NovaGold Resources Inc.
Third Quarter 2010
Consolidated Financial Statements
August 31, 2010
(Unaudited)
Table of Contents
2 | NovaGold Resources Inc. |
Q3-2010 |
Consolidated Balance Sheets – Unaudited
August 31, 2010 | November 30, 2009 | |||||
$ | $ | |||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | 172,779 | 38,180 | ||||
Accounts receivable | 1,241 | 942 | ||||
Inventories (note 4) | 463 | - | ||||
Deposits and prepaid amounts | 1,028 | 2,154 | ||||
175,511 | 41,276 | |||||
Accounts receivable | 229 | 130 | ||||
Land | 1,876 | 1,892 | ||||
Inventories(note 4) | 7,397 | 15,547 | ||||
Property, plant and equipment(note 5) | 347,023 | 454,271 | ||||
Mineral properties, rights and development costs(note 6) | 266,287 | 247,130 | ||||
Investments(note 7) | 7,519 | 4,287 | ||||
Investment tax credits | 3,393 | 3,393 | ||||
Reclamation deposits | 13,359 | 13,326 | ||||
822,594 | 781,252 | |||||
Liabilities | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | 11,906 | 13,132 | ||||
Current portion of long-term liabilities (note 6(a)) | 14,098 | 1,565 | ||||
26,004 | 14,697 | |||||
Long-term liabilities | ||||||
Promissory note (note 7(b)) | 64,643 | 61,532 | ||||
Convertible notes (note 8) | 62,959 | 58,553 | ||||
Capital lease obligations | 488 | 1,148 | ||||
Asset retirement obligations | 20,973 | 20,730 | ||||
Future income taxes | 7,196 | 8,524 | ||||
Other liabilities (note 6(a)) | 11,827 | 249 | ||||
194,090 | 165,433 | |||||
Non-controlling interest(note 3) | 295,490 | 293,247 | ||||
Shareholders’ equity | ||||||
Share capital (note 9) | 1,074,795 | 878,086 | ||||
Equity component of convertible notes (note 8) | 43,352 | 43,352 | ||||
Contributed surplus | 8,629 | 9,994 | ||||
Stock-based compensation (note 9) | 31,845 | 31,838 | ||||
Warrants (note 9) | 28,488 | 31,065 | ||||
Deficit | (854,326 | ) | (672,258 | ) | ||
Accumulated other comprehensive income (loss) | 231 | 495 | ||||
333,014 | 322,572 | |||||
822,594 | 781,252 | |||||
Nature of operations(note 1) | ||||||
Commitments and contingencies(note 12) |
(See accompanying notes to consolidated financial statements)
/s/ Rick Van Nieuwenhuyse | Director | /s/ James Philip | Director |
Approved by the Board of Directors |
NovaGold Resources Inc. | 3 |
Q3-2010 |
Consolidated Statements of Operations and Deficit – Unaudited
except for per share and share amounts
Three months | Three months | Nine months | Nine months | |||||||||
ended | ended | ended | ended | |||||||||
August 31, 2010 | August 31, 2009 | August 31, 2010 | August 31, 2009 | |||||||||
$ | $ | $ | $ | |||||||||
Revenue | ||||||||||||
Land, gravel, gold and other revenue | 334 | 331 | 427 | 905 | ||||||||
Interest income | 128 | 106 | 338 | 350 | ||||||||
462 | 437 | 765 | 1,255 | |||||||||
Cost of sales | 116 | 176 | 219 | 207 | ||||||||
346 | 261 | 546 | 1,048 | |||||||||
Expenses and other items | ||||||||||||
Corporate development and communication | 306 | 534 | 955 | 1,056 | ||||||||
Exploration | 13,674 | 3,766 | 21,619 | 14,561 | ||||||||
Foreign exchange loss (gain) | 134 | 109 | (3,043 | ) | (11,453 | ) | ||||||
General and administrative | 1,086 | 2,430 | 3,225 | 4,642 | ||||||||
Interest and accretion | 3,912 | 3,446 | 11,341 | 15,841 | ||||||||
Professional fees | 661 | 274 | 1,726 | 2,440 | ||||||||
Salaries | 1,282 | 986 | 5,483 | 3,146 | ||||||||
Salaries – stock-based compensation (note 9(c)) | 688 | 802 | 3,829 | 8,222 | ||||||||
Project care and maintenance | 6,506 | 8,587 | 19,865 | 24,064 | ||||||||
Project suspension cost recovery | - | - | - | (648 | ) | |||||||
28,249 | 20,934 | 65,000 | 61,871 | |||||||||
Gain on disposal of mineral properties | - | - | - | 1,563 | ||||||||
Asset impairment | (116,231 | ) | - | (116,231 | ) | - | ||||||
Inventory write down | (7,537 | ) | - | (7,537 | ) | - | ||||||
Loss on disposal of fixed assets | - | (532 | ) | - | (612 | ) | ||||||
Non-controlling interest (note 3) | 3,277 | 2,322 | 5,032 | 5,545 | ||||||||
