NOVAGOLD RESOURCES INC. The following discussion and analysis of our financial condition and results of operations constitutes management's review of the factors that affected our financial and operating performance for the years endedNovember 30, 2020 and 2019. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report. For a discussion of the years endedNovember 30, 2019 and 2018, see section Item 7., Management's Discussion and Analysis of Financial Condition and Results of Operations, on Registrant's Annual Report on Form 10-K for the year endedNovember 30, 2019 , filed with theSecurities and Exchange Commission onJanuary 22, 2020 . Overview Our corporate goals include continuing to advance the Donlin Gold project toward a construction decision maintaining support forDonlin Gold among the project's stakeholders; promoting a strong safety, sustainability, and environmental culture; maintaining a favorable reputation of NOVAGOLD; and preserving a healthy balance sheet. Our operations primarily relate to the delivery of project milestones, including the achievement of various technical, environmental, sustainable development, economic and legal objectives, obtaining necessary permits, completion of feasibility studies, preparation of engineering designs and the financing to fund these objectives.
COVID-19 response and community engagement
NOVAGOLD's primary objective is to ensure the health and safety of its employees, partners and contractors. The Company has implemented policies at its offices inSalt Lake City andVancouver designed to ensure the safety and well-being of all employees and the people associated with them. In that regard, to reduce risk, our employees have been asked to work remotely, avoid all non-essential travel, adhere to good hygiene practices, and engage in physical distancing. AtDonlin Gold LLC , with dedicated community partners inAlaska and in the Y-K region, who share the objective of protecting the health of Donlin Gold's employees and contractors, a wide-ranging set of policies and procedures have been implemented at the Donlin Gold project site and office inAnchorage this year designed to mitigate the spread of COVID-19. Drilling activities at the Donlin Gold project site commenced in March and were suspended in early April due to concerns related to the COVID-19 pandemic. Activities recommenced in May after development and implementation of a new COVID-19 management plan. The plan implemented a set of policies and procedures including testing of all employees and contractors prior to visiting the Donlin Gold project site; utilizing charters to safely deliver employees to and from camp to minimize in-region travel; screening and physical distancing measures while at camp; more frequent sanitization practices; and increased communication around hygiene and sanitization practices, as well as identification of symptoms.Donlin Gold LLC also responded to the COVID-19 pandemic with urgently needed community support, including delivery of food and supplies to 56 villages in the Y-K region, alongside itsNative Corporation partners Calista and TKC.Donlin Gold LLC joined forces with theBethel Community Services Foundation to support theY-K Resiliency Fund and Covenant House Alaska, which provides services to homeless and at-risk youth, and partnered with theCampfire Organization to help fund 34,000 Elder and youth meals throughout 22 communities with other key donors in the region. Despite this year's challenges, Donlin Gold maintained some community engagement programs related to environmental management, safety, training, educational, health and cultural initiatives. The programs included the Backhaul Hazardous Waste Removal from remote villages in the Y-K region, where a total of approximately 45,000 pounds of household hazardous materials, such as large appliances, fluorescent tubes, lead acid batteries, and electronic waste was collected and shipped out of the area for safe and proper disposal; scholarships awarded to 225 students selected by ourNative Corporation partners (Calista and TKC) to benefit youth education in the region; advanced work to upgrade and improve health and safety standards of water and sewer services in the middle Kuskokwim portion of the Y-K region in partnership with TKC, theState of Alaska , and theAlaska Native Tribal Health Consortium ; and supported various environmental initiatives such as the Fishwheel energy project with TKC and the annual CleanUp GreenUp event that takes place in approximately 32 villages in the Y-K region to clean their outdoor environment.Donlin Gold LLC has five Friendship Agreements with villages in the Y-K region (Sleetmute ,Crooked Creek ,Napaskiak ,Nikolai , andAkiak ) that formalize current engagement with key local communities. These agreements include educational, environmental, and social initiatives to help support the villages. Involving the local communities in many aspects of the project is core to both Barrick's and NOVAGOLD's philosophy as illustrated by the fact that approximately 80% of Donlin Gold direct hires for the 2020 drilling program were Alaska Natives. The COVID-19 pandemic did not prevent us from delivering on the key goals we established or result in significant additional costs in 2020. However, continuation of the COVID-19 pandemic in 2021 could impact employee health, workforce productivity, insurance premiums, ability to travel, the availability of industry experts and personnel, restrictions or delays to field work and studies, and other factors that will depend on future developments that may be beyond our control. 47
