|
Item 1.
|
Financial Statements
|
Trilogy Metals Inc.
Consolidated Balance Sheets
(unaudited)
in thousands of US dollars
|
|
May
31, 2018
$
|
|
|
November
30, 2017
$
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
37,469
|
|
|
|
5,391
|
|
Accounts receivable
|
|
|
29
|
|
|
|
470
|
|
Deposits and prepaid amounts
|
|
|
904
|
|
|
|
837
|
|
Investments (note 3)
|
|
|
229
|
|
|
|
2,516
|
|
|
|
|
38,631
|
|
|
|
9,214
|
|
Plant and Equipment (note 4)
|
|
|
408
|
|
|
|
478
|
|
Mineral properties and development
costs (note 5)
|
|
|
30,587
|
|
|
|
30,587
|
|
|
|
|
69,626
|
|
|
|
40,279
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
(note 6)
|
|
|
2,567
|
|
|
|
4,249
|
|
|
|
|
2,567
|
|
|
|
4,249
|
|
|
|
|
|
|
|
|
|
|
Mineral properties purchase option
(note 5(c))
|
|
|
20,000
|
|
|
|
10,365
|
|
|
|
|
22,567
|
|
|
|
14,614
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Share
capital (note 7)
– unlimited common shares authorized, no par value Issued -131,348,458
(2017 – 105,684,523)
|
|
|
163,947
|
|
|
|
136,525
|
|
Warrants (note 7(c))
|
|
|
2,253
|
|
|
|
2,163
|
|
Contributed surplus
|
|
|
124
|
|
|
|
124
|
|
Contributed surplus – options (note 7(a))
|
|
|
18,942
|
|
|
|
18,402
|
|
Contributed surplus – units (note 7(b))
|
|
|
1,361
|
|
|
|
1,319
|
|
Deficit
|
|
|
(139,568
|
)
|
|
|
(132,868
|
)
|
|
|
|
47,059
|
|
|
|
25,665
|
|
|
|
|
69,626
|
|
|
|
40,279
|
|
Commitments and contingencies
(notes
5, 9)
(See accompanying notes to the interim
consolidated financial statements)
/s/ Rick Van Nieuwenhuyse,
Director
|
|
/s/ Kalidas Madhavpeddi,
Director
|
Approved on behalf of the Board of
Directors
Trilogy Metals Inc.
Consolidated Statements of Loss and
Comprehensive Loss
(unaudited)
in thousands of US dollars, except share
and per share amounts
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
May
31, 2018
$
|
|
|
May
31, 2017
$
|
|
|
May
31, 2018
$
|
|
|
May
31, 2017
$
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
42
|
|
|
|
19
|
|
|
|
83
|
|
|
|
39
|
|
Foreign exchange loss (gain)
|
|
|
19
|
|
|
|
130
|
|
|
|
(44
|
)
|
|
|
50
|
|
General and administrative
|
|
|
454
|
|
|
|
407
|
|
|
|
799
|
|
|
|
785
|
|
Investor relations
|
|
|
138
|
|
|
|
93
|
|
|
|
202
|
|
|
|
156
|
|
Mineral properties expense (note 5(d))
|
|
|
2,475
|
|
|
|
1,297
|
|
|
|
3,606
|
|
|
|
1,936
|
|
Professional fees
|
|
|
114
|
|
|
|
193
|
|
|
|
273
|
|
|
|
318
|
|
Salaries
|
|
|
223
|
|
|
|
224
|
|
|
|
452
|
|
|
|
466
|
|
Salaries – stock-based compensation
|
|
|
151
|
|
|
|
106
|
|
|
|
1,073
|
|
|
|
499
|
|
Total expenses
|
|
|
3,616
|
|
|
|
2,469
|
|
|
|
6,444
|
|
|
|
4,249
|
|
Other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss (gain) on held for trading investments
|
|
|
(377
|
)
|
|
|
(70
|
)
|
|
|
(1,016
|
)
|
|
|
1,169
|
|
Loss (gain) on sale of investments
|
|
|
502
|
|
|
|
3
|
|
|
|
1,276
|
|
|
|
-
|
|
Interest and other income
|
|
|
(77
|
)
|
|
|
(12
|
)
|
|
|
(94
|
)
|
|
|
(31
|
)
|
Loss and comprehensive
loss for the period
|
|
|
3,664
|
|
|
|
2,390
|
|
|
|
6,610
|
|
|
|
5,387
|
|
Basic and diluted
loss per common share
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
Weighted average
number of common shares outstanding
|
|
|
117,583,238
|
|
|
|
105,543,283
|
|
|
|
111,989,192
|
|
|
|
105,495,882
|
|
(See accompanying notes to the interim
consolidated financial statements)
Trilogy Metals Inc.
