the period | - | - | - | - | - | (6,664 | ) | - | (6,664 | ) | ||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 7,509 | 7,509 | ||||||||||||||||
Issuance for acquisition of Copper Canyon | 4,171 | 42,339 | 42,339 | |||||||||||||||||||||
Exercise of warrants | 8,785 | 123,756 | - | - | - | - | - | 123,756 | ||||||||||||||||
Conversion of foreign currency warrants | - | - | - | 441,969 | - | - | - | 441,969 | ||||||||||||||||
Exercise of options | 749 | 2,576 | - | - | (2,165 | ) | - | - | 411 | |||||||||||||||
Share-based payments | - | - | - | - | 5,665 | - | - | 5,665 | ||||||||||||||||
Performance share unit (PSU) expense | - | - | - | - | 1,476 | - | - | 1,476 | ||||||||||||||||
Deferred share unit (DSU) grant | - | - | - | - | 99 | - | - | 99 | ||||||||||||||||
Balance, August 31, 2011 | 239,697 | 1,286,541 | 8,629 | 441,969 | 36,528 | (1,519,326 | ) | 8,961 | 263,302 | |||||||||||||||
Shares held by a wholly- owned subsidiary | 9 | - | - | - | - | - | - | - | ||||||||||||||||
Balance, August 31, 2011 | 239,706 | 1,286,541 | 8,629 | 441,969 | 36,528 | (1,519,326 | ) | 8,961 | 263,302 | |||||||||||||||
Balance, December 1, 2011 | 239,976 | 1,288,917 | 8,629 | 440,221 | 38,013 | (1,618,839 | ) | 61,405 | 218,346 | |||||||||||||||
Return of capital on Plan of Arrangement | - | (144,858 | ) | - | - | - | - | - | (144,858 | ) | ||||||||||||||
Net income for the period | - | - | - | - | - | 89,550 | - | 89,550 | ||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (8,380 | ) | (8,380 | ) | ||||||||||||||
Issued pursuant to financing | 35,000 | 316,417 | - | - | - | - | - | 316,417 | ||||||||||||||||
Exercise of options | 515 | 213 | - | - | (213 | ) | - | - | - | |||||||||||||||
Exercise of warrants | 3,892 | 54,401 | - | (48,647 | ) | - | - | - | 5,754 | |||||||||||||||
Issued for vested PSU | 87 | 177 | - | - | (316 | ) | - | - | (139 | ) | ||||||||||||||
Issued for vested DSU | 4 | - | - | - | - | - | - | - | ||||||||||||||||
Excess value over fair value - performance share unit | - | - | (694 | ) | - | - | - | - | (694 | ) | ||||||||||||||
Share-based payments | 313 | 2,886 | - | - | 12,395 | - | - | 15,281 | ||||||||||||||||
PSU expense | - | - | - | - | 1,858 | - | - | 1,858 | ||||||||||||||||
DSU grants | - | - | - | - | 139 | - | - | 139 | ||||||||||||||||
Balance, August 31, 2012 | 279,787 | 1,518,153 | 7,935 | 391,574 | 51,876 | (1,529,289 | ) | 53,025 | 493,274 | |||||||||||||||
Shares held by a wholly- owned subsidiary | 9 | - | - | - | - | - | - | - | ||||||||||||||||
Balance, August 31, 2012 | 279,796 | 1,518,153 | 7,935 | 391,574 | 51,876 | (1,529,289 | ) | 53,025 | 493,274 |
(See accompanying notes to condensed consolidated financial statements)
NOVAGOLD Resources Inc. | 5 | |
Q3 2012 |
Consolidated Statements of Cash Flows Unaudited
in thousands of Canadian dollars | ||||||||||||
Three months | Three months | Nine months | Nine months | |||||||||
ended | ended | ended | ended | |||||||||
August 31, 2012 | August 31, 2011 | August 31, 2012 | August 31, 2011 | |||||||||
$ | $ | $ | $ | |||||||||
Cash flows used in operating activities | ||||||||||||
Net income (loss) for the period | (21,457 | ) | (52,104 | ) | 89,550 | (6,664 | ) | |||||
Items not affecting cash | ||||||||||||
Depreciation | 18 | 129 | 266 | 258 | ||||||||
Decommissioning liabilities | (3,090 | ) | 20,572 | 764 | 20,572 | |||||||
Deferred income tax (recovery) expense | (2,348 | ) | 5,952 | (4,459 | ) | (59 | ) | |||||
Finance costs | 6,149 | 2,577 | 10,712 | 8,241 | ||||||||
Foreign exchange (loss) gain | 8,152 | 702 | (10,529 | ) | (24,842 | ) | ||||||
Share-based payments | 2,936 | 1,664 | 15,493 | 7,203 | ||||||||
Gain on assets distributed to the shareholders (note 5) | - | - | (71,641 | ) | - | |||||||
Gain on derivative liability | (5,321 | ) | (1,582 | ) | (37,560 | ) | (36,572 | ) | ||||
Gain on embedded derivative liability | (4,844 | ) | (9,356 | ) | (50,043 | ) | (32,461 | ) | ||||
Gain on sale of inventory | (1,216 | ) | - | (1,216 | ) | - | ||||||
Gain on sale of land and equipment | - | (1,090 | ) | - | (17,200 | ) | ||||||
Inventory write down | - | 7,611 | - | 7,611 | ||||||||
Share of losses Donlin Gold (note 3) | 5,020 | 6,590 | 13,319 | 16,772 | ||||||||
Share of losses Galore Creek (note 4) | 9,513 | 7,578 | 17,865 | 30,198 | ||||||||
Cash funding Donlin Gold (note 3) | (5,485 | ) | (6,239 | ) | (15,513 | ) | (17,889 | ) | ||||
Cash funding Galore Creek (note 4) | (7,527 | ) | (7,880 | ) | (12,392 | ) | (7,880 | ) | ||||
Net change in non-cash working capital | ||||||||||||
(Increase) decrease in trade and other receivables, deposits and prepaid amounts | 702 | 1,274 | (740 | ) | 822 | |||||||
Decrease in note receivable | - | - | 10,057 | - | ||||||||
Decrease in trade and other payables and current decommissioning liabilities | (3,457 | ) | (3,825 | ) | (12,269 | ) | (2,795 | ) | ||||
(22,255 | ) | (27,427 | ) | (58,336 | ) | (54,685 | ) | |||||
Cash flows from financing activities | ||||||||||||
Cash transferred to NovaCopper (note 5) | - | - | (40,359 | ) | - | |||||||
Proceeds from issuance of common shares net | - | - | 316,417 | 411 | ||||||||
Proceeds from warrant exercises net | - | 1,831 | 5,756 | 13,190 | ||||||||
Payroll and withholding tax on issuance of PSU | - | - | (831 | ) | - | |||||||
Payment of note payable for acquisition of Ambler | - | (11,737 | ) | - | (23,658 | ) | ||||||
- | (9,906 | ) | 280,983 | (10,057 | ) | |||||||
Cash flows from investing activities | ||||||||||||
Proceeds from sale of inventory | 1,690 | - | 1,690 | - | ||||||||
Proceeds from sale of land and equipment | - | 6,963 | - | 6,963 | ||||||||
Acquisition of property, plant and equipment | - | (238 | ) | (571 | ) | (3,530 | ) | |||||
Increase in reclamation bonds | - | - | (13,625 | ) | (66 | ) | ||||||
Purchase of marketable securities | - | - | - | (269 | ) | |||||||
Expenditures on mineral properties | - | (392 | ) | - | (392 | ) | ||||||
Acquisition of Copper Canyon | - | - | - | (4,007 | ) | |||||||
1,690 | 6,333 | (12,506 | ) | (1,301 | ) | |||||||
Effect of foreign exchange rate on cash and cash equivalents | (13,189 | ) | 5,580 | (3,276 | ) | 252 | ||||||
Increase (decrease) in cash and cash equivalents during the period | (33,754 | ) | (25,420 | ) | 206,865 | (65,791 | ) | |||||
Cash and cash equivalents beginning of period | 301,191 | 109,796 | 60,572 | 150,167 | ||||||||
Cash and cash equivalents end of period | 267,437 | 84,376 | 267,437 | 84,376 | ||||||||
Supplemental disclosure | ||||||||||||
Interest received | 156 | 81 | 402 | 317 | ||||||||
Interest paid | - | 166 | 2,581 | 2,649 |
(See accompanying notes to condensed consolidated financial statements)
6 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
1 |
Nature of operations |
NOVAGOLD Resources Inc. (NOVAGOLD or the Company) was incorporated under the Companies Act (Nova Scotia) on December 5, 1984. NOVAGOLD is a precious metals company engaged in the exploration and development of mineral properties primarily in North America. The Company has a portfolio of mineral properties located principally in Alaska, U.S.A. and British Columbia, Canada.
The Donlin Gold project in Alaska is held by a limited liability company owned equally by wholly-owned subsidiaries of NOVAGOLD and Barrick Gold Corporation (Barrick). The Galore Creek project is held by a partnership (Galore Creek Partnership or the Partnership) owned equally by wholly-owned subsidiaries of NOVAGOLD and Teck Resources Limited (Teck).
The Company is listed on the Toronto Stock Exchange and on the NYSE-MKT (formerly NYSE-AMEX) under the symbol NG. The Companys head office is located at Suite 2300 200 Granville Street, Vancouver, BC, Canada V6C 1S4.
2 |
Basis of preparation and adoption of IFRS |
The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
Previously, the Company prepared its consolidated annual and consolidated interim financial statements in accordance with previous Canadian generally accepted accounting principles (Previous Canadian GAAP). In 2010, the Handbook of the Canadian Institute of Chartered Accountants was revised to incorporate International Financial Reporting Standards (IFRS), and require publicly accountable enterprises to apply such standards for years beginning on or after January 1, 2011. Accordingly, the Company has prepared its consolidated interim financial statements effective as of October 9, 2012 in accordance with the current Canadian GAAP, which has adopted IFRS as if the accounting policies had always been in effect subject to certain transition elections. Note 20 discloses the impact of the transition to IFRS, including the nature and effect of significant changes in accounting policies from those disclosed in our consolidated annual financial statements for the year ended November 30, 2011.
The interim consolidated financial statements should be read in conjunction with the Companys annual consolidated financial statements and the notes thereto for the year ended November 30, 2011, prepared in accordance with previous Canadian GAAP, and the Companys interim consolidated financial statements for the quarter ended February 29, 2012, prepared in accordance with IFRS, current Canadian GAAP. The Companys IFRS accounting policies were disclosed in Note 3 of the condensed interim consolidated financial statements for the period ended February 29, 2012.
Statement of compliance with International Financial Reporting Standards
These condensed consolidated interim financial statements have been prepared in accordance with and using accounting policies in full compliance with the IFRS issued by the International Accounting Standards Board (IASB) and IFRIC interpretations applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting (IAS 34) and IFRS 1, First-Time Adoption of International Financial Reporting Standards (IFRS 1).
NOVAGOLD Resources Inc. | 7 | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
3 |
Equity investment - Donlin Gold |
On December 1, 2007, together with Barrick Gold U.S. Inc., the Company formed a limited liability company (Donlin Gold LLC) to advance the Donlin Gold project in Alaska. Donlin Gold LLC has a board of four directors, with two nominees selected by each company. All significant decisions related to Donlin Gold LLC require the approval of both companies. As part of the Donlin Gold LLC agreement, the Company agreed to reimburse Barrick over time approximately US$64.3 million, representing 50% of Barricks expenditures of US$128.6 million at the Donlin Gold project from April 1, 2006 to November 30, 2007. Reimbursement has been partially made by the Company paying US$12.7 million of Barricks share of project costs during 2008. A promissory note for the remaining US$51.6 million plus interest at a rate of U.S. prime plus 2% will be paid out of NOVAGOLDs share of future mine production cash flow. The Company has recorded US$14.8 million in accrued interest since the inception of the promissory note. As of August 31, 2012, the Company recorded $66.3 million in promissory note with $2.6 million in interest expense related to this promissory note for the quarter. Interest on this long-term debt is expensed. Both parties are currently sharing all project costs on a 50/50 basis.
Under IAS 31, the Company determined that Donlin Gold LLC is a jointly controlled entity and consequently accounts for its investment Donlin Gold LLC using the equity method of accounting. The equity method is a basis of accounting for investments whereby the investment is initially recorded at cost and the carrying value, adjusted thereafter to include the investor's pro rata share of post-acquisition earnings of the investee, is computed by the consolidation method. Profit distributions received or receivable from an investee reduce the carrying value of the investment.
For the nine months ended August 31, 2012, the Company and Barrick each contributed $15.5 million. The investment in Donlin Gold LLC is accounted for using the equity method as follows:
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Balance beginning of period | 2,596 | 1,889 | ||||
Funding | 15,513 | 22,044 | ||||
Share of losses | (13,319 | ) | (21,353 | ) | ||
Foreign exchange | (135 | ) | 16 | |||
Balance end of period | 4,655 | 2,596 |
The following amounts represent the Companys 50% share of the assets, liabilities, and results of operations of Donlin Gold LLC:
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Cash, prepaid and other receivables | 6,199 | 3,544 | ||||
Property, plant and equipment | 99,314 | 102,737 | ||||
Accounts payables and accrued liabilities | (2,159 | ) | (1,521 | ) | ||
Net assets | 103,354 | 104,760 |
in thousands of Canadian dollars | ||||||
Nine months ended | Nine months ended | |||||
August 31, 2012 | August 31, 2011 | |||||
$ | $ | |||||
Depreciation | 126 | 75 | ||||
Mineral property expenditures | 13,193 | 16,709 | ||||
Total expenses | 13,319 | 16,784 |
The Companys share of commitments contracted by Donlin Gold LLC at August 31, 2012 is $2.8 million.
8 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
4 |
Equity investment Galore Creek |
The Galore Creek Partnership was formed with Teck in May 2007 to advance the Galore Creek project in British Columbia, Canada. Teck was able to earn a 50% interest in the Galore Creek project by making funding contributions to project development cost. The Galore Creek Partnership original funding arrangement was amended following the November 2007 decision to suspend construction activities at the project, and again in February 2009. Under the amended agreement, Teck was responsible for funding all costs for the Galore Creek project up to approximately $373.3 million, the funding was completed on June 2011. Since July 2011, the Company and Teck have equally funded all project costs.
