NOVAGOLD RESOURCES INC - Quarter Report: 2016 August (Form 10-Q)

 

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended August 31, 2016

OR

For the Transition Period from            to


Commission File Number: 001-31913

NOVAGOLD RESOURCES INC.

(Exact Name of Registrant as Specified in Its Charter)

British Columbia	N/A
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
789 West Pender Street, Suite 720 Vancouver, British Columbia Canada	V6C 1H2
(Address of Principal Executive Offices)	(Zip Code)
(604) 669-6227 (Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

As of September 27, 2016, the Company had 320,015,809 Common Shares, no par value, outstanding.

 

NOVAGOLD RESOURCES INC.

TABLE OF CONTENTS

 

		Page
PART I - FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	10
Item 4.	Controls and Procedures	15
PART II - OTHER INFORMATION		16
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Mine Safety Disclosures	16
Item 5.	Other Information.	16
Item 6.	Exhibits	16

This Quarterly Report on Form 10-Q contains forward-looking statements or information within the meaning of Canadian securities laws and the United States Private Securities Litigation Reform Act of 1995 concerning anticipated results and developments in our operations in future periods, planned exploration activities, the adequacy of our financial resources and other events or conditions that may occur in the future. These forward-looking statements may include statements regarding perceived merit of our 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 our plans and expectations relating to the permitting and development of the Donlin Gold and Galore Creek projects, completion of transactions, 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:

·	our ability to achieve production at any of our mineral exploration and development properties;

·	estimated capital costs, operating costs, production and economic returns;

·	estimated metal pricing, metallurgy, mineability, marketability and operating and capital costs, together with other assumptions underlying our resource and reserve estimates;

·	our expected ability to develop adequate infrastructure and that the cost of doing so will be reasonable;

·	assumptions that all necessary permits and governmental approvals will be obtained;

·	assumptions made in the interpretation of drill results, the geology, grade and continuity of our mineral deposits;

·	our expectations regarding demand for equipment, skilled labor and services needed for exploration and development of mineral properties; and

·	that our activities will not be adversely disrupted or impeded by development, operating or regulatory risks.

 

 

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:

·	uncertainty of whether there will ever be production at our mineral exploration and development properties;

·	uncertainty of estimates of capital costs, operating costs, production and economic returns;

·	uncertainties relating to the assumptions underlying our resource and reserve estimates, such as metal pricing, metallurgy, mineability, marketability and operating and capital costs;

·	risks related to our ability to commence production and generate material revenues or obtain adequate financing for our planned exploration and development activities;

·	risks related to our ability to finance the development of our mineral properties through external financing, strategic alliances, the sale of property interests or otherwise;

·	risks related to the third parties on which we depend for our exploration and development activities;

·	dependence on cooperation of joint venture partners in exploration and development of properties;

·	credit, liquidity, interest rate and currency risks;

·	risks related to market events and general economic conditions;

·	uncertainty related to inferred mineral resources;

·	risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of our mineral deposits;

·	risks related to lack of infrastructure required to develop, construct, and operate our mineral properties;

·	mining and development risks, including risks related to infrastructure, accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with, or interruptions in, development, construction or production;

·	the risk that permits and governmental approvals necessary to develop and operate mines on our properties will not be available on a timely basis, subject to reasonable conditions, or at all;

·	commodity price fluctuations;

·	risks related to governmental regulation and permits, including environmental regulation;

·	risks related to the need for reclamation activities on our properties and uncertainty of cost estimates related thereto;

·	uncertainty related to title to our mineral properties;

·	uncertainty related to unsettled aboriginal rights and title in British Columbia;

·	our history of losses and expectation of future losses;

·	uncertainty as to the outcome of potential litigation;

·	risks related to our largest shareholder;

·	risks related to increases in demand for equipment, skilled labor and services needed for exploration and development of mineral properties, and related cost increases;

·	competition in the mining industry;

·	our need to attract and retain qualified management and technical personnel;

·	risks related to our current practice of not using hedging arrangements;

·	risks related to conflicts of interests of some of the directors of the Company;

·	risks related to global climate change;

·	risks related to opposition to our operations at our mineral exploration and development properties from non-governmental organizations or civil society; and

·	increased regulatory compliance costs relating to the Dodd-Frank Act.