Loss for the period before income taxes | (148,394 | ) | (18,883 | ) | (183,190 | ) | (54,327 | ) | ||||
Future income tax recovery | 796 | 770 | 1,122 | 2,963 | ||||||||
Loss for the period after income taxes | (147,598 | ) | (18,113 | ) | (182,068 | ) | (51,364 | ) | ||||
Deficit – beginning of period | (706,728 | ) | (632,145 | ) | (672,258 | ) | (598,894 | ) | ||||
Deficit – end of period | (854,326 | ) | (650,258 | ) | (854,326 | ) | (650,258 | ) | ||||
Loss per share | ||||||||||||
Basic and diluted | (0.66 | ) | (0.10 | ) | (0.87 | ) | (0.30 | ) | ||||
Weighted average number of shares | ||||||||||||
(thousands) | ||||||||||||
Basic and diluted | 223,407 | 189,911 | 209,620 | 168,601 |
(See accompanying notes to consolidated financial statements)
4 | NovaGold Resources Inc. |
Q3-2010 |
Consolidated Statements of Comprehensive Income – Unaudited
Three months | Three months | Nine months | Nine months | |||||||||
ended | ended | ended | ended | |||||||||
August 31, 2010 | August 31, 2009 | August 31, 2010 | August 31, 2009 | |||||||||
$ | $ | $ | $ | |||||||||
Loss for the period before other comprehensive income | (147,598 | ) | (18,113 | ) | (182,068 | ) | (51,364 | ) | ||||
Unrealized gain (loss) on available-for-sale investments | 7 | (455 | ) | (470 | ) | 1,460 | ||||||
Future income tax recovery (expense) | 23 | 192 | 206 | (384 | ) | |||||||
Comprehensive loss | (147,568 | ) | (18,376 | ) | (182,332 | ) | (50,288 | ) |
Consolidated Statements of Changes in Shareholders’ Equity – Unaudited
in thousands of Canadian dollars | ||||||
Nine months ended | Year ended | |||||
August 31, 2010 | November 30, 2009 | |||||
$ | $ | |||||
Share capital | ||||||
Balance – beginning of period | 878,086 | 776,237 | ||||
Issued pursuant to private placement | 179,000 | 61,480 | ||||
Issued pursuant to property acquisition | 5,167 | - | ||||
Issued pursuant to stock options exercised | 1,567 | 1,558 | ||||
Issued pursuant to warrants exercised | 9,549 | 14,601 | ||||
Issued pursuant to performance share units | 1,426 | - | ||||
Issued pursuant to debt conversion | - | 24,210 | ||||
Balance – end of period | 1,074,795 | 878,086 | ||||
Equity component of convertible notes | ||||||
Balance – beginning of period | 43,352 | 43,352 | ||||
Balance – end of period | 43,352 | 43,352 | ||||
Contributed surplus | ||||||
Balance – beginning of period | 9,994 | 9,994 | ||||
Excess value over fair value of performance share unit (note 9(d)) | (1,365 | ) | - | |||
Balance – end of period | 8,629 | 9,994 | ||||
Stock-based compensation | ||||||
Balance – beginning of period | 31,838 | 22,223 | ||||
Stock option vesting | 2,618 | 9,117 | ||||
Performance share unit vesting | 1,334 | 1,265 | ||||
Director share unit grants | 71 | - | ||||
Transfer to share capital on exercise of stock options | (1,567 | ) | (767 | ) | ||
Transfer to share capital on issuance of performance share units | (2,449 | ) | - | |||
Balance – end of period | 31,845 | 31,838 | ||||
Warrants | ||||||
Balance – beginning of period | 31,065 | 1,995 | ||||
Issuance of warrants | - | 34,606 | ||||
Transfer to share capital on exercise of stock warrants | (2,577 | ) | (5,536 | ) | ||
Balance – end of period | 28,488 | 31,065 | ||||
Deficit | ||||||
Balance – beginning of period | (672,258 | ) | (598,894 | ) | ||
Loss for the period | (182,068 | ) | (73,364 | ) | ||
Balance – end of period | (854,326 | ) | (672,258 | ) | ||
Accumulated other comprehensive income | ||||||
Balance – beginning of period | 495 | (418 | ) | |||
Unrealized gains (losses) on available-for-sale investments | (470 | ) | 1,119 | |||
Future income taxes on unrealized losses (gains) | 206 | (206 | ) | |||
Balance – end of period | 231 | 495 | ||||
Total shareholders’ equity | 333,014 | 322,572 |
(See accompanying notes to consolidated financial statements)
NovaGold Resources Inc. | 5 |
Q3-2010 |
Consolidated Statements of Cash Flows – Unaudited