For the nine months ended August 31, 2012, the Company and Teck each contributed $12.4 million. The Galore Creek Partnership is a jointly controlled entity under IAS 31 accounted for under the equity method of accounting as follows:
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Balance beginning of period | 386,525 | 364,839 | ||||
Purchase of Copper Canyon | - | 46,013 | ||||
Funding | 12,392 | 14,062 | ||||
Share of losses | (17,865 | ) | (38,389 | ) | ||
Balance end of period | 381,052 | 386,525 |
The following amounts represent the Companys 50% share of the assets, liabilities, and results of operations of the Galore Creek Partnership:
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Cash, prepaid and other receivables | 3,126 | 3,831 | ||||
Property, plant and equipment, mineral properties, and reclamation bond | 332,408 | 303,043 | ||||
Accounts payables and accrued liabilities | (2,900 | ) | (2,671 | ) | ||
Reclamation obligation long term and payable to related party | (9,007 | ) | (9,079 | ) | ||
Net assets | 323,627 | 295,124 |
in thousands of Canadian dollars | ||||||
Nine months ended | Nine months ended | |||||
August 31, 2012 | August 31, 2011 | |||||
$ | $ | |||||
Amortization | 4,860 | 4,860 | ||||
Care & maintenance expenses | 3,547 | 3,900 | ||||
Mineral property expenditures | 9,457 | 7,649 | ||||
Impairment of power transmission rights | - | 13,779 | ||||
Total expenses | 17,864 | 30,188 |
The Companys share of commitments contracted by the Galore Creek Partnerships operating entity, the Galore Creek Mining Corporation (GCMC), at August 31, 2012 is $0.1 million.
5 |
Assets held for distribution to the shareholders |
On April 30, 2012, the Company completed a plan of arrangement under the Nova Scotia Companies Act pursuant to which it spun-out NovaCopper Inc. (NovaCopper), a wholly-owned subsidiary of the Company which held the Ambler assets, to the Companys shareholders (the Arrangement). Under the Arrangement, each shareholder of the Company received one share of NovaCopper for every six shares held of the Company.
The Arrangement was approved by the Companys Board of Directors and the favourable vote of NOVAGOLDs securityholders at a special meeting of securityholders held on March 28, 2012.
NOVAGOLD Resources Inc. | 9 | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
Upon completion of the Arrangement under IFRS, the Company recorded a non-taxable gain of $71.6 million on the spin-out of NovaCopper, as NOVAGOLD was required to recognize the fair value of the Ambler projects net assets.
The fair value of the Amblers net assets transferred under the Arrangement pursuant to IFRS is summarized in the table below:
in thousands of Canadian dollars | |||
April 30, 2012 | |||
$ | |||
Cash | 40,359 | ||
Deposits and prepaids | 765 | ||
Due from related party | 715 | ||
Long term assets: | |||
Plant and equipment | 1,459 | ||
Mineral properties | 103,030 | ||
Accounts payables and accrued liabilities | (1,470 | ) | |
Fair value of the net assets distributed to shareholders | 144,858 |
6 |
Assets held for sale and liabilities directly associated with assets classified as held for sale |
On May 30, 2012, the Company signed a Purchase and Sale Agreement (the Agreement) to transfer the Rock Creek property in Nome, Alaska to Bering Straits Native Corporation (BSNC). Under the Agreement, the Company will transfer all Rock Creek assets, a minimum of US$14.0 million in reclamation bond for the remainder of the decommissioning obligation, and a one-time payment of US$250,000. As consideration, BSNC will provide a net profits interest which entitles the Company to receive 5% of all future net profits generated from ore extracted from the property. Prior to the transfer of the assets, the Company is required to complete phase one of the reclamation activities and satisfy a number of other conditions. The Company expects to complete phase one activities and satisfy the other conditions in the Agreement during fourth quarter 2012. After the transfer, BSNC will assume full responsibility and liability for the remainder of the reclamation plan and any future reclamation activities requested by regulatory authorities.
As a result of the Agreement, the Company has accounted for the Rock Creek projects reclamation bond as an asset held for sale and the decommissioning liabilities (note 14), as liabilities directly related to assets classified as held for sale at August 31, 2012.
7 |
Cash and cash equivalents |
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Cash at bank | 267,437 | 60,572 | ||||
Cash and cash equivalents | 267,437 | 60,572 |
The Companys cash is held with a large Canadian bank with an S&P rating of AA-. As of August 31, 2012, the Company had US$269.0 million in cash. Assuming that all variables remain constant, a 4% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of US$10.8 million in the Companys net profit or loss.
10 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
8 |
Trade and other receivables |
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Trade receivables | 670 | 637 | ||||
Note receivable | 17 | 13,319 | ||||
Receivables from related parties (note 16) | 4,308 | 4,154 | ||||
4,995 | 18,110 | |||||
Current portion | 670 | 13,939 | ||||
Current portion: receivables from related parties (note 16) | 188 | 34 | ||||
Non-current portion: receivables | 17 | 17 | ||||
Non-current portion: receivables from related parties (a) (note 16) | 4,120 | 4,120 | ||||
4,995 | 18,110 |
(a) |
Funding used to secure reclamation bond held by the Galore Creek project. |
9 |
Property, plant and equipment |
in thousands of Canadian dollars | ||||||||||||||||||
Office furniture | Leasehold | |||||||||||||||||
Land | Equipment | and equipment | improvements | Vehicle | Total | |||||||||||||
Costs: | $ | $ | $ | $ | $ | $ | ||||||||||||
Balance as at December 1, 2010 | 1,265 | - | 1,520 | 575 | 79 | 3,439 | ||||||||||||
Additions | - | 1,424 | 161 | 53 | - | 1,638 | ||||||||||||
Disposals | (1,078 | ) | - | - | - | (79 | ) | (1,157 | ) | |||||||||
Cumulative translation adjustment | (59 | ) | 47 | - | - | - | (12 | ) | ||||||||||
Balance as at November 30, 2011 | 128 | 1,471 | 1,681 | 628 | - | 3,908 | ||||||||||||
Additions | - | 469 | 7 | - | 88 | 564 | ||||||||||||
Disposal of assets distributed to shareholders | - | (1,899 | ) | (88 | ) | - | (88 | ) | (2,075 | ) | ||||||||
Disposals | (3 | ) | - | - | - | - | (3 | ) | ||||||||||
Cumulative translation adjustment | (4 | ) | (41 | ) | - | - | - | (45 | ) | |||||||||
Balance as at August 31, 2012 | 121 | - | 1,600 | 628 | - | 2,349 | ||||||||||||
Office furniture | Leasehold | |||||||||||||||||
Land | Equipment | and equipment | improvements | Vehicle | Total | |||||||||||||
Depreciation: | $ | $ | $ | $ | $ | $ | ||||||||||||
Balance as at December 1, 2010 | - | - | (1,449 | ) | (327 | ) | (56 | ) | (1,832 | ) | ||||||||
Current period depreciation | - | (341 | ) | (105 | ) | (65 | ) | - | (511 | ) | ||||||||
Disposals | - | - | - | - | 56 | 56 | ||||||||||||
Cumulative translation adjustment | - | (11 | ) | - | - | - | (11 | ) | ||||||||||
Balance as at November 30, 2011 | - | (352 | ) | (1,554 | ) | (392 | ) | - | (2,298 | ) | ||||||||
Current period depreciation | - | (128 | ) | (13 | ) | (49 | ) | - | (190 | ) | ||||||||
Disposal of assets transferred on | ||||||||||||||||||
Plan of Arrangement | - | 478 | 26 | - | - | 504 | ||||||||||||
Cumulative translation adjustment | - | 2 | 1 | - | - | 3 | ||||||||||||
Balance as at August 31, 2012 | - | - | (1,540 | ) | (441 | ) | - | (1,981 | ) | |||||||||
Net book value: | ||||||||||||||||||
As at December 1, 2010 | 1,265 | - | 71 | 248 | 23 | 1,607 | ||||||||||||
As at November 30, 2011 | 128 | 1,119 | 127 | 236 | - | 1,610 | ||||||||||||
As at August 31, 2012 | 121 | - | 60 | 187 | - | 368 |
NOVAGOLD Resources Inc. | 11 | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
10 |
Mineral properties |
in thousands of Canadian dollars | |||||||||
Alaska, USA | Argentina | ||||||||
Exploration and | |||||||||
Exploration and | evaluation - San | ||||||||
evaluation Ambler | Roque | Total | |||||||
$ | $ | $ | |||||||
Balance as at December 1, 2010 | 27,252 | 114 | 27,366 | ||||||
Additions | 4,076 | 396 | 4,472 | ||||||
Cumulative translation adjustment | (294 | ) | - | (294 | ) | ||||
Reclassification to asset held for distribution (note 5) | (31,034 | ) | - | (31,034 | ) | ||||
Balance as at November 30, 2011 | - | 510 | 510 | ||||||
Balance as at August 31, 2012 | - | 510 | 510 |
11 |
Investments |
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Available-for-sale investments | 2,683 | 4,525 | ||||
Total investments | 2,683 | 4,525 |
Investments classified as available-for-sale are recorded at fair value based on quoted market prices, with unrealized gains or losses excluded from earnings and reported as other comprehensive income or loss. The total cost as at August 31, 2012 was $4.6 million (2011: $4.6 million) and total unrealized holding loss for the nine months ended August 31, 2012 was $1.8 million (2011: loss of $0.8 million). The balance includes 3,125,000 shares in TintinaGold Resources Inc. (cost: $1.4 million; fair value at August 31, 2012: $0.8 million) and 3,125,000 shares in AsiaBaseMetals Inc. (cost: $0.2 million; fair value at August 31, 2012: $0.3 million). Both companies have a director in common with NOVAGOLD.
12 |
Convertible notes |
On March 26, 2008, the Company issued US$95.0 million ($96.7 million) in 5.5% unsecured senior convertible notes (Notes) maturing on May 1, 2015, and incurred a 3.0% underwriters fee and other expenses aggregating US$2.9 million ($3.5 million), for net proceeds of US$ 92.2 million ($93.2 million). Interest is payable semi-annually in arrears on May 1 and November 1 of each year, beginning November 1, 2008. The Notes are convertible into the Companys common shares at a fixed conversion rate. The conversion rate and accordingly the number of shares issuable were adjusted as a result of the NovaCopper spin out which reduced the conversion rate from US$10.61 to US$9.656 per common share. A total of 9,838,442 common shares are issuable upon conversion and additional shares may become issuable following the occurrence of certain corporate acts or events. On conversion, at the Companys election, holders of the Notes will receive cash, if applicable, or a combination of cash and shares. Holders of the Notes have the right to require the Company to repurchase all or part of their Notes on May 1, 2013 (Put option), or upon certain fundamental corporate changes, at a price equal to 100% of the principal amount of such Notes plus any accrued and unpaid interest. As a result of the Put option, the Company may be required to repurchase all of the Notes within the next twelve months and thus the Company has classified the convertible debt and the related embedded derivative as current liabilities.
As the Notes are denominated in U.S. dollars, a currency different from the functional currency of the Company, an embedded derivative is recognized as a liability. The embedded derivative is recorded at fair value and re-measured each period with the movement being charged to net income. The Notes are classified as a liability, less the portion relating to the embedded derivative feature ($49.5 million). As a result, the recorded liability to repay the Notes is lower than its face value. Using the effective interest rate method and the 17.78% rate implicit in the calculation, the difference of $43.7 million, characterized as the note discount, is being charged to interest expense and accreted to the liability over the term of the Notes.
12 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
The fair value of the embedded derivative has been estimated using the Black-Scholes pricing model as it is considered as a Level 3 financial instrument in the fair value hierarchy with significant unobservable inputs. Assumptions used in the pricing model for each period are provided below.
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Average risk-free interest rate | 1.22% | 1.10% | ||||
Expected life | 2.67 | 3.42 | ||||
Expected volatility | 60.90% | 78.43% | ||||
Expected dividends | Nil | Nil |
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Beginning balance | 66,880 | 61,313 | ||||
Accretion expense of debt discount for the period | 5,102 | 5,745 | ||||
Foreign exchange revaluation | (2,361 | ) | (178 | ) | ||
Convertible notes | 69,621 | 66,880 | ||||
Beginning balance | 58,660 | 90,465 | ||||
Gain on embedded derivative liability | (50,043 | ) | (29,761 | ) | ||
Foreign exchange revaluation | (935 | ) | (2,044 | ) | ||
Embedded derivative liability - convertible notes | 7,682 | 58,660 |
13 |
Derivative liability warrants |
The Companys functional currency is the Canadian dollar and it has issued and outstanding warrants that have an exercise price denominated in U.S. dollars. The Company has determined that such warrants with an exercise price that is different from the entitys functional currency are classified as a derivative liability based on the evaluation of the warrants settlement provisions, and carried at their fair value. Any changes in the fair value from period to period are recorded as a gain or loss in net income.
In January 2011, an agreement was entered into between the Company and the holder of 37.1 million warrants to amend the currency that the exercise price is denominated in from U.S. dollars to Canadian dollars. The exercise price was amended from US$1.50 to $1.479 at the prevailing spot rate on the date of the agreement. The expiry date remains unchanged at January 2013. The terms of the remaining 5.1 million warrants were unchanged. The conversion of the currency denomination on these warrants permanently crystallized the fair value of these warrants, for purposes of determining future transfers to share capital upon exercise of these warrants.
The fair value of the derivative for the warrants has been estimated using the Black-Scholes pricing model as it is considered as a Level 3 financial instrument in the fair value hierarchy with significant unobservable inputs. Assumptions used in the pricing model for each period are provided below.
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Average risk-free interest rate | 1.16% | 1.01% | ||||
Expected life | 0.39 years | 1.15 years | ||||
Expected volatility | 79.93% | 59.38% | ||||
Expected dividends | Nil | Nil |
NOVAGOLD Resources Inc. | 13 | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Derivative balance beginning of the period | 54,818 | 658,841 | ||||
Gain on derivative liability for the period | (37,560 | ) | (28,529 | ) | ||
Foreign exchange revaluation | (1,075 | ) | (485,983 | ) | ||
Conversion of warrants to equity | - | (89,511 | ) | |||
Derivative balance end of the period | 16,183 | 54,818 |
14 |
Decommissioning liabilities |
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Beginning balance | 29,176 | 9,192 | ||||
Increases to existing provisions | 764 | 20,268 | ||||
Incurred during the period | (11,510 | ) | (865 | ) | ||
Exchange differences | (761 | ) | 581 | |||
Reclassification to liabilities held for sale (note 6) | (16,634 | ) | - | |||
Total | 1,035 | 29,176 |
Analysis of total provisions:
in thousands of Canadian dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Non-current | - | 2,602 | ||||
Current | 1,035 | 26,574 | ||||
Total | 1,035 | 29,176 |
The Companys decommissioning liabilities consist of reclamation costs for Nome properties. The Nome properties were impaired in previous years, thus all changes to the decommissioning liabilities are recorded directly to net income.