 

This list is not exhaustive of the factors that may affect any of our forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and our actual achievements 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 this Quarterly Report on Form 10-Q under the heading “Risk Factors” and elsewhere.

Our forward-looking statements contained in this Quarterly Report on Form 10-Q are based on the beliefs, expectations and opinions of management as of the date of this report. We do not assume any obligation to update forward-looking statements if circumstances or management’s 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.

Item 1.

Financial Statements

 

NOVAGOLD RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, US dollars in thousands)
		At August 31, 2016				At November 30, 2015
ASSETS
Cash and cash equivalents		$	28,455			$	41,731
Term deposits			80,000				85,000
Other assets			1,520				3,310
Current assets			109,975				130,041
Investment in Donlin Gold (note 4)			1,761				1,058
Investment in Galore Creek (note 5)			247,317				242,906
Mineral property			44,394				43,605
Deferred income taxes			9,886				9,711
Other assets			7,056				6,263
Total assets		$	420,389			$	433,584
LIABILITIES
Accounts payable and accrued liabilities		$	2,412			$	3,066
Other liabilities			276				451
Current liabilities			2,688				3,517
Promissory note (note 6)			83,660				80,261
Deferred income taxes			20,881				20,510
Total liabilities			107,229				104,288
Commitments and contingencies (note 13)
EQUITY
Common shares			1,942,451				1,938,262
Contributed surplus			80,756				80,774
Accumulated deficit			(1,698,551	)			(1,672,055	)
Accumulated other comprehensive loss			(11,496	)			(17,685	)
Total equity			313,160				329,296
Total liabilities and equity		$	420,389			$	433,584
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
These condensed consolidated interim financial statements are authorized for issue by the Board of Directors on October 4, 2016. They are signed on the Company’s behalf by:

/s/ Gregory A. Lang, Director	/s/ Anthony P. Walsh, Director

 

 

NOVAGOLD RESOURCES INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF LOSS AND COMPREHENSIVE GAIN (LOSS)
(Unaudited, US dollars in thousands except per share amounts)
		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Operating expenses:
Equity loss – Donlin Gold (note 4)		$	1,980			$	2,803			$	6,485			$	8,953
Equity loss – Galore Creek (note 5)			212				(346	)			726				65
General and administrative (note 8)			4,222				4,062				16,107				15,714
Studies and evaluation			—				52				—				353
Depreciation			8				8				25				26
			6,422				6,579				23,343				25,111
Loss from operations			(6,422	)			(6,579	)			(23,343	)			(25,111	)
Other income (expense) (note 10)			(885	)			288				(3,000	)			341
Loss before income taxes			(7,307	)			(6,291	)			(26,343	)			(24,770	)
Income tax expense			(74	)			(10	)			(153	)			(14	)
Net loss		$	(7,381	)		$	(6,301	)		$	(26,496	)		$	(24,784	)
Other comprehensive income (loss):
Unrealized holding gains (losses) on marketable securities during period			42				(75	)			637				(327	)
Reclassification adjustment for losses included in net loss (note 10)			—				—				—				426
Net unrealized gain (loss), net of $(6), $10, $(92),and $14 tax (expense) recovery			42				(75	)			637				99
Foreign currency translation adjustments			(127	)			(17,969	)			5,552				(48,185	)
			(85	)			(18,044	)			6,189				(48,086	)
Comprehensive income (loss)		$	(7,466	)		$	(24,345	)		$	(20,307	)		$	(72,870	)
Net loss per common share
Basic and diluted		$	(0.02	)		$	(0.02	)		$	(0.08	)		$	(0.08	)
Weighted average shares outstanding
Basic and diluted (thousands)			319,967				317,862				319,694				317,835
The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