Consolidated Statements of Changes in
Shareholders’ Equity
(unaudited)
in thousands of US dollars, except share
amounts
|
|
Number
of
shares
outstanding
|
|
|
Share
capital
$
|
|
|
Warrants
$
|
|
|
Contributed
surplus
$
|
|
|
Contributed
surplus
–
options
$
|
|
|
Contributed
surplus
–
units
$
|
|
|
Deficit
$
|
|
|
Total
shareholders’
equity
$
|
|
Balance
– November 30, 2016
|
|
|
105,286,469
|
|
|
|
136,357
|
|
|
|
2,163
|
|
|
|
124
|
|
|
|
18,134
|
|
|
|
1,140
|
|
|
|
(111,764
|
)
|
|
|
46,154
|
|
Exercise of options
|
|
|
58,822
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted Share Units
|
|
|
209,198
|
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(173
|
)
|
|
|
-
|
|
|
|
(90
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
269
|
|
|
|
230
|
|
|
|
-
|
|
|
|
499
|
|
Loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,387
|
)
|
|
|
(5,387
|
)
|
Balance
– May 31, 2017
|
|
|
105,554,489
|
|
|
|
136,463
|
|
|
|
2,163
|
|
|
|
124
|
|
|
|
18,380
|
|
|
|
1,197
|
|
|
|
(117,151
|
)
|
|
|
41,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– November 30, 2017
|
|
|
105,684,523
|
|
|
|
136,525
|
|
|
|
2,163
|
|
|
|
124
|
|
|
|
18,402
|
|
|
|
1,319
|
|
|
|
(132,868
|
)
|
|
|
25,665
|
|
Bought deal financing (note 7)
|
|
|
24,784,482
|
|
|
|
28,750
|
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(90
|
)
|
|
|
28,750
|
|
Share issuance costs
|
|
|
-
|
|
|
|
(1,819
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,819
|
)
|
Exercise of options
|
|
|
79,453
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted Share Units
|
|
|
800,000
|
|
|
|
457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(457
|
)
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
574
|
|
|
|
499
|
|
|
|
-
|
|
|
|
1,073
|
|
Loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,610
|
)
|
|
|
(6,610
|
)
|
Balance
– May 31, 2018
|
|
|
131,348,458
|
|
|
|
163,947
|
|
|
|
2,253
|
|
|
|
124
|
|
|
|
18,942
|
|
|
|
1,361
|
|
|
|
(139,568
|
)
|
|
|
47,059
|
|
(See accompanying notes to the interim
consolidated financial statements)
Trilogy Metals Inc.