15 |
Share capital |
Authorized
1,000,000,000 common shares, no par
value
10,000,000
preferred shares issuable in one or more series
(a) Share capital
In January 2012, the Company issued 313,675 shares to the outgoing and incoming CEOs as part of their employment agreements.
On February 7, 2012, the Company completed an equity financing and issued 35,000,000 common shares at US$9.50 per common share for gross proceeds of US$332.5 million. The net proceeds to the Company, after deducting underwriters fees and issuance expenses of $14.6 million, were $316.4 million.
(b) Stock options
The Company has a stock option plan providing for the issuance of options at a rolling maximum number that shall not be greater than 10% of the issued and outstanding common shares of the Company at any given time. The Company may grant options to its directors, officers, employees and service providers. The exercise price of each option cannot be lower than the market price of the shares at the date of the option grant. The number of shares optioned to any single optionee may not exceed 5% of the issued and outstanding shares at the date of grant. The options are exercisable for a maximum of five years from the date of grant, and may be subject to vesting provisions. The Company recognizes compensation cost over the tranches vesting period over the respective vesting period for the stock options.
14 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
During the three months ended February 29, 2012, the Company granted 2,557,150 (2011: 1,064,700) stock options at a weighted average fair value per option of $11.11 (2011: $14.53) and recognized share-based payments charge of $8.4 million (2011: $3.1 million) for options granted to directors, employees and consultants net of forfeitures in accordance with IFRS 2.
During the three months ended May 31, 2012, the Company granted 300,000 (2011: 170,000) stock options at a weighted average fair value per option of $4.54 (2011: $12.83) and recognized a share-based payments charge of $2.5 million (2011: $1.7 million) for options granted to directors, employees and consultants net of forfeitures in accordance with IFRS 2.
During the three months ended August 31, 2012, the Company granted 895,500 (2011: 10,000) stock options at a weighted average fair value per option of $7.34 (2011: $4.99) and recognized a share-based payments charge of $2.5 million (2011: $1.3 million) for options granted to directors, employees and consultants net of forfeitures in accordance with IFRS 2.
For the three months ended August 31, 2012, 306,296 options were exercised at a weighted average exercise price of $0.96, the weighted average closing price based for the corresponding exercises was $6.01. As of August 31, 2012, there were 2,474,525 non-vested options outstanding with a weighted average exercise price of $7.23; the non-vested stock option and PSU expense not yet recognized was $2.1 million (2011: $2.3 million); and this expense is expected to be recognized over the next two years.
The fair value of the stock options recognized in the period has been estimated using an option pricing model. Assumptions used in the pricing model for the period are as provided below.
in thousands of Canadian dollars | ||||||
Three months | Three months | |||||
ended | ended | |||||
August 31, 2012 | August 31, 2011 | |||||
Weighted average share price | $ | 6.02 | $ | 4.99 | ||
Average risk-free interest rate | 1.01% - 1.08% | 1.27% | ||||
Weighted average exercise price | $ | 6.02 | $ | 4.99 | ||
Expected life | 3.0 years | 3.5 years | ||||
Expected volatility | 54.99% - 55.25% | 81% | ||||
Expected dividends | Nil | Nil |
The Black-Scholes and other option pricing models require the input of highly subjective assumptions. The expected life of the options considered such factors as the average length of time similar option grants in the past have remained outstanding prior to exercise and the vesting period of the grants. Volatility was estimated based upon historical price observations over the expected term.
(c) Warrants
During the three months ended February 29, 2012, 2,491,600 share purchase warrants were exercised for total proceeds of $3.7 million. In the three months ended May 31, 2012, 1,400,000 share purchase warrants were exercised for total proceeds of $2.1 million.
A summary of the Companys share purchase warrants outstanding at August 31, 2012 is presented below:
Weighted average | |||||||||
Warrants outstanding | Weighted average | remaining | |||||||
and exercisable | exercise price | contractual life | |||||||
Prices | (thousands) | $ | (years) | ||||||
US$ 1.50 | 5,192 | 1.53 | 0.64 | ||||||
$1.48 | 31,337 | 1.48 | 0.64 | ||||||
36,529 | 1.49 | 0.64 |
NOVAGOLD Resources Inc. | 15 | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
(d) Performance share units
The Company has a Performance Share Unit (PSU) plan that provides for the issuance of PSUs in amounts as approved by the Companys Compensation Committee. Each PSU entitles the participant to receive that number of common shares of the Company at the end of a specified period set by the Compensation Committee to be determined by the achievement of certain performance and vesting criteria. The performance criteria are based on the Companys performance relative to a representative group of other mining companies and the TSX index. The actual performance against each of these criteria generates a multiplier that varies from 0% to 150%. Thus, the shares that may be issued vary between 0% and 150% of the number of PSUs granted, and is reduced by the amounts for recipients no longer at the Company on vesting date.
For the three months ended August 31, 2012, the Company recognized a share-based payment charge against income of $0.8 million (2011: $0.5 million) for PSUs granted to employees.
(e) Deferred share units
The Company has a deferred share unit (DSU) plan that provides for the issuance of DSUs in amounts ranging from 50% to 100% of directors annual retainers at the election of the directors. Each DSU entitles the directors to receive one common share of the Company when they retire from their position.
For the three months ended August 31, 2012, the Company recognized a share-based payment charge against income of $0.03 million (2011: $0.02 million) for the DSUs granted to directors during the period.
16 |
Related party transactions |
Services rendered
During the nine months ended August 31, 2012, the Company provided exploration and management services to the following companies: $12,000 (2011: $13,000) to Alexco, a company having two common directors; $7,000 (2011: $12,000) to TintinaGold, a company having one director in common; US$155,000 (2011: US$500,000) to Donlin Gold LLC; $667,000 (2011: Nil) to NovaCopper, a company having common directors; and office rental and services totaling $587,000 (2011: $618,000) to GCMC. At August 31, 2012, the Company had $4.3 million in receivables from related parties of which $4.1 million are non-current receivables from GCMC (note 8).
Key management compensation
Key management includes the executive officers of the Company which includes the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer. The compensation paid or payable to key management for employee services is shown below:
in thousands of Canadian dollars | ||||||
Nine months | Nine months | |||||
ended | ended | |||||
August 31, 2012 | August 31, 2011 | |||||
$ | $ | |||||
Salaries and other short term employee benefits | 2,367 | 1,910 | ||||
Share-based payment | 6,845 | 3,484 | ||||
Total | 9,212 | 5,394 |
16 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
17 |
Commitments |
Lease commitments
The Company is party to certain operating leases. These operating leases include the Companys leased head office location and certain office equipment with commitments ranging from one to ten years. The future minimum lease payments as at August 31, 2012 are approximately as follows.
in thousands of Canadian dollars | |||
August 31, 2012 | |||
$ | |||
2012 | 183 | ||
2013 | 664 | ||
2014 | 709 | ||
2015 | 795 | ||
2016 | 912 | ||
Thereafter | 735 |
The Company has a non-cancellable sublease for an office location and the future minimum sublease payments expected to be received as at August 31, 2012 are approximately as follows:
in thousands of Canadian dollars | |||
August 31, 2012 | |||
$ | |||
2012 | 86 | ||
2013 | 261 | ||
2014 | 270 | ||
2015 | 270 | ||
2016 | 270 | ||
Thereafter | 180 |
18 |
Segmented information |
The Company has one operating segment in exploration and development of mineral properties. The Chief Executive Officer considers the business from a geographic perspective for the performance of our business units. Segment information is provided on each of the material projects individually in notes 3, 4 and 5.
19 |
Net finance costs |
in thousands of Canadian dollars | ||||||
Nine months | Nine months | |||||
ended | ended | |||||
August 31, 2012 | August 31, 2011 | |||||
$ | $ | |||||
Interest received from bank account | (437 | ) | (329 | ) | ||
Accretion income from note receivable | (902 | ) | (987 | ) | ||
(1,339 | ) | (1,316 | ) | |||
Interest on notes receivable | - | 956 | ||||
Interest on promissory note (note 3) | 2,583 | 2,383 | ||||
Interest on convertible debt (note 12) | 9,031 | 7,980 | ||||
11,614 | 11,319 | |||||
Total | 10,275 | 10,003 |
NOVAGOLD Resources Inc. | 17 | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
20 |
Transition to International Financial Reporting Standards |
These are the Companys third interim consolidated financial statements prepared in accordance with IFRS. The IFRS accounting policies are presented in note 3 in the interim consolidated financial statements for the period ended February 29, 2012. The IFRS accounting policies have been applied in preparing the financial statements for the period ended August 31, 2012 and the comparative information.
The Company has applied IFRS 1 First-time Adoption of International Financial Reporting Standards in preparing these first IFRS condensed consolidated financial statements.
(a) First-time adoption exemptions applied
IFRS 1, which governs the first time adoption of IFRS, in general requires accounting policies to be applied retrospectively to determine the opening balance sheet at the Companys transition date, and allows certain exemptions on the transition to IFRS. The elections we have elected to apply and are considered significant to the Company include:
º Foreign currency: IFRS 1 allows the Company to exempt themselves from the retrospective application of IAS 21 The Effects of Changes in Foreign Exchange Rates. Cumulative translation differences that existed at the date of transition are recorded to opening retained earnings. |
|
º Deemed cost: IFRS 1 allows the Company to individually measure items of property, plant and equipment, land, and mineral properties at fair value at transition or an event-driven valuation under prior GAAP. The Company has elected to apply this exemption to its Rock Creek property, as under the previous Canadian GAAP the value has previously been impaired. |
|
º Share-based payment transactions: IFRS 1 allows the Company to exempt themselves from the retrospective application of IFRS 2 for all options vested at the transition date. Adjustments were made for all options unvested at transition to comply with the requirements of IFRS 2. |
(b) Reconciliations of shareholders equity
Reconciliations between the previous Canadian GAAP and IFRS Consolidated Balance Sheet at December 1, 2010, August 31, 2011 and November 30, 2011 are provided below:
in thousands of Canadian dollars | ||||||||||||
December 1, 2010 | August 31, 2011 | November 30, 2011 | ||||||||||
Note | $ | $ | $ | |||||||||
Total shareholders equity under previous Canadian GAAP | 611,214 | 553,426 | 510,780 | |||||||||
Galore Creek Partnership | (i) | (198,666 | ) | (184,461 | ) | (172,217 | ) | |||||
Derivative liability - warrants | (ii) | (658,841 | ) | (44,868 | ) | (54,819 | ) | |||||
Convertible notes | (iii) | (89,896 | ) | (53,186 | ) | (58,138 | ) | |||||
Future income tax | (iv) | (16,752 | ) | (6,096 | ) | (6,952 | ) | |||||
Changes related to functional currency | (v) | (317 | ) | (1,513 | ) | (310 | ) | |||||
Total shareholders equity under IFRS | (353,258 | ) | 263,302 | 218,344 |
Notes to the reconciliations of equity at December 1, 2010, August 31, 2011 and November 30, 2011
i. Galore Creek Partnership
Under previous Canadian GAAP, the Companys 50% interest in the Galore Creek Partnership was accounted for as a Variable Interest Entity in which the Company was the primary beneficiary resulting in consolidation of Galore Creek. Under IFRS, it has been determined that the Galore Creek Partnership is a jointly controlled entity and is accounted for under the equity method in accordance with the Companys policy. The Company has adjusted, through opening deficit, the difference in accounting as if the Partnership was accounted for under the equity method since its formation in 2007.
18 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
At December 1, 2010, total assets decreased by $221.4 million, liabilities decreased by $24.1 million, and equity decreased by $198.7 million as a result of the change in method of accounting. The impact to opening deficit was $98.6 million on transition date. The significant changes to the presentation of the balance sheet are a reduction in property, plant and equipment of $346.4 million, a reduction in mineral properties of $238.9 million, and the recognition of an equity investment in Galore Creek of $364.8 million as at December 1, 2010.
At August 31, 2011, as a result of Galore Creek being accounted for under the equity method, total assets decreased by $199.8 million, liabilities decreased by $44.6 million, and equity decreased by $155.1 million from the amounts previously disclosed under previous Canadian GAAP. For the period ended August 31, 2011, an equity loss of $31.2 million was recognized for Galore Creek. Due to the change in accounting, exploration and development, project care and maintenance, and general and administrative expenses decreased by $23.1 million for the same period. An asset impairment of $52.7 million, as well as a corresponding impact to deferred income tax recovery of $7.2 million was reversed relating to the impairment of the Galore Creek power transmission rights.
At November 30, 2011, total assets decreased by $191.2 million, liabilities decreased by $19.0 million, and equity decreased by $172.2 million. For the year ended November 30, 2011, an equity loss of $38.4 million was recognized for Galore Creek. Due to the change in accounting, exploration and development, project care and maintenance, and general and administrative expenses decreased by $38.4 million for the same period. An asset impairment of $61.0 million, as well as a corresponding impact to deferred income tax recovery of $7.3 million, was reversed relating to the impairment of the Galore Creek power transmission rights and equipment recognized under Canadian GAAP.
The loss for the year attributable to non-controlling interest of $37.1 million under previous Canadian GAAP was also removed.
ii. Derivative liability warrants
The Company has outstanding warrants which are denominated in U.S. dollars. Under the previous Canadian GAAP, the Companys outstanding warrants were accounted for as an equity instrument at a historical value determined at the time of issuance. Under IFRS, as the warrants are denominated in a currency other than the functional currency of the Company, the warrants are a derivative liability, recorded at fair value and marked-to-market through the statement of loss.
At December 1, 2010, a derivative liability of $658.8 million was recognized under IFRS with an increase to opening deficit on transition of $666.7 million. Share capital increased by $36.4 million to account for previously exercised warrants prior to transition, and warrants decreased by $28.5 million upon the recognition of the liability.
As discussed in note 13, during the first quarter of 2011, 37.1 million warrants were amended to change the currency that the exercise price is denominated in from U.S. dollars to Canadian dollars. At the transaction date, the fair value of the warrants converted of $463.0 million was transferred from the derivative liability to equity.
At August 31, 2011, the derivative liability under IFRS was $44.9 million. The change from previous Canadian GAAP to IFRS resulted in an increase to share capital of $141.9 million and an increase to warrants (equity) of $418.6 million. For the nine months ended August 31, 2011, a gain on derivative liability of $36.6 million and a foreign exchange gain of $24.9 million were recognized under IFRS.
At November 30, 2011, the derivative liability was $54.8 million, and the change resulted in an increase to share capital of $143.6 million and an increase to warrants (equity) of $416.9 million. For the year ended November 30, 2011, a gain on derivative liability of $28.5 million and a foreign exchange gain of $23.0 million were recognized.
