NovaGold Resources Inc.
Second Quarter 2012
Interim Condensed Consolidated Financial Statements
May 31, 2012
(Unaudited)
Table of Contents
NovaGold Resources Inc.
Q2 2012
Consolidated Balance Sheets – Unaudited
in thousands of Canadian dollars | |||||||||
May 31, 2012 | November 30, 2011 | December 1, 2010 | |||||||
$ | $ | $ | |||||||
Assets | |||||||||
Current assets | |||||||||
Cash and cash equivalents (note 7) | 301,191 | 60,572 | 150,167 | ||||||
Trade and other receivables (note 8) | 1,020 | 13,973 | 525 | ||||||
Deposits and prepaid amounts | 1,155 | 1,637 | 1,702 | ||||||
Inventories (note 9) | 497 | 491 | 7,690 | ||||||
Assets held for sale (note 6) | 20,939 | - | - | ||||||
324,802 | 76,673 | 160,084 | |||||||
Non – current assets | |||||||||
Trade and other receivables (note 8) | 4,137 | 4,137 | 4,262 | ||||||
Property, plant and equipment (note 10) | 407 | 1,610 | 1,607 | ||||||
Mineral properties (note 11) | 510 | 510 | 27,366 | ||||||
Assets held for distribution to the shareholders (note 5) | - | 31,034 | - | ||||||
Equity investment – Donlin Gold (note 3) | 4,405 | 2,596 | 1,889 | ||||||
Equity investment – Galore Creek (note 4) | 383,038 | 386,525 | 364,839 | ||||||
Investments (note 12) | 3,192 | 4,525 | 5,683 | ||||||
Investment tax credits | 3,221 | 3,221 | 3,271 | ||||||
Reclamation deposits | 1,917 | 8,900 | 8,944 | ||||||
Total assets | 725,629 | 519,731 | 577,945 | ||||||
Liabilities | |||||||||
Current liabilities | |||||||||
Trade and other payables | 9,029 | 14,802 | 7,523 | ||||||
Liabilities directly associated with assets classified as held for sale (note 6) | 26,206 | - | - | ||||||
Current portion of decommissioning liabilities (note 15) | 235 | 26,574 | 7,110 | ||||||
Current portion of non - current liabilities | - | - | 12,245 | ||||||
35,470 | 41,376 | 26,878 | |||||||
Non – current liabilities | |||||||||
Convertible notes (note 13) | 71,121 | 66,880 | 61,313 | ||||||
Embedded derivative liability – convertible notes (note 13) | 12,997 | 58,660 | 90,465 | ||||||
Decommissioning liabilities (note 15) | 1,085 | 2,602 | 2,326 | ||||||
Deferred liability | - | 4,030 | - | ||||||
Derivative liability – warrants (note 14) | 22,393 | 54,818 | 658,841 | ||||||
Promissory note (note 3) | 68,547 | 65,979 | 63,034 | ||||||
Deferred income tax | 4,776 | 6,887 | 16,752 | ||||||
Other liabilities | 129 | 153 | 11,594 | ||||||
Total liabilities | 216,518 | 301,385 | 931,203 | ||||||
Shareholders’ equity | |||||||||
Share capital (note 16) | 1,518,141 | 1,288,917 | 1,117,870 | ||||||
Contributed surplus | 7,935 | 8,629 | 8,629 | ||||||
Warrants (note 16) | 391,574 | 440,221 | - | ||||||
Share-based payments (note 16) | 48,951 | 38,013 | 31,453 | ||||||
Deficit | (1,507,832 | ) | (1,618,839 | ) | (1,512,662 | ) | |||
Accumulated other comprehensive income | 50,342 | 61,405 | 1,452 | ||||||
Total equity | 509,111 | 218,346 | (353,258 | ) | |||||
Total liabilities and equity | 725,629 | 519,731 | 577,945 | ||||||
Nature of operations(note 1) | |||||||||
Commitments(notes 3, 4 and 18) |
(See accompanying notes to condensed consolidated financial statements)
These consolidated financial statements are authorized for issue by the Board of Directors on July 9, 2012. They are signed on the Company’s behalf by:
/s/ Gregory A. Lang, Director | /s/ Anthony Walsh, Director | |
Approved by the Board of Directors |
NovaGold Resources Inc. | 3 | |
Q2 2012 |
Consolidated Statements of Comprehensive Income – Unaudited
in thousands of Canadian dollars, | ||||||||||||
except for per share and share amounts | ||||||||||||
Three months | Three months | Six months | Six months | |||||||||
ended | ended | ended | ended | |||||||||
May 31, 2012 | May 31, 2011 | May 31, 2012 | May 31, 2011 | |||||||||
$ | $ | $ | $ | |||||||||
Decommissioning expense (note 15) | 2,203 | - | 3,854 | - | ||||||||
Corporate development and communication | 164 | 208 | 236 | 316 | ||||||||
Foreign exchange gain | (17,199 | ) | (254 | ) | (18,610 | ) | (26,837 | ) | ||||
General and administrative | 2,440 | 1,548 | 3,955 | 2,345 | ||||||||
Mineral property expenses | 737 | 1,714 | 1,644 | 2,461 | ||||||||
Professional fees | 1,109 | 1,528 | 2,163 | 1,861 | ||||||||
Project care and maintenance | 2,340 | 2,300 | 4,914 | 4,883 | ||||||||
Salaries | 3,171 | 2,075 | 6,396 | 4,544 | ||||||||
Salaries – share-based payments (note 16) | 2,469 | 1,702 | 12,557 | 5,539 | ||||||||
Share of losses – Donlin Gold (note 3) | 4,676 | 5,561 | 8,299 | 10,183 | ||||||||
Share of losses – Galore Creek (note 4) | 4,287 | 5,076 | 8,352 | 22,620 | ||||||||
Other gain | (76 | ) | (138 | ) | (51 | ) | (104 | ) | ||||
Operating loss | 6,321 | 21,320 | 33,709 | 27,811 | ||||||||
Finance income (note 20) | (542 | ) | (581 | ) | (1,171 | ) | (715 | ) | ||||
Finance expense (note 20) | 3,815 | 3,575 | 7,620 | 7,284 | ||||||||
Finance costs – net | 3,273 | 2,994 | 6,449 | 6,569 | ||||||||
Gain on sale of land | - | (16,110 | ) | - | (16,110 | ) | ||||||
Gain on derivative liability (note 14) | (13,696 | ) | (15,640 | ) | (32,239 | ) | (34,990 | ) | ||||
Gain on embedded derivative liability (note 13) | (17,421 | ) | (16,191 | ) | (45,199 | ) | (23,105 | ) | ||||
Gain on transfer of assets (note 5) | (71,641 | ) | - | (71,641 | ) | - | ||||||
Income for the period before income taxes | 93,164 | 23,627 | 108,921 | 39,825 | ||||||||
Income tax recovery | 1,074 | 969 | 2,086 | 5,615 | ||||||||
Income for the period | 94,238 | 24,596 | 111,007 | 45,440 | ||||||||
Other comprehensive income (loss) | ||||||||||||
Unrealized loss on available-for-sale investments (note 12) | (1,335 | ) | (1,732 | ) | (1,334 | ) | (82 | ) | ||||
Exchange gains (loss) on translating foreign subsidiaries | (12,367 | ) | 622 | (9,755 | ) | 3,177 | ||||||
Income tax recovery | 22 | 396 | 26 | 40 | ||||||||
Other comprehensive income (loss) for the period | (13,680 | ) | (714 | ) | (11,063 | ) | 3,135 | |||||
Total comprehensive income for the period | 80,558 | 23,882 | 99,944 | 48,575 | ||||||||
Income (loss) per share | ||||||||||||
Basic | 0.34 | 0.11 | 0.42 | 0.19 | ||||||||
Diluted | 0.26 | (0.01 | ) | 0.26 | (0.13 | ) | ||||||
Basic weighted average number of shares (thousands) | 278,936 | 233,995 | 264,676 | 233,050 | ||||||||