Three months | Three months | Nine months | Nine months | |||||||||
ended | ended | ended | ended | |||||||||
August 31, 2010 | August 31, 2009 | August 31, 2010 | August 31, 2009 | |||||||||
$ | $ | $ | $ | |||||||||
Cash flows used in operating activities | ||||||||||||
Loss for the period | (147,598 | ) | (18,113 | ) | (182,068 | ) | (51,364 | ) | ||||
Items not affecting cash | ||||||||||||
Exploration | 8,122 | 3,567 | 15,436 | 12,123 | ||||||||
Amortization | 166 | 39 | 474 | 202 | ||||||||
Interest and accretion | 1,656 | 3,403 | 9,084 | 11,931 | ||||||||
Future income tax recovery | (842 | ) | (770 | ) | (1,534 | ) | (2,963 | ) | ||||
Foreign exchange loss (gain) | 4,769 | 441 | 2,271 | (12,311 | ) | |||||||
Stock-based compensation | 688 | 803 | 3,829 | 8,371 | ||||||||
Asset impairment | 116,231 | - | 116,231 | - | ||||||||
Inventory write down | 7,537 | - | 7,537 | - | ||||||||
Gain on disposal of mineral properties | - | - | - | (1,563 | ) | |||||||
Loss on disposal of fixed assets | - | 530 | - | 612 | ||||||||
Project suspension recovery | - | - | - | (648 | ) | |||||||
Non-controlling interest | (3,277 | ) | (2,322 | ) | (5,032 | ) | (5,546 | ) | ||||
Net change in non-cash working capital | ||||||||||||
Decrease in GST and other receivables, deposits and prepaid amounts | 220 | 324 | 827 | 2,818 | ||||||||
Decrease (increase) in inventories | 56 | (108 | ) | 150 | (202 | ) | ||||||
Increase (decrease) in accounts payable and accrued liabilities | 4,627 | 1,434 | (3,043 | ) | (2,988 | ) | ||||||
Decrease in suspension costs – long term | - | - | - | (453 | ) | |||||||
(7,645 | ) | (10,771 | ) | (35,838 | ) | (41,981 | ) | |||||
Cash flows from financing activities | ||||||||||||
Proceeds from issuance of common shares – net | - | 253 | 179,000 | 93,854 | ||||||||
Proceeds from non-controlling interest | 7,275 | 4,086 | 7,275 | 12,160 | ||||||||
Proceeds from warrant exercise | 6,723 | 2,611 | 6,971 | 5,082 | ||||||||
Payroll and withholding tax on issuance of performance share units | - | - | (2,387 | ) | - | |||||||
13,998 | 6,950 | 190,859 | 111,096 | |||||||||
Cash flows used in investing activities | ||||||||||||
Acquisition of property, plant and equipment | (347 | ) | (1,699 | ) | (817 | ) | (26,889 | ) | ||||
(Expenditures) recoveries on mineral properties and related deferred costs | (337 | ) | 50 | (819 | ) | (1,571 | ) | |||||
Decrease (increase) in reclamation deposits | 64 | 23 | 64 | (87 | ) | |||||||
Decrease (increase) in accounts receivable | 4 | 25 | (99 | ) | 261 | |||||||
Proceeds on sale of investments | - | - | - | 3,769 | ||||||||
Investment in Donlin Creek | (8,468 | ) | (4,277 | ) | (18,751 | ) | (10,433 | ) | ||||
(9,084 | ) | (5,878 | ) | (20,422 | ) | (34,950 | ) | |||||
Increase (decrease) in cash and cash equivalents during the period | (2,731 | ) | (9,699 | ) | 134,599 | 34,165 | ||||||
Cash and cash equivalents – beginning of period | 175,510 | 56,088 | 38,180 | 12,224 | ||||||||
Cash and cash equivalents – end of period | 172,779 | 46,389 | 172,779 | 46,389 | ||||||||
Supplemental disclosure | ||||||||||||
Increase (decrease) in accounts payable and accrued liabilities and other liabilities related to mineral properties and property, plant and equipment | 6 | (2,143 | ) | (9 | ) | (28,007 | ) | |||||
Bridge loan converted into shares | - | - | - | 25,178 | ||||||||
Interest received | 124 | 106 | 327 | 350 | ||||||||
Interest paid | (3 | ) | (3,227 | ) | (2,649 | ) | (3,227 | ) |
(See accompanying notes to consolidated financial statements)
6 | NovaGold Resources Inc. |
Q3-2010 |
Notes to Consolidated Financial Statements
1 Nature of operations
NovaGold Resources Inc. (“NovaGold” or “the Company”) is a precious metals company engaged in the exploration and development of mineral properties in North America. The Company has a portfolio of mineral properties located in Alaska, U.S.A. and British Columbia, Canada.