NOVAGOLD Resources Inc. | 19 | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
iii. Convertible notes
The Company has convertible notes outstanding which are denominated in U.S. dollars. As the Companys functional currency is Canadian dollars, under IFRS, the convertible notes host an embedded derivative liability which is recorded at fair value each period with changes recognized through the statement of loss. Under previous Canadian GAAP, the instrument was accounted for as a compound instrument with equity and liability components.
On transition, the impact to opening deficit was an increase of $46.5 million along with the recognition of the embedded derivative liability of $90.5 million, a reduction to the liability component of $0.6 million, and a reduction to the equity component of $43.4 million.
At August 31, 2011, the embedded derivative liability was $53.7 million, the liability component decreased by $0.5 million and the equity component of $43.4 million was removed. For the nine months ended August 31, 2011, a gain on the embedded derivative of $32.5 million and a gain on foreign exchange of $4.3 million were recognized under IFRS.
At November 30, 2011, the embedded derivative liability was $58.7 million, the liability component decreased by $0.5 million, and the equity component of $43.4 million was removed. For the year ended November 30, 2011, a gain on the embedded derivative of $29.8 million and a gain on foreign exchange of $2.0 million were recognized under IFRS.
iv. Deferred income tax
Under previous Canadian GAAP, the Company recognized a future income tax liability on asset acquisitions where the accounting basis was greater than the tax basis. Under IFRS, the initial recognition exemption does not allow for the recognition of a deferred income tax liability on asset acquisitions.
In the second quarter of 2011, the Company acquired Copper Canyon Resources which resulted in the recognition of a future income tax liability under previous Canadian GAAP. Under IFRS, the deferred income tax liabilities and the corresponding asset of $14.4 million were eliminated in the period ended November 30, 2011.
As discussed above under (i), the Galore Creek Partnership is accounted for as an equity investment under IFRS. Previously, under previous Canadian GAAP, the Partnership was accounted for using the inside basis method of accounting for deferred income tax. Under IFRS, as an equity investment, the Partnership is accounted for under the outside basis method.
Under IFRS, deferred income tax liabilities of $16.8 million, $6.1 million, and $6.9 million were recognized for the Galore Creek Partnership as at December 1, 2010, August 31, 2011 and November 30, 2011, respectively. For the three months ended August 31, 2011, a deferred income tax recovery of $1.9 million was recognized. And for the nine months ended August 31, 2011, a deferred income tax recovery of $7.6 million was recognized and for the year ended November 30, 2011, a deferred income tax recovery of $9.8 million was recognized.
v. Changes in functional currency
Under previous Canadian GAAP, subsidiaries that were not self-sustaining were translated under the temporal method. Under IFRS, it was determined that the Company had several entities with a U.S. dollar functional currency. As a result of the change in functional currency, the impact to equity was $0.3 million, $1.5 million and $0.3 million at December 1, 2010, August 31, 2011 and November 30, 2011, respectively.
vi. Flow-through shares
Under previous Canadian GAAP, the future income tax expense for the losses renounced to investors and the premium received on the equity offering of flow-through shares is recorded to share capital. Under IFRS, the deferred income tax expense and premium are recognized through the statement of loss. At December 1, 2010, a reclassification of $4.2 million was recognized increasing share capital and decreasing opening retained earnings for historical flow-through share offerings.
20 | NOVAGOLD Resources Inc. | |
Q3 2012 |
Notes to Condensed Consolidated Financial Statements
vii. Share-based payments
Under IFRS, the Companys recognition of share-based payments has been accounted for under the graded vesting method. At transition, there is no impact to equity. For the three months and nine months ended August 31, 2011 and for the year ended November 30, 2011, share-based payments expense increased by $0.4 million, $0.9 million and $ 1.2 million, respectively.
(c) Reconciliation of total comprehensive income
Reconciliation between the previous Canadian GAAP and IFRS total comprehensive income for the three months and nine months periods ended August 31, 2011 and year ended November 30, 2011 are provided below.
in thousands of Canadian dollars | ||||||||||||
Three months | Nine months | Year ended | ||||||||||
Note | ended | ended | November 30, | |||||||||
(note 20b) | August 31, 2011 | August 31, 2011 | 2011 | |||||||||
$ | $ | $ | ||||||||||
Comprehensive loss under previous Canadian GAAP | 63,205 | 141,164 | 191,779 | |||||||||
Loss (income) adjustments | ||||||||||||
Galore Creek Partnership | (i) | (4,295 | ) | (38,364 | ) | (53,685 | ) | |||||
Derivative liability - warrants | (ii) | (1,062 | ) | (61,437 | ) | (51,487 | ) | |||||
Convertible notes | (iii) | (8,722 | ) | (36,710 | ) | (31,758 | ) | |||||
Deferred income tax | (iv) | (1,895 | ) | (7,550 | ) | (9,800 | ) | |||||
Changes in functional currency | (v) | 5,244 | 9,487 | 61,478 | ||||||||
Share-based payments | (vi) | 369 | 856 | 1,179 | ||||||||
Comprehensive loss (income) adjustments | ||||||||||||
Changes related to functional currency | (v) | (5,114 | ) | (8,291 | ) | (61,485 | ) | |||||
Comprehensive loss (income) under IFRS | 47,730 | (845 | ) | 46,221 |
(d) Statement of cash flows
The transition to IFRS did not have a material impact on the Companys net cash flows except for the presentation of its joint venture of GCMC which was deconsolidated under IFRS thus reducing the overall cash position by GCMCs cash balance at the year ending November 30, 2011 and year beginning December 1, 2010.
NOVAGOLD Resources Inc. | 21 | |
Q3 2012 |
NOVAGOLD Resources Inc.
Third Quarter 2012
Managements Discussion & Analysis
August 31, 2012
(Unaudited)
Table of Contents
2 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Managements Discussion and Analysis
General
This Managements Discussion and Analysis (MD&A) of NOVAGOLD Resources Inc. (NOVAGOLD or the Company) is dated October 11, 2012 and provides an analysis of NOVAGOLDs unaudited financial results for the three and nine month periods ended August 31, 2012 compared to the same periods in the previous year.
The following information should be read in conjunction with the Companys August 31, 2012 unaudited consolidated financial statements and related notes which were prepared in accordance with International Financial Reporting Standards (IFRS). The Company adopted IFRS on December 1, 2011 with a transition date of December 1, 2010. A reconciliation of the previously disclosed comparative periods financial statements prepared in accordance with previous Canadian generally accepted accounting principles (previous Canadian GAAP) to the current Canadian GAAP, which has adopted IFRS is set out in note 20 to the interim consolidated financial statements. The MD&A should also be read in conjunction with the Companys audited consolidated financial statements and related notes for the year ended November 30, 2011, which were prepared in accordance with previous Canadian GAAP and the Companys interim consolidated financial statements for the quarter ended February 29, 2012, prepared in accordance with IFRS. The Companys IFRS accounting policies were disclosed in note 3 of the condensed interim consolidated financial statements for the period ended February 29, 2012. All amounts are in Canadian dollars unless otherwise stated.
The Companys shares are listed on the Toronto Stock Exchange and the NYSE-MKT (formerly NYSE-AMEX) under the symbol NG. Additional information related to NOVAGOLD is available on SEDAR at www.sedar.com, on EDGAR at www.sec.gov and the Companys website at www.novagold.com.
Description of business
NOVAGOLD is a precious metals company engaged in the exploration and development of mineral properties in Alaska, U.S.A. and British Columbia, Canada. The Company conducts its operations through wholly-owned subsidiaries, partnerships, limited liability companies and joint ventures. The Company has a 50% interests in two of the worlds largest known undeveloped gold and copper projects Donlin Gold and Galore Creek. The Company is primarily focused on gold properties, some of which also have significant copper resources. In addition, NOVAGOLDs principal properties are located in Alaska and British Columbia, regions with low geopolitical risk that have a long history of mining, established permitting standards, and governments supportive of resource development. NOVAGOLD has drawn on the expertise of its management and that of our partners, Barrick Gold Corporation (Barrick) on the Donlin Gold project and Teck Resources Limited (Teck) on the Galore Creek project.
Corporate developments
Corporate governance
On September 4, 2012, the Company announced the appointment of David Deisley to the position of Executive Vice President and General Counsel, effective November 1, 2012. In this executive role, Mr. Deisley will be responsible for NOVAGOLD's legal governance and support the Company's efforts to advance the permitting process on the Donlin Gold project. Mr. Deisley has over 25 years of experience in the mining industry in the Americas. He currently serves as Executive Vice President, Corporate Affairs and General Counsel for Goldcorp Inc. ("Goldcorp). Mr. Deisley joined Goldcorp in September 2007 as General Counsel and was appointed to his current position in July 2010. During his tenure with Goldcorp, Mr. Deisley has played a leading role in the implementation of corporate development transactions and in the advancement of Goldcorp's corporate social responsibility policy and practices.
On September 19, 2012, the Company announced the appointment of David Ottewell to the position of Vice President and Chief Financial Officer effective November 13, 2012. In this senior role, Mr. Ottewell will be responsible for all aspects of NOVAGOLD's financial management as the Company advances permitting and financial optimization of its 50%-owned Donlin Gold Project. Mr. Ottewell has over 25 years of mining industry experience. He currently serves as Vice President and Controller for Newmont Mining Corporation ("Newmont). During his tenure with Newmont, Mr. Ottewell led the global accounting functions for external reporting to shareholders and regulators in the U.S. and Canada.
NOVAGOLD Resources Inc. | 3 | |
Q3-2012 |
Managements Discussion & Analysis
Property review
Donlin Gold
Donlin Gold is one of the worlds largest known undeveloped gold deposits. Donlin Gold is owned and operated by Donlin Gold LLC, a limited liability company that is owned equally by wholly-owned subsidiaries of NOVAGOLD and Barrick. The deposit is located entirely on private, Alaska Native-owned land and Alaska state mining claims totaling 154,631 acres (62,577 hectares). Donlin Gold LLC has a good working relationship with Calista Corporation (Calista) and The Kuskokwim Corporation (TKC), owners of the mineral and surface rights to Donlin Gold, respectively. The property has estimated proven and probable mineral reserves of 505 million tonnes grading 2.09 grams per tonne gold representing 33.8 million ounces of gold. This represents an approximate 16% increase from the mineral reserve estimate outlined in the 2009 Feasibility Study and is broadly comparable to the March 2010 mineral reserve and resource update released by NOVAGOLD. The property hosts estimated measured and indicated mineral resources (inclusive of mineral reserves) of 541 million tonnes grading 2.24 grams per tonne gold representing 39 million ounces of gold and inferred mineral resources of 92 million tonnes grading 2.02 grams per tonne gold representing 6.0 million ounces of gold.
On December 5, 2011, NOVAGOLD announced the completion of the updated Feasibility Study for the Donlin Gold project (Study). This updated Study revised the original feasibility study which had been completed in April 2009 (the 2009 Feasibility Study) with updated mineral reserves and resources, capital cost, and operating cost estimates and formed the basis of the Donlin Gold Project, Alaska, USA NI 43-101 Technical Report on Second Updated Feasibility with an effective date of November 18, 2011.
Donlin Gold, if put into production in accordance with the Study, would produce an average of 1.5 million ounces of gold per year in its first five years of operation at an average cash cost of US$409 per ounce, and an average of 1.1 million ounces of gold per year at average cash cost of US$585 per ounce over its projected 27-year mine life. Current proven and probable mineral reserves are estimated at 33.8 million ounces, which represents three kilometers along an eight kilometer long established mineralized corridor.
The Study utilizes natural gas rather than the original diesel option for power generation. Natural gas would be delivered to site via a 500-kilometer-long pipeline. The change to utilizing natural gas is an important modification that improved certain project parameters including lowering power operating costs, potentially simplifying environmental management; and providing flexibility for future operational modifications.
The total project capital cost was estimated at US$6.7 billion1 including US$834.0 million for the natural gas pipeline that would deliver natural gas from the Cook Inlet to the mine site, and a contingency of US$984.0 million. NOVAGOLD would be responsible for 50% of the total project capital costs. The resultant after-tax net present value (NPV) using the three-year trailing average of US$1,200 per ounce of gold for the base case displays a positive NPV of US$547 million using a 5% discount rate.
On August 7, 2012, NOVAGOLD announced that Donlin Gold LLC commenced permitting of the project. This announcement follows the Donlin Gold LLC Board of Directors approval of the Project's Updated Feasibility Study. Barrick and NOVAGOLD have expressed that they are committed to advance the project through permitting. Donlin Gold submitted a Plan of Operations and the Wetlands Permit Application under Section 404 of the U.S. Clean Water Act to the federal and state regulators, formally initiating the permitting process. This permit application is the driver for the start of the environmental review process under the National Environmental Policy Act ("NEPA) leading to the development of an Environmental Impact Statement ("EIS). The U.S. Army Corps of Engineers, which is the lead agency for the NEPA process, has selected an independent contractor to prepare the EIS. It is anticipated that the Notice of Intent for the EIS will be filed over the coming weeks and will be followed by a public scoping as part of the NEPA process.
The Donlin Gold deposit is located on Calista mineral lands and the project operates under a mining lease with Calista. Calista is one of 13 regional Alaska Native corporations established as part of the Alaska Native Claims Settlement Act (ANCSA) of 1971. The mining lease agreement provides Calista with payments, royalties and other rights.
Donlin Gold LLC, through native lease agreements, holds a significant portion of the surface rights that will be required to support mining operations in the proposed mining area. ANCSA established TKC, which is the owner of the surface rights estate for most of the project lands. Donlin Gold operates under a surface use agreement with TKC. Donlin Gold is negotiating a restructuring of the TKC agreement to, among other things, add additional lands and clarify the term. The surface use agreement provides TKC with payments for lands used and protection of subsistence activities.
____________________
1 Does not include escalation for inflation
4 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Managements Discussion & Analysis
Donlin Gold has an approved 2012 budget of approximately US$37.2 million of which half of the expenditures will be funded by NOVAGOLD. For the nine months and three months ended August 31, 2012, the project has spent US$22.8 million and US$9.9 million respectively in preparation for the permitting application process. The 2012 work program includes expenditures for permitting activities and community development. The projects expenditure is targeting to be in line with its annual budget.
Due to the accounting rules under International Accounting Standards 31 (IAS 31), NOVAGOLD continues to record its interest in the Donlin Gold project as an equity investment, which results in all of NOVAGOLDs funding being recorded in the income statement as equity loss, and any unspent funding to Donlin Gold LLC being recorded in the balance sheet on the equity investment line.