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NOVAGOLD RESOURCES INC. Donlin Gold project In 2020,Donlin Gold LLC completed an 85-hole drilling program totaling approximately 23,400 meters in both the ACMA and Lewis deposit areas, exceeding the planned program with additional holes. The primary objective of the program, the largest such campaign at Donlin Gold since 2008, was to validate recent geologic modeling concepts and testing for extensions of high-grade zones in both intrusive (igneous) and sedimentary rocks. Assay results received to-date from the 2020 drilling program have shown areas with higher grades observed over thinner intervals compared to those predicted by previous modeling, particularly in sedimentary rocks. Reported results from the drilling support modeled lithology and improve understanding of controls of the higher grades. Additional confirmation and extension drilling are planned in 2021 focusing on mineralization continuity, structural control, resource model upgrades, and geotechnical data collection. The program specifics will be finalized once all assay results for the 2020 drill program have been received and integrated into an interim model update. The newly obtained data will be incorporated into the geologic and resource model and should lead the owners to determine updated mining schedules and life of mine business plans. Ultimately, the information will assist in determining the next steps to update the Donlin Gold feasibility study and initiate the engineering work necessary to advance the project design before reaching a construction decision. The owners will advance the Donlin Gold project in a financially disciplined manner with a strong focus on engineering excellence, environmental stewardship, a strong safety culture and continued community engagement.The Donlin Gold LLC board must approve a construction program and budget before the Donlin Gold project can be developed. The timing of the required engineering work and theDonlin Gold LLC board's approval of a construction program and budget, the receipt of all required governmental permits and approvals, and the availability of financing, commodity price fluctuations, risks related to market events and general economic conditions among other factors, will affect the timing of and whether to develop the Donlin Gold project. Among other reasons, project delays could occur as a result of public opposition, litigation challenging permit decisions, requests for additional information or analysis, limitations in agency staff resources during regulatory review and permitting, project changes made byDonlin Gold LLC , or any impact on operations from COVID-19. Our share of funding for the Donlin Gold project in 2020 was$15.3 million ,$4.7 million lower than our original outlook of$20 million due to drill productivity exceeding planned rates, environmental and community engagement work delayed due to COVID-19 restrictions, assay costs carried forward into 2021 and lower administrative costs. In 2021, our share ofDonlin Gold LLC funding is expected to be$18 to$22 million , including:$11 million for follow-up drilling, camp improvements and studies;$7 million for permitting, community engagement and administration; and an additional$4 million for other studies contingent upon mid-year approval by both owners. 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. Donlin Gold permittingThe ADNR's Division of Mining , Land, and Water (DMLW) issued the easement land leases, land use permits, and material site authorizations for the proposed transportation facilities including the access road, airstrip, and upriver Jungjuk port, as well as the easement for the fiber optic cable on State lands onJanuary 2, 2020 . After initially issuing the State Right-of-Way (ROW) agreement and lease authorization for the buried natural gas pipeline onJanuary 17, 2020 , the ADNR agreed to reconsider its decision on the ROW agreement and lease authorization for the buried natural gas pipeline inApril 2020 . Under the reconsideration, onSeptember 10, 2020 , the ADNR issued for additional public comment a revised Consideration of Comments document. This document further describes how the ADNR is considering previous public input that was solicited in the ROW review, including how cumulative effects are addressed in the decision. The comment period ended onNovember 9, 2020 .Donlin Gold LLC supported the ADNR's decision to complete this work and we expect that the final ROW agreement and lease authorization offer will be reissued by the ADNR in the first half of 2021. InMay 2020 , ADEC approved a second extension of the date by which construction of the Donlin Gold project as authorized by the Prevention of Significant Deterioration air quality permit must begin untilDecember 31 , 2021.TheState of Alaska's CWA Section 401 certification of the Federal CWA Section 404 permit was formally appealed to the ADEC Commissioner inJune 2020 by Earthjustice, on behalf of ONC,Akiak Native Community IRA Council ,Organized Village of Kwethluk,Native Village of Kwigillingok,Chuloonawick Tribal Council , and theYukon-Kuskokwim River Alliance . The appeal focuses on three narrow issues related to compliance with the State's water quality standards near the project site.Donlin Gold LLC and its litigation team are actively involved in the process, assisting the State in responding to the appeal issues. We expect that the ADEC Commissioner will issue his decision on the appeal in the first half of 2021. OnNovember 30, 2020 , the ADNR published a public notice for comment on Donlin Gold's 12 applications for water rights associated with the mine site and transportation facilities. The comment period closed onDecember 15, 2020 . The ADNR is expected to issue final decisions on the water rights applications in the first half of 2021. 48
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NOVAGOLD RESOURCES INC. The ADNR's issuance of the Alaska Dam Safety certificates for the tailings storage facility and water retention and diversion structures requires a thorough multi-year stepwise process to deliver a final construction package to the ADNR. The program necessary for the certificates, including geotechnical core drilling, test pits, overburden drilling, packer tests, hydrogeologic test well installation and pumping tests, and geophysical surveys, commenced in 2019. The field work was temporarily paused pending the prioritization of the 2020 drill program.