Consolidated Statements of Cash Flows
(unaudited)
in thousands of US dollars
|
|
For the six months ended
|
|
|
|
May
31, 2018
$
|
|
|
May
31, 2017
$
|
|
Cash flows used in operating activities
|
|
|
|
|
|
|
Loss for the period
|
|
|
(6,610
|
)
|
|
|
(5,387
|
)
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
83
|
|
|
|
39
|
|
Unrealized gain on held for trading investments
|
|
|
(1,016
|
)
|
|
|
1,169
|
|
Realized foreign exchange loss (gain)
|
|
|
(64
|
)
|
|
|
20
|
|
Realized loss on sale of investments
|
|
|
1,276
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,073
|
|
|
|
499
|
|
Net change in non-cash working capital
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
441
|
|
|
|
(59
|
)
|
Decrease in deposits and prepaid amounts
|
|
|
(67
|
)
|
|
|
(388
|
)
|
Decrease in accounts payable and
accrued liabilities
|
|
|
(1,682
|
)
|
|
|
521
|
|
|
|
|
(6,566
|
)
|
|
|
(3,586
|
)
|
Cash flows from (used in) financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bought deal financing (note 7)
|
|
|
28,750
|
|
|
|
-
|
|
Share issuance cost
|
|
|
(1,819
|
)
|
|
|
-
|
|
Settlement of Restricted Share Units
|
|
|
-
|
|
|
|
(90
|
)
|
|
|
|
26,931
|
|
|
|
(90
|
)
|
Cash flows from (used in) investing
activities
|
|
|
|
|
|
|
|
|
Acquisition of plant & equipment
|
|
|
(13
|
)
|
|
|
(16
|
)
|
Mineral properties funding (note 5 (c))
|
|
|
9,635
|
|
|
|
10,000
|
|
Proceeds from the sale of investments,
net of fees
|
|
|
2,080
|
|
|
|
881
|
|
|
|
|
11,702
|
|
|
|
10,865
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
32,067
|
|
|
|
7,189
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
11
|
|
|
|
-
|
|
Cash and cash equivalents –
beginning of period
|
|
|
5,391
|
|
|
|
7,340
|
|
Cash and cash equivalents
– end of period
|
|
|
37,469
|
|
|
|
14,529
|
|
(See accompanying notes to the interim
consolidated financial statements)
Trilogy Metals Inc.
Notes to the Consolidated Financial
Statements
Trilogy Metals Inc. (“Trilogy”
or the “Company”) was incorporated in British Columbia under the
Business Corporations Act (BC)
on April 27, 2011.
The Company is engaged in the exploration and development of mineral properties with a focus on the Upper Kobuk Mineral Projects
(“UKMP”), including the Arctic and Bornite Projects located in Northwest Alaska in the United States of America (“US”).
|
2.
|
Summary
of significant accounting policies
|
Basis of presentation
These consolidated financial statements
have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) and include
the accounts of Trilogy and its wholly-owned subsidiary, NovaCopper US Inc. (dba “Trilogy Metals US”). All
significant intercompany transactions are eliminated on consolidation.
All figures are in United States dollars
unless otherwise noted. References to CAD$ refer to amounts in Canadian dollars.
The unaudited interim consolidated financial
statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial
position as of May 31, 2018 and our results of operations and cash flows for the six months ended May 31, 2018 and May 31, 2017.
The results of operations for the six months ended May 31, 2018 are not necessarily indicative of the results to be expected for
the year ending November 30, 2018.
As these interim consolidated financial
statements do not contain all of the disclosures required by U.S. GAAP for annual financial statements, these unaudited interim
consolidated financial statements should be read in conjunction with the annual financial statements and related notes included
in our Annual Report on Form 10-K for the fiscal year ended November 30, 2017 filed with the U.S. Securities and Exchange Commission
(“SEC”) on February 2, 2018.
These financial statements were approved
by the Company’s Audit Committee on behalf of the Board of Directors for issue on July 16, 2018.
Recent accounting pronouncements
In February 2016, the Financial
Accounting Standards Board (“FASB”) issued new accounting requirements for accounting for, presentation of, and classification
of leases (“ASU 2016-02”). This will result in most leases being capitalized as a right of use asset with a related
liability on the balance sheets. The requirements of the new standard are effective for annual reporting periods beginning after
December 15, 2018, and interim periods within those annual periods, which for us is the first quarter of the fiscal year
ending November 30, 2020. We expect the adoption will have an impact as we expect to capitalize leases, specifically our office
leases which are not currently recognized on the balance sheets. We are in the process of analyzing the quantitative
impact of this guidance on our results of operations and financial position. The impact of this adoption will increase asset and
liability balances as part of recognizing the leases on the balance sheet. It will impact the statement of loss and comprehensive
loss due to the recognition of depreciation on the leased assets and interest expense from the lease liability compared to the
current recognition of lease expense as incurred.
|
ii.
