NovaGold Resources Inc.
First Quarter 2011
Consolidated Financial Statements
February 28, 2011
(Unaudited)
Table of Contents
2 | NovaGold Resources Inc. | |
Q1-2011 |
Consolidated Balance Sheets – Unaudited
in thousands of Canadian dollars | ||||||
February 28, 2011 | November 30, 2010 | |||||
$ | $ | |||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | 129,284 | 151,723 | ||||
Accounts receivable | 832 | 1,037 | ||||
Inventories (note 4) | 8,110 | 8,120 | ||||
Deposits and prepaid amounts | 2,175 | 1,938 | ||||
Deferred charges | 950 | - | ||||
141,351 | 162,818 | |||||
Accounts receivable | 134 | 142 | ||||
Land | 1,876 | 1,876 | ||||
Property, plant and equipment(note 5) | 346,855 | 346,777 | ||||
Mineral properties, rights and development costs(note 6) | 213,812 | 266,408 | ||||
Investments(note 7) | 9,843 | 7,362 | ||||
Investment tax credits | 3,271 | 3,271 | ||||
Reclamation deposits | 12,708 | 13,086 | ||||
729,850 | 801,740 | |||||
Liabilities | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | 9,717 | 9,654 | ||||
Current portion of asset retirement obligations | 7,890 | 7,890 | ||||
Current portion of capital lease obligation | 698 | 698 | ||||
Notes payable | 10,983 | 12,245 | ||||
29,288 | 30,487 | |||||
Long-term liabilities | ||||||
Promissory note (note 7(b)) | 60,424 | 63,034 | ||||
Convertible notes (note 8) | 59,907 | 61,882 | ||||
Capital lease obligations | 198 | 369 | ||||
Asset retirement obligations | 15,967 | 15,967 | ||||
Future income taxes | 96 | 7,193 | ||||
Other liabilities | 189 | 11,594 | ||||
166,069 | 190,526 | |||||
Shareholders’ equity | ||||||
Share capital (note 9) | 1,092,669 | 1,077,219 | ||||
Equity component of convertible notes (note 8) | 43,352 | 43,352 | ||||
Contributed surplus | 8,629 | 8,629 | ||||
Stock-based compensation (note 9) | 33,564 | 30,589 | ||||
Warrants (note 9) | 24,391 | 28,488 | ||||
Deficit | (927,258 | ) | (875,807 | ) | ||
Accumulated other comprehensive income | 2,746 | 1,452 | ||||
Non-controlling interest (note 3) | 285,688 | 297,292 | ||||
563,781 | 611,214 | |||||
729,850 | 801,740 | |||||
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 | |
Q1-2011 |
Consolidated Statements of Operations and Deficit – Unaudited
in thousands of Canadian dollars, | ||||||
except for per share and share amounts | ||||||
Three months ended | Three months ended | |||||
February 28, 2011 | February 28, 2010 | |||||
$ | $ | |||||
Revenue | ||||||
Land, gravel, gold and other revenue | 16 | 26 | ||||
Interest income | 137 | 85 | ||||
153 | 111 | |||||
Cost of sales | 50 | 40 | ||||
103 | 71 | |||||
Expenses and other items | ||||||
Corporate development and communication | 108 | 217 | ||||
Equity loss (note 7) | 4,621 | 2,487 | ||||
Foreign exchange (gain) loss | (993 | ) | 121 | |||
General and administrative | 822 | 858 | ||||
Interest and accretion | 3,732 | 3,661 | ||||
Mineral property expense | 2,568 | 219 | ||||
Professional fees | 333 | 733 | ||||
Project care and maintenance | 5,046 | 7,876 | ||||
Salaries | 2,469 | 1,275 | ||||
Salaries – stock-based compensation (note 9(c) and (d)) | 3,538 | 2,091 | ||||
Total expenses | 22,244 | 19,538 | ||||
Loss before other items | (22,141 | ) | (19,467 | ) | ||
Other items | ||||||
Asset impairment – power transmission rights (note 6) | 52,668 | - | ||||
52,668 | - | |||||
Loss for the period before income taxes | (74,809 | ) | (19,467 | ) | ||
Future income tax recovery – power transmission rights (note 6) | (9,722 | ) | - | |||
Future income tax expense (recovery) | 2,269 | (55 | ) | |||
Loss for the period | (67,356 | ) | (19,412 | ) | ||