Diluted weighted average number of shares (thousands) | 310,256 | 277,616 | 299,258 | 278,657 |
(See accompanying notes to condensed consolidated financial statements)
4 | NovaGold Resources Inc. | |
Q2 2012 |
Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
in thousands of Canadian dollars, | ||||||||||||||||||||||||
except share amounts | ||||||||||||||||||||||||
Share capital | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Share - | other | |||||||||||||||||||||||
Contributed | based | Accumulated | comprehensive | |||||||||||||||||||||
Shares | Amount | surplus | Warrants | payments | deficit | income | Total | |||||||||||||||||
(thousands) | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Balance, December 1, 2010 | 225,992 | 1,117,870 | 8,629 | - | 31,453 | (1,512,662 | ) | 1,452 | (353,258 | ) | ||||||||||||||
Income for the period | - | - | - | - | - | 45,440 | - | 45,440 | ||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 3,135 | 3,135 | ||||||||||||||||
Issuance for acquisition of Copper Canyon | 4,171 | 42,339 | 42,339 | |||||||||||||||||||||
Exercise of warrants | 7,550 | 106,492 | - | - | - | - | - | 106,492 | ||||||||||||||||
Conversion of foreign currency warrants | - | - | - | 457,401 | - | - | - | 457,401 | ||||||||||||||||
Exercise of options | 344 | 1,471 | - | - | (1,060 | ) | - | - | 411 | |||||||||||||||
Share-based payments | - | - | - | - | 4,508 | - | - | 4,508 | ||||||||||||||||
Performance share unit (“PSU”) expense | - | - | - | - | 1,002 | - | - | 1,002 | ||||||||||||||||
Deferred share unit (“DSU”) grant | - | - | - | - | 66 | - | - | 66 | ||||||||||||||||
Balance, May 31, 2011 | 238,057 | 1,268,172 | 8,629 | 457,401 | 35,969 | (1,467,222 | ) | 4,587 | 307,536 | |||||||||||||||
Shares held by a wholly- owned subsidiary | 9 | - | - | - | - | - | - | - | ||||||||||||||||
Balance, May 31, 2011 | 238,066 | 1,268,172 | 8,629 | 457,401 | 35,969 | (1,467,222 | ) | 4,587 | 307,536 | |||||||||||||||
| ||||||||||||||||||||||||
Balance, November 30,2011 | 239,976 | 1,288,917 | 8,629 | 440,221 | 38,013 | (1,618,839 | ) | 61,405 | 218,346 | |||||||||||||||
Return of Capital on Plan of Arrangement | - | (144,858 | ) | - | - | - | - | - | (144,858 | ) | ||||||||||||||
Net income for the period | - | - | - | - | - | 111,007 | - | 111,007 | ||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (11,063 | ) | (11,063 | ) | ||||||||||||||
Issued pursuant to financing | 35,000 | 316,417 | - | - | - | - | - | 316,417 | ||||||||||||||||
Exercise of options | 258 | 201 | - | - | (201 | ) | - | - | - | |||||||||||||||
Exercise of warrants | 3,892 | 54,401 | - | (48,647 | ) | - | - | - | 5,754 | |||||||||||||||
Issued for vested PSU | 87 | 177 | - | - | (317 | ) | - | - | (140 | ) | ||||||||||||||
Issued for vested deferred share unit (“DSU”) | 4 | - | - | - | - | - | - | - | ||||||||||||||||
Excess value over fair value - performance share unit | - | - | (694 | ) | - | - | - | - | (694 | ) | ||||||||||||||
Share-based payments | 313 | 2,886 | - | - | 10,292 | - | - | 13,178 | ||||||||||||||||
PSU expense | - | - | - | - | 1,079 | - | - | 1,079 | ||||||||||||||||
DSU grants | - | - | - | - | 85 | - | - | 85 | ||||||||||||||||
Balance, May 31, 2012 | 279,530 | 1,518,141 | 7,935 | 391,574 | 48,951 | (1,507,832 | ) | 50,342 | 509,111 | |||||||||||||||
Shares held by a wholly- owned subsidiary | 9 | - | - | - | - | - | - | - | ||||||||||||||||
Balance, May 31, 2012 | 279,539 | 1,518,141 | 7,935 | 391,574 | 48,951 | (1,507,832 | ) | 50,342 | 509,111 |
(See accompanying notes to condensed consolidated financial statements)
NovaGold Resources Inc. | 5 | |
Q2 2012 |
Consolidated Statements of Cash Flows - Unaudited
in thousands of Canadian dollars | ||||||||||||
Three months | Three months | Six months | Six months | |||||||||
ended | ended | ended | ended | |||||||||
| May 31, 2012 | May 31, 2011 | May 31, 2012 | May 31, 2011 | ||||||||
| $ | $ | $ | $ | ||||||||
Cash flows used in operating activities | ||||||||||||
Net income for the period | 94,238 | 24,596 | 111,007 | 45,440 | ||||||||
Items not affecting cash | ||||||||||||
Depreciation | 111 | 88 | 248 | 129 | ||||||||
Decommissioning liabilities | 2,203 | - | 3,854 | - | ||||||||
Finance costs | 1,301 | 1,973 | 4,563 | 5,664 | ||||||||
Deferred income tax recovery | (1,097 | ) | (1,365 | ) | (2,112 | ) | (6,011 | ) | ||||
Foreign exchange (loss) gain | (4,585 | ) | 2,927 | (9,020 | ) | (30,787 | ) | |||||
Share-based payments | 2,469 | 1,702 | 12,557 | 5,539 | ||||||||
Gain on assets distributed to the shareholders | (71,641 | ) | - | (71,641 | ) | - | ||||||
Gain on derivative liability | (13,696 | ) | (15,640 | ) | (32,239 | ) | (34,990 | ) | ||||
Gain on embedded derivative liability | (17,421 | ) | (16,191 | ) | (45,199 | ) | (23,105 | ) | ||||
Gain on sale of land | - | (16,110 | ) | - | (16,110 | ) | ||||||
Share of losses – Donlin Gold (note 3) | 4,676 | 5,561 | 8,299 | 10,182 | ||||||||
Share of losses – Galore Creek (note 4) | 4,287 | 5,076 | 8,352 | 22,620 | ||||||||
Cash funding – Donlin Gold (note 3) | (6,607 | ) | (6,203 | ) | (10,028 | ) | (11,650 | ) | ||||
Cash funding – Galore Creek (note 4) | (3,275 | ) | - | (4,866 | ) | - | ||||||
Net change in non-cash working capital | ||||||||||||
(Increase) decrease in trade and other receivables, deposits and prepaid amounts | (1,112 | ) | 875 | (1,442 | ) | (452 | ) | |||||
Decrease in note receivable | 10,057 | - | 10,057 | - | ||||||||
(Decrease) increase in trade and other payables and current decommissioning liabilities | (2,309 | ) | 1,933 | (8,812 | ) | 1,030 | ||||||
| (2,401 | ) | (10,778 | ) | (26,422 | ) | (32,501 | ) | ||||
Cash flows from financing activities | ||||||||||||
Cash transferred to NovaCopper | (40,359 | ) | - | (40,359 | ) | - | ||||||
Proceeds from issuance of common shares – net | - | 350 | 316,417 | 411 | ||||||||
Proceeds from warrant exercises – net | 2,071 | 666 | 5,754 | 11,359 | ||||||||
Payroll and withholding tax on issuance of performance share units | (203 | ) | - | (831 | ) | - | ||||||
Payment of note payable for acquisition of Ambler | - | - | - | (11,921 | ) | |||||||
| (38,491 | ) | 1,016 | 280,981 | (151 | ) | ||||||