NOVAGOLD RESOURCES INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited, US dollars in thousands)
		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Operating activities:
Net loss		$	(7,381	)		$	(6,301	)		$	(26,496	)		$	(24,784	)
Adjustments to reconcile net income to net cash used in operating activities:
Equity losses of affiliates			2,192				2,457				7,211				9,018
Share-based compensation			1,869				1,673				8,446				7,730
Interest on promissory note			1,155				1,045				3,399				3,066
Depreciation			8				8				25				26
Deferred income taxes			(6	)			10				(92	)			14
Foreign exchange (gain) loss			(4	)			(1,141	)			268				(4,356	)
Write-down of investments			—				—				—				426
Other			14				(27	)			79				638
Withholding tax on share-based compensation			—				—				(4,275	)			(827	)
Net change in operating assets and liabilities (note 11)			1,618				521				1,016				(864	)
Net cash used in operations			(535	)			(1,755	)			(10,419	)			(9,913	)
Investing activities:
Proceeds from term deposits			5,000				40,000				90,000				135,000
Purchases of term deposits			(5,000	)			(40,000	)			(85,000	)			(125,000	)
Funding of affiliates			(2,742	)			(2,757	)			(7,935	)			(9,219	)
Net cash provided from (used in) investing activities			(2,742	)			(2,757	)			(2,935	)			781
Financing activities:
Repayment of debt			—				—				—				(15,829	)
Net cash used in financing activities			—				—				—				(15,829	)
Effect of exchange rate changes on cash			(11	)			(197	)			78				(377	)
Decrease in cash and cash equivalents			(3,288	)			(4,709	)			(13,276	)			(25,338	)
Cash and cash equivalents at beginning of period			31,743				49,696				41,731				70,325
Cash and cash equivalents at end of period		$	28,455			$	44,987			$	28,455			$	44,987

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

NOVAGOLD RESOURCES INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF EQUITY
(Unaudited, US dollars and shares in thousands)
	Common shares								Contributed				Accumulated				Accumulated other comprehensive				Total
	Shares				Amount				surplus				deficit				income (loss)				equity
November 30, 2014			317,288			$	1,936,336			$	74,038			$	(1,640,103	)		$	34,845			$	405,116
Net loss			—				—				—				(31,952	)			—				(31,952	)
Other comprehensive loss			—				—				—				—				(52,530	)			(52,530	)
Share-based compensation and related share issuances			622				1,926				6,736				—				—				8,662
November 30, 2015			317,910			$	1,938,262			$	80,774			$	(1,672,055	)		$	(17,685	)		$	329,296
Net loss			—				—				—				(26,496	)			—				(26,496	)
Other comprehensive income			—				—				—				—				6,189				6,189
Share-based compensation and related share issuances			2,106				4,189				(18	)			—				—				4,171
August 31, 2016			320,016			$	1,942,451			$	80,756			$	(1,698,551	)		$	(11,496	)		$	313,160

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

 

NOVAGOLD RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited, US dollars in thousands except per share amounts)

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

NOVAGOLD RESOURCES INC. and its affiliates and subsidiaries (collectively, “NOVAGOLD” or the “Company”) operates in the mining industry, focused on the exploration for and development of gold and copper mineral properties. The Company has no operations or realized revenues from its planned principal business purpose. The Company’s principal assets include a 50% interest in the Donlin Gold project in Alaska, U.S.A. and a 50% interest in the Galore Creek project in British Columbia, Canada.

The Condensed Consolidated Interim Financial Statements of NOVAGOLD are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. These interim statements should be read in conjunction with NOVAGOLD’s Consolidated Financial Statements for the year ended November 30, 2015. The year-end balance sheet data was derived from the audited financial statements and certain information and footnote disclosures required by United States generally accepted accounting principles (US GAAP) have been condensed or omitted.

The functional currency for the Company’s Canadian operations is the Canadian dollar and the functional currency for the Company’s U.S. operations is the U.S. dollar. References to “$” refer to United States currency and “C$” to Canadian currency. Dollar amounts are in thousands, except for per share amounts.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently adopted accounting pronouncements

Consolidation – Amendments to the Consolidation Analysis

In February 2015, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) guidance was issued to amend current consolidation guidance. The amendments affect both the variable interest entity and voting interest entity consolidation models and primarily relate to: limited partnerships and similar legal entities; evaluating fees paid to a decision maker or a service provider as a variable interest; the effect of fee arrangements on the primary beneficiary determination; the effect of related parties on the primary beneficiary determination; and certain investment funds. The Company determined that these changes did not have an impact on its previous consolidation analysis and elected early adoption of the new standard effective for the Company’s fiscal year beginning December 1, 2016. Application of the new guidance had no impact on the consolidated financial position, results of operations or cash flows.