Heather White, B.Sc., P. Eng, an employee of the Company and a qualified person under National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101), has approved the scientific and technical information included in this section.
Galore Creek
Galore Creek, a large copper-gold-silver project located in northwestern British Columbia, is held by a partnership, in which wholly-owned subsidiaries of NOVAGOLD and Teck each own a 50% interest, and is managed by Galore Creek Mining Corporation (GCMC). The 293,838 acre (118,912 hectare) property holds a large undeveloped porphyry-related copper-gold-silver deposit. On July 27, 2011 NOVAGOLD announced the results of the pre-feasibility study (PFS) on the project. The PFS confirmed the technical and economic viability of the Galore Creek project. NOVAGOLD announced its intention to investigate opportunities to sell all or part of its interest in Galore Creek in November 2011, and commenced a formal process in that regard in March 2012.
Galore Creek has an approved 2012 budget of $35.4 million of which half of the expenditures will be funded by NOVAGOLD. In the nine months and three months ended August 31, 2012, the project spent $23.3 million and $15.8 million respectively on mostly exploration and geotechnical drilling for the enhanced engineering plan. The 2012 program includes approximately 20,000 meters of exploration drilling and 5,000 meters of geotechnical drilling program, additional engineering studies and site care and maintenance costs. The projects expenditure is targeting to be in line with its annual budget. NOVAGOLD is responsible to fund 50% of the Galore Creek expenditures, although future expenditures are contingent on the timing and success of its divestment process.
Due to the accounting rules under IAS 31, NOVAGOLD records its interest in the Galore Creek project as an equity investment, which results in all of NOVAGOLDs funding being recorded in the income statement as equity loss, and any unspent funding to GCMC is being recorded in the balance sheet on the equity investment line.
Other properties
On May 30, 2012, the Company signed a Purchase and Sale Agreement (the Agreement) to transfer the Rock Creek property in Nome, Alaska to Bering Straits Native Corporation (BSNC). Under the Agreement, the Company will transfer all Rock Creek assets, a minimum of US$14.0 million in reclamation bond for the remainder of the decommissioning obligation, and a one-time payment of US$250,000. As consideration, BSNC will provide a net profits interest which entitles the Company to receive 5% of all future net profits generated from ore extracted from the property.
Prior to the transfer of the assets, the Company is required to complete phase one of the reclamation activities and satisfy a number of other conditions in the Agreement. During the third quarter, the Company continued work on completing all phase one activities. Earlier in 2012, the Company covered the tailings in the tailings storage facility and breached the tailings dam thereby eliminating the primary source of water that has required ongoing treatment and injection since 2009. In this quarter, the Company has focused on eliminating the remaining sources of water that require treatment at Rock Creek as well as land reclamation and re-vegetation activities. Currently, phase one activities are nearly complete. After the property transfer, BSNC will assume full responsibility and liability for the remainder of the reclamation plan and any future reclamation activities requested by regulatory authorities.
NOVAGOLD Resources Inc. | 5 | |
Q3-2012 |
Managements Discussion & Analysis
Discussion of operations
in thousands of Canadian dollars, | ||||||||||||
except for per share amounts | ||||||||||||
Three months | Three months | Nine months | Nine months | |||||||||
ended | ended | ended | ended | |||||||||
August 31, 2012 | August 31, 2011 | August 31, 2012 | August 31, 2011 | |||||||||
$ | $ | $ | $ | |||||||||
Decommissioning expense (recovery) | (3,090 | ) | 20,572 | 764 | 20,572 | |||||||
Finance expense | 3,994 | 4,035 | 11,614 | 11,319 | ||||||||
Foreign exchange loss (gain) | 8,422 | 5,382 | (10,188 | ) | (21,464 | ) | ||||||
Gain on derivative liability | (5,321 | ) | (1,582 | ) | (37,560 | ) | (36,572 | ) | ||||
Gain on embedded derivative liability | (4,844 | ) | (9,356 | ) | (50,043 | ) | (32,461 | ) | ||||
Gain on sale of inventory | (1,216 | ) | - | (1,216 | ) | - | ||||||
Gain on sale of land and equipment | - | - | - | (17,200 | ) | |||||||
Gain on distribution of assets to shareholders | - | - | (71,641 | ) | - | |||||||
Project care and maintenance | 1,790 | 3,831 | 6,704 | 8,714 | ||||||||
Salaries and severance | 4,717 | 2,442 | 11,113 | 6,986 | ||||||||
Share-based payments | 2,936 | 1,664 | 15,493 | 7,203 | ||||||||
Share of losses Donlin Gold | 5,020 | 6,590 | 13,319 | 16,772 | ||||||||
Share of losses Galore Creek | 9,513 | 7,578 | 17,865 | 30,198 | ||||||||
Income (loss) for the period | (21,457 | ) | (52,104 | ) | 89,550 | (6,664 | ) | |||||
Basic income (loss) per share | (0.08 | ) | (0.22 | ) | 0.33 | (0.03 | ) | |||||
Diluted income (loss) per share | (0.08 | ) | (0.22 | ) | 0.17 | (0.03 | ) |
For the three-month period ended August 31, 2012, the Company reported net loss of $21.5 million (or $0.08 basic and diluted loss per share) compared to a net loss of $52.1 million (or $0.22 basic and diluted loss per share) for the corresponding period in 2011. This variance was primarily due to the recovery of a $3.1 million decommissioning expensein 2012 as a result in change in the Rock Creek closure costs compared with a $20.6 million expense for the corresponding period in 2011.
For the nine-month period ended August 31, 2012, the Company reported net income of $89.6 million (or $0.33 basic income per share and $0.17 diluted income per share) compared to a net loss of $6.7 million (or $0.03 basic and diluted loss per share) for the corresponding period in 2011. This variance was primarily due to the non-cash gain of $71.6 million recognized on the transfer of assets realized as a result of the spin-out of NovaCopper Inc. to shareholders during the second quarter with no comparable gain during the same period in 2011. Further, share-based payments increased during the year, as the Company recorded a $15.5 million share-based compensation charges compared to $7.2 million in the same period in 2011, since the Company elected to focus its annual share-based compensation on granting stock options to its employees instead of granting a combination of stock options and performance share units, as per prior years. Accounting for the two share-based compensation programs differs in that stock options result in higher expenses during the early portion of the vesting periods, whereas performance share units result in an equally distributed expense over the entire vesting period.
The main expenses variances for the three-month period ended August 31, 2012 compared to the same period in 2011 are as follows: (a) $5.0 million share of losses from Donlin Gold for permitting preparation expenditures, compared to $6.6 million in the same period in 2011 for the completion of the gas pipeline studies; (b) $9.5 million share of losses from Galore Creek for enhanced engineering plan preparation, compared to $7.6 million in the same period in 2011 for the pre-feasibility study costs; (c) $8.4 million foreign exchange loss in 2012 compared to $5.4 million in 2011, due to a decrease in the value of the U.S. dollar against the Canadian dollar, which weakened the value of the Companys U.S. dollar cash holdings; (d) $4.8 million non-cash gain on embedded derivative liability in 2012 compared to $9.4 million in 2011, due to a decrease in the Companys share price during the quarter ended August 31, 2012, which equates to a decrease in the fair value of the convertible feature of the convertible debt resulting in a non-cash embedded derivative gain in 2012; and (e) $5.3 million non-cash gain on derivative liability in 2012 compared to $1.6 million in 2011, due to the decrease in the Companys share price which decreased the fair value of the Companys U.S. dollar warrants.
The significant expenses variances for the nine-month period ended August 31, 2012 compared to the same period in 2011 are as follows: (a) $13.3 million share of losses from Donlin Gold for permitting preparation expenditures, compared to $16.8 million for the same period in 2011 for the completion of the gas pipeline studies; and (b) $17.9 million share of losses from the Galore Creek project compared to $30.2 million in 2011, primarily due to a 2011 non-cash asset impairment on the Galore Creek projects power transmission rights. The impairment was as a result of the Canadian Federal and British Columbia Provincial Governments approval of construction of its high-capacity 287-kV transmission line in Northwestern British Columbia that would follow roughly the same route as Galore Creeks power transmission rights thus eliminating the need for GCMC to utilize the power transmission rights to construct its own transmission lines.
6 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Managements Discussion & Analysis
Selected financial data
Quarterly information
The following unaudited quarterly information is prepared in accordance with IFRS and previous Canadian GAAP.
in thousands of Canadian dollars, | ||||||||||||||||||||||||
except per share amounts | ||||||||||||||||||||||||
08/31/12 | 05/31/12 | 02/29/12 | 11/30/11 | 8/31/11 | 5/31/11 | 2/28/11 | 11/30/10(1) | |||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Net revenues | 179 | 51 | (25 | ) | 170 | (305 | ) | 774 | 150 | 172 | ||||||||||||||
Earnings (loss) for the quarter | (21,457 | ) | 94,238 | 16,769 | (99,512 | ) | (52,104 | ) | 24,596 | 20,844 | (21,481 | ) | ||||||||||||
Earnings (loss) per share basic | (0.08 | ) | 0.34 | 0.07 | (0.41 | ) | (0.22 | ) | 0.10 | 0.09 | (0.12 | ) | ||||||||||||
Earnings (loss) per share diluted | (0.08 | ) | 0.26 | (0.01 | ) | (0.41 | ) | (0.22 | ) | (0.01 | ) | (0.15 | ) | (0.12 | ) |
(1) |
Financial information for the last quarter in the 2010 fiscal year has been prepared in accordance to previous Canadian GAAP and is not comparable to the financial data prepared in accordance with IFRS. |
Factors that can cause fluctuations in the Companys quarterly results include the timing of stock option grants, foreign exchange gains or losses related to the Companys U.S. dollar-denominated debt when the Canadian dollar exchange rate fluctuates, and fluctuations of the Companys share price that effects the fair value of the derivatives (U.S. denominated warrants) and embedded derivatives (U.S. denominated convertible debt), disposal of assets or investments, and subsequent activities related thereto. During the last fiscal quarter of 2010, the Company incurred a total of $17.9 million in care and maintenance costs and exploration activities. During the first quarter of 2011, the Company recorded a share of loss from Galore Creek of $17.5 million due to the impairment loss of Galore Creeks power transmission rights. During the second quarter of 2011, the Company had a gain on disposition of its alluvial gold properties and recorded a gain of $16.1 million. During the third quarter of 2011, the Company recorded an adjustment to its decommissioning liabilities of $20.4 million and inventory write-down of $6.9 million to reflect the Companys decision to proceed with closure activities at the Rock Creek project. During the fourth quarter of 2011, the Company incurred $2.7 million in compensation expenses as a result of the corporate reorganization. During the first quarter of 2012, the Company recorded a gain on embedded derivative liability of $27.8 million from the decrease of the Companys share price which reduced the fair value of the convertible feature of the convertible debt (embedded derivatives). During the second quarter of 2012, the Company recorded a gain on transfer of assets of $71.6 million realized as a result of the spin-out of NovaCopper Inc. to shareholders. During the third quarter of 2012, the Company recorded a recovery of decommissioning liabilities of $3.1 million as a result in change in the Rock Creek closure cost estimate and an $8.4 million foreign exchange loss. The Companys properties are not yet in production; consequently, the Company believes that its loss (and consequent loss per share) is not a primary concern to investors in the Company.
Liquidity and capital resources
At August 31, 2012, the Company had $267.4 million in cash and cash equivalents.
The Company expended $22.3 million on operating activities during the three-month period ended August 31, 2012, compared to expenditures of $27.4 million for operating activities for the same period in 2011. The Company made cash funding of $5.5 million and $7.5 million for the activities at the Donlin Gold and Galore Creek projects respectively for the quarter ended August 31, 2012, compared to a $6.2 million and $7.9 million cash funding for the Donlin Gold project and Galore Creek projects respectively in the same period in 2011. Also during the three-month period, the Company had no expenditures on financing activities compared to expending $11.7 million on payment of note payable for the Ambler acquisition for the same period in 2011. During the quarter, the Company generated $1.7 million for sale of inventory on investing activities compared with $6.3 million on sale of the land and equipment in 2011.
The Company expended $58.3 million on operating activities during the nine-month period ended August 31, 2012, compared with expenditures of $54.7 million for operating activities for the same period in 2011. The Company had contributed $15.5 million and $12.4 million to the Donlin Gold and Galore Creek projects respectively during the nine months ended August 31, 2012, compared with $17.9 million and $7.9 million funding in the same period in 2011. Also during the nine-month period, the Company generated net proceeds of $281.0 million in cash from financing activities compared to expending $10.1 million for the same period in 2011. The Company received net proceeds of $316.4 million from an equity financing in February 2012, $5.8 million from the exercise of warrants and contributed US$40.0 million to NovaCopper Inc. as part of the spin-out of that company to shareholders. During the nine months ended August 31, 2012, the Company expended $12.5 million on investing activities compared with $1.3 million in 2011. The increase in 2012 is due to the Company funding an additional US$13.4 million for the Rock Creek reclamation bond for a total of US$20.3 million as required by regulatory authorities for the closure activities with no comparative amounts for the same period in 2011.
NOVAGOLD Resources Inc. | 7 | |
Q3-2012 |
Managements Discussion & Analysis
The Company has no material off-balance sheet arrangements.