Cash flows used in investing activities | ||||||||||||
Acquisition of property, plant and equipment | (571 | ) | (3,260 | ) | (571 | ) | (3,292 | ) | ||||
Increase in reclamation bonds | - | (66 | ) | (13,625 | ) | (66 | ) | |||||
Purchase of marketable securities | - | (269 | ) | - | (269 | ) | ||||||
Acquisition of Copper Canyon | - | (4,007 | ) | - | (4,007 | ) | ||||||
| (571 | ) | (7,602 | ) | (14,196 | ) | (7,634 | ) | ||||
Effect of foreign exchange rate on cash & cash equivalents | 78 | (634 | ) | 256 | (85 | ) | ||||||
Increase (decrease) in cash and cash equivalents during the period | (41,385 | ) | (17,998 | ) | 240,619 | (40,371 | ) | |||||
Cash and cash equivalents – beginning of period | 342,576 | 127,794 | 60,572 | 150,167 | ||||||||
Cash and cash equivalents – end of period | 301,191 | 109,796 | 301,191 | 109,796 | ||||||||
| ||||||||||||
Supplemental disclosure | ||||||||||||
Interest received | 185 | 102 | 271 | 236 | ||||||||
Interest paid | 2,581 | 2,483 | 2,581 | 2,483 |
(See accompanying notes to condensed consolidated financial statements)
6 | NovaGold Resources Inc. | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
1 | Nature of operations |
NovaGold Resources Inc. (“NovaGold” or “the Company”) was incorporated under the Companies Act (Nova Scotia) on December 5, 1984. NovaGold is a precious metals company engaged in the exploration and development of mineral properties primarily in North America. The Company has a portfolio of mineral properties located principally in Alaska, U.S. and British Columbia, Canada.
The Donlin Gold project in Alaska is held by a limited liability company owned equally by wholly-owned subsidiaries of NovaGold and Barrick Gold Corporation (“Barrick”). The Galore Creek project is held by a partnership (“Galore Creek Partnership” or “the Partnership”) owned equally by wholly-owned subsidiaries of NovaGold and Teck Resources Limited (“Teck”).
The Company has its primary listing on the Toronto Stock Exchange and a secondary listing on the NYSE-MKT (formerly NYSE-AMEX). The Company’s head office is located at 2300 – 200 Granville Street, Vancouver, BC, Canada V6C 1S4.
2 | Basis of preparation and adoption of IFRS |
The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
Previously, the Company prepared its consolidated annual and consolidated interim financial statements in accordance with previous Canadian generally accepted accounting principles (“Previous Canadian GAAP”). In 2010, the Handbook of the Canadian Institute of Chartered Accountants was revised to incorporate International Financial Reporting Standards (“IFRS”), and require publicly accountable enterprises to apply such standards for years beginning on or after January 1, 2011. Accordingly, the Company has prepared its consolidated interim financial statements effective as of July 9, 2012 in accordance with the current Canadian GAAP, which has adopted IFRS as if the accounting policies had always been in effect subject to certain transition elections. Note 21 discloses the impact of the transition to IFRS, including the nature and effect of significant changes in accounting policies from those disclosed in our consolidated annual financial statements for the year ended November 30, 2011.
The interim consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto for the year ended November 30, 2011, prepared in accordance with previous Canadian GAAP, and the Company’s interim consolidated financial statements for the quarter ended February 29, 2012, prepared in accordance with IFRS, current Canadian GAAP. The Company’s IFRS accounting policies were disclosed in Note 3 of the condensed interim consolidated financial statements for the period ended February 29, 2012.
Statement of compliance with International Financial Reporting Standards
These condensed consolidated interim financial statements have been prepared in accordance with and using accounting policies in full compliance with the IFRS issued by the International Accounting Standards Board (“IASB”) and IFRIC interpretations applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting (“IAS 34”) and IFRS 1, First-Time Adoption of International Financial Reporting Standards (“IFRS 1”).
NovaGold Resources Inc. | 7 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
3 | Equity investment - Donlin Gold |
On December 1, 2007, together with Barrick Gold U.S. Inc., the Company formed a limited liability company (“Donlin Gold LLC”) to advance the Donlin Gold project in Alaska. Donlin Gold LLC has a board of four directors, with two nominees selected by each company. All significant decisions related to Donlin Gold LLC require the approval of both companies. As part of the Donlin Gold LLC agreement, the Company agreed to reimburse Barrick over time approximately US$64.3 million, representing 50% of Barrick’s expenditures of US$128.6 million at the Donlin Gold project from April 1, 2006 to November 30, 2007. Reimbursement has been partially made by the Company paying US$12.7 million of Barrick’s share of project costs during 2008. A promissory note for the remaining US$51.6 million plus interest at a rate of U.S. prime plus 2% will be paid out of NovaGold’s share of future mine production cash flow. The Company has recorded US$14.8 million in accrued interest since the inception of the promissory note. As of May 31, 2012, the Company recorded $68.5 million in promissory note with $1.7 million in interest expense related to this promissory note for the quarter. Interest on this long-term debt is expensed. Both parties are currently sharing all project costs on a 50/50 basis.
Under IAS 31, the Company determined that Donlin Gold LLC is a jointly controlled entity and consequently accounts for its investment Donlin Gold LLC using the equity method of accounting. The equity method is a basis of accounting for investments whereby the investment is initially recorded at cost and the carrying value, adjusted thereafter to include the investor's pro rata share of post-acquisition earnings of the investee, is computed by the consolidation method. Profit distributions received or receivable from an investee reduce the carrying value of the investment.