Recently issued accounting pronouncements

Classification of Certain Cash Receipts and Cash Payments

In August 2016, ASC guidance was issued to amend the classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance is effective for the Company’s fiscal year and interim periods beginning December 1, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating this guidance and the impact on its consolidated financial statements.

Compensation—Stock Compensation

In March 2016, ASC guidance was issued to amend employee share-based payment accounting. The new guidance amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for the Company’s fiscal year and interim periods beginning December 1, 2017. Early adoption is permitted in any interim or annual period. If adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. All of the amendments must be adopted in the same period. The Company is currently evaluating this guidance and the impact on its consolidated financial statements.

NOVAGOLD RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited, US dollars in thousands except per share amounts)

Leases

In February 2016, ASC guidance was issued to amend lease accounting guidance. The new guidance amends the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases and amends disclosure requirements associated with leasing arrangements. The new guidance is effective for the Company’s fiscal year beginning December 1, 2019. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating this guidance and the impact on its consolidated financial statements.

Classification and Measurement of Financial Instruments

In January 2016, ASC guidance was issued to amend the guidance on the classification and measurement of financial instruments. The new guidance significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The new guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for the Company’s fiscal year beginning December 1, 2018. Early adoption for most of the provisions is not allowed. The Company is currently evaluating this guidance and the impact on its consolidated financial statements.

NOTE 3 – SEGMENTED INFORMATION

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. The Chief Executive Officer considers the business from a geographic perspective considering the performance of our investments in the Donlin Gold project in Alaska, U.S.A. and the Galore Creek project in British Columbia, Canada. Segment information is provided on each of the material projects individually in notes 4 and 5.

NOTE 4 – INVESTMENT IN DONLIN GOLD

The Donlin Gold project is owned and operated by Donlin Gold LLC, a limited liability company in which wholly owned subsidiaries of Barrick Gold Corporation (“Barrick”) and NOVAGOLD each own a 50% interest. Donlin Gold LLC has a board of four directors, with two directors selected by Barrick and two directors selected by the Company. All significant decisions related to Donlin Gold LLC require the approval of both Barrick and the Company.

Changes in the Company’s 50% investment in Donlin Gold LLC are summarized as follows:

		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Balance – beginning of period		$	1,287			$	1,486			$	1,058			$	1,618
Share of losses:
Mineral property expenditures			(1,947	)			(2,760	)			(6,377	)			(8,825	)
Depreciation			(33	)			(43	)			(108	)			(128	)
			(1,980	)			(2,803	)			(6,485	)			(8,953	)
Funding			2,454				2,693				7,188				8,711
Balance – end of period		$	1,761			$	1,376			$	1,761			$	1,376

The following amounts represent the Company’s 50% share of the assets and liabilities of Donlin Gold LLC. Donlin Gold LLC has capitalized as Mineral property the initial contribution of the Donlin Gold property with a carrying value of $64,000 resulting in a higher carrying value of the Mineral property than the Company.

NOVAGOLD RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited, US dollars in thousands except per share amounts)

 

		At August 31, 2016				At November 30, 2015
Current assets: Cash, prepaid expenses and other receivables		$	1,862			$	1,762
Non-current assets: Property and equipment			677				232
Non-current assets: Mineral property			32,692				32,692
Current liabilities: Accounts payable and accrued liabilities			(778	)			(936	)
Non-current liabilities: Reclamation obligation			(692	)			(692	)
Net assets		$	33,761			$	33,058

NOTE 5 – INVESTMENT IN GALORE CREEK

The Galore Creek project is owned by Galore Creek Partnership (GCP), a partnership in which Teck Resources Limited (“Teck”) and a wholly owned subsidiary of NOVAGOLD each own a 50% interest. GCP has a board of four directors, with two members selected by Teck and two members selected by the Company. All significant decisions related to GCP require the approval of both Teck and the Company.