|
Financial instruments
|
In March 2016, the FASB issued
new guidance on classifying and measuring financial instruments (“ASU 2016-02”). This update is effective for annual
reporting periods beginning after December 15, 2017, and early adoption is permitted. The Company has analyzed the impact of the
update and determined that the changes to classification and measurement of financial instruments are not expected to have an
impact as the Company’s current equity investments are held at fair value with changes recorded to the statement of loss
and comprehensive loss. The remaining changes in the update do not have an effect on the Company’s accounting for financial
instruments. The standard will be effective for the Company for the fiscal year ending November 30, 2019.
|
iii.
|
Stock-based compensation
|
In March 2016, the FASB issued
new guidance simplifying the accounting for stock-based compensation transactions, including income tax consequences, classification
of awards as equity or liabilities, forfeitures, and classification on the statement of cash flows (“ASU 2016-09”).
This update is effective for annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The
Company has adopted this guidance and made the policy choice of estimating the number of awards expected to be forfeited and adjusting
the estimate when it is no longer probable that the employee will fulfill the service condition. This policy choice
is consistent with the Company’s previous practice and therefore, no adjustments were necessary on adoption. The
remaining changes in the update do not have an effect on the Company’s accounting for stock-based compensation.
|
iv.
|
Business combinations
|
In January 2017, the FASB
issued new guidance to assist in determining if a set of assets and activities being acquired or sold is a business (“ASU
2017-01”). It also provided a framework to assist entities in evaluating whether both an input and a substantive process
are present, which at a minimum, must be present to be considered a business. This update is effective for annual reporting
periods beginning after December 15, 2017, and early adoption is permitted in most circumstances. The standard does not have an
impact to the Company’s historical recognition of asset acquisitions and business combinations. However, the
Company expects there would be an impact to how the Company accounts for assets acquired in the future. The Company has adopted
the standard early for the fiscal year ended November 30, 2018.
|
v.
|
Accounting for certain
financial instruments with down round features
|
In July 2017, the FASB issued
a two-part Accounting Standards Update (“ASU”), No. 2017-11, Earnings Per Share (ASC 260), Distinguishing Liabilities
from Equity (ASC 480), Derivatives and Hedging (ASC 815): I. Accounting for Certain Financial Instruments with Down Round Features
and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Under the guidance, entities will
no longer consider a down round feature when determining whether a free standing financial instrument or an embedded feature that
contains a down round feature is considered indexed to the entity’s own stock under ASC 815-40 which is required for a freestanding
financial instrument to be classified in shareholder’s equity and may exempt an embedded feature from bifurcation and derivative
accounting. Entities will recognize the effect of a down round feature only when it is triggered.
ASU 2017-11 is effective for
public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and
early adoption is permitted. The Company has adopted this guidance at the beginning of this fiscal year.
On September 1, 2016, Trilogy acquired
5,000,000 common shares of GoldMining Inc. (“GMI”), formerly Brazil Resources Inc., a public company listed on the
TSX-Venture exchange, and 1,000,000 warrants, with each warrant exercisable into one common share of GMI until September 1, 2018
at an exercise price of CAD$3.50, through its sale of Sunward Investments Ltd.
The common shares and warrants received
have been designated as held-for-trading financial assets and are classified as current investments.
in
thousands of dollars
|
|
May
31, 2018
$
|
|
|
November
30, 2017
$
|
|
|
|
|
|
|
|
|
|
|
Current investments
|
|
|
229
|
|
|
|
2,516
|
|
During the period ended May 31, 2018,
the Company sold 2,085,000 (2017 – 570,000) common shares of GMI for proceeds of $2.1 million (2017 – $0.9 million)
and realized a loss on sale of $1.3 million (2017 - $Nil million). During the period, the Company recorded an unrealized gain
on the common shares and warrants of GMI of $1.0 million (2017 - loss of $1.2 million).