The Donlin Creek project is held by a limited liability company owned equally by NovaGold and Barrick Gold U.S. Inc. (“Barrick”). The Galore Creek project is held by a partnership owned equally by NovaGold and Teck Resources Limited (“Teck”).
2 Accounting policies
Basis of presentation
These consolidated financial statements have been prepared using accounting principles generally accepted in Canada (“Canadian GAAP”) and include the accounts of NovaGold Resources Inc. and its material wholly-owned subsidiaries, NovaGold Canada Inc., Alaska Gold Company and NovaGold Resources Alaska, Inc. All significant intercompany transactions are eliminated on consolidation. In addition, the Company consolidates variable interest entities for which it is determined to be the primary beneficiary.
As these unaudited interim consolidated financial statements do not contain all of the disclosures required by Canadian GAAP for complete financial statements, they should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the year ended November 30, 2009.
The accounting policies followed by the Company are set out in note 3 to the audited consolidated financial statements for the year ended November 30, 2009, and have been consistently followed in the preparation of these consolidated financial statements.
Business Combinations
In January 2009, the CICA issued CICA Handbook Section 1582, “Business Combinations”, which replaces former guidance on business combinations. Section 1582 establishes principles and requirements of the acquisition method and related disclosures. In addition, the CICA issued Section 1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling Interests”, which replace the existing guidance. Section 1601 establishes standards for the preparation of consolidated financial statements and Section 1602 provides guidance on accounting for non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with earlier application permitted. The Company is evaluating these new standards to determine the potential impact on its consolidated financial statements.
3 Galore Creek Partnership
The Company determined that the Galore Creek Partnership (“Partnership”) is a variable interest entity and consequently uses the principles of AcG-15 Consolidation of Variable Interest Entities to determine the accounting for its ownership interest. Management concluded that the Company is the primary beneficiary and consolidates the activities of the Partnership.
On November 26, 2007, the Company and Teck announced that construction activities would be suspended at the Galore Creek project in order to undertake a comprehensive review of the overall design plan when it was recognized that industry wide cost increases and an extension of the anticipated project schedule would likely result in significantly higher capital costs for the project. At that time, the terms of Teck’s initial contribution into the Partnership were amended. Under the amended arrangements, in addition to Teck’s funding from August 1, 2007 to the year ended November 30, 2007 of $264.0 million, Teck’s total committed investment in the Partnership would be $403.0 million, including $72.0 million to be invested in the Partnership over the next five years principally to reassess and evaluate the project’s alternative development strategies. Excluding costs covered by Teck’s $72.0 million noted above, the Company and Teck agreed to share the next $100.0 million of project costs 33% and 67% respectively, and share project costs on a 50/50 basis thereafter.
NovaGold Resources Inc. | 7 |
Q3-2010 |
Notes to Consolidated Financial Statements
In February 2009, the Company and Teck renegotiated the Partnership agreement to reduce the $72.0 million to $60.0 million, and from November 1, 2008 onwards Teck agreed to fund all project costs until the $60.0 million is fully spent.
At August 31, 2010, the Galore Creek Partnership had cash of $3.8 million. Certain road construction equipment and facilities were recovered and sold during the year. The proceeds from the sales directly fund the project’s activities and did not reduce Teck’s required contributions. Total cash contributions to date by Teck at August 31, 2010 were $355.0 million and $18.0 million remained to be contributed by Teck to earn its 50% interest.
Teck’s contributions to date have been recorded as non-controlling interest as follows.