GCP prepares its financial statements under International Financial Reporting Standards, as issued by the IASB, and presents its financial statements in Canadian dollars. In accounting for its investment in GCP, the Company converts and presents reported amounts in accordance with US GAAP and in U.S. dollars.

Changes in the Company’s investment in GCP are summarized as follows:

		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Balance – beginning of period		$	247,352			$	260,606			$	242,906			$	283,247
Share of gains (losses):
Mineral property expenditures			(13	)			(46	)			(146	)			(71	)
Care and maintenance expense			(199	)			(247	)			(580	)			(633	)
Gain on sale of equipment			—				639				—				639
			(212	)			346				(726	)			(65	)
Funding			288				64				747				508
Foreign currency translation			(111	)			(14,285	)			4,390				(36,959	)
Balance – end of period		$	247,317			$	246,731			$	247,317			$	246,731

The following amounts represent the Company’s 50% share of the assets and liabilities of GCP presented in U.S. dollars and in accordance with US GAAP. As a result of recording the Company’s investment at fair value in June 2011, the carrying value of the Company’s 50% interest is higher than 50% of the book value of GCP. Therefore, the Company’s investment does not equal 50% of the net assets recorded by GCP:

 

		At August 31, 2016				At November 30, 2015
Current assets: Cash, prepaid expenses and other receivables		$	282			$	497
Non-current assets: Mineral property			222,481				218,532
Current liabilities: Accounts payable and accrued liabilities			(71	)			(365	)
Non-current liabilities: Reclamation obligation			(7,292	)			(7,162	)
Net assets		$	215,400			$	211,502

 

 

NOVAGOLD RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited, US dollars in thousands except per share amounts)

NOTE 6 – PROMISSORY NOTE

The Company has a promissory note payable to Barrick for $51,576, plus interest at a rate of U.S. prime plus 2%, amounting to $32,084 in accrued interest. The promissory note resulted from the agreement that led to the formation of Donlin Gold LLC, where the Company agreed to reimburse Barrick for a portion of their expenditures incurred from April 1, 2006 to November 30, 2007. The promissory note and accrued interest are payable from 85% of the Company’s share of revenue from future mine production or from any net proceeds resulting from a reduction of the Company’s interest in Donlin Gold LLC. The carrying value of the promissory note approximates fair value.

NOTE 7 – FAIR VALUE ACCOUNTING

Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the significance of the inputs used in making the measurement. The three levels of the fair value hierarchy are as follows:

 

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 — Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 — Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The Company’s marketable equity securities are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the marketable equity securities was $1,303 at August 31, 2016 ($571 at November 30, 2015), calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.

NOTE 8 – GENERAL AND ADMINISTRATIVE EXPENSES

 

		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Salaries		$	1,536			$	1,513			$	4,852			$	4,563
Share-based compensation			1,869				1,673				8,446				7,730
Office expense			457				503				1,512				1,571
Professional fees			256				176				524				554
Corporate development and communications			104				197				773				1,296
		$	4,222			$	4,062			$	16,107			$	15,714

NOTE 9 – SHARE-BASED COMPENSATION

 

		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Stock options		$	734			$	493			$	5,138			$	4,111
Performance share unit plan			1,077				1,124				3,142				3,457
Deferred share unit plan			58				56				166				162
		$	1,869			$	1,673			$	8,446			$	7,730

In the first nine months of 2016, the Company granted 4,586,700 share options to employees and directors with an exercise price of C$5.02 per share and a fair value of C$1.83 per share. The Company also granted 1,241,900 performance share units (PSUs) to employees with a fair value of C$4.65 per unit. PSU grants made on January 4, 2014 vested and were paid out on December 1, 2015 in common shares of the Company at 140% of the PSU grant amount. The Company elected to remit PSU withholding taxes of $4,275 using cash and issued the net amount of 1,377,364 shares to holders.

In the first nine months of 2015, the Company granted 4,359,450 share options to employees and directors with an exercise price of C$3.18 per share and a fair value of C$1.28 per share. The Company also granted 1,377,250 PSUs to employees with a fair value of C$3.86 per unit. PSU grants made on December 5, 2012 vested and were paid out on December 5, 2014 in common shares of the Company at 137% of the PSU grant amount. The Company elected to remit PSU withholding taxes of $827 using cash and issued the net amount of 506,175 shares to holders.