Contractual obligated undiscounted cash flow requirements, excluding operating leases, as at August 31, 2012 are as follows.
in thousands of Canadian dollars, | |||||||||||||||||||||
unless otherwise specified | |||||||||||||||||||||
Total | < 1 Year | 12 Years | 23 Years | 34 Years | 45 Years | Thereafter | |||||||||||||||
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||
Accounts payable and accrued liabilities | 14,478 | 14,478 | - | - | - | - | - | ||||||||||||||
Decommissioning liabilities | 1,035 | 1,035 | - | - | - | - | - | ||||||||||||||
Liabilities directly associated with assets classified as held for sale Rock Creek | 16,634 | 16,634 | - | - | - | - | - | ||||||||||||||
Convertible notes interest (a) | US$15,675 | US$5,225 | US$5,225 | US$5,225 | - | - | - | ||||||||||||||
Convertible notes holders option (a) | US$95,000 | US$95,000 | - | - | - | - | - | ||||||||||||||
Promissory note | US$67,231 | - | - | - | - | - | US$67,231 |
(a) |
The Convertible notes (Notes) mature on May 1, 2015. The holders of the Notes have the right to require the Company to repurchase all or part of their Notes on May 1, 2013 (Put option) and upon certain fundamental corporate changes at a price equal to 100% of the principal amount of such Notes plus any accrued and unpaid interest. As a result of the Put option, the Company may be required to repurchase all of the Notes within the next twelve months and thus the Company has classified the convertible debt and the related embedded derivative as current liabilities. |
The future minimum payments under operating leases at August 31, 2012 are approximately as follows.
in thousands of Canadian dollars | |||
Operating leases | |||
$ | |||
2012 | 183 | ||
2013 | 664 | ||
2014 | 709 | ||
2015 | 795 | ||
2016 | 912 | ||
Thereafter | 735 | ||
Total | 3,998 |
The Company has a non-cancellable sublease for an office location and the future minimum sublease payments expected to be received as at August 31, 2012 are approximately as follows:
in thousands of Canadian dollars | |||
Operating subleases | |||
$ | |||
2012 | 86 | ||
2013 | 261 | ||
2014 | 270 | ||
2015 | 270 | ||
2016 | 270 | ||
Thereafter | 180 | ||
Total | 1,337 |
Related party transactions
The Company has arms-length market based agreements to provide certain services to TintinaGold Resources Inc. (TintinaGold), Alexco Resource Corp. (Alexco), and NovaCopper Inc. Under the agreements exploration and management services were provided to the following companies for the nine-month period ended August 31, 2012: $12,000 (2011: $13,000) to Alexco, a company having two common directors; $7,000 (2011: $12,000) to TintinaGold, a company having one director in common; US$155,000 (2011: US$500,000) to Donlin Gold LLC; $667,000 (2011: Nil) to NovaCopper, a company having common directors; and office rental and services totaling $587,000 (2011: $618,000) to GCMC. At August 31, 2012, the Company had $4.3 million in receivables from related parties of which $4.1 million are non-current receivables from GCMC.
8 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Managements Discussion & Analysis
Financial instruments
The Companys financial instruments are exposed to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk.
(a) Currency risk
The Company is exposed to financial risk related to the fluctuation of foreign exchange rates. The Company operates in Canada and the United States and a portion of its expenses are incurred in U.S. dollars. A significant change in the currency exchange rates between the Canadian dollar relative to the U.S. dollar could have an effect on the Companys financial performance, financial position, or cash flows.
The Company has not hedged its exposure to currency fluctuations. At August 31, 2012, the Company is exposed to currency risk through the following assets and liabilities denominated in U.S. dollars.
in thousands of U.S. dollars | ||||||
August 31, 2012 | November 30, 2011 | |||||
Cash and cash equivalents | 269,075 | 55,204 | ||||
Accounts receivables | 183 | 13,200 | ||||
Assets held for sale | 20,272 | - | ||||
Reclamation deposits | - | 6,845 | ||||
Accounts payable and accrued liabilities | (6,980 | ) | (6,008 | ) | ||
Deferred liability | - | (3,950 | ) | |||
Decommissioning liabilities | (1,050 | ) | (29,175 | ) | ||
Liabilities directly associated with assets classified as held for sale | (17,925 | ) | - | |||
Amounts payable to Barrick non-current | (67,231 | ) | (64,666 | ) | ||
Convertible notes | (69,621 | ) | (66,061 | ) | ||
Derivative liability | (16,183 | ) | (54,818 | ) | ||
Embedded derivative liability | (7,682 | ) | (57,493 | ) | ||
Total | 102,858 | (206,922 | ) |
Based on the above net exposures, and assuming that all other variables remain constant, a 4% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of $4.1 million in the Companys net profit or loss
(b) Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations.
The Companys cash equivalents and short-term investments are held through large Canadian financial institutions. Current and non-current investments (including those presented as part of cash and cash equivalents) are composed of financial instruments issued by Canadian banks and companies with high investment-grade ratings. These investments mature at various dates over the current operating period. The Companys accounts receivables consist of general sales tax due from the Federal Government of Canada and amounts due from related parties.
The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Companys maximum exposure to credit risk.
NOVAGOLD Resources Inc. | 9 | |
Q3-2012 |
Managements Discussion & Analysis
(c) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages liquidity risk through the management of its capital structure and financial leverage. Accounts payable, accrued liabilities and coupon interest on the Notes are due within one year from the balance sheet date.
(d) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The risk that the Company will realize a loss as a result of a decline in the fair value of the short-term investments included in cash and cash equivalents is limited because these investments, although available-for-sale, are generally held to maturity. In respect of financial liabilities, convertible notes and capital leases are not subject to interest rate risk because they are at fixed rates. The promissory note owed to Barrick is variable with the U.S. prime rate. Based on the amount owing on the promissory note as at August 31, 2012, and assuming that all other variables remain constant, a 1% change in the U.S. prime rate would result in an increase/decrease of $0.7 million in the interest accrued by the Company per annum.
(e) Price risk
The Company is exposed to price risk with respect to commodity prices. The Company closely monitors commodity prices to determine the appropriate course of action to be taken. The Company does not currently have any hedging or other commodity-based risk management programs with respect to its projects.
International Financial Reporting Standards
In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of previous Canadian GAAP with IFRS over an expected five-year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing previous Canadian GAAP. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Companys adoption date was December 1, 2011 with a transition date of December 1, 2010. The Company has now substantially completed its IFRS changeover plan, with the post-implementation phase currently ongoing.
The post-implementation phase will involve continuous monitoring of IFRS changes in future periods. It has been noted that the standard-setting bodies that determine IFRS have significant ongoing projects that could impact the IFRS accounting policies that the Company has selected. In particular, there may be additional new or revised IFRS or Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), as well as the International Accounting Standards Board which is also currently working on an extractive industries project, which could significantly impact the financial statements of the Company. Processes are in place to ensure that potential changes are monitored and evaluated. The impact of any new IFRS and IFRIC Interpretations will be evaluated as they are drafted and published.
Critical accounting estimates
The most critical accounting estimates upon which the Companys financial status depends are those requiring estimates of the recoverability of carrying amount of investments, assets held for sale, mineral properties, derivatives, embedded derivatives, stock-based compensation, income taxes, and decommissioning liabilities.
Investment in joint ventures
The Companys investments in the Donlin Gold project and the Galore Creek project are jointly controlled entities. All jointly controlled entities 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, adjusted thereafter to include the investors 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. Management reviews and evaluates the carrying value of each of its investments when events or changes in circumstances indicate that the carrying amounts of the related investment may not be recoverable. As at August 31, 2012, management concluded that there have been no events or changes in circumstances since the last impairment review which indicated that any of the carrying amounts of the Companys investment may not be recoverable.
10 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Managements Discussion & Analysis
Mineral properties and assets held for sale
The Company capitalizes mineral property acquisition costs and expenses mineral property exploration expenditures when incurred. When it has been established that a mineral deposit is commercially mineable and an economic analysis has been completed, the costs subsequently incurred to develop a mine on the property prior to the start of mining operations are capitalized and will be amortized against future production following commencement of commercial production, or written off if the property is sold, allowed to lapse or abandoned. There can be no assurances that the subsequent decision to sell or reclaim the project would result in a material gain on sale or accrual of closure costs, which would be incurred when a decision is made.
The acquisition of title to mineral properties is a complicated and uncertain process. The Company has taken steps, in accordance with industry standards, to verify title to mineral properties in which it has an interest. Although the Company has made efforts to ensure that legal title to its properties is properly recorded in the name of the Company, there can be no assurance that such title will ultimately be secured.
Derivatives, embedded derivatives, stock-based compensation
The fair value of the U.S. denominated warrants, U.S. denominated convertible debt convertible feature, share options, and performance share units are computed to determine the relevant charge to the statement of comprehensive income and balance sheet. In order to compute this fair value, the Company uses different option pricing models that inherently require management to make various estimates and assumptions in relation to the expected life of the award, expected volatility, and the risk-free rate.
Income taxes
The determination of the Companys tax expense for the period and deferred tax assets and liabilities involves significant estimation and judgment by management. In determining these amounts, management interprets tax legislation in a variety of jurisdictions and makes estimates of the expected timing of the reversal of deferred tax assets and liabilities. Management also makes estimates of future earnings which affect the extent to which potential future tax benefits may be used. The Company is subject to assessments by various taxation authorities, which may interpret legislation differently. These differences may affect the final amount or the timing of the payment of taxes. The Company provides for such differences where known based on managements best estimate of the probable outcome of these matters.
Decommissioning liabilities
The amounts recorded for reclamation costs are estimates based on independent third party engineering studies and the Companys assessment of the work that is anticipated to remediate old mine workings of the Companys Nome Gold properties and the Rock Creek mine site. The decommissioning liabilities are recognized initially at fair value and are charged to operations. The Rock Creek decommissioning liabilities have not been discounted as the closure is currently in process. Actual costs incurred during reclamation and the timing of when the costs will be incurred could be materially different from these estimates. The Rock Creek decommissioning liabilities have been adjusted in this quarter ended August 31, 2012, to reflect the updated closure activities at Rock Creek.
New accounting pronouncements
Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after December 1, 2013, except IFRS 9 which is after December 1, 2015 and IAS1 which is after December 1, 2012, with earlier application permitted. The Corporation has not yet assessed the impact of these standards and amendments or determined whether it will early adopt them.
NOVAGOLD Resources Inc. | 11 | |
Q3-2012 |
Managements Discussion & Analysis
IFRS 10 Consolidated Financial Statements requires an entity to consolidate an investee when it has power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements.
IFRS 11 Joint Arrangements requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities Nonmonetary Contributions by Venturers.
IFRS 12 Disclosure of Interests in Other Entities establishes disclosure requirements for interests in other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional disclosure that address the nature of, and risks associated with, an entitys interests in other entities.
IFRS 13 Fair Value Measurement is a comprehensive standard for fair value measurement and disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosures.
There have been amendments to existing standards, including IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures. IAS 27 addresses accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 13.
IAS 1 Presentation of Financial Statements has been amended to require entities to separate items presented in OCI into two groups, based on whether or not items may be recycled in the future. Entities that choose to present OCI items before tax will be required to show the amount of tax related to the two groups separately. The amendment is effective for annual periods beginning on or after July 1, 2012 with earlier application permitted.
IFRS 7 Financial Instruments: Disclosures, has been amended to include additional disclosure requirements in the reporting of transfer transactions and risk exposures relating to transfers of financial assets and the effect of those risks on an entitys financial position, particularly those involving securitization of financial assets. The amendment is applicable for annual periods beginning on or after July 1, 2011, with earlier application permitted.
Risk factors
The Company and its future business, operations and financial condition are subject to various risks and uncertainties due to the nature of its business and the present stage of exploration and development of its mineral properties. Certain of these risks and uncertainties are under the heading Risk Factors in NOVAGOLDs Annual Information Form for the year ended November 30, 2011 available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and on the Companys website at www.novagold.com.
12 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Managements Discussion & Analysis
As a result of recent officer appointments, we may lose our status as a foreign private issuer under U.S. federal securities laws, resulting in additional expenses associated with compliance with the U.S. securities laws applicable to U.S. domestic issuers.
As a foreign private issuer, we are exempt from certain of the provisions of the U.S. federal securities laws. For example, the U.S. proxy rules and the Section 16 reporting and short swing profit rules do not apply to foreign private issuers. However, as a result of recent officer appointments (as described more fully above under the heading Corporate Developments Corporate Governance), we may lose our status as a foreign private issuer as early as December 1, 2013. If we lose our status as a foreign private issuer the aforementioned regulations would apply and we would also be required to commence reporting on forms required of U.S. companies, such as Forms 10-K, 10-Q and 8-K, rather than the forms currently available to us, such as Forms 40-F and 6-K. Compliance with these additional disclosure and timing requirements under these securities laws would likely result in increased expenses and would require our management to devote substantial time and resources to comply with new regulatory requirements following a loss of our foreign private issuer status. Further, to the extent that we were to offer or sell our securities outside of the United States, we would have to comply with the more restrictive Regulation S requirements that apply to U.S. companies, and we would no longer be able to utilize the multijurisdictional disclosure system forms for registered offerings by Canadian companies in the United States, which could limit our ability to access the capital markets in the future.
Other
On March 14, 2012, the U.S. Environmental Protection Agency (USEPA) notified Alaska Gold Company by letter that it intended to seek penalties for alleged violations of the Clean Water Act at the Rock Creek Mine. These alleged violations related to storm water discharges during 2009-2011. The letter afforded Alaska Gold Company the opportunity to enter into discussions with USEPA regarding a potential administrative settlement to resolve the alleged violations. Alaska Gold Company and the USEPA have reached an administrative settlement and the Company has paid US$177,500 to the USEPA subsequent to the period ended August 31, 2012. This administrative settlement resolves all past liabilities related to storm water discharges at the Rock Creek Mine.
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to permit timely decisions regarding public disclosure.
Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in the rules of the US Securities and Exchange Commission and Canadian Securities Administration, as at the end of the current reporting period. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed or submitted by the Company under United States and Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in those rules.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in internal control over financial reporting
There have been no changes in the Companys internal controls over financial reporting during the nine month period ended August 31, 2012 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
Cautionary notes
Forward-looking statements
NOVAGOLD Resources Inc. | 13 | |
Q3-2012 |
Managements Discussion & Analysis
This Managements Discussion and Analysis contains statements of forward-looking information. These forward-looking statements may include statements regarding perceived merit of properties, exploration results and budgets, mineral reserves and resource estimates, work programs, capital expenditures, operating costs, cash flow estimates, production estimates and similar statements relating to the economic viability of a project, timelines, strategic plans, including the Companys plans and expectations relating to its Donlin Gold and Galore Creek, completion of transactions, and the proposal to sell NOVAGOLDs interest in the Galore Creek project, market prices for precious and base metals, or other statements that are not statements of fact. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. Statements concerning mineral resource estimates may also be deemed to constitute forward-looking statements to the extent that they involve estimates of the mineralization that will be encountered if the property is developed.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, identified by words or phrases such as expects, is expected, anticipates, believes, plans, projects, estimates, assumes, intends, strategy, goals, objectives, potential, possible or variations thereof or stating that certain actions, events, conditions or results may, could, would, should, might or will be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking statements.
Forward-looking statements are based on a number of material assumptions, including those listed below, which could prove to be significantly incorrect:
Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those reflected in the forward-looking statements, including, without limitation:
14 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Managements Discussion & Analysis
This list is not exhaustive of the factors that may affect any of the Companys forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in NOVAGOLDs Annual Information Form for the year ended November 30, 2011, filed with the Canadian securities regulatory authorities, NOVAGOLDs annual report on Form 40-F filed with the United States Securities and Exchange Commission (the SEC), and other information released by NOVAGOLD and filed with the appropriate regulatory agencies.
The Companys forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made, and the Company does not assume any obligation to update forward-looking statements if circumstances or managements beliefs, expectations or opinions should change, except as required by law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.