August 31, 2010 | November 30, 2009 | |||||
$ | $ | |||||
Balance – beginning of period | 293,247 | 291,231 | ||||
Contributions by Teck | 7,275 | 14,407 | ||||
Teck’s share of suspension recoveries | - | 324 | ||||
Teck’s share of care and maintenance costs | (5,032 | ) | (7,863 | ) | ||
Teck’s share of loss on disposal of fixed assets | - | (4,852 | ) | |||
Balance – end of period | 295,490 | 293,247 |
4 Inventories
August 31, 2010 | November 30, 2009 | |||||
$ | $ | |||||
Supplies (a) | 6,648 | 13,609 | ||||
Stockpiled ore | 749 | 1,499 | ||||
Gold | 463 | 439 | ||||
Total inventories | 7,860 | 15,547 | ||||
Current portion | 463 | - | ||||
Long-term portion | 7,397 | 15,547 |
(a) | Management reviewed the valuation of the inventory to the lower of cost and net realizable value (“NRV”) and recorded a $7.5 million write down to reflect the decrease of the NRV. |
5 Property, plant and equipment
August 31, 2010 | ||||||||||||
Accumulated | ||||||||||||
Cost | amortization | Impairment | Net | |||||||||
$ | $ | $ | $ | |||||||||
Alaska, USA | ||||||||||||
Construction costs – Rock Creek (a)(b) | 90,519 | - | (90,519 | ) | - | |||||||
Mining and milling equipment – Rock Creek (a)(b) | 15,342 | - | (15,342 | ) | - | |||||||
Heavy machinery and equipment – Rock Creek (b) | 1,680 | (573 | ) | (1,107 | ) | - | ||||||
Building | 372 | (156 | ) | - | 216 | |||||||
British Columbia, Canada | ||||||||||||
Construction costs – Galore Creek (a) | 318,877 | - | - | 318,877 | ||||||||
Mobile equipment – Galore Creek (a) | 26,651 | - | - | 26,651 | ||||||||
Office furniture and equipment | 2,460 | (1,444 | ) | - | 1,016 | |||||||
Leasehold improvements | 575 | (312 | ) | - | 263 | |||||||
456,476 | (2,485 | ) | (106,968 | ) | 347,023 |
8 | NovaGold Resources Inc. |
Q3-2010 |
Notes to Consolidated Financial Statements
in thousands of Canadian dollars | |||||||||
November 30, 2009 | |||||||||
Accumulated | |||||||||
Cost | amortization | Net | |||||||
$ | $ | $ | |||||||
Alaska, USA | |||||||||
Construction costs – Rock Creek (a) | 90,519 | - | 90,519 | ||||||
Mining and milling equipment – Rock Creek (a) | 15,342 | - | 15,342 | ||||||
Heavy machinery and equipment – Rock Creek | 1,298 | (272 | ) | 1,026 | |||||
Building | 372 | (140 | ) | 232 | |||||
British Columbia, Canada | |||||||||
Construction costs – Galore Creek (a) | 318,980 | - | 318,980 | ||||||
Mobile equipment – Galore Creek (a) | 26,651 | - | 26,651 | ||||||
Office furniture and equipment | 2,459 | (1,243 | ) | 1,216 | |||||
Leasehold improvements | 575 | (270 | ) | 305 | |||||
456,196 | (1,925 | ) | 454,271 |
(a) | Construction costs, mining and milling equipment, and mobile equipment had not yet been placed in productive activity, and accordingly were not depreciated. |
(b) | Asset impairment |
The Rock Creek project located in Nome, Alaska, was substantially constructed by the summer of 2008 and the start-up process began in September 2008, upon receipt of operating permits. During start-up, the mine experienced unanticipated mechanical problems in the mill and Arctic weather conditions caused problems with the crushing circuit. On November 24, 2008, the Company suspended the start-up, system testing and commissioning activities and the project was placed on care and maintenance. The Company had previously assessed the estimated recoverability of the Rock Creek project in the year ended 2008 and recorded an asset impairment of $161.2 million. Due to management’s decision to not restart operations at the project, the Company reassessed the estimated recoverability of the project in the third quarter ended August 31, 2010 and recorded an impairment charge of $116.2 million (property, plant and equipment: $107.0 million; and mineral properties: $9.2 million) and a remaining value of nil for accounting purposes. | |
The impairment adjustment was calculated using the probability weighted approach considering various sales and closure scenarios where the sales scenarios were evaluated based upon the present value of the estimated future cash flows in accordance with CICA Handbook Section 3063, “Impairment of Long-lived Assets”. The impairment loss was allocated proportionately to construction in progress, mining and milling equipment, and mineral properties and development costs. There can be no assurance that a subsequent decision to sell or reclaim the project would result in a material gain on sale or accrual of closure costs which would incur when a decision is made. |
6 Mineral properties, rights and development costs
November 30, 2009 | Acquisition/Expenditures | Impairment | August 31, 2010 | |||||||||
$ | $ | $ | $ | |||||||||
Alaska, USA | ||||||||||||
Ambler (a) | - | 27,437 | - | 27,437 | ||||||||
Rock Creek (note 5(b)) | 8,395 | 868 | (9,263 | ) | - | |||||||
British Columbia, Canada | ||||||||||||
Galore Creek | 184,400 | 999 | - | 185,399 | ||||||||
Power transmission rights | 54,335 | (999 | ) | - | 53,336 | |||||||
Argentina | ||||||||||||
San Roque (b) | - | 115 | - | 115 | ||||||||
247,130 | 28,420 | (9,263 | ) | 266,287 |
NovaGold Resources Inc. | 9 |
Q3-2010 |
Notes to Consolidated Financial Statements