 

NOVAGOLD RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited, US dollars in thousands except per share amounts)

 

NOTE 10 – OTHER INCOME (EXPENSE)

 

		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Interest income		$	266			$	192			$	667			$	557
Interest expense			(1,155	)			(1,045	)			(3,399	)			(4,146	)
Foreign exchange gain (loss)			4				1,141				(268	)			4,356
Write-down of investments			—				—				—				(426	)
		$	(885	)		$	288			$	(3,000	)		$	341

During the nine month period ended August 31, 2015, a loss of $426 related to marketable equity securities was reclassified from other comprehensive income (loss) to net loss.

NOTE 11 – CHANGE IN OPERATING ASSETS AND LIABILITIES

 

		Three months ended August 31,								Nine months ended August 31,
		2016				2015				2016				2015
Decrease in receivables, deposits and prepaid amounts		$	915			$	54			$	1,856			$	559
Increase (decrease) in accounts payable and accrued liabilities			721				497				(665	)			(1,316	)
Decrease in other liabilities			(19	)			(30	)			(175	)			(107	)
		$	1,618			$	521			$	1,016			$	(864	)

During the first nine months of 2016, the Company provided office rental and services to GCP for $251 ($266 in the first nine months of 2015).

As of August 31, 2016, the Company has accounts receivable from GCP of $28 (November 30, 2015: $28) included in other current assets and a receivable of $3,610 (November 30, 2015: $3,546) from GCP included in other long-term assets.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

General

The Company follows ASC guidance in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

Obligations under operating leases

The Company leases certain assets, such as office equipment and office facilities, under operating leases expiring at various dates through 2017. Future minimum annual lease payments are $93 in the remainder of 2016, $325 in 2017 and $18 in 2018, totaling $436.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

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

Our goals for 2016 include:

 

·	Advance the Donlin Gold project toward a construction decision.

·	Advance Galore Creek mine planning and project design.

·	Evaluate opportunities to monetize the value of Galore Creek.

·	Maintain a healthy balance sheet.

·	Maintain an effective corporate social responsibility program.

 

Third quarter highlights

Advancement of the Donlin Gold project

·	Outline of the purpose and need for the development of the proposed mine and the benefit it would bring to the stakeholders of Donlin Gold’s Alaska Native Corporation partners, Calista Corporation and The Kuskokwim Corporation (TKC).

 

·	Identify and analyze a reasonable range of alternatives to the mine development proposed by Donlin Gold which comprise variations on certain mine site facility designs, as well as local transportation and power supply options.

 

·

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

 

·	Describe potential mitigation measures intended to reduce or eliminate the environmental impacts described in the impact analysis section.

 

 

In addition to actively participating in the NEPA process, Donlin Gold continues to advance other major permits and approvals by providing State and Federal agencies with information on major permit applications, including:

·	working with the State to advance the review of Donlin Gold’s air quality permit application and preparation of the air quality permit, targeted for issuance in 2017;

 

·	advancing the water discharge permit application and working with the State to advance the review of the integrated waste management permit application and reclamation plan;

 

·	the Corps provided opportunities for public comment on Donlin Gold’s Public Notice CWA Section 404 (wetland)/10 (rivers and harbors) permit application as part of the draft EIS comment period which closed on May 31, 2016;

 

·	Donlin Gold continues to work with State and Federal agencies to advance issuance of all other required permits, including dam safety approvals, pipeline authorizations, water use permits, fish habitat permits, as well as land and shoreline lease and right-of-way approvals.

 

An extensive list of additional Federal and State government permits and approvals must be obtained before the Donlin Gold project can commence construction. Preparation of the applications for some of these permits and approvals requires additional, more detailed engineering that was not part of the Donlin Gold feasibility study. Completion of this engineering will require a significant investment of funds, time, and other resources by Donlin Gold and its contractors. Also, the Donlin Gold board must approve a construction program and budget before proceeding with the development of the Donlin Gold project. The timing of the required engineering work and the Donlin Gold board’s approval of a construction program and budget, the receipt of all required governmental permits and approvals, and the availability of financing, among other factors, will affect the decision and timing to develop the Donlin Gold project. Among other reasons, project delays could occur as a result of public opposition, requests for additional information or analysis, limitations in agency staff resources during regulatory review and permitting, or project changes made by Donlin Gold.