As at May 31, 2018, the Company held 280,000
(2017 – 2,365,000) common shares of GMI, which were sold In June 2018 and 1,000,000 (2017 – 1,000,000) warrants expiring
September 1, 2018 which were valued at $Nil using the Black-Scholes option pricing model at period end.
in thousands of dollars
|
|
May 31, 2018
|
|
|
|
Cost
$
|
|
|
Accumulated
amortization
$
|
|
|
Net
$
|
|
British Columbia, Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
64
|
|
|
|
(11
|
)
|
|
|
53
|
|
Leasehold improvements
|
|
|
53
|
|
|
|
(6
|
)
|
|
|
47
|
|
Computer hardware and software
|
|
|
115
|
|
|
|
(107
|
)
|
|
|
8
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, and equipment
|
|
|
3,178
|
|
|
|
(2,913
|
)
|
|
|
265
|
|
Vehicles
|
|
|
348
|
|
|
|
(321
|
)
|
|
|
27
|
|
Computer hardware and software
|
|
|
41
|
|
|
|
(33
|
)
|
|
|
8
|
|
|
|
|
3,799
|
|
|
|
(3,391
|
)
|
|
|
408
|
|
in thousands of dollars
|
|
November 30, 2017
|
|
|
|
Cost
$
|
|
|
Accumulated
amortization
$
|
|
|
Net
$
|
|
British Columbia, Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
63
|
|
|
|
(4
|
)
|
|
|
59
|
|
Leasehold improvements
|
|
|
85
|
|
|
|
(34
|
)
|
|
|
51
|
|
Computer hardware and software
|
|
|
108
|
|
|
|
(105
|
)
|
|
|
3
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, and equipment
|
|
|
3,178
|
|
|
|
(2,855
|
)
|
|
|
323
|
|
Vehicles
|
|
|
348
|
|
|
|
(309
|
)
|
|
|
39
|
|
Computer hardware and software
|
|
|
35
|
|
|
|
(32
|
)
|
|
|
3
|
|
|
|
|
3,817
|
|
|
|
(3,339
|
)
|
|
|
478
|
|
|
5.
|
Mineral properties and development
costs
|
in thousands of dollars
|
|
November
30, 2017
$
|
|
|
Acquisition
costs
$
|
|
|
May
31, 2018
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambler (a)
|
|
|
26,587
|
|
|
|
-
|
|
|
|
26,587
|
|
Bornite (b)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
|
30,587
|
|
|
|
-
|
|
|
|
30,587
|
|
in thousands of dollars
|
|
November
30, 2016
$
|
|
|
Acquisition
costs
$
|
|
|
November 30,
2017
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambler (a)
|
|
|
26,586
|
|
|
|
1
|
|
|
|
26,587
|
|
Bornite (b)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
|
30,586
|
|
|
|
-
|
|
|
|
30,587
|
|
On January 11, 2010,
NovaGold Resources Inc. (“NovaGold”), through Alaska Gold Company (“AGC”), at the time a wholly-owned
NovaGold subsidiary, purchased 100% of the Ambler lands in Northwest Alaska, which contains the copper-zinc-lead-gold-silver Arctic
Project and other mineralized targets within the volcanogenic massive sulfide belt, through a series of cash and share payments.
Total fair value of the consideration was $26.6 million. The vendor retained a 1% net smelter return royalty that the Company
can purchase at any time for a one-time payment of $10.0 million.
The Ambler lands were acquired
on October 17, 2011 by Trilogy Metals US through a purchase and sale agreement with AGC. On October 24, 2011, NovaGold
transferred its ownership of Trilogy Metals US to the Company, then itself a wholly owned subsidiary of NovaGold, which was subsequently
spun-out to NovaGold shareholders and publicly listed on April 30, 2012 (“NovaGold Arrangement”).
On October 19, 2011, Trilogy
Metals US acquired the exclusive right to explore and the non-exclusive right to access and enter on the Bornite lands, and lands
deeded to NANA Regional Corporation, Inc. (“NANA”) through the Alaska Native Claims Settlement Act, located adjacent
to the Ambler lands in Northwest Alaska. As consideration, Trilogy Metals US paid $4 million to acquire the right to explore
and develop the combined Upper Kobuk Mineral Projects through an Exploration Agreement and Option to Lease with NANA. Upon a decision
to proceed with construction of a mine on the lands, NANA maintains the right to purchase between a 16%-25% ownership interest
in the mine or retain a 15% net proceeds royalty which is payable after Trilogy Metals US has recovered certain historical costs,
including capital and cost of capital. Should NANA elect to purchase an ownership interest, consideration will be payable equal
to all historical costs incurred on the properties at the elected percentage purchased less $40 million, not to be less than
zero. The parties would form a joint venture and be responsible for all future costs, including capital costs of the mine based
on their pro-rata share.