For the six months ended May 31, 2012, the Company and Barrick each contributed $10.0 million. The investment in Donlin Gold LLC is accounted for using the equity method as follows:
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Balance – beginning of period | 2,596 | 1,889 | ||||
Funding | 10,028 | 22,044 | ||||
Share of losses | (8,299 | ) | (21,353 | ) | ||
Foreign exchange | 80 | 16 | ||||
Balance – end of period | 4,405 | 2,596 |
The following amounts represent the Company’s 50% share of the assets, liabilities, and results of operations of Donlin Gold LLC:
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Cash, prepaid and other receivables | 5,383 | 3,544 | ||||
Property, plant and equipment | 104,034 | 102,737 | ||||
Accounts payables and accrued liabilities | (1,587 | ) | (1,521 | ) | ||
Net assets | 107,830 | 104,760 |
in thousands of Canadian dollars | ||||||
Six months ended | Six months ended | |||||
May 31, 2012 | May 31, 2011 | |||||
$ | $ | |||||
Depreciation | 81 | 41 | ||||
Mineral property expenditures | 8,218 | 10,142 | ||||
Total expenses | 8,299 | 10,183 |
The Company’s share of commitments contracted by Donlin Gold LLC at May 31, 2012 is $3.0 million.
8 | NovaGold Resources Inc. | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
4 | Equity investment – Galore Creek |
The Galore Creek Partnership was formed in May 2007, with Teck to advance the Galore Creek project in British Columbia, Canada. Teck was able to earn a 50% interest in the Galore Creek project by making funding contribution to project development cost. The Galore Creek Partnership original funding arrangement was amended following the November 2007 decision to suspend construction activities at the project, and again in February 2009. Under the amended agreement, Teck was responsible for funding all costs for the Galore Creek project up to approximately $373.3 million, which was completed on June 2011. In July 2011, the Company and Teck have equally funded all costs for the project.
For the six months ended May 31, 2012, the Company and Teck each contributed $4.9 million. The Galore Creek Partnership is a jointly controlled entity under IAS 31 accounted for under the equity method of accounting as follows:
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Balance – beginning of period | 386,524 | 364,839 | ||||
Purchase of Copper Canyon | - | 46,013 | ||||
Funding | 4,866 | 14,062 | ||||
Share of losses | (8,352 | ) | (38,389 | ) | ||
Balance – end of period | 383,038 | 386,525 |
The following amounts represent the Company’s 50% share of the assets, liabilities, and results of operations of the Galore Creek Partnership:
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Cash, prepaid and other receivables | 1,995 | 3,831 | ||||
Property, plant and equipment, mineral properties, and reclamation bond | 334,154 | 303,043 | ||||
Accounts payables and accrued liabilities | (1,639 | ) | (2,671 | ) | ||
Reclamation obligation LT and payable to related party | (8,897 | ) | (9,079 | ) | ||
Net assets | 325,613 | 295,124 |
in thousands of Canadian dollars | ||||||
Six months ended | Six months ended | |||||
May 31, 2012 | May 31, 2011 | |||||
$ | $ | |||||
Amortization | 3,240 | 3,240 | ||||
Care & maintenance expenses | 1,934 | 3,260 | ||||
Mineral property expenditures | 3,178 | 2,341 | ||||
Impairment of power transmission rights | - | 13,779 | ||||
Total expenses | 8,352 | 22,620 |
The Company’s share of commitments contracted by the Galore Creek Partnership’s operating entity, the Galore Creek Mining Corporation, at May 31, 2012 is $0.1 million.
5 | Assets held for distribution to the shareholders |
On April 30, 2012, the Company completed a plan of arrangement under the Nova Scotia Companies Act pursuant to which it spun-out NovaCopper Inc. (“NovaCopper”), a wholly-owned subsidiary of the Company which held the Ambler assets, to the Company’s shareholders (the “Arrangement”). Under the Arrangement, each shareholder of the Company received one share of NovaCopper for every six shares held of the Company.
NovaGold Resources Inc. | 9 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
The Arrangement was approved by the Company’s Board of Directors and the favourable vote of NovaGold’s securityholders at a special meeting of securityholders held on March 28, 2012.
Upon completion of the Arrangement under IFRS, the Company recorded a non-taxable gain of $71.6 million on the spin out of NovaCopper, as the Company was required to recognize the fair value of the Ambler project’s net assets.
The fair value of the Ambler’s net assets transferred under the Arrangement pursuant to IFRS is summarized in the table below:
in thousands of Canadian dollars | |||
April 30, 2012 | |||
$ | |||
Cash | 40,279 | ||
Deposits and prepaids | 845 | ||
Due from related party | 715 | ||
Long term assets: | |||
Plant and equipment | 1,459 | ||
Mineral properties | 103,030 | ||
Accounts payables and accrued liabilities | (1,470 | ) | |
Fair value of the net assets distributed to shareholders | 144,858 |
6 | Assets held for sale and liabilities directly associated with assets classified as held for sale |
On May 30, 2012, the Company signed a Purchase and Sale Agreement (the “Agreement”) to transfer the Rock Creek property in Nome, Alaska to Bering Straits Native Corporation (“BSNC”). Under the Agreement, the Company will transfer all Rock Creek assets, a minimum of US$14.0 million in reclamation bond for the remainder of the decommissioning obligation, and a one-time payment of US$250,000. As consideration, BSNC will provide a net profits interest which entitles the Company to receive 5% of all future net profits generated from ore extracted from the property. Prior to the transfer of the assets, the Company is required to complete phase one of the reclamation activities and satisfy a number of other conditions. After the transfer, BSNC will assume full responsibility and liability for the remainder of the reclamation plan and any future reclamation activities requested by regulatory authorities. .
As a result of the Agreement, the Company has accounted for the Rock Creek project’s reclamation bond as an asset held for sale and the decommissioning liabilities (note 15), as liabilities directly related to assets classified as held for sale at May 31, 2012.
7 | Cash and cash equivalents |
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Cash at bank | 301,191 | 60,572 | ||||
Cash and cash equivalents | 301,191 | 60,572 |
The Company’s cash is held with a large Canadian bank with an S&P rating of AA-. As of May 31, 2012, the Company had US$288.0 million in cash. Assuming that all variables remain constant, a 4% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of US$11.5 million in the Company’s net profit or loss.