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

Galore Creek project

Our share of cash funding for Galore Creek was $0.2 million and $0.7 million in the third quarter and first nine months of 2016, respectively, for technical studies, care and maintenance, and supporting community initiatives. In 2016, our 50% share of the work program is expected to be approximately $1 million to continue to advance technical studies, support community initiatives and provide site care and maintenance.

 

We record our interest in the Galore Creek Partnership as an equity investment, which results in our 50% share of expenses being recorded in the income statement as an operating loss. The investment amount recorded on the balance sheet primarily represents the fair value of our investment in the Galore Creek Partnership in 2011, recorded upon completion of the earn-in by Teck Resources Limited, as well as unused funds advanced to the Partnership, all in Canadian dollars, and translated to U.S. dollars at the current exchange rate.

A sustained decline in the long-term copper price is deemed to be an indicator of possible impairment for our investment in the Galore Creek Partnership and our 40% direct interest in the Copper Canyon mineral property. The Canadian dollar is the functional currency for our Canadian operations and therefore we assess whether there has been a potential impairment triggering event related to copper prices in Canadian dollars. In Canadian dollar terms, there has not been a significant decline in the price of copper and therefore is not presently an indicator of possible impairment.

Outlook

Summary of Consolidated Financial Performance

		Three months ended August 31,								Nine months ended August 31,
($ thousands, except per share)		2016				2015				2016				2015
Loss from operations		$	(6,422	)		$	(6,579	)		$	(23,343	)		$	(25,111	)
Net loss		$	(7,381	)		$	(6,301	)		$	(26,496	)		$	(24,784	)
Net loss per common share
Basic and diluted		$	(0.02	)		$	(0.02	)		$	(0.08	)		$	(0.08	)

Results of Operations

Third quarter 2016 compared to 2015

Loss from operations decreased from $6.6 million in 2015 to $6.4 million in 2016, primarily due to a reduction of our share of losses at the Donlin Gold project, partially offset by a gain on the sale of equipment at Galore Creek in the third quarter of 2015.

Net loss increased from $6.3 million ($0.02 per share) in 2015 to $7.4 million ($0.02 per share) in 2016, primarily due to a $1.1 million foreign exchange gain in the third quarter of 2015.  The U.S. dollar significantly strengthened in relation to the Canadian dollar during the third quarter of 2015 and a foreign exchange gain was realized by the Canadian parent company on its cash denominated in U.S. dollars.

First nine months 2016 compared to 2015

 

Net loss increased from $24.8 million ($0.08 per share) in 2015 to $26.5 million ($0.08 per share) in 2016, primarily due to a $4.4 million foreign exchange gain in 2015, partially offset by the reduction in loss from operations and lower interest expense. The U.S. dollar significantly strengthened in relation to the Canadian dollar during the first nine months of 2015 and a foreign exchange gain was realized by the Canadian parent company on its cash denominated in U.S. dollars.

Liquidity, Capital Resources and Capital Requirements

		Three months ended August 31,							Nine months ended August 31,
($ thousands)		2016			2015				2016				2015
Cash used in operations		$	(535	)		$	(1,755	)		$	(10,419	)		$	(9,913	)
Cash used to fund Donlin Gold and Galore Creek		$	(2,742	)		$	(2,757	)		$	(7,935	)		$	(9,219	)
Net cash provided from term deposits		$	—			$	—			$	5,000			$	10,000
Cash used in financing activities		$	—			$	—			$	—			$	(15,829	)
					At				At
($ thousands)					August 31, 2016				November 30, 2015				Change
Cash and cash equivalents						$	28,455			$	41,731			$	(13,276	)
Term deposits						$	80,000			$	85,000			$	(5,000	)

Third quarter 2016 compared to 2015

Cash and cash equivalents decreased by $3.3 million during the third quarter of 2016. The decrease in cash was primarily related to $2.7 million to fund our share of the Donlin Gold and Galore Creek projects and $0.5 million used in operating activities for administrative costs and working capital.