Attributable to the shareholders of the Company | (51,451 | ) | (18,717 | ) | ||
Attributable to non-controlling interest | ||||||
Power transmission rights (note 3 and 6) | (13,779 | ) | - | |||
Operating expenses (note 3) | (2,126 | ) | (695 | ) | ||
(67,356 | ) | (19,412 | ) | |||
Loss for the period – attributable to the shareholders of the Company | (51,451 | ) | (18,717 | ) | ||
Deficit – beginning of period | (875,807 | ) | (672,258 | ) | ||
Deficit – end of period | (927,258 | ) | (690,975 | ) | ||
Loss per share – attributable to the shareholders of the Company | ||||||
Basic and diluted | (0.22 | ) | (0.10 | ) | ||
Weighted average number of shares (thousands) | 232,084 | 187,867 |
(See accompanying notes to consolidated financial statements)
4 | NovaGold Resources Inc. | |
Q1-2011 |
Consolidated Statements of Comprehensive Loss – Unaudited
in thousands of Canadian dollars | ||||||
Three months ended | Three months ended | |||||
February 28, 2011 | February 28, 2010 | |||||
$ | $ | |||||
Net loss for the period before other comprehensive income | (67,356 | ) | (19,412 | ) | ||
Unrealized gain (loss) on available-for-sale investments | 1,650 | (231 | ) | |||
Future income tax (expense) recovery | (356 | ) | 90 | |||
Comprehensive loss | (66,062 | ) | (19,553 | ) | ||
Attributable to the shareholders of the Company | (50,157 | ) | (18,858 | ) | ||
Attributable to the non-controlling interest (note 3) | (15,905 | ) | (695 | ) | ||
(66,062 | ) | (19,553 | ) |
Consolidated Statements of Changes in Shareholders’ Equity – Unaudited
in thousands of Canadian dollars | ||||||
Three months ended | Year ended | |||||
February 28, 2011 | November 30, 2010 | |||||
$ | $ | |||||
Share capital | ||||||
Balance – beginning of period | 1,077,219 | 878,086 | ||||
Issued pursuant to private placement net of share issue costs | - | 179,000 | ||||
Issued pursuant to stock options exercised | 661 | 3,991 | ||||
Issued pursuant to warrants exercised | 14,789 | 9,549 | ||||
Issued pursuant to performance share units vested | - | 1,426 | ||||
Issued pursuant to property acquisition | - | 5,167 | ||||
Balance – end of period | 1,092,669 | 1,077,219 | ||||
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 | 8,629 | 9,994 | ||||
Excess value over fair value of performance share unit (note 10(c)) | - | (1,365 | ) | |||
Balance – end of period | 8,629 | 8,629 | ||||
Stock-based compensation | ||||||
Balance – beginning of period | 30,589 | 31,838 | ||||
Stock option vesting | 3,068 | 3,738 | ||||
Performance share unit vesting | 474 | 1,352 | ||||
Director share unit grants | 33 | 101 | ||||
Transfer to share capital on exercise of stock options | (600 | ) | (3,991 | ) | ||
Transfer to share capital on issuance of performance share units | - | (2,449 | ) | |||
Balance – end of period | 33,564 | 30,589 | ||||
Warrants | ||||||
Balance – beginning of period | 28,488 | 31,065 | ||||
Fair value of warrant exercises | (4,097 | ) | (2,577 | ) | ||
Balance – end of period | 24,391 | 28,488 | ||||
Deficit | ||||||
Balance – beginning of period | (875,807 | ) | (672,258 | ) | ||
Loss for the period – attributable to the shareholders of the Company | (51,451 | ) | (203,549 | ) | ||
Balance – end of period | (927,258 | ) | (875,807 | ) | ||
Accumulated other comprehensive income | ||||||
Balance – beginning of period | 1,452 | 495 | ||||
Unrealized gains on available-for-sale investments | 1,650 | 994 | ||||
Future income taxes on unrealized gains | (356 | ) | (37 | ) | ||
Balance – end of period | 2,746 | 1,452 | ||||
Total shareholders’ equity | 276,490 | 313,922 | ||||
Non-controlling interest(note 3) | ||||||
Balance – beginning of period | 297,292 | 293,247 | ||||