NOVAGOLD Resources Inc. | 15 | |
Q3-2012 |
Managements Discussion & Analysis
Reserve and resource estimates
This Managements Discussion and Analysis has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of U.S. securities laws. Unless otherwise indicated, all resource and reserve estimates included in this Managements Discussion and Analysis have been prepared in accordance with NI 43-101 and the Canadian Institute of Mining, Metallurgy, and Petroleum Definition Standards on Mineral Resources and Mineral Reserves. NI 43-101 is a rule developed by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Canadian standards, including NI 43-101, differ significantly from the requirements of the United States Securities and Exchange Commission (SEC), and resource and reserve information contained herein may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting the generality of the foregoing, the term resource does not equate to the term reserves. Under U.S. standards, mineralization may not be classified as a reserve unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. The SECs disclosure standards normally do not permit the inclusion of information concerning measured mineral resources, indicated mineral resources or inferred mineral resources or other descriptions of the amount of mineralization in mineral deposits that do not constitute reserves by U.S. standards in documents filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. U.S. investors should also understand that inferred mineral resources have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimated inferred mineral resources may not form the basis of feasibility or pre-feasibility studies except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of contained ounces in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute reserves by SEC standards as in-place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of reserves are also not the same as those of the SEC, and reserves reported by the Company in compliance with NI 43-101 may not qualify as reserves under SEC standards. Accordingly, information concerning mineral deposits set forth herein may not be comparable with information made public by companies that report in accordance with U.S. standards.
16 | NOVAGOLD Resources Inc. | |
Q3-2012 |
Form 52-109F2 |
Certification of interim filings - full certificate |
I, Gregory A. Lang, Chief Executive Officer of NOVAGOLD Resources Inc., certify the following:
1. |
Review: I have reviewed the interim financial report and interim MD&A (together, the interim filings) of NOVAGOLD Resources Inc. (the issuer) for the interim period ended August 31, 2012. |
2. |
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
3. |
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
4. |
Responsibility: The issuers other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings, for the issuer. |
5. |
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuers other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
(a) |
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that | ||
(i) |
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||
(ii) |
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and | ||
(b) |
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuers GAAP. |
5.1 Control framework: The control framework the issuers other certifying officer(s) and I used to design the issuers ICFR is the Internal Control Integrated Framework issued in September 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 |
N/A | |
5.3 |
N/A |
6. |
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuers ICFR that occurred during the period beginning on June 1, 2012 and ended on August 31, 2012 that has materially affected, or is reasonably likely to materially affect, the issuers ICFR. |
Date: October 11, 2012
/s/ Gregory A. Lang | |
Gregory A. Lang, | |
Chief Executive Officer |
2
Form 52-109F2 |
Certification of interim filings - full certificate |
I, Elaine Sanders, Chief Financial Officer of NOVAGOLD Resources Inc., certify the following:
1. |
Review: I have reviewed the interim financial report and interim MD&A (together, the interim filings) of NOVAGOLD Resources Inc. (the issuer) for the interim period ended August 31, 2012. |
2. |
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
3. |
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
4. |
Responsibility: The issuers other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings, for the issuer. |
5. |
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuers other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
(a) |
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that | ||
(i) |
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||
(ii) |
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and | ||
(b) |
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuers GAAP. |
5.1 Control framework: The control framework the issuers other certifying officer(s) and I used to design the issuers ICFR is the Internal Control Integrated Framework issued in September 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 |
N/A | |
5.3 |
N/A |
6. |
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuers ICFR that occurred during the period beginning on June 1, 2012 and ended on August 31, 2012 that has materially affected, or is reasonably likely to materially affect, the issuers ICFR. |
Date: October 11, 2012
/s/ Elaine Sanders | |
Elaine Sanders, | |
Chief Financial Officer |
2
CONSENT OF HEATHER WHITE
I, Heather White, consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-117370; 333-134871; 333-136493; 333-164083 and 333-171630) and on Form F-10 (No. 333-178588) of the references to my name and the technical information included in the Third Quarter 2012 Managements Discussion and Analysis of NovaGold Resources, Inc., dated October 11, 2012.
DATED: October 11, 2012
/s/ Heather White | |
Name: Heather White |
NOVAGOLD Announces Third Quarter 2012 Financial Results
and
Permitting Progress at Donlin Gold
> |
Permitting at Donlin Gold Project Commenced with the Submission of the Plan of Operations and Permit Application Under the U.S. Clean Water Act | |
> |
Management Team Further Strengthened with Senior Industry Leaders to Advance Donlin Gold Through Permitting, Construction and Beyond |
October 11, 2012 - Vancouver, British Columbia NOVAGOLD RESOURCES INC. (TSX, NYSE-MKT: NG) (NOVAGOLD or the Company) today announced results for the third quarter ended August 31, 2012 along with an update on the advancement of its flagship 50%-owned Donlin Gold project (Donlin Gold) in Alaska and its 50%-owned Galore Creek project (Galore Creek) in British Columbia. The most significant milestone in the third quarter was the commencement of permitting at Donlin Gold with the submission of the Plan of Operations and Permit Application, under Section 404 of the U.S. Clean Water Act which was announced on August 7, 2012. Donlin Gold is owned equally by a wholly-owned subsidiary of NOVAGOLD and a wholly-owned subsidiary of Barrick Gold Corporation (Barrick).
The Company also reported on the status of the divestiture of its Rock Creek property in Alaska. Details of the Companys financial results are described in the consolidated financial statements and Managements Discussion and Analysis (MDA) which, together with further details on each of the Companys projects, including resource and reserve estimates, will be available on the Companys website at www.novagold.com, on SEDAR at www.sedar.com, and on EDGAR at www.sec.gov. All amounts are in Canadian dollars unless otherwise stated and all resource and reserve estimates are shown on a 100% project basis.
During the Third 2012 Quarter, NOVAGOLD:
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Commenced the environmental evaluation process under the National Environmental Policy Act (NEPA), a key step towards permitting Donlin Gold | |
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Completed the 2012 Galore Creek drilling program with results expected to be released in the coming months | |
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Strengthened the management team with the appointment of David Deisley to the position of Executive Vice President and General Counsel and David Ottewell to the position of Vice President and Chief Financial Officer. Both individuals are industry leaders with extensive experience needed to successfully advance Donlin Gold through permitting, construction and ultimately production | |
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Advanced the Rock Creek property in Alaska towards closure and divestiture | |
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Maintained a strong cash balance with approximately $267 million, sufficient to take Donlin Gold through permitting and up to a construction decision as well as satisfy all pending financial obligations |
Presidents Message
In the first nine months of the 2012 fiscal year, NOVAGOLD achieved all the milestones which had been presented to the market last November, including strengthening the Companys cash position; successfully completing the spin-out of the Ambler asset into NovaCopper; advancing the closure and divestiture of Rock Creek; completing the drill program at Galore Creek and embarking upon a process to realize the significant value of this major asset; reorganizing the senior management team; approving the Donlin Gold Updated Feasibility Study; and commencing the permitting of Donlin Gold... all of which have significantly de-risked the Company for its shareholders. These significant accomplishments were achieved against a backdrop of an accelerating industry focus on jurisdictional safety and resource nationalism in many of the largest gold and copper-producing counties. By underscoring the fact that NOVAGOLD's first-class assets are located in some of the very safest jurisdictions in the world, it is expected that industry trends will result in a heightened investor focus on the "safety premium" that will be attached to the value of the Companys key projects as they advance up the value chain.
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NOVAGOLD surely has the right assets in the right places. In our view of the world, out of the dwindling number of addresses where one can look for leverage to gold, yet can count on keeping the fruits of that leverage, we believe that Donlin Gold is uniquely attractive. We also believe that we are nearing an inflection point in terms of the market's positive realization that NOVAGOLD holds assets that are extraordinarily well positioned to achieve the premium valuation they deserve. Nonetheless, we have been frustrated by NOVAGOLD's share price performance of late. Despite achieving key objectives across the range of our activities, it is a fact that NOVAGOLD was caught in the backwash of, and negatively impacted by, a misinterpretation by the marketplace of Barricks second quarter report as to the meaning of that report as it related to Donlin Gold. It is thus important to reiterate that Donlin Gold continues on the permitting path with the full support of its co-owners, NOVAGOLD and Barrick, and at the same pace as projected earlier in the fiscal year. In fact, it should be emphasized that, while other major gold projects around the world have seen delays and de facto cancellation during the quarter, by proceeding at exactly the same pace with permitting as was previously envisioned, Donlin Gold is now essentially moving up the "ranks" in terms of major gold projects and their timelines. As the market realizes that nothing has changed with regard to Donlin Gold's progress, we believe that NOVAGOLD's share price will respond accordingly.
To that end, the process of advancing Donlin Gold has already begun. With the commencement of permitting at Donlin Gold, activities in the third quarter 2012 included submitting the Plan of Operations and Permit Application under the U.S. Clean Water Act. The Donlin Gold team in Alaska has worked diligently over the past 16 years accumulating the baseline data needed to file permit applications. This is one of the most extensive baseline data accumulated in preparation for permitting. The U.S. Army Corps of Engineers, which is the lead agency for the NEPA process, has selected an independent contractor to prepare the Environmental Impact Statement (EIS). It is anticipated that the Notice of Intent for the EIS will be filed over the coming weeks and will be followed by a public scoping as part of the NEPA process. Permitting is a uniform and orderly step-by-step process in Alaska which is expected to take 3-4 years. Donlin Gold continues to enjoy the strong support of our stakeholders, which include the Alaska Native Corporations -Calista Corporation and The Kuskokwim Corporation- who own the Donlin Gold mineral and surface rights, respectively.
In summary, as a mine builder with considerable experience in our sector, Im extremely pleased with Donlin Golds progress to date. Indeed, more than at any time since coming aboard NOVAGOLD, with permitting now underway, I can reaffirm that the opportunity ahead with Donlin Gold is not just unique, but exciting as well. An asset of such quality and scale is not only rare but vital to an industry where reserves are rapidly depleting. In an environment of declining grades, escalating costs and limited discoveries in the gold industry, Donlin Gold, with approximately 39 million ounces of gold in the Measured and Indicated resource categories and with a grade of 2.2 grams per tonne, enjoys the status of being the worlds largest known high-grade undeveloped open-pit gold deposit. The size, which understates considerably the true resource potential, is extraordinary. The significance of this statement is magnified when one considers that the grade at Donlin Gold is of such quality that it equals the average grade found in open-pit deposits 10 years ago which compares favorably to todays average reserve grade of 1.1 grams per tonne. One must also remember that the existing footprint of this unusually attractive asset covers only a portion of three kilometers of an eight-kilometer ore-bearing strike length. This represents significant exploration upside potential to substantially increase the endowment's mine life and/or throughput.
As it stands now, once in operation, Donlin Gold is expected to produce approximately 1,500,000 ounces of gold per year in the first five full years of production and, incidentally, is envisioned to enter production as the largest gold producing mine in the world. Assuming no future expansions, it is expected to average well over 1,000,000 ounces per year over its present 27-year life. Donlin Gold is one of only six of the worlds gold mines producing or which have the potential to produce in excess of a million gold ounces per year and it is only one of three such mega-assets to be located in North America. Donlin Gold is, moreover, in a location which is not only the second largest gold producer in the United States, but which supports environmentally and socially responsible mining and has very low geo-political risk.
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We believe it speaks volumes to the quality of its assets that NOVAGOLD has also been able to attract a high quality senior leadership team to steward this exceptional asset. The Company recently announced the appointment of David Deisley as the Executive Vice President and General Counsel. During his career, Dave was in various senior executive roles with Goldcorp Inc. (Goldcorp) and with Barrick Gold North America. At Goldcorp, where he was Vice President- General Counsel, Dave played a leading role in the implementation of all corporate development transactions and participated in the advancement of Goldcorps flagship development projects. While at Barrick, Dave served in several progressively responsible capacities, including Regional General Counsel for Barrick Gold North America where he advanced the cause of Social Responsibility in mining and permitted some of the largest gold mining operations in the world, including Goldstrike and Cortez Hills. In addition, NOVAGOLD also announced the appointment of David Ottewell, as Vice President and Chief Financial Officer. David had a long tenure with Newmont Mining Corporation, most recently as Vice President and Corporate Controller where he was responsible for global accounting functions, ensuring consistent delivery and quality control in external reporting to shareholders and regulators in the U.S. and Canada. Notably, having held the position of a mine site Controller during his career, David not only has a wide frame of reference in corporate financial matters, but also has tremendous experience and understanding of the mining industry from the ground up. David Deisley and David Ottewell will be joining us in early November.
We are equally pleased to announce the appointment of Ryan Modesto to the position of Corporate Controller. Ryan will be responsible for overseeing the internal accounting processes and the accounting team, preparing company financial statements, coordinating audit reviews, and implementing new accounting procedures. Ryan was previously the Manager of Joint Venture Accounting and Financial Reporting at Barrick Gold North America. In sum, an excellent team has been assembled and brought together to take NOVAGOLD forward as Donlin Gold advances through permitting, a construction decision and beyond.
In order to facilitate and benefit activities relating to the Donlin Gold project, and to cut administrative costs, NOVAGOLD will be moving the finance group, as well as its legal and project-related functions, to Salt Lake City, the home of a number of mining companies. The executive office and corporate communications functions will remain at the Corporate Office in Vancouver. With the reorganization almost complete, NOVAGOLD has become a much simpler company focused on the development of Donlin Gold, a pure-gold, high-quality asset located in a stable and safe jurisdiction with a much smaller but experienced team in place to achieve these objectives.
NOVAGOLD made progress during the third fiscal quarter of 2012 to finalize phase one of the reclamation activities at its Rock Creek property, a non-core asset for the Company. The closure activities in the third quarter included eliminating the remaining sources of water that require treatment at Rock Creek as well as land reclamation and re-vegetation activities. With the closure work nearly complete, the Company is on track to finalize the previously announced divestiture of Rock Creek in the coming months. After the property transfer, Bering Straits Native Corporation (BSNC) will assume full responsibility and liability for the remainder of the reclamation plan and any future reclamation activities requested by regulatory authorities. This transaction represents a major step toward streamlining NOVAGOLDs financial and management resources to focus on its flagship Donlin Gold project.