10 | NovaGold Resources Inc. | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
8 | Trade and other receivables |
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Trade receivables | 954 | 637 | ||||
Note receivable | - | 13,319 | ||||
Receivables from related parties | 4,203 | 4,154 | ||||
5,157 | 18,110 | |||||
Current portion | 1,020 | 13,973 | ||||
Non-current portion: receivables | 17 | 17 | ||||
Non-current portion: receivables from related parties (a) | 4,120 | 4,120 | ||||
5,157 | 18,110 |
(a) | Funding used to secure reclamation bond held by the Galore Creek project. |
9 | Inventories |
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Supplies (a) | - | - | ||||
Gold | 481 | 481 | ||||
Foreign exchange | 16 | 10 | ||||
Total inventories | 497 | 491 |
(a) | During the year ended November 30, 2011, management reviewed the valuation of its supplies inventory and recorded a net write down of $6.9 million to reflect the decrease from cost to net realizable value. This write down is due to the decision to initiate closure of the Rock Creek project during the year ended November 30, 2011. |
10 | Property, plant and equipment |
in thousands of Canadian dollars | ||||||||||||||||||
Office furniture | Leasehold | |||||||||||||||||
Land | Equipment | and equipment | improvements | Vehicle | Total | |||||||||||||
Costs: | $ | $ | $ | $ | $ | $ | ||||||||||||
Balance as at December 1, 2010 | 1,265 | - | 1,520 | 575 | 79 | 3,439 | ||||||||||||
Additions | - | 1,424 | 161 | 53 | - | 1,638 | ||||||||||||
Disposals | (1,078 | ) | - | - | - | (79 | ) | (1,157 | ) | |||||||||
Cumulative translation adjustment | (59 | ) | 47 | - | - | - | (12 | ) | ||||||||||
Balance as at November 30, 2011 | 128 | 1,471 | 1,681 | 628 | - | 3,908 | ||||||||||||
Additions | 469 | 7 | - | 88 | 564 | |||||||||||||
Disposal of assets distributed to shareholders | (1,899 | ) | (88 | ) | (88 | ) | (2,075 | ) | ||||||||||
Cumulative translation adjustment | 1 | (41 | ) | 90 | - | - | 50 | |||||||||||
Balance as at May 31, 2012 | 129 | - | 1,690 | 628 | - | 2,447 |
NovaGold Resources Inc. | 11 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
Office furniture | Leasehold | |||||||||||||||||
Land | Equipment | and equipment | improvements | Vehicle | Total | |||||||||||||
Depreciation: | $ | $ | $ | $ | $ | $ | ||||||||||||
Balance as at December 1, 2010 | - | - | (1,449 | ) | (327 | ) | (56 | ) | (1,832 | ) | ||||||||
Current period depreciation | - | (341 | ) | (105 | ) | (65 | ) | - | (511 | ) | ||||||||
Disposals | - | - | - | - | 56 | 56 | ||||||||||||
Cumulative translation adjustment | - | (11 | ) | - | - | - | (11 | ) | ||||||||||
Balance as at November 30, 2011 | - | (352 | ) | (1,554 | ) | (392 | ) | - | (2,298 | ) | ||||||||
Current period depreciation | - | (128 | ) | (88 | ) | (32 | ) | - | (248 | ) | ||||||||
Disposal of assets transferred on | ||||||||||||||||||
Plan of Arrangement | - | 478 | 26 | - | - | 504 | ||||||||||||
Cumulative translation adjustment | - | 2 | - | - | 2 | |||||||||||||
Balance as at May 31, 2012 | - | - | (1,616 | ) | (424 | ) | - | (2,040 | ) | |||||||||
Net book value: | ||||||||||||||||||
As at December 1, 2010 | 1,265 | - | 71 | 248 | 23 | 1,607 | ||||||||||||
As at November 30, 2011 | 128 | 1,119 | 127 | 236 | - | 1,610 | ||||||||||||
As at May 31, 2012 | 129 | - | 74 | 204 | - | 407 |
11 | Mineral properties |
in thousands of Canadian dollars | |||||||||
Alaska, USA | Argentina | ||||||||
Exploration and | |||||||||
Exploration and | evaluation - San | ||||||||
evaluation – Ambler | Roque | Total | |||||||
$ | $ | $ | |||||||
Balance as at December 1, 2010 | 27,252 | 114 | 27,366 | ||||||
Additions | 4,076 | 396 | 4,472 | ||||||
Cumulative translation adjustment | (294 | ) | - | (294 | ) | ||||
Reclassification to asset held for distribution (note 5) | (31,034 | ) | - | (31,034 | ) | ||||
Balance as at November 30, 2011 | - | 510 | 510 | ||||||
Balance as at May 31, 2012 | - | 510 | 510 |
12 | Investments |
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Available-for-sale investments | 3,192 | 4,525 | ||||
Total investments | 3,192 | 4,525 |
Investments classified as available-for-sale are recorded at fair value based on quoted market prices, with unrealized gains or losses excluded from earnings and reported as other comprehensive income or loss. The total cost as at May 31, 2012 was $4.6 million (2011: $4.6 million) and total unrealized holding loss for the six months ended May 31, 2012 was $1.3 million (2011: gain of $0.1 million). The balance includes 3,125,000 shares in TintinaGold Resources Inc. (cost: $1.4 million; fair value at May 31, 2012: $1.0 million) and 3,125,000 shares in AsiaBaseMetals Inc. (cost: $0.2 million; fair value at May 31, 2012: $0.5 million), both companies have a director in common with NovaGold.
13 | Convertible notes |
On March 26, 2008, the Company issued US$95.0 million ($96.7 million) in 5.5% unsecured senior convertible notes (“Notes”) maturing on May 1, 2015, and incurred a 3.0% underwriter’s fee and other expenses aggregating US$2.9 million ($3.5 million), for net proceeds of US$ 92.2 million ($93.2 million). Interest is payable semi-annually in arrears on May 1 and November 1 of each year, beginning November 1, 2008. The Notes are convertible into the Company’s common shares at a fixed conversion rate. The conversion rate and accordingly the number of shares issuable were adjusted as a result of the NovaCopper spin out which reduced the conversion rate from US$10.61 to US$9.656 per common share. A total of 9,838,442 common shares are issuable upon conversion and additional shares may become issuable following the occurrence of certain corporate acts or events. On conversion, at the 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.
12 | NovaGold Resources Inc. | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
As the Notes are denominated in U.S. dollars, a currency different from the functional currency of the Company, an embedded derivative is recognized as a liability. The embedded derivative is recorded at fair value and re-measured each period with the movement being charged to net income. The Notes are classified as a liability, less the portion relating to the embedded derivative feature ($49.5 million). As a result, the recorded liability to repay the Notes is lower than its face value. Using the effective interest rate method and the 17.78% rate implicit in the calculation, the difference of $43.7 million, characterized as the note discount, is being charged to interest expense and accreted to the liability over the term of the Notes.
The fair value of the embedded derivative has been estimated using the Black-Scholes pricing model as it is considered as a Level 3 financial instrument in the fair value hierarchy with significant unobservable inputs. Assumptions used in the pricing model for each period are provided below.
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Average risk-free interest rate | 1.11% | 1.10% | ||||
Expected life | 2.92 | 3.42 | ||||
Expected volatility | 60.06% | 78.43% | ||||
Expected dividends | Nil | Nil |
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Beginning balance | 66,880 | 61,313 | ||||
Accretion expense of debt discount for the period | 3,307 | 5,745 | ||||
Foreign exchange revaluation | 934 | (178 | ) | |||
Convertible notes | 71,121 | 66,880 | ||||
Beginning balance | 58,660 | 90,465 | ||||
Gain on embedded derivative liability | (45,199 | ) | (29,761 | ) | ||
Foreign exchange revaluation | (464 | ) | (2,044 | ) | ||
Embedded derivative liability - convertible notes | 12,997 | 58,660 |
14 | Derivative liability – warrants |
The Company’s functional currency is the Canadian dollar and it has issued and outstanding warrants that have an exercise price denominated in U.S. dollars. The Company has determined that such warrants with an exercise price that is different from the entity’s functional currency are classified as a derivative liability based on the evaluation of the warrant’s settlement provisions, and carried at their fair value. Any changes in the fair value from period to period are recorded as a gain or loss in net income.
In January 2011, an agreement was entered into between the Company and the holder of 37.1 million warrants to amend the currency that the exercise price is denominated in from U.S. dollars to Canadian dollars. The exercise price was amended from US$1.50 to $1.479 at the prevailing spot rate on the date of the agreement. The expiry date remains unchanged at January 2013. The terms of the remaining 5.1 million warrants were unchanged. The conversion of the currency denomination on these warrants permanently crystallized the fair value of these warrants, for purposes of determining future transfers to share capital upon exercise of these warrants.