Contributions by Teck Resources Limited | 4,301 | 12,058 | ||||
Loss for the period – attributable to the non-controlling interest | (15,905 | ) | (8,013 | ) | ||
Balance – end of period | 285,688 | 297,292 | ||||
Total equity | 563,781 | 611,214 |
(See accompanying notes to consolidated financial statements)
NovaGold Resources Inc. | 5 | |
Q1-2011 |
Consolidated Statements of Cash Flows – Unaudited
in thousands of Canadian dollars | ||||||
Three months ended | Three months ended | |||||
February 28, 2011 | February 28, 2010 | |||||
$ | $ | |||||
Cash flows used in operating activities | ||||||
Loss for the period | (67,356 | ) | (19,412 | ) | ||
Items not affecting cash | ||||||
Amortization | 41 | 74 | ||||
Asset impairment – power transmission rights (note 6) | ||||||
Impairment charge | 52,668 | - | ||||
Future income tax recovery | (9,722 | ) | - | |||
Equity loss | 4,621 | 2,487 | ||||
Future income tax expense (recovery) | 2,269 | (54 | ) | |||
Interest and accretion | 3,732 | 3,662 | ||||
Mineral properties expense | 36 | 176 | ||||
Stock-based compensation | 3,538 | 2,092 | ||||
Unrealized foreign exchange gain | (7,751 | ) | (90 | ) | ||
Net change in non-cash working capital | ||||||
Increase in receivables, deposits and prepaid amounts, and deferred charges | (982 | ) | (145 | ) | ||
Decrease in inventories | 10 | 59 | ||||
Decrease in accounts payable and accrued liabilities | (1,133 | ) | (5,116 | ) | ||
(20,029 | ) | (16,267 | ) | |||
Cash flows from financing activities | ||||||
Proceeds from issuance of common shares – net | 60 | - | ||||
Proceeds from non-controlling interest | 4,301 | - | ||||
Proceeds from warrant exercise | 10,693 | 248 | ||||
Payment of note payable | (11,921 | ) | - | |||
3,133 | 248 | |||||
Cash flows used in investing activities | ||||||
Acquisition of property, plant and equipment | (32 | ) | (163 | ) | ||
Expenditures on mineral properties and related deferred costs | (72 | ) | (559 | ) | ||
Decrease in accounts receivable | 8 | - | ||||
Investment in Donlin Creek | (5,447 | ) | (3,582 | ) | ||
(5,543 | ) | (4,304 | ) | |||
Decrease in cash and cash equivalents during the period | (22,439 | ) | (20,323 | ) | ||
Cash and cash equivalents – beginning of period | 151,723 | 38,180 | ||||
Cash and cash equivalents – end of period | 129,284 | 17,857 | ||||
Supplemental disclosure | ||||||
Interest received | 134 | 85 | ||||
Interest paid | - | 7 |
(See accompanying notes to consolidated financial statements)
6 | NovaGold Resources Inc. | |
Q1-2011 |
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 located primarily in Alaska, U.S.A. and British Columbia, Canada.
The Donlin Creek project in Alaska 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 subsidiaries, NovaGold Canada Inc., Alaska Gold Company (“AGC”) 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, 2010.
The accounting policies followed by the Company are set out in note 2 to the audited consolidated financial statements for the year ended November 30, 2010, 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. The Company has adopted these pronouncements at December 1, 2010; the result of this adoption led to the non-controlling interest balance being classified as shareholders’ equity on the consolidated balance sheet and loss attributable to non-controlling interest on the statement of operations and deficit.
3 Galore Creek Partnership
The Company determined that the Galore Creek Partnership is a variable interest entity and consequently uses the principles of Accounting Guideline 15 (“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 Galore Creek Partnership.
