Question

Discuss the weighted average cost of capital of Novagold. How do they finance investments/projects in the country where they have presence.

Answer 1

WACC or weighted average cost of capital is the return that both stakeholders of firm, debt and equity stakeholders can expect to earn from their investment in a firm. WACC thus generally represents any investor's opportunity cost of taking a risk and investing in a firm. WACC thus by definition represents the minimum return the company produces for its investors. ThusWACC can be used as a tool to decide if the company is woth investing. If the company return is more than the WACC, the company is doing well and worth investing more. If the company return is less than the company's WACC, the company is not able to provide the minimum return it had promised to its investors.

NOVAGOLD is a Vancouver based Canadian company which is working towards development of Donlin Gold mine in Alaska. As they are in the field of Gold mining, the value of NOVAGOLD is strongly correlated to the gold prices and its volatility.

As of may 2020, the wacc of Novagold around 6.78% considering the market capitalization of the company as equity value, the market value of debt (sum of short and long term obligations along with lease obligations) as debt value, interest rate (interest rate divided by total debt outstanding) as cost of debt and cost of equity calculated using CAPM. The main and principal asset of Novagold is the 50% interest its owns in the Donlin Gold project which is a huge project consists of around 493 mining claims located in multiple areas around Alaska. Financial markets are quite positive about the growth prospects for Novogold And major shareholders of the company's as of today includes include multiple participants like individual investors, hedge funds, mutual funds, or institutional investors like pension funds etc. Financing is also done with the helps of debt holders.