(a) | On January 11, 2010, the Company purchased 100% of the Ambler property in northern Alaska, which hosts the high-grade copper-zinc-gold-silver Arctic deposit. As consideration, the Company issued 931,098 shares with a fair value of US$5 million (Canadian equivalent: $5.2 million) and agreed to make cash payments to the vendor of US$12.0 million each in January 2011 and January 2012, respectively. The vendor retained a 1% net smelter return royalty that the Company can purchase at any time for a one-time payment of US$10.0 million. |
The Company used a weighted average cost of capital at 7.76% to discount the above cash payments in 2011 and 2012. As of August 31, 2010, the Company recorded $12.5 million in the current portion of long-term liabilities and $11.6 million in long-term other liabilities. | |
(b) | On June 22, 2010, the Company entered into an option agreement for the San Roque property in Argentina with Marifil Mines Inc (“Marifil”). The Company has the option to acquire a 49% interest in the property by making a $0.4 million payment and spending $2.6 million prior to the second anniversary of the effective date of the agreement and paying Marifil $0.1 million per year. After the Company earns its 49%, it also has the option to increase its interest to 70% by spending an additional $6.0 million prior to the fifth anniversary of the effective date of the agreement and paying Marifil $0.1 million per year. |
7 Investments
in thousands of Canadian dollars | ||||||
August 31, 2010 | November 30, 2009 | |||||
$ | $ | |||||
Available-for-sale investments (a) | 2,967 | 3,438 | ||||
Investments accounted for under the equity method | ||||||
Donlin Creek LLC (b) | 4,552 | 849 | ||||
Total investments | 7,519 | 4,287 |
(a) | Investments classified as available-for-sale are reported at fair value (or marked-to-market) 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, 2010 was $2.8 million (November 30, 2009: $2.8 million) and total unrealized holding loss for the nine months ended August 31, 2010 was $0.5 million (November 30, 2009: $0.5 million). The balance includes 126,625 shares in Etruscan Resources Inc. (cost: $5,000; fair value at August 31, 2010: $57,614), a company having two directors in common with the Company; 3,125,000 shares in TintinaGold Resources Inc. (cost: $1,281,250; fair value at August 31, 2010: $1,093,750), a company having one director and a major shareholder in common with the Company; and 3,125,000 shares in AsiaBaseMetals Inc. (cost: $500,000; fair value at August 31, 2010: $578,125), a company having one director and a major shareholder in common with the Company. |
(b) | On December 1, 2007, together with Barrick, the Company formed a limited liability company (“Donlin Creek LLC”) to advance the Donlin Creek project. The Donlin Creek LLC has a board of four directors, with two nominees selected by each company. All significant decisions related to Donlin Creek require the approval of both companies. As part of the Donlin Creek LLC agreement, the Company agreed to reimburse Barrick over time approximately US$64.3 million, representing 50% of Barrick’s approximately US$128.6 million in expenditures at the Donlin Creek project from April 1, 2006 to November 30, 2007. Reimbursement had been partially made by the Company paying US$12.7 million of Barrick’s share of project development 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 future mine production cash flow. Both parties are currently sharing development costs on a 50/50 basis. Interest on this long-term debt is expensed. |
The Company determined that the Donlin Creek LLC is a variable interest entity and consequently used the principles of AcG-15 Consolidation of Variable Interest Entities to determine the accounting for its 50% ownership interest. Management concluded that the Company is not the primary beneficiary and has accounted for its investment in the Donlin Creek 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. |
10 | NovaGold Resources Inc. |
Q3-2010 |
Notes to Consolidated Financial Statements
8 Convertible notes
On March 26, 2008, the Company issued US$95.0 million (Canadian equivalent: $96.7 million) in 5.5% unsecured senior convertible notes (“Notes”) maturing on May 1, 2015, and incurred a 3% underwriter’s fee and other expenses aggregating $3.5 million, for net proceeds of $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 Company’s common shares at a fixed conversion rate of US$10.61 per common share. A total of 8,952,971 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 Company’s 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, 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.
The Notes are classified as a liability. The fair value of the conversion feature on the date of issue ($43.4 million) is classified as a component of shareholders’ equity and was deducted from the initial amount of the liability recorded. As a result, the recorded liability to repay the Notes was initially lower than its face value. Using the effective interest rate method and the 17.78% rate implicit in the calculation, the difference of $43.4 million, characterized as the note discount, is being charged to interest expense and added to the liability over the term of the Notes.