NovaGold Resources Inc. | 13 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
The fair value of the derivative for the warrants has been estimated using the Black-Scholes pricing model as it is considered as a Level 3 financial instrument in the fair value hierarchy with significant unobservable inputs. Assumptions used in the pricing model for each period are provided below.
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Average risk-free interest rate | 1.06% | 1.01% | ||||
Expected life | 0.64 years | 1.15 years | ||||
Expected volatility | 71.02% | 59.38% | ||||
Expected dividends | Nil | Nil |
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Derivative balance – beginning of the period | 54,818 | 658,841 | ||||
Gain on derivative liability for the period | (32,239 | ) | (28,529 | ) | ||
Foreign exchange revaluation | (186 | ) | (485,983 | ) | ||
Conversion of warrants to equity | - | (89,511 | ) | |||
Derivative balance – end of the period | 22,393 | 54,818 |
15 | Decommissioning liabilities |
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Beginning balance | 29,176 | 9,192 | ||||
Increases to existing provisions | 3,854 | 20,268 | ||||
Expended during the period | (5,810 | ) | (865 | ) | ||
Exchange differences | 306 | 581 | ||||
Reclassification to liabilities held for sale (note 6) | (26,206 | ) | - | |||
Total | 1,320 | 29,176 |
Analysis of total provisions:
in thousands of Canadian dollars | ||||||
May 31, 2012 | November 30, 2011 | |||||
$ | $ | |||||
Non-current | 1,085 | 2,602 | ||||
Current | 235 | 26,574 | ||||
Total | 1,320 | 29,176 |
The Company’s decommissioning liabilities consist of reclamation costs for Nome properties. The Nome properties were impaired in previous years, thus all additional estimates to the decommissioning liabilities are expensed directly to net income. The reclamation activities include land rehabilitation and other costs.
16 | Share capital |
Authorized
1,000,000,000 common shares, no par value
10,000,000 preferred shares issuable in one or more series
14 | NovaGold Resources Inc. | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
(a) Share capital
In January 2012, the Company issued 313,675 shares to the outgoing and incoming CEOs as part of their employment agreements.
On February 7, 2012, the Company completed an equity financing and issued 35,000,000 common shares at US$9.50 per common share for gross proceeds of US$332.5 million. The net proceeds to the Company, after deducting underwriters’ fees and issuance expenses of $14.6 million, were $316.4 million.
(b) Stock options
The Company has a stock option plan providing for the issuance of options at a rolling maximum number that shall not be greater than 10% of the issued and outstanding common shares of the Company at any given time. The Company may grant options to its directors, officers, employees and service providers. The exercise price of each option cannot be lower than the market price of the shares at the date of the option grant. The number of shares optioned to any single optionee may not exceed 5% of the issued and outstanding shares at the date of grant. The options are exercisable for a maximum of five years from the date of grant, and may be subject to vesting provisions. The Company recognizes compensation cost over the tranche’s vesting period over the respective vesting period for the stock options.
During the three months ended February 29, 2012, the Company granted 2,557,150 (2011: 1,064,700) stock options at a weighted average fair value of $11.11 (2011: $14.53) and recognized a share-based payments charge of $8.4 million (2011: $3.1 million) for options granted to directors, employees and consultants net of forfeitures in accordance with IFRS 2.
During the three months ended May 31, 2012, the Company granted 300,000 (2011: 170,000) stock options at a weighted average fair value of $7.34 (2011: $12.83) and recognized a share-based payments charge of $2.5 million (2011: $1.7 million) for options granted to directors, employees and consultants net of forfeitures in accordance with IFRS 2.
For the three months ended May 31, 2012, 281,667 options were exercised at a weighted average exercise price of $3.88, the weighted average closing price based for the corresponding exercises was $6.39. As of May 31, 2012, there were 1,888,494 non-vested options outstanding with a weighted average exercise price of $9.41; the non-vested stock option and PSU expense not yet recognized was $6.1 million (2011: $7.7 million); and this expense is expected to be recognized over the next two years.
The fair value of the stock options recognized in the period has been estimated using an option pricing model. Assumptions used in the pricing model for the period are as provided below.
in thousands of Canadian dollars | ||||||
Three months | Three months | |||||
ended | ended | |||||
May 31, 2012 | May 31, 2011 | |||||
Weighted average share price | $7.34 | $12.83 | ||||
Average risk-free interest rate | 1.32% - 1.53% | 1.91% - 2.11% | ||||
Weighted average exercise price | $7.34 | $12.83 | ||||
Expected life | 3.0 years | 3.5 years | ||||
Expected volatility | 57.03% - 58.45% | 80.62% - 81.10% | ||||
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.
NovaGold Resources Inc. | 15 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
(c) Warrants
During the three months ended February 29, 2012, 2,491,600 share purchase warrants were exercised for total proceeds of $3.7 million. In the three months ended May 31, 2012, 1,400,000 share purchase warrants were exercised for total proceeds of $2.1 million.
A summary of the Company’s share purchase warrants outstanding at May 31, 2012 is presented below:
Weighted average | |||||||||
Warrants outstanding | Weighted average | remaining | |||||||
and exercisable | exercise price | contractual life | |||||||
Prices | (thousands) | $ | (years) | ||||||
US$ 1.50 | 5,192 | 1.55 | 0.64 | ||||||
$1.48 | 31,337 | 1.48 | 0.64 | ||||||
36,529 | 1.49 | 0.64 |
(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 criteria are based on the Company’s performance relative to a representative group of other mining companies and the TSX index. The actual performance against each of these criteria generates a multiplier that varies from 0% to 150%. Thus, the shares that may be issued vary between 0% and 150% of the number of PSUs granted, and is reduced by the amounts for recipients no longer at the Company on vesting date.
For the three months ended May 31, 2012, the Company recognized a share-based payment charge against income of $0.5 million (2011: $0.5 million) for PSUs granted to employees.
(e) Deferred share units
The Company has a deferred share unit (“DSU”) plan that provides for the issuance of DSUs in amounts ranging from 50% to 100% of directors’ annual retainers at the election of the directors. Each DSU entitles the directors to receive one common share of the Company when they retire from their position.
For the three months ended May 31, 2012, the Company had 4,261 DSUs converted into shares for one of its departing directors. The Company also recognized a share-based payment charge against income of $0.04 million (2011: $0.03 million) for the DSUs granted to directors during the period.
17 | Related party transactions |
Services rendered
During the six months ended May 31, 2012, the Company provided exploration and management services to the following companies: $3,000 (2011: $10,000) to Alexco, a related party having two common directors; $4,000 (2011: $6,000) to TintinaGold, a related party having one director in common; US$102,000 (2011: US$400,000) to Donlin Gold LLC; $251,000 (2011: Nil) to NovaCopper, a related party having common directors; and office rental and services totaling $474,000 (2011: $384,000) to GCMC. At May 31, 2012, the Company had $4.2 million in receivables from related parties of which $4.1 million are non-current receivables from GCMC (note 8).