The Galore Creek Partnership was formed in May 2007, with Teck able to earn a 50% interest in the Galore Creek project by funding approximately $520.0 million in project development costs. The Galore Creek Partnership funding arrangement was amended following the November 2007 decision to suspend construction activities at the project, and again in February 2009. Under the terms of the current agreement, Teck is funding all costs for the Galore Creek project up to approximately $373.3 million, at which point the partners will share project costs on a 50/50 basis. At February 28, 2011, the Galore Creek Partnership had cash of $1.5 million. Total cash contributions to date by Teck at February 28, 2011 were $364.4 million and $8.9 million remained to be contributed by Teck to earn its 50% interest. During the quarter ended February 28, 2011, Teck contributed $4.3 million to the Galore Creek Partnership; its share of expenses was $2.1 million and its share of impairment costs was $13.8 million for a total of $17.5 million.
NovaGold Resources Inc. | 7 | |
Q1-2011 |
Notes to Consolidated Financial Statements
4 Inventories
in thousands of Canadian dollars | ||||||
February 28, 2011 | November 30, 2010 | |||||
$ | $ | |||||
Gold | 522 | 519 | ||||
Supplies | 7,588 | 7,601 | ||||
Total inventories | 8,110 | 8,120 |
5 Property, plant and equipment
in thousands of Canadian dollars | |||||||||
February 28, 2011 | |||||||||
Accumulated | |||||||||
Cost | amortization | Net | |||||||
$ | $ | $ | |||||||
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 | 2,636 | (1,595 | ) | 1,041 | |||||
Leasehold improvements | 628 | (342 | ) | 286 | |||||
348,792 | (1,937 | ) | 346,855 |
in thousands of Canadian dollars | ||||||||||||
November 30, 2010 | ||||||||||||
Accumulated | ||||||||||||
Cost | amortization | Impairment | Net | |||||||||
$ | $ | $ | $ | |||||||||
Alaska, USA | ||||||||||||
Construction costs – Rock Creek | 90,519 | - | (90,519 | ) | - | |||||||
Mining and milling equipment – Rock Creek | 15,342 | - | (15,342 | ) | - | |||||||
Heavy machinery and equipment – Rock Creek | 1,680 | (570 | ) | (1,110 | ) | - | ||||||
Building | 297 | (161 | ) | (136 | ) | - | ||||||
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 | 2,506 | (1,505 | ) | - | 1,001 | |||||||
Leasehold improvements | 575 | (327 | ) | - | 248 | |||||||
456,447 | (2,563 | ) | (107,107 | ) | 346,777 |
(a) | Construction costs and mobile equipment had not yet been placed in productive activity, and accordingly were not depreciated. |
8 | NovaGold Resources Inc. | |
Q1-2011 |
Notes to Consolidated Financial Statements
6 Mineral properties, rights and development costs
in thousands of Canadian dollars | ||||||||||||
Expenditures | ||||||||||||
November 30, 2010 | (Amortization) | Impairment | February 28, 2011 | |||||||||
$ | $ | $ | $ | |||||||||
Alaska, USA | ||||||||||||
Ambler | 27,437 | - | - | 27,437 | ||||||||
British Columbia, Canada | ||||||||||||
Galore Creek | 185,855 | 406 | - | 186,261 | ||||||||
Power transmission rights (a) | 53,002 | (334 | ) | (52,668 | ) | - | ||||||
Argentina | ||||||||||||
San Roque | 114 | - | - | 114 | ||||||||
266,408 | 72 | (52,668 | ) | 213,812 |
in thousands of Canadian dollars | ||||||||||||
Expenditures | ||||||||||||
November 30, 2009 | (Amortization) | Impairment | November 30, 2010 | |||||||||
$ | $ | $ | $ | |||||||||
Alaska, USA | ||||||||||||
Ambler | - | 27,437 | - | 27,437 | ||||||||
Rock Creek | 8,395 | 868 | (9,263 | ) | - | |||||||
British Columbia, Canada | ||||||||||||
Galore Creek | 184,400 | 1,455 | - | 185,855 | ||||||||
Power transmission rights | 54,335 | (1,333 | ) | - | 53,002 | |||||||
Argentina | ||||||||||||
San Roque | - | 114 | - | 114 | ||||||||
247,130 | 28,541 | (9,263 | ) | 266,408 |