NANA would also be granted
a net smelter return royalty of between 1% and 2.5% upon the execution of a mining lease or a surface use agreement, the amount
of which is determined by the classification of land from which production originates.
On April 10, 2017, Trilogy and
Trilogy Metals US entered into an Option Agreement to form a Joint Venture with South32 Group Operations Pty Ltd. (“South32
Operations”), a wholly-owned subsidiary of South32 Limited, on the UKMP (the “Option Agreement”), which agreement
was later assigned by South32 Operations to its affiliate, South32 USA Exploration Inc. (together with South32 Operations, “South32”).
Trilogy Metals US granted South32 the right to form a 50/50 joint venture to hold all of Trilogy Metals US’ Alaskan assets.
If the option is exercised, Trilogy Metals US will transfer its Alaskan assets, including the UKMP, and South32 will contribute
a minimum of $150 million to a newly formed limited liability company (“JV LLC”), plus any amounts Trilogy Metals US
spends at the Arctic Project over the next three years to a maximum of $5 million per year (the “Subscription Price”),
less an amount of the initial funding contributed by South32.
To maintain the option in good
standing, South32 is required to fund a minimum of $10 million per year for up to a three year period, which funds will be used
to execute a mutually agreed upon program at the UKMP. The funds provided by South32 may only be expended based on the approved
program. Provided that all the exploration data and information has been made available to South32 by no later than December 31
of each year, South32 must decide by the end of January of the following year whether: (i) to fund a further tranche of a minimum
of $10 million, or (ii) to withdraw and not provide any further annual funding. If the election to fund a further tranche
is not made in January, South32 has until the end of March to exercise the option to form the JV LLC and make the subscription
payment.
During the year ended November
30, 2017, the Company received the first payment of $10.0 million for and these funds were expended on the year 1 program at the
Bornite Project. During the six months ended May 31, 2018, the Company received the second payment of $10.0 million following
the approval of the year 2 program and budget in January 2018. The Company is responsible for the disbursement of these
funds in accordance with the approved program and budget and accordingly has not classified the funds as restricted cash.
As the initial option payments
are credited against the future subscription price upon exercise, the Company has accounted for the payment received as deferred
consideration for the purchase of the UKMP interest. At such time as the option is exercised, the initial payments received to
that date will be recognized as part of the consideration received for the Company’s contribution of the UKMP into JV LLC.
If South 32 withdraws from the Option Agreement, the consideration will be recognized in the statement of loss at that time.
The option to form the JV LLC
is recognized as a financial instrument at inception of the arrangement with an initial fair value of $nil. This option
is required to be re-measured at fair value at each reporting date with any changes in fair value recorded in loss for the period.
The Company determined that the fair value of the option is still $nil as at May 31, 2018.
|
(d)
|
Mineral properties expense
|
The following table summarizes
mineral properties expense for the noted periods.