Summary of Consolidated Financial Performance
Years ended November 30,
($ thousands, except per share) 2020 2019 2018
General and administrative $ (18,735 ) $ (16,321 ) $ (18,493 )
Equity loss - Donlin Gold (14,502 ) (10,491 ) (8,798 )
Loss from operations $ (33,237 ) $ (26,812 ) $ (27,291 )
Net loss from continuing operations $ (33,564 ) $ (27,761 ) $ (31,466 )
Net loss from discontinued operations, net of tax - - (81,299 )
Net loss $ (33,564 ) $
(27,761 )
Net loss per common share - basic and diluted Continuing operations$ (0.10 ) $ (0.09 ) $ (0.10 ) Discontinued operations - - (0.25 )$ (0.10 ) $ (0.09 ) $ (0.35 ) Results of Operations Loss from operations increased from$26.8 million in 2019 to$33.2 million in 2020 due to increases in general and administrative and Donlin Gold expenses. General and administrative expense increased due to higher share-based compensation, legal and regulatory costs, partially offset by lower travel costs. Donlin Gold expenses increased due to the 2020 drilling program, partially offset by lower permitting, administrative, and community engagement costs. Net loss from continuing operations increased from$27.8 million ($0.09 per share) in 2019 to$33.6 million ($0.10 per share) in 2020, primarily due to the increased Loss from operations and lower interest income, partially offset by a recovery of income taxes and lower interest expense. Lower interest rates in 2020 reduced interest income and the interest accrued on the promissory note payable to Barrick. The recovery of income taxes results from the Company's intention to file a consolidatedU.S. income tax return for itsU.S. subsidiaries commencing with the year endedNovember 30, 2020 and in future periods.
Liquidity, Capital Resources and Capital Requirements
As of November 30,
($ thousands) 2020 2019 Change
Cash and cash equivalents $ 60,906 $ 67,549 $ (6,643 )
Term deposits 61,000 81,000 (20,000 )
$ 121,906 $ 148,549 $ (26,643 ) Term deposits are denominated in
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NOVAGOLD RESOURCES INC.
The net changes in total Cash and cash equivalents and Term deposits resulted
from:
Years ended November 30,
($ thousands) 2020 2019 2018
Continuing operations
Operating activities $ (10,020 ) $ (6,127 ) $ (10,392 )
Funding of Donlin Gold (15,276 ) (11,122 ) (8,907 )
Withholding tax on share-based compensation (1,652 ) (1,197 ) -
Other 305 (9 ) (99 )
(26,643 ) (18,455 ) (19,398 )
Discontinued operation
Galore Creek - - 102,448
$ (26,643 ) $ (18,455 ) $ 83,050
Net cash used in operating activities increased by $3.9 million , primarily due
to lower interest income, and higher legal and regulatory costs. Funding of
Donlin Gold increased by $4.2 million due to the 2020 drilling program.
Withholding taxes were paid on vested performance share units in each of the
first quarters of 2020 and 2019.
Donlin Gold funding of $15.3 million was $4.7 million lower than our original
outlook of $20 million primarily due to better than planned drill productivity
and lower permitting, administrative and community engagement costs. Spending on
corporate general and administrative costs, excluding share-based compensation
costs, was $0.5 million higher than our original outlook of $11 million due to
higher legal and regulatory costs, partially offset by lower travel costs.
We do not currently generate operating cash flows. As of November 30, 2020 , we
had cash and cash equivalents of $60.9 million and term deposits of $61.0
million . In July 2021 , we expect to receive $75 million from the first note
receivable from Newmont in relation to the 2018 sale of our 50% interest in the
Galore Creek project. Our anticipated expenditures in 2021 are $31 to $35
million , including $18 to $22 million to fund the Donlin Gold project and $13
million for corporate general and administrative costs. At present, we believe
we have sufficient working capital available for the next twelve-month period to
cover anticipated funding of the Donlin Gold project and corporate general and
administrative costs.
Additional capital will be necessary if a decision to commence engineering and
construction is reached for the Donlin Gold project. Future financings to fund
construction are anticipated through debt, equity, project specific debt, and/or
other means. Our continued operations are dependent on our ability to obtain
additional financing or to generate future cash flows. However, there can be no
assurance that we will be successful in our efforts to raise additional capital
on terms favorable to us, or at all. For further information, see section Item
1A, Risk Factors - Our ability to continue the exploration, permitting,
development, and construction of the Donlin Gold project, and to continue as a
going concern, will depend in part on our ability to obtain suitable financing,
above.
