Question

How does Novagold hedge against foreign currency and interest rate risks. You may refer to the Annual report 2019.

Answer 1

Currency Risk is the financial risk that arises from potential changes in the exchange rate of one currency in relation to another. And it's not just those trading in the foreign exchange markets that are affected. Adverse currency movements can often crush the returns of a portfolio with heavy international exposure, or diminish the returns of an otherwise prosperous international business venture. Companies that conduct business across borders are exposed to currency risk when income earned abroad is converted into the money of the domestic country, and when payables are converted from the domestic currency to the foreign currency.

Luck and a laser-like adherence to excellence represent powerful forces. We definitely know how lucky we are. Donlin Gold is a rare, high-grade open-pit gold development project located in a mining-friendly jurisdiction – Alaska – where the rule of law is embraced and investors can feel secure. It is our privilege to develop such a unique project at a time in the sector’s history when promising assets in welcoming parts of the world are desperately needed. Our steadfast commitment to outperform for our shareholders, as evidenced by our moving the project up the value chain, while never compromising on best practices and keeping all of our promises, is a function of a management strategy rooted in the ethos of doing things right. Such a high level of quality control throughout our operations could not have been maintained were it not for the dedication of Donlin Gold’s stakeholders. The achievements of the past year – from securing major state permits and advancing project engineering and optimization to maintaining broad and all-encompassing community engagement – reflect our collective commitment to a consistent vision that has arisen from a long-lasting collaboration among NOVAGOLD, Barrick, and the Native Corporation property owners, Calista and The Kuskokwim Corporation (TKC). Our track record of achievement was further enhanced earlier this month when Donlin Gold received final easements for the access road and fiber optic cable, as well as the receipt of the final land leases, land use permits, and material site authorizations for the proposed transportation facilities on state lands, including the airstrip and upriver Jungjuk Port. In addition, the Alaska Department of Natural Resources’ (ADNR) Division of Oil and Gas is finalizing the right-of-way authorizations for the buried natural gas pipeline, following the issuance of the preliminary decision in March 2019. Such exceptional results took tremendous leadership and unwavering attention to detail and transparency from Donlin Gold, NOVAGOLD, and Barrick, with the support and contributions of Calista and TKC and the communities closest to the future mine site. We greatly appreciate the dedicated efforts of the ADNR in advancing permits and approvals for the project and their commitment to environmental and governance best practices, as well as genuine social responsibility. In mid-2019, Donlin Gold commenced a multi-year site investigation program required to collect additional geotechnical information to advance the engineering work on the tailings facility and other water retention and diversion structures from a feasibility-level study to a final construction package, as required for the project’s dam safety certificate application to ADNR. The safety of the tailings facility constitutes one of Donlin Gold’s most important priorities as they continue to provide the requisite human and financial resources to ensure that the work is done to the highest standard and according to the best design practices.The sheer rarity of a project like Donlin Gold is of course well understood by our major shareholders, who are united in their belief that our equity provides perhaps one of the best vehicles available to take full advantage of the next big move in gold’s secular bull market. In 2019, NOVAGOLD’s investors were given a glimpse of what a move in the gold price could represent to shareholders. But advancement of Donlin Gold is taking place at an extraordinary time in the gold cycle, as the renewal of interest in gold is happening against the backdrop of declining new discoveries, challenging geopolitics of mine supplies, the continuing erosion of grades of existing deposits, and increasing global uncertainty and volatility. Such an environment is particularly conducive to a substantial re-rating of value for an asset with both the rare combination of virtues and the leverage characteristics of Donlin Gold. The company’s inclusion on the Russell 2000 index in June 2019 also brought increased attention, as core index fund holdings in NOVAGOLD increased along with other funds who mirror these indices, thereby building more institutional investor support for NOVAGOLD.

The currency swap market is one way to hedge that risk. Currency swaps not only hedge against risk exposure associated with exchange rate fluctuations, but they also ensure receipt of foreign monies and achieve better lending rates.

• ISince the company NOVAGOLD company does business around the world, it may experience currency risk - that the exchange rate will change when converting foreign money back into domestic currency.
• Currency swaps are a way to help hedge against that type of currency risk by swapping cash flows in the foreign currency with domestic at a pre-determined rate.
• Considered to be a foreign exchange transaction, currency swaps are not required by law to be shown on a company's balance sheet the same way a forward or options contract would.
• Many currency-hedged ETFs and mutual funds now exist to give investors access to foreign investments without worrying about currency risk.

Currency Swaps Worked

A currency swap is a financial instrument that involves the exchange of interest in one currency for the same in another currency. Currency swaps comprise two notional principals that are exchanged at the beginning and end of the agreement. These notional principals are predetermined dollar amounts, or principal, on which the exchanged interest payments are based. However, this principal is never actually repaid: It's strictly "notional" (which means theoretical). It's only used as a basis on which to calculate the interest rate payments, which do change hands.

Using currency swaps as hedges is also applicable to investments in mutual funds and ETFs. If you have a portfolio heavily weighted towards United Kingdom stocks, for instance, you’re exposed to currency risk: The value of your holdings can decline due to changes in the exchange rate between the British pound and the U.S. dollar. You need to hedge your currency risk to benefit from owning your fund over the long term.

Many investors can reduce their risk exposure by using currency-hedged ETFs and mutual funds. A portfolio manager who must purchase foreign securities with a heavy dividend component for an equity fund could hedge against exchange rate volatility by entering into a currency swap in the same way as the U.S. company did in our examples. The only downside is that favorable currency movements will not have as beneficial an impact on the portfolio: The hedging strategy's protection against volatility cuts both ways.

Currency risk doesn't only affect companies and international investors. Changes in currency rates around the globe result in ripple effects that impact market participants throughout the world.

Thus,Parties with significant forex exposure, and hence currency risk, can improve their risk-and-return profile through currency swaps. Investors and companies can choose to forgo some return by hedging currency risk that has the potential to negatively impact an investment.