in thousands of Canadian dollars | ||||||
August 31, 2010 | November 30, 2009 | |||||
$ | $ | |||||
Beginning balance | 58,553 | 63,573 | ||||
Accretion of debt discount for the period | 3,703 | 4,692 | ||||
Foreign exchange revaluation | 703 | (9,712 | ) | |||
Convertible notes | 62,959 | 58,553 | ||||
Conversion right | 44,992 | 44,992 | ||||
Financing costs allocated to equity component | (1,640 | ) | (1,640 | ) | ||
Equity component of convertible notes | 43,352 | 43,352 |
9 Share capital
Authorized
1,000,000,000 common shares, no par value
10,000,000 preferred shares issuable in one or more series
in thousands of Canadian dollars | ||||||
Number of shares | Ascribed value | |||||
(thousands) | $ | |||||
Balance at November 30, 2009 | 187,133 | 878,086 | ||||
Issued in quarter | ||||||
Pursuant to property acquisition | 931 | 5,167 | ||||
For cash and fair value pursuant to warrants exercise | 157 | 339 | ||||
For cash and fair value pursuant to stock options exercise | 110 | 377 | ||||
Balance at February 28, 2010 | 188,331 | 883,969 | ||||
Issued in quarter | ||||||
For cash pursuant to private placement | 31,818 | 179,000 | ||||
For fair value pursuant to performance share units exercise | 365 | 1,426 | ||||
For cash and fair value pursuant to stock options exercise | 508 | 1,085 | ||||
Balance at May 31, 2010 | 221,022 | 1,065,480 | ||||
Issued in quarter | ||||||
For cash and fair value pursuant to stock options exercise | 21 | 105 | ||||
For cash and fair value pursuant to warrants exercise | 4,308 | 9,210 | ||||
Balance at August 31, 2010 | 225,351 | 1,074,795 | ||||
Shares held by a wholly-owned subsidiary eliminated on consolidation | 9 | - | ||||
Total issued and outstanding | 225,360 | 1,074,795 |
NovaGold Resources Inc. | 11 |
Q3-2010 |
Notes to Consolidated Financial Statements
(a) Issuance of common shares
In January 2010, the Company issued 931,098 shares with a fair value of US$5.0 million as consideration for the Ambler mineral property acquisition.
In March 2010, the Company issued by way of private placement 31,818,182 shares at US$5.50 per common share for gross proceeds of US$175.0 million to several investment funds managed by Paulson & Co. Inc and to Quantum Partners Ltd, a private investment fund managed by Soros Fund Management LLC.
(b) Warrants
In December 2009, 156,880 share purchase warrants were exercised for total proceeds of $0.2 million.
In July 2010, 4,307,691 share purchase warrants were exercised for total proceeds of $6.7 million.
(c) 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 on a straight-line basis over the respective vesting period for the stock options.
During the three months ended February 28, 2010, the Company granted 1,237,100 stock options (three months ended February 28, 2009: 2,973,000). For the three months ended February 28, 2010, the Company recognized a stock-based compensation charge against income of $1.5 million for options granted to directors, employees and consultants in accordance with CICA 3870, net of forfeitures.
During the three months ended May 31, 2010, the Company granted 40,000 stock options (three months ended May 31, 2009: 4,543,750). For the three months ended May 31, 2010, the Company recognized a stock-based compensation charge against income of $0.4 million for options granted to directors, employees and consultants in accordance with CICA 3870, net of forfeitures.
During the three months ended August 31, 2010, the Company granted 100,000 stock options (three months ended August 31, 2009: 110,000). For the three months ended August 31, 2010, the Company recognized a stock-based compensation charge against income of $0.5 million for options granted to directors, employees and consultants in accordance with CICA 3870, net of forfeitures. As of August 31, 2010, there were 2,275,553 non-vested options outstanding with a weighted average exercise price of $5.27.
The fair value of the stock options recognized in the consolidated statements of operations and deficit has been estimated using an option pricing model. Assumptions used in the pricing model for each year are provided below.
Vested during | Granted during | |||||
nine months ended | nine months ended | |||||
August 31, 2010 | August 31, 2010 | |||||
Average risk-free interest rate | 0.50% – 1.76% | 1.22% – 1.76% | ||||
Expected life | 1.00 – 4.27 years | 1.00 year | ||||
Expected volatility | 57% – 97% | 57% – 87% | ||||
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. Changes in the subjective input can materially affect the fair value estimate and therefore do not necessarily provide a reliable measure of the fair value of the Company’s stock options.
12 | NovaGold Resources Inc. |
Q3-2010 |
Notes to 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 Company’s 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 and vesting criteria are based on the Company’s performance relative to a representative group of other mining companies and the Toronto Stock Exchange 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, as reduced by the amounts for recipients no longer at the Company on vesting date.
For the 501,050 PSUs granted in May 2009, a multiplier of 125% was determined based upon the Company’s actual performance in January and December 2009, resulting in 626,308 common shares vested during the period ending May 31, 2010. The Company issued 364,863 common shares in May 2010 and withheld and cancelled the remaining vested PSU for tax remittance purposes and, consequently, the Company paid the cash equivalent amount of $2.4 million to the corresponding tax authorities. The value of the vested PSU cancellation was in excess of the original PSU fair value and as a result the excess of $1.4 million was charged against contributed surplus.