Cash used in operations decreased from $1.8 million in 2015, to $0.5 million in 2016, primarily due to the receipt of exploration tax credits resulting from drilling programs at Galore Creek in prior years.

First nine months 2016 compared to 2015

Cash and cash equivalents decreased by $13.3 million and term deposits decreased by $5.0 million during the first nine months of 2016. The decrease in cash was primarily related to $10.4 million used in operating activities for administrative costs and withholding taxes paid on performance share units vested and $7.9 million to fund our share of the Donlin Gold and Galore Creek projects, partially offset by a $5.0 million reduction in term deposits.

·	Cash used in operations increased from $9.9 million in 2015, to $10.4 million in 2016, primarily due to higher withholding taxes paid on performance share units vested in the first quarter of 2016, partially offset by the receipt of exploration tax credits.

 

·	Cash used to fund Donlin Gold and Galore Creek decreased by $1.3 million in 2016 due to the timing of Donlin Gold funding requirements for permitting.

 

·	Cash provided from term deposits was $5.0 million in 2016 and $10.0 million in 2015.

 

·	Cash used in financing activities in 2015 included $15.8 million to repay the remaining convertible notes.

 

 

Outstanding share data

As of September 27, 2016, the Company had 320,015,809 common shares issued and outstanding. Also as of September 27, the Company had outstanding 19,828,841 stock options with a weighted-average exercise price of C$4.50, 2,619,150 Performance Share Units and 286,847 Deferred Share Units. Upon exercise of the foregoing convertible securities, the Company would be required to issue a maximum of 24,044,413 common shares.

Accounting Developments

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

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

Our financial instruments are exposed to certain financial risks, including currency, credit and interest rate risks.

Currency risk

We are exposed to financial risk related to the fluctuation of foreign exchange rates. We operate in Canada and the United States and a portion of our expenses are incurred in Canadian dollars. A significant change in the currency exchange rate between the Canadian dollar relative to the U.S. dollar could have an effect on our results of operations, financial position or cash flows.

We have not hedged our exposure to currency fluctuations. At August 31, 2016, we are exposed to currency risk through our investment in the Galore Creek project, mineral properties, deferred income taxes and cash balances held in Canadian dollars.

Based on the above net exposures as at August 31, 2016, and assuming that all other variables remain constant, a $0.01 depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of approximately $3.0 million in our consolidated comprehensive income (loss).

Credit risk

Concentration of credit risk exists with respect to our cash and cash equivalents and term deposit investments. All deposits are held through two large Canadian chartered banks with high investment-grade ratings and have maturities of less than one year.

Interest rate risk

Item 4.

Controls and Procedures

 

Management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of August 31, 2016. On the basis of this review, our President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated by the SEC under the Exchange Act) during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting. The company’s internal controls over financial reporting are based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Item 1.

Legal Proceedings

 

From time to time, we are a party to routine litigation and proceedings that are considered part of the ordinary course of our business. We are not aware of any material current, pending, or threatened litigation.

There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended November 30, 2015, as filed with the SEC on January 27, 2016. The risk factors in our Annual Report on Form 10-K for the year ended November 30, 2015, in addition to the other information set forth in this quarterly report, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition or results of operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

Item 3.

Defaults Upon Senior Securities

 

None.

Item 4.

Mine Safety Disclosures

 

These disclosures are not applicable to us.

Item 5.

Other Information.

 

None.

Item 6.

Exhibits

 

Exhibits

See Exhibit Index.

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 4, 2016	NOVAGOLD RESOURCES INC.
	By:	/s/ Gregory A. Lang
		Gregory A. Lang
		President and Chief Executive Officer (principal executive officer)
	By:	/s/ David A. Ottewell
		David A. Ottewell
		Vice President and Chief Financial Officer (principal financial and accounting officer)

 

 

 

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2		Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101		The following materials are filed herewith: (i) XBRL Instance, (ii) XBRL Taxonomy Extension Schema, (iii) XBRL Taxonomy Extension Calculation, (iv) XBRL Taxonomy Extension Labels, (v) XBRL Taxonomy Extension Presentation, and (vi) XBRL Taxonomy Extension Definition. In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by the specific reference in such filing.

 

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