During the third fiscal quarter of 2012, NOVAGOLD continued to work on investigating opportunities to sell all or part of its 50% interest in Galore Creek, jointly and equally owned by NOVAGOLD and Teck Resources Limited. Discussions with several parties are ongoing and the timeline of the sales process has indeed been extended by a quarter to the first quarter 2013 due to the arrival of additional entrants into the process. If an attractive offer is made, we are prepared to sell our share of the asset. If the Company does not get an offer which is reflective of Galore Creeks inherent and, in our view, rising value, NOVAGOLD will not sell its interest but intends to significantly reduce activities until such time as market conditions have improved and the Company can sell its 50% interest for an appropriate amount. The proposed sale would not only allow the Company to achieve the same streamlining objectives as the sale of its other non-core assets, but it would further strengthen an already strong balance sheet. It should be stated however that, at this point, even without the cash that a transaction on Galore Creek would potentially generate, NOVAGOLD has approximately $267 million in cash on the balance sheet and, with significantly reduced expenditures going forward, the Company has sufficient financial resources to advance Donlin Gold through permitting, as well as meet its other financial obligations.
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In conclusion, I would like to thank our shareholders and stakeholders for their tremendous support and trust; our Board of Directors for its shareholder-friendly and value-focused vision; our project teams for their hard work, dedication and expertise in the excellent management of our quality assets; the Governments and Native Corporations of the jurisdictions where we operate, who give us the foundation of support without which we could not develop our projects; and finally, our transitioning and new employees whose dedication and hard work have helped us deliver on our objectives of completing the reorganization, enter into permitting at Donlin Gold, and lay the foundation for maximizing the value of our assets for the benefit of our stakeholders.
Results of Operations
in thousands of Canadian dollars, except for per share amounts | ||||||||||||
Three months | Three months | Nine months | Nine months | |||||||||
ended | ended | ended | ended | |||||||||
August 31, 2012 | August 31, 2011 | August 31, 2012 | August 31, 2011 | |||||||||
$ | $ | $ | $ | |||||||||
Decommissioning expense (recovery) | (3,090 | ) | 20,572 | 764 | 20,572 | |||||||
Finance expense | 3,994 | 4,035 | 11,614 | 11,319 | ||||||||
Foreign exchange loss (gain) | 8,422 | 5,382 | (10,188 | ) | (21,464 | ) | ||||||
Gain on derivative liability | (5,321 | ) | (1,582 | ) | (37,560 | ) | (36,572 | ) | ||||
Gain on embedded derivative liability | (4,844 | ) | (9,356 | ) | (50,043 | ) | (32,461 | ) | ||||
Gain on sale of inventory | (1,216 | ) | - | (1,216 | ) | - | ||||||
Gain on sale of land and equipment | - | - | - | (17,200 | ) | |||||||
Gain on distribution of assets to shareholders | - | - | (71,641 | ) | - | |||||||
Project care and maintenance | 1,790 | 3,831 | 6,704 | 8,714 | ||||||||
Salaries and severance | 4,717 | 2,442 | 11,113 | 6,986 | ||||||||
Share-based payments | 2,936 | 1,664 | 15,493 | 7,203 | ||||||||
Share of losses Donlin Gold | 5,020 | 6,590 | 13,319 | 16,772 | ||||||||
Share of losses Galore Creek | 9,513 | 7,578 | 17,865 | 30,198 | ||||||||
Income (loss) for the period | (21,457 | ) | (52,104 | ) | 89,550 | (6,664 | ) | |||||
Basic income (loss) per share | (0.08 | ) | (0.22 | ) | 0.33 | (0.03 | ) | |||||
Diluted income (loss) per share | (0.08 | ) | (0.22 | ) | 0.17 | (0.03 | ) |
Financial Results
For the three-month and nine-month periods ended August 31, 2012, the Company reported a net loss of $21.5 million (or $0.08 basic and diluted loss per share) and net income of $89.6 million (or $0.33 basic income per share and $0.17 diluted income per share), respectively, compared to a net loss of $52.1 million (or $0.22 basic and diluted loss per share) and $6.7 million (or $0.03 basic and diluted loss per share) for the corresponding periods in 2011. The variance for the three-month period ended August 31, 2012 was primarily due to the recovery of a decommissioning expense of $3.1 million in 2012 as a result in change in estimate of the Rock Creek closure costs compared with the expense of $20.6 million for the corresponding period in 2011. The variance for the nine-month period ended August 31, 2012 was primarily due to the non-cash gain of $71.6 million recognized on the transfer of assets realized as a result of the spin-out of NovaCopper Inc. to NOVAGOLD shareholders during the second quarter with no comparable gain during the same period in 2011. Further, share-based payments increased during the year, as the Company recorded a $15.5 million share-based compensation charges compared to $7.2 million in the same period in 2011, since the Company elected to focus its annual share-based compensation on granting stock options to its employees instead of granting a combination of stock options and performance share units, as in prior years. Accounting for the two share-based compensation programs differs in that stock options result in higher expenses during the early portion of the vesting periods, whereas performance share units result in equally distributed expenses over the entire vesting period.
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The main expenses variances for the three-month and nine-month periods ended August 31, 2012 compared to the same period in 2011 are as follows: (a) $5.0 million and $13.3 million, respectively, share of losses from Donlin Gold for permitting preparation expenditures, compared to $6.6 million and $16.8 million, respectively, in the same periods in 2011 for the completion of the gas pipeline studies; (b) $9.5 million and $17.9 million, respectively, share of losses from Galore Creek for enhanced engineering plan preparation, compared to $7.6 million and $30.2 million, respectively, in the same periods in 2011 for the pre-feasibility study costs and non-cash asset impairment on the power transmission rights; (c) $8.4 million foreign exchange loss in 2012 compared to $5.4 million in 2011, due to a decrease in the value of the U.S. dollar against the Canadian dollar, which weakened the value of the Companys U.S. dollar cash holdings; (d) $4.8 million non-cash gain on embedded derivative liability in 2012 compared to $9.4 million in 2011, due to a decrease in the Companys share price during the quarter ended August 31, 2012, which equates to a decrease in the fair value of the convertible feature of the convertible debt resulting in a non-cash embedded derivative gain in 2012; and (e) $5.3 million non-cash gain on derivative liability in 2012 compared to $1.6 million in 2011, due to the decrease in the Companys share price which decreased the fair value of the Companys U.S. dollar warrants.
Liquidity and Capital Resource
As at the end of the third quarter 2012, the Company had $267.4 million in cash and cash equivalents.
During the three-month and nine-month periods ended August 31, 2012, NOVAGOLD expended $22.3 million and $58.3 million on operating activities, respectively, compared to expenditures of $27.8 million and $60.3 million for operating activities for the same periods in 2011. The Company made cash funding of $5.5 million and $7.5 million for the activities at the Donlin Gold and Galore Creek projects, respectively in the third quarter 2012 for a total of $15.5 million and $12.4 million, respectively for the nine-month period ended August 31, 2012, compared to a $6.2 million and $7.9 million in cash funding for the Donlin Gold project and Galore Creek projects, respectively for a total of $17.9 million and $7.9 million in the same periods in 2011. Additionally, during the third quarter, the Company had no expenditures on financing activities compared to expending $11.7 million on the payment of notes payable for the acquisition of the Ambler project for the same period in 2011.
In the third quarter, NOVAGOLD generated $1.7 million for the sale of inventory on investing activities compared with $6.3 million on sale of the land and equipment in 2011. For the nine-month period, the Company generated net proceeds of $281.0 million in cash from financing activities compared to expending $10.1 million for the same period in 2011. The Company received net proceeds of $316.4 million from an equity financing in February 2012, $5.8 million from the exercise of warrants and contributed US$40.0 million to NovaCopper Inc. as part of the spin-out of that company to shareholders. During the nine months ended August 31, 2012, the Company expended $12.5 million on investing activities compared with $1.3 million in 2011. The increase in 2012 is due to the Company funding an additional US$13.4 million for the Rock Creek reclamation bond for a total of US$20.3 million as required by regulatory authorities for the closure activities with no comparative amounts for the same period in 2011.
Outlook
The Company is focused on advancing Donlin Gold. The total project budget for 2012 is US$37.2 million of which the Companys 50% share is approximately US$18.7 million and includes expenditures for permitting activities and community development. In the third quarter, Donlin Gold commenced permitting which is expected to take approximately 3-4 years. During this period, Donlin Gold will be working to accentuate project returns by looking at various avenues to reduce capital costs by sharing upfront cost with third party operators and further optimize project design and layout. As the anticipated operating margins of the project are already robust, the emphasis on reducing up-front capital costs could potentially have a significant impact on project returns. When the permitting process nears completion, the owners of Donlin Gold will be in an optimal position to make further decisions on the project. NOVAGOLD has a strong balance sheet to support its share of activities through permitting and a production decision.
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At the Galore Creek project, GCMC has an approved 2012 budget of approximately $35.4 million, of which the Companys 50% share is approximately $17.7 million, to fund the 2012 exploration and geotechnical in-fill drilling for the enhanced engineering plan, in addition to site care and maintenance costs. This years program included approximately 20,000 meters of exploration drilling and 5,000 meters of geotechnical drilling program. More recently, Galore Creek completed the 2012 drilling program and looks forward to releasing results in the coming months. The Galore Creek project remains on budget this year, although future expenditures are contingent on the timing and success of its divestment process.
At Rock Creek, NOVAGOLD had a 2012 budget of approximately $30.0 million for completion of closure activities at Rock Creek and an additional $7.0 million for site care and maintenance. In the third quarter ended August 31, 2012, NOVAGOLD continued with the completion of the phase one reclamation activities ahead of transferring Rock Creek to BSNC, which is expected to be complete by year-end. The Company anticipates that the previously released 2012 closure costs will be reduced by approximately US$14.0 million, which is the minimum amount that is anticipated to be retained in the reclamation bond for final closure activities.
Conference Call & Webcast Details
NOVAGOLD will host a conference call and webcast on Thursday, October 11, 2012 at 8:00 am PDT (11:00 am EDT). The webcast and conference call-in details are provided below.
Webcast: | www.novagold.com |
North American callers: | 1-800-659-1942 |
International callers: | 1-617-614-2710 |
Participant Passcode: | 47254136 |
The webcast will be archived on NOVAGOLDs website for one year and the conference call replay will be available for 14 days. To access the conference call replay please dial 1-888-286-8010 (North America), or 1-617-801-6888 (International), followed by your Access PIN: 83609991. For a transcript of the call please email info@novagold.com.
About NOVAGOLD
NOVAGOLD is a well-financed precious metals company engaged in the exploration and development of mineral properties in North America. The Companys flagship asset is its 50%-owned Donlin Gold project in Alaska, one of the safest jurisdictions in the world. With approximately 39 million ounces of gold in the Measured and Indicated resource categories (541 million tonnes at an average grade of approximately 2.2 grams per tonne), Donlin Gold is regarded to be one of the largest, and most prospective known gold deposits in the world. According to the Updated Feasibility Study, once in production, Donlin Gold should average approximately 1.5 million ounces of gold per year for the first five years, followed by decades of more than one million ounces per year. The Donlin Gold project has substantial exploration potential beyond the designed footprint which currently covers only three kilometers of an approximately eight-kilometer strike length of the property. Permitting is underway for the Donlin Gold project, a clearly defined process expected to take 3-4 years. NOVAGOLD also owns 50% of the Galore Creek copper-gold-silver project located in northern British Columbia. According to the 2011 Pre-Feasibility Study, Galore Creek is expected to be the largest copper mine in Canada, a tier-one jurisdiction, when it is put into production. NOVAGOLD is currently evaluating opportunities to sell all or a portion of its interest in Galore Creek and would apply the proceeds toward the development of Donlin Gold. NOVAGOLD has a strong track record of forging collaborative partnerships, both with local communities and with major mining companies.
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Please note: As part of the rebranding, the company has converted its primary domain to .com from .net, therefore, our website can now be accessed at www.novagold.com and all email formats within NOVAGOLD are now firstname.lastname@novagold.com. Please update your contacts accordingly.
Scientific and Technical Information
Scientific and technical information contained herein with respect to Donlin Gold is derived from the Donlin Creek Gold Project Alaska, USA NI 43-101 Technical Report on Second Updated Feasibility Study compiled by AMEC. Kirk Hanson, P.E., Technical Director, Open Pit Mining, North America, (AMEC, Reno), Gordon Seibel, R.M. SME, Principal Geologist, (AMEC, Reno), Tony Lipiec, P.Eng. Manager Process Engineering (AMEC, Vancouver) are the Qualified Persons responsible for the preparation of the independent technical report, each of whom are independent qualified persons as defined by NI 43-101.
NOVAGOLD Contact:
Mélanie Hennessey
Vice President, Corporate Communications
Erin OToole
Analyst, Investor Relations
604-669-6227 or 1-866-669-6227
Cautionary Note Regarding Forward-Looking Statements
This press release includes certain forward-looking information and forward-looking statements (collectively forward-looking statements) within the meaning of applicable securities legislation, including the United States Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included herein including, without limitation, the timing of permitting and potential development of Donlin Gold, statements relating to NOVAGOLDs future operating and financial performance, outlook, and the potential sale of all or part of NOVAGOLDs interest in Galore Creek are forward-looking statements. Forward-looking statements are frequently, but not always, identified by words such as expects, anticipates, believes, intends, estimates, potential, possible, and similar expressions, or statements that events, conditions, or results will, may, could, or should occur or be achieved. These forward-looking statements may include statements regarding perceived merit of properties; exploration results and budgets; mineral reserves and resource estimates; work programs; capital expenditures; timelines; strategic plans; completion of transactions; market prices for precious and base metals; intended use of proceeds; or other statements that are not statements of fact. Forward-looking statements involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from NOVAGOLDs expectations include the uncertainties involving the need for additional financing to explore and develop properties and availability of financing in the debt and capital markets; uncertainties involved in the interpretation of drilling results and geological tests and the estimation of reserves and resources; the need for continued cooperation with Barrick Gold Corporation and Teck Resources Limited for the continued exploration and development of the Donlin Gold and Galore Creek properties; the need for cooperation of government agencies and native groups in the development and operation of properties; the need to obtain permits and governmental approvals; risks of construction and mining projects such as accidents, equipment breakdowns, bad weather, non-compliance with environmental and permit requirements, unanticipated variation in geological structures, ore grades or recovery rates; unexpected cost increases, which could include significant increases in estimated capital and operating costs; fluctuations in metal prices and currency exchange rates; and other risk and uncertainties disclosed in NOVAGOLDs Annual Information Form for the year-ended November 30, 2011, filed with the Canadian securities regulatory authorities, and NOVAGOLDs annual report on Form 40-F filed with the United States Securities and Exchange Commission and in other NOVAGOLD reports and documents filed with applicable securities regulatory authorities from time to time. NOVAGOLDs forward-looking statements reflect the beliefs, opinions and projections on the date the statements are made. NOVAGOLD assumes no obligation to update the forward-looking statements of beliefs, opinions, projections, or other factors, should they change, except as required by law.
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