16 | NovaGold Resources Inc. | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
Key management compensation
Key management includes the executive officers of the Company which includes the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer. The compensation paid or payable to key management for employee services is shown below:
in thousands of Canadian dollars | ||||||
Six months | Six months | |||||
ended | ended | |||||
May 31, 2012 | May 31, 2011 | |||||
$ | $ | |||||
Salaries and other short term employee benefits | 1,752 | 1,555 | ||||
Share-based payment | 4,401 | 2,565 | ||||
Total | 6,153 | 4,120 |
18 | Commitments |
Lease commitments
The Company is party to certain operating leases. These operating leases include the Company’s leased head office location and certain office equipment with commitments ranging from one to ten years. The future minimum lease payments as at May 31, 2012 are approximately as follows.
in thousands of Canadian dollars | |||
May 31, 2012 | |||
$ | |||
2012 | 308 | ||
2013 | 576 | ||
2014 | 580 | ||
2015 | 662 | ||
2016 | 776 | ||
Thereafter | 582 |
The Company has a non-cancellable sublease for an office location and the future minimum sublease payments expected to be received as at May 31, 2012 are approximately as follows:
in thousands of Canadian dollars | |||
May 31, 2012 | |||
$ | |||
2012 | 128 | ||
2013 | 260 | ||
2014 | 270 | ||
2015 | 270 | ||
2016 | 270 | ||
Thereafter | 203 |
19 | Segmented information |
The Company has one operating segment in exploration development of mineral properties. The Chief Executive Officer considers the business from a geographic perspective for the performance of our business units. Segment information is provided on each of the material projects individually in notes 3, 4 and 5.
NovaGold Resources Inc. | 17 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
20 | Net finance costs |
in thousands of Canadian dollars | ||||||
Six months | Six months | |||||
ended | ended | |||||
May 31, 2012 | May 31, 2011 | |||||
$ | $ | |||||
Interest received from bank account | (271 | ) | (249 | ) | ||
Accretion income from note receivable | (900 | ) | (466 | ) | ||
(1,171 | ) | (715 | ) | |||
Interest on notes receivable | - | 482 | ||||
Interest on promissory note (note 3) | 1,706 | 1,583 | ||||
Interest on convertible debt (note 13) | 5,914 | 5,219 | ||||
7,620 | 7,284 | |||||
Total | 6,449 | 6,569 |
21 | Transition to International Financial Reporting Standards |
These are the Company’s second interim consolidated financial statements prepared in accordance with IFRS. The IFRS accounting policies are presented in note 3 in the interim consolidated financial statements for the period ended February 29, 2012. The IFRS accounting policies have been applied in preparing the financial statements for the period ended May 31, 2012 and the comparative information.
The Company has applied IFRS 1First-time Adoption of International Financial Reporting Standardsin preparing these first IFRS condensed consolidated financial statements.
(a) First-time adoption exemptions applied
IFRS 1, which governs the first time adoption of IFRS, in general requires accounting policies to be applied retrospectively to determine the opening balance sheet at the Company’s transition date, and allows certain exemptions on the transition to IFRS. The elections we have elected to apply and are considered significant to the Company include:
ºForeign currency: IFRS 1 allows the Company to exempt themselves from the retrospective application of IAS 21The Effects of Changes in Foreign Exchange Rates. Cumulative translation differences that existed at the date of transition are recorded to opening retained earnings.
ºDeemed cost: IFRS 1 allows the Company to individually measure items of property, plant and equipment, land, and mineral properties at fair value at transition or an event-driven valuation under prior GAAP. The Company has elected to apply this exemption to its Rock Creek property, as under the previous Canadian GAAP the value has previously been impaired.
ºShare-based payment transactions: IFRS 1 allows the Company to exempt themselves from the retrospective application of IFRS 2 for all options vested at the transition date. Adjustments were made for all options unvested at transition to comply with the requirements of IFRS 2.
18 | NovaGold Resources Inc. | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
(b) Reconciliations of shareholders’ equity
Reconciliations between the previous Canadian GAAP and IFRS Consolidated Balance Sheet at December 1, 2010, May 31, 2011 and November 30, 2011 are provided below:
in thousands of Canadian dollars | ||||||||||||
December 1, 2010 | May 31, 2011 | November 30, 2011 | ||||||||||
Note | $ | $ | $ | |||||||||
Total shareholders’ equity underpreviousCanadian GAAP | 611,214 | 604,851 | 510,780 | |||||||||
Galore Creek Partnership | (i) | (198,666 | ) | (183,894 | ) | (172,217 | ) | |||||
Derivative liability - warrants | (ii) | (658,841 | ) | (45,930 | ) | (54,819 | ) | |||||
Convertible notes | (iii) | (89,896 | ) | (61,907 | ) | (58,138 | ) | |||||
Future income tax | (iv) | (16,752 | ) | (4,201 | ) | (6,952 | ) | |||||
Changes related to functional currency | (v) | (317 | ) | (1,383 | ) | (310 | ) | |||||
Total shareholders’ equity under IFRS | (353,258 | ) | 307,536 | 218,344 |
Notes to the reconciliations of equity at December 1, 2010, May 31, 2011 and November 30, 2011
i. | Galore Creek Partnership |
Under previous Canadian GAAP, the Company’s 50% interest in the Galore Creek Partnership was accounted for as a Variable Interest Entity in which the Company was the primary beneficiary resulting in consolidation of Galore Creek. Under IFRS, it has been determined that the Galore Creek Partnership is a jointly controlled entity and is accounted for under the equity method in accordance with the Company’s policy. The Company has adjusted, through opening deficit, the difference in accounting as if the Partnership was accounted for under the equity method since its formation in 2007.
At December 1, 2010, total assets decreased by $221.4 million, liabilities decreased by $24.1 million, and equity decreased by $198.7 million as a result of the change in method of accounting. The impact to opening deficit was $98.6 million on transition date. The significant changes to the presentation of the balance sheet are a reduction in property, plant and equipment of $346.4 million, a reduction in mineral properties of $238.9 million, and the recognition of an equity investment in Galore Creek of $364.8 million as at December 1, 2010.
At May 31, 2011, as a result of Galore Creek being accounted for under the equity method, total assets decreased by $194.6 million, liabilities decreased by $43.8 million, and equity decreased by $150.8 million from the amounts previously disclosed under previous Canadian GAAP. For the period ended May 31, 2011, an equity loss of $22.6 million was recognized for Galore Creek. Due to the change in accounting, exploration and development, project care and maintenance, and general and administrative expenses decreased by $11.2 million for the same period. An asset impairment of $52.7 million, as well as a corresponding impact to deferred income tax recovery of $7.2 million was reversed relating to the impairment of the Galore Creek power transmission rights.
At November 30, 2011, total assets decreased by $191.2 million, liabilities decreased by $19.0 million, and equity decreased by $172.2 million. For the year ended November 30, 2011, an equity loss of $38.4 million was recognized for Galore Creek. Due to the change in accounting, exploration and development, project care and maintenance, and general and administrative expenses decreased by $38.4 million for the same period. An asset impairment of $61.0 million, as well as a corresponding impact to deferred income tax recovery of $7.3 million, was reversed relating to the impairment of the Galore Creek power transmission rights and equipment recognized under Canadian GAAP.