Contractual Obligations
Our contractual obligations as of
Less than More than
($ thousands) Total 1 year 1-3 years 3-5 years 5 years
Remediation $ 182 $ 182 $ - $ - $ -
Office and equipment leases 611 207 420 7 -
Promissory note 109,801 - - - 109,801
$ 110,594 $ 389 $ 420 $ 7 $ 109,801 Off-Balance Sheet Arrangements
The Company does not have any material off-balance sheet arrangements required to be disclosed in this Annual Report on Form 10-K.
Outstanding share data As ofJanuary 20, 2021 , the Company had 331,320,620 common shares issued and outstanding. Also, as ofJanuary 20, 2021 , the Company had: i) a total of 11,083,170 stock options outstanding; 9,557,572 of those stock options with a weighted-average exercise price of$5.22 and the remaining 1,525,598 with a weighted-average exercise price ofC$6.80 ; and ii) 1,583,100 PSUs and 285,717 deferred share units (DSUs) outstanding. Upon exercise of the foregoing convertible securities, the Company would be required to issue a maximum of 13,747,537 common shares. 50
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NOVAGOLD RESOURCES INC. Related party transactions The Company provided technical services toDonlin Gold LLC for$658,000 in 2018. The Company did not provide technical services toDonlin Gold LLC in 2020 or 2019. As ofNovember 30, 2020 , the Company has accounts receivable fromDonlin Gold LLC of$6,000 (November 30, 2019 : $nil) included in Other current assets. Fourth quarter results
During the fourth quarter of 2020, we incurred a net loss of
Accounting Developments
For a discussion of Recently Issued Accounting Pronouncements, see Note 2 to the Consolidated Financial Statements.
Critical Accounting Policies
We believe the following accounting policies are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, or expense being reported.
Contingent note receivable As a portion of the proceeds on the sale of the Company's 50% interest in theGalore Creek project to Newmont, the Company received a contingent note for$75 million receivable upon the approval of aGalore Creek project construction plan by the owner(s). The Company has not assigned a value to the contingent note receivable as management determined that approval ofGalore Creek project construction was not probable as of the closing of theGalore Creek sale, and management's assessment did not change as ofNovember 30, 2020 . The contingent note will be recognized only when, in management's judgement, payment is probable, and the amount recorded will not reverse in future periods. Investment in affiliates Investments in unconsolidated ventures over which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity method and include the Company's investment in the Donlin Gold project. We identifiedDonlin Gold LLC as a Variable Interest Entity (VIE) as the entity is dependent on funding from its owners. All funding, ownership, voting rights and power to exercise control is shared equally on a 50/50 basis between the owners of the VIE. Therefore, the Company has determined that it is not the primary beneficiary of the VIE. The Company's maximum exposure to loss is its investment inDonlin Gold LLC .Donlin Gold LLC is a non-publicly traded equity investee holding exploration and development projects. The Company reviews and evaluates its investment in affiliates for other than temporary impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Events that could indicate impairment of an investment in affiliates include a significant decrease in long-term expected gold price, a significant increase in expected operating or capital costs, unfavorable exploration results or technical studies, a significant decrease in reserves, a loss of significant mineral claims, or a change in the development plan or strategy for the project. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. If the underlying assets are not recoverable, an impairment loss is measured and recorded based on the difference between the carrying amount of the investee and its estimated fair value which may be determined using a discounted cash flow model. Income taxes We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the asset and liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized. Share-based compensation We grant share-based compensation awards in exchange for employee services, including a stock option plan and a PSU plan. The fair value of awards granted under the plans are recognized in the Consolidated Statements of Loss over the related service period. The fair values of stock options are estimated at the time of each grant using a BlackScholes option pricing model, and the fair values of PSUs are measured at each grant date using aMonte Carlo valuation model. The fair value estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, the Company's performance, and the Company's performance in relation to its peers. 51
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NOVAGOLD RESOURCES INC. We grant members of our board of directors DSUs whereby each DSU entitles the directors to receive one common share of the Company when they retire from service with the Company. The fair value of the DSUs is measured at the date of the grant in amounts ranging from 50% to 100% of directors' annual retainers at the election of the directors. The fair value is recognized in the Consolidated Statements of Loss over the related service period. As ofNovember 30, 2020 , we had$2.6 million of unrecognized compensation cost related to 4.681 million non-vested stock options expected to be expensed and vest over a period of approximately two years. Also, as ofNovember 30, 2020 , we had 1.684 million non-vested PSU awards outstanding of which 0.432 million were fully expensed and vested inDecember 2020 with a multiplier of 150%. The remaining 1.252 million non-vested PSU awards with$3.1 million of unrecognized compensation cost will be expensed over a period of approximately two years.
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