(a) | In May 2006, NovaGold acquired Coast Mountain Power Corp. and all of its assets, which included the power transmission rights to build a 138kV power line from Meziadin Junction to Bob Quinn to bring power to the Galore Creek project. In 2010, the Canadian Federal and British Columbia Provincial Governments announced their intention to build a high-capacity 287-kV transmission line (“NTL”) in northwestern British Columbia that would follow roughly the same route from Meziadin Junction to Bob Quinn. In late February 2011, the NTL project received provincial environmental assessment approval; hence NovaGold will not need to build its own transmission line to bring power to the Galore Creek project, and management has accordingly impaired the full value of the 138kV power transmission rights of $52.7 million and recorded a related future income tax recovery of $9.7 million and a corresponding offset to non-controlling interest for the impairment in the amount of $13.8 million. |
7 Investments
in thousands of Canadian dollars | ||||||
February 28,2011 | November 30, 2010 | |||||
$ | $ | |||||
Available-for-sale investments (a) | 7,319 | 5,665 | ||||
Investments accounted for under the equity method Donlin Creek LLC (b) | 2,524 | 1,697 | ||||
Total investments | 9,843 | 7,362 |
Investment in Donlin Creek LLC accounted for using the equity method as follows.
in thousands of Canadian dollars | ||||||
February 28,2011 | November 30, 2010 | |||||
$ | $ | |||||
Balance – beginning of period | 1,697 | 849 | ||||
Funding | 5,448 | 21,721 | ||||
Equity loss | (4,621 | ) | (20,873 | ) | ||
Balance – end of period | 2,524 | 1,697 |
NovaGold Resources Inc. | 9 | |
Q1-2011 |
Notes to Consolidated Financial Statements
(a) | Investments classified as available-for-sale are reported at fair value (or mark-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 February 28, 2011 was $4.2 million (November 30, 2010: $4.2 million) and total unrealized holding gain for the three months ended February 28, 2011 was $1.6 million (November 30, 2010: $1.0 million). The balance includes 11,801 shares of Endeavour Mining Corp. (cost: $5,000; fair value at February 28, 2011: $33,000); 3,125,000 shares in TintinaGold Resources Inc. (cost: $1.4 million; fair value at February 28, 2011: $3.4 million), a company having one director and a major shareholder in common with the Company; and 3,125,000 shares in AsiaBaseMetals Inc. (cost: $0.2 million; fair value at February 28, 2011: $1.1 million), 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. |
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 | ||||||
February 28, 2011 | November 30, 2010 | |||||
$ | $ | |||||
Beginning balance | 61,882 | 58,553 | ||||
Accretion of debt discount for the period | 1,388 | 4,975 | ||||
Foreign exchange revaluation | (3,363 | ) | (1,646 | ) | ||
Convertible notes liability | 59,907 | 61,882 | ||||
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 |
10 | NovaGold Resources Inc. | |
Q1-2011 |
Notes to Consolidated Financial Statements
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, 2010 | 225,992 | 1,077,220 | ||||
Issued in quarter | ||||||
For cash and fair value pursuant to stock option agreements | 242 | 662 | ||||
For cash and fair value pursuant to warrant agreements | 7,100 | 14,789 | ||||
Balance at February 28, 2011 | 233,334 | 1,092,671 | ||||
Shares held by a wholly-owned subsidiary eliminated on consolidation | 9 | - | ||||
Total issued and outstanding | 233,343 | 1,092,671 |
(a) Warrants
In December 2010, 7.1 million warrants were exercised for total proceeds of $10.7 million, which resulted in 42.2 million warrants outstanding at the end of the first quarter. During the quarter, an agreement was entered into between the Company and the holder of 37.1 million warrants to amend the currency that the exercise price is denominated in from U.S. dollars to Canadian dollars. The exercise price was amended from US$1.50 to $1.479 at the prevailing spot rate on the date of the agreement. The terms of the remaining 5.1 million warrants are unchanged.