NovaGold Resources Inc. | 19 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
The loss for the year attributable to non-controlling interest of $37.1 million under previous Canadian GAAP was also removed.
ii. | Derivative liability – warrants |
The Company has outstanding warrants which are denominated in U.S. dollars. Under the previous Canadian GAAP, the Company’s outstanding warrants were accounted for as an equity instrument at a historical value determined at the time of issuance. Under IFRS, as the warrants are denominated in a currency other than the functional currency of the Company, the warrants are a derivative liability, recorded at fair value and marked-to-market through the statement of loss.
At December 1, 2010, a derivative liability of $658.8 million was recognized under IFRS with an increase to opening deficit on transition of $666.7 million. Share capital increased by $36.4 million to account for previously exercised warrants prior to transition, and warrants decreased by $28.5 million upon the recognition of the liability.
As discussed in note 14, during the first quarter of 2011, 37.1 million warrants were amended to change the currency that the exercise price is denominated in from U.S. dollars to Canadian dollars. At the transaction date, the fair value of the warrants converted of $463.0 million was transferred from the derivative liability to equity.
At May 31, 2011, the derivative liability under IFRS was $45.9 million. The change from previous Canadian GAAP to IFRS resulted in an increase to share capital of $127.2 million and an increase to warrants (equity) of $433.3 million. For the six months ended May 31, 2011, a gain on derivative liability of $35.0 million and a foreign exchange gain of $25.4 million were recognized under IFRS.
At November 30, 2011, the derivative liability was $54.8 million, and the change resulted in an increase to share capital of $143.6 million and an increase to warrants (equity) of $416.9 million. For the year ended November 30, 2011, a gain on derivative liability of $28.5 million and a foreign exchange gain of $23.0 million were recognized.
iii. | Convertible notes |
The Company has convertible notes outstanding which are denominated in U.S. dollars. As the Company’s functional currency is Canadian dollars, under IFRS, the convertible notes host an embedded derivative liability which is recorded at fair value each period with changes recognized through the statement of loss. Under previous Canadian GAAP, the instrument was accounted for as a compound instrument with equity and liability components.
On transition, the impact to opening deficit was an increase of $46.5 million along with the recognition of the embedded derivative liability of $90.5 million, a reduction to the liability component of $0.6 million, and a reduction to the equity component of $43.4 million.
At May 31, 2011, the embedded derivative liability was $62.4 million, the liability component decreased by $0.5 million and the equity component of $43.4 million was removed. For the six months ended May 31, 2011, a gain on the embedded derivative of $23.1 million and a gain on foreign exchange of $4.9 million were recognized under IFRS.
At November 30, 2011, the embedded derivative liability was $58.7 million, the liability component decreased by $0.5 million, and the equity component of $43.4 million was removed. For the year ended November 30, 2011, a gain on the embedded derivative of $29.8 million and a gain on foreign exchange of $2.0 million were recognized under IFRS.
iv. | Deferred income tax |
Under previous Canadian GAAP, the Company recognized a future income tax liability on asset acquisitions where the accounting basis was greater than the tax basis. Under IFRS, the initial recognition exemption does not allow for the recognition of a deferred income tax liability on asset acquisitions.
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Q2 2012 |
Notes to Condensed Consolidated Financial Statements
In the second quarter of 2011, the Company acquired Copper Canyon Resources which resulted in the recognition of a future income tax liability under previous Canadian GAAP. Under IFRS, the deferred income tax liabilities and the corresponding asset of $14.4 million were eliminated in the period ended November 30, 2011.
As discussed above under (a), the Galore Creek Partnership is accounted for as an equity investment under IFRS. Previously, under previous Canadian GAAP, the Partnership was accounted for using the inside basis method of accounting for deferred income tax. Under IFRS, as an equity investment, the Partnership is accounted for under the outside basis method.
Under IFRS, deferred income tax liabilities of $16.8 million, $4.2 million, and $6.9 million were recognized for the Galore Creek Partnership as at December 1, 2010, May 31, 2011 and November 30, 2011, respectively. For the three months ended May 31, 2011, a deferred income tax recovery of $1.3 million was recognized. And for the six months ended May 31, 2011, a deferred income tax recovery of $5.7 million was recognized and for the year ended November 30, 2011, a deferred income tax recovery of $9.9 million was recognized.
v. | Changes in functional currency |
Under previous Canadian GAAP, subsidiaries that were not self-sustaining were translated under the temporal method. Under IFRS, it was determined that the Company had several entities with a U.S. dollar functional currency. As a result of the change in functional currency, the impact to equity was $0.3 million, $1.4 million and $0.3 million at December 1, 2010, May 31, 2011 and November 30, 2011, respectively.
vi. | Flow-through shares |
Under previous Canadian GAAP, the future income tax expense for the losses renounced to investors and the premium received on the equity offering of flow-through shares is recorded to share capital. Under IFRS, the deferred income tax expense and premium are recognized through the statement of loss. At December 1, 2010, a reclassification of $4.2 million was recognized increasing share capital and decreasing opening retained earnings for historical flow-through share offerings.
vii. | Share-based payments |
Under IFRS, the Company’s recognition of share-based payments has been accounted for under the graded vesting method. At transition, there is no impact to equity. For the three months ended and six months ended May 31, 2011 and for the year ended November 30, 2011, share-based payments expense increased by $0.2 million, $0.5 million and $ 1.2 million, respectively.
(c) Reconciliation of total comprehensive income
Reconciliation between the previous Canadian GAAP and IFRS total comprehensive income for the three months and six months periods ended May 31, 2011 and year ended November 30, 2011 are provided below.
NovaGold Resources Inc. | 21 | |
Q2 2012 |
Notes to Condensed Consolidated Financial Statements
in thousands of Canadian dollars | ||||||||||||
Three months | Six months | Year ended | ||||||||||
Note | ended | ended | November 30, | |||||||||
May 31, 2011 | May 31, 2011 | 2011 | ||||||||||
$ | $ | $ | ||||||||||
Comprehensive loss under previous Canadian GAAP | 11,897 | 77,959 | 191,779 | |||||||||
Loss (income) adjustments | ||||||||||||
Galore Creek Partnership | (i) | (1,894 | ) | (34,069 | ) | (53,685 | ) | |||||
Derivative liability - warrants | (ii) | (15,837 | ) | (60,375 | ) | (51,487 | ) | |||||
Convertible notes | (iii) | (16,421 | ) | (27,988 | ) | (31,758 | ) | |||||
Deferred income tax | (iv) | (1,269 | ) | (5,655 | ) | (9,800 | ) | |||||
Changes in functional currency | (v) | 76 | 4,243 | 61,478 | ||||||||
Share-based payments | (vi) | 188 | 487 | 1,179 | ||||||||
Comprehensive loss (income) adjustments | ||||||||||||
Changes related to functional currency | (v) | (622 | ) | (3,177 | ) | (61,485 | ) | |||||
Comprehensive (income) loss under IFRS | (23,882 | ) | (48,575 | ) | 46,221 |
(d) Statement of cash flows
The transition to IFRS did not have a material impact on the Company’s net cash flows except for the presentation of its joint venture of GCMC which was deconsolidated under IFRS thus reducing the overall cash balance by GCMC’s cash balance at the year ending November 30, 2011 and year beginning December 1, 2010.
22 | Subsequent event |
On June 8, 2012, the Company issued 500,000 stock options and 200,000 PSUs.
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Q2 2012 |