For the three months and nine months ended August 31, 2010, the Company recognized a stock-based compensation charge against income of $0.1 million and $1.3 million, respectively, for PSUs vested to employees in accordance with CICA 3870, net of forfeitures.
(e) Deferred share units
The Company has a deferred share unit (“DSU”) plan that provides for the issuance of DSUs in amounts of 50% of directors’ annual retainers. Each DSU entitles the directors to receive one common share when they retire from the Company.
For the three months and nine months ended August 31, 2010, the Company recognized a stock-based compensation charge against income of $0.03 million and $0.07 million, respectively, for DSUs granted to directors.
10 Related party transactions
The Company has arms-length market-based agreements to provide certain services to TintinaGold Resources Inc. (“TintinaGold”) and Alexco Resource Corp (“Alexco”). Under the agreements the services provided were $0.1 million for the nine months ended August 31, 2010 (2009: nil) to TintinaGold, a related party having one director and a major shareholder in common with the Company; and $0.03 million for the nine months ended August 31, 2010 (2009: $0.1 million) to Alexco, a related party having two directors in common with the Company. The Company also provided exploration and management services totaling US$0.7 million for the nine months ended August 31, 2010 (2009: US$0.6 million) to the Donlin Creek LLC. These transactions were in the normal course of business and are measured at the exchange amount, which is the amount agreed to by the parties. At August 31, 2010, the Company had $0.2 million (November 30, 2009: $0.3 million) receivable from related parties.
11 Segmented information
The Company’s revenues and cost of sales from external customers are generated from one reportable operating segment: sales from land and gravel and gold royalties from its operations located in Nome, Alaska. The majority of the Company’s property, plant and equipment and exploration assets are located in the United States and Canada and the geographical breakdown is shown in notes 5 and 6.
NovaGold Resources Inc. | 13 |
Q3-2010 |
Notes to Consolidated Financial Statements
12 Commitments and contingencies
(a) Lease commitments
As at August 31, 2010, the Company’s aggregate commitments for operating leases totaled $4.8 million. These include the Company’s leased head office location and certain office equipment with leases ranging from one to seven years.
(b) Legal actions
On September 10, 2010, the Company received U.S. final court approval for the U.S. settlement of a consolidated class action lawsuit filed on December 22, 2008 in the United States District Court for the Southern District of New York consolidating similar complaints of violations of U.S. Securities laws. On October 14, 2009, a similar notice of action was filed in the Ontario Superior Court of Justice in Canada and on October 28, 2009, the same parties were named as defendants in a class action lawsuit in the Supreme Court of British Columbia. All three actions alleged misrepresentations, misstatements and omissions in various public statements and filings concerning NovaGold’s Galore Creek property. On February 16, 2010, the Company announced that it entered into a memorandum of understanding to settle outstanding securities class action lawsuits in both the United States and Canada, in which NovaGold and certain of its directors and officers were named as defendants. The $28.0 million settlement is covered by NovaGold’s insurance, and the Company will not pay out any of its own cash under the terms of the settlement. The Supreme Court of British Columbia issued an order on consent certifying the proposed British Columbia proceeding as a class action on April 30, 2010. The Ontario Superior Court of Justice issued an order on consent certifying the proposed Ontario proceeding as a class action on May 5, 2010. On August 4, 2010, the Ontario Court approved the settlement of the Ontario action and on August 6, 2010, the British Columbia Court approved the settlement of the British Columbia action. On May 10, 2010, the U.S. District Court preliminarily approved the settlement and issued final approval on September 10, 2010. As a result of these court approvals of the settlement, these proceedings are complete and the actions are dismissed.
On July 15, 2009, two claims were filed in the United States District Court for the District of Alaska against NovaGold, Alaska Gold Company (“AGC”) and other parties arising out of an accident on July 19, 2007, where two employees of a contractor were killed in a construction-related accident at the Company’s Rock Creek project. The claims are seeking wrongful death damages in excess of US$2.5 million. The Company and AGC filed an answer to the complaint denying all allegations and asserting certain affirmative defenses. The Company and AGC have disputed these claims and believe they have substantial and meritorious legal and factual defenses, which they intend to pursue vigorously. Indeed, the claims against AGC have now been dismissed by agreement without payment of any money. However, there can be no assurance that these proceedings will be resolved in favor of NovaGold.
13 Subsequent events
On September 30, 2010, the Company sold its remaining 50% participating interest in the Shotgun property to TNR Gold Corp (“TNR”) for an aggregate of 6 million common shares and 3 million share purchase warrants of TNR. The Company also retained a 2% net smelter return royalty from mineral products produced from the property which can be purchased for US$5.0 million any time prior to a production decision having been made.
14 | NovaGold Resources Inc. |
Q3-2010 |