(b) Stock options
The Company has a stock option plan providing for the issuance of options at a rolling maximum number that shall not be greater than 10% of the issued and outstanding common shares of the Company at any given time. The Company may grant options to its directors, officers, employees and service providers. The exercise price of each option cannot be lower than the market price of the shares at the date of the option grant. The number of shares optioned to any single optionee may not exceed 5% of the issued and outstanding shares at the date of grant. The options are exercisable for a maximum of five years from the date of grant, and may be subject to vesting provisions. The Company recognizes compensation cost on a straight-line basis over the respective vesting period for the stock options.
During the three months ended February 28, 2011, the Company granted 1,064,700 stock options (three months ended February 28, 2010: 1,237,000). For the three months ended February 28, 2011, the Company recognized a stock-based compensation charge against income of $3.0 million for options granted to directors, employees and consultants in accordance with CICA 3870, net of forfeitures.
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 | |||||
three monthsended | three monthsended | |||||
February 28, 2011 | February 28, 2011 | |||||
Average risk-free interest rate | 0.50% – 1.76% | 2.00% | ||||
Expected life | 1.00 – 3.71 years | 2.50 years | ||||
Expected volatility | 65% – 97% | 75% | ||||
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.
NovaGold Resources Inc. | 11 | |
Q1-2011 |
Notes to Consolidated Financial Statements
(c) 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 three months ended February 28, 2011, the Company recognized a stock-based compensation charge against income of $0.5 million for PSUs vested to employees in accordance with CICA 3870, net of forfeitures.
(d) Deferred share units
The Company has a deferred share unit (“DSU”) plan that provides for the issuance of DSUs in amounts ranging from 50% to 100% of directors’ annual retainers at the election of the directors. Each DSU entitles the directors to receive one common share when they retire from the Company.
For the three months ended February 28, 2011, the Company recognized a stock-based compensation charge against income of $0.03 million 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”). During the three months ended February 28, 2011, the services provided were $2,000 (2010: $10,000) to TintinaGold, a related party having one director and a major shareholder in common with the Company; and $4,000 (2010: $10,000) to Alexco, a related party having two directors in common with the Company. The Company also provided exploration and management services totaling US$0.4 million for the three months ended February 28, 2011 (2010: US$0.4 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 February 28, 2011, the Company had $0.4 million receivable (November 30, 2010: $0.2 million) 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 the Company’s 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.
12 Commitments and contingencies
(a) Lease commitments
As at February 28, 2011, the Company’s aggregate commitments for operating leases totaled $4.4 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 July 15, 2009, two claims were filed in the United States District Court for the District of Alaska against NovaGold, 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 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.
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Q1-2011 |
Notes to Consolidated Financial Statements
13 Subsequent events
On March 7, 2011, the Company and Copper Canyon Resources Ltd (“Copper Canyon”) entered into a binding letter agreement (“Letter Agreement”) providing for the Company to acquire all outstanding common share of Copper Canyon by way of a plan of arrangement (“Arrangement”). The Letter Agreement was superseded by an arrangement agreement dated March 18, 2011. Under the Arrangement, Copper Canyon shareholders will receive common shares of NovaGold on the basis of 0.0735 of a NovaGold common share for each common share of Copper Canyon, plus one common share of a newly incorporated company (“SpinCo”) for every four Copper Canyon common shares. SpinCo will hold substantially all of Copper Canyon’s assets other than certain cash and Copper Canyon’s 40% joint venture interest in the Copper Canyon copper-gold-silver property, which will remain with Copper Canyon. The remaining 60% joint venture interest in the Copper Canyon copper-gold-silver property is held by a wholly-owned subsidiary of NovaGold.
On March 14, 2011, the Company entered into an agreement to sell its alluvial gold properties comprising 11,500 acres of fee-simple United States patented mining claims near Nome, Alaska. The claims were held by AGC. Nome Gold Alaska Corp. will pay AGC US$21.0 million in three installments, and will also provide a letter of credit for US$4.0 million as an environmental reclamation bond.
NovaGold Resources Inc. | 13 | |
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