In thousands of dollars
|
|
Three
months
ended
May 31,
2018
$
|
|
|
Three
months
ended
May 31,
2017
$
|
|
|
Six
months
ended
May 31,
2018
$
|
|
|
Six
months
ended
May 31,
2017
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
|
|
|
154
|
|
|
|
78
|
|
|
|
244
|
|
|
|
134
|
|
Drilling
|
|
|
180
|
|
|
|
90
|
|
|
|
180
|
|
|
|
90
|
|
Engineering
|
|
|
195
|
|
|
|
154
|
|
|
|
527
|
|
|
|
423
|
|
Environmental
|
|
|
84
|
|
|
|
59
|
|
|
|
161
|
|
|
|
59
|
|
Geochemistry and geophysics
|
|
|
591
|
|
|
|
5
|
|
|
|
646
|
|
|
|
5
|
|
Land and permitting
|
|
|
154
|
|
|
|
348
|
|
|
|
345
|
|
|
|
452
|
|
Project support
|
|
|
601
|
|
|
|
287
|
|
|
|
677
|
|
|
|
334
|
|
Other income
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
-
|
|
Wages and benefits
|
|
|
518
|
|
|
|
276
|
|
|
|
846
|
|
|
|
439
|
|
Mineral property
expense
|
|
|
2,475
|
|
|
|
1,297
|
|
|
|
3,606
|
|
|
|
1,936
|
|
Mineral property expenses consist
of direct drilling, personnel, community, resource reporting and other exploration expenses as outlined above, as well as indirect
project support expenses such as fixed wing charters, helicopter support, fuel, and other camp operation costs. Cumulative mineral
properties expense in Alaska from the initial earn-in agreement on the property in 2004 to May 31, 2018 is $81.7 million
and cumulative acquisition costs are $30.6 million totaling $112.3 million spent to date.
|
6.
|
Accounts payable and accrued
liabilities
|
in thousands of dollars
|
|
May
31, 2018
$
|
|
|
November
30, 2017
$
|
|
Trade accounts payable
|
|
|
372
|
|
|
|
2,767
|
|
Accrued liabilities
|
|
|
2,101
|
|
|
|
1,293
|
|
Accrued salaries and vacation
|
|
|
94
|
|
|
|
189
|
|
Accounts payable
and accrued liabilities
|
|
|
2,567
|
|
|
|
4,249
|
|
Authorized:
unlimited common shares, no par
value
in thousands of dollars, except share
amounts
|
|
Number of shares
|
|
|
Ascribed
value
$
|
|
November 30,
2016
|
|
|
105,286,469
|
|
|
|
136,357
|
|
Exercise of options
|
|
|
188,856
|
|
|
|
85
|
|
Restricted Share Units
|
|
|
209,198
|
|
|
|
83
|
|
November 30,
2017
|
|
|
105,684,523
|
|
|
|
136,525
|
|
Bought deal financing
|
|
|
24,784,482
|
|
|
|
28,750
|
|
Share issuance costs
|
|
|
-
|
|
|
|
(1,819
|
)
|
Exercise of options
|
|
|
79,453
|
|
|
|
34
|
|
Restricted Share Units
|
|
|
800,000
|
|
|
|
457
|
|
May 31, 2018,
issued and outstanding
|
|
|
131,348,458
|
|
|
|
163,947
|
|
On April 20, 2018, the Company completed
a bought-deal financing for gross proceeds of $28.7 million by issuing 24,784,482 common shares at $1.16 per common share. Expenses
including bank commissions, legal fees, stock exchange and other fees totaled $1.8 million for net proceeds of $26.9 million.
As of May 31, 2018, 20,685 NovaGold DSUs
remain outstanding representing a right to receive 3,447 common shares in Trilogy, which will settle upon certain directors retiring
from the board of NovaGold Resources Inc.
During the period ended May 31, 2018,
2,125,000 options (2017 – 1,695,000 options) at a weighted-average exercise price of CAD$1.04 (2016 – CAD$0.72) were
granted to employees, consultants and directors exercisable for a period of five years with various vesting terms between nil
and two years. The weighted-average fair value attributable to options granted in the period was $0.37.
For the period ended May 31, 2018, Trilogy
recognized a stock-based compensation charge of $0.58 million (2017– $0.27 million) for options granted to directors,
employees and service providers, net of estimated forfeitures.
The fair value of the stock options recognized
in the period has been estimated using the Black-Scholes option pricing model.
Assumptions used in the pricing model
for the period are as provided below.
|
|
May 31,
2018
|
|
Risk-free interest rates
|
|
|
1.55
|
%
|
Exercise price
|
|
CAD$
|
1.04
|
|
Expected life
|
|
|
3.0
years
|
|
Expected volatility
|
|
|
77.6
|
%
|
Expected dividends
|
|
|
Nil
|
|
As of May 31, 2018, there were 1,403,342
non-vested options outstanding with a weighted average exercise price of CAD$0.96; the non-vested stock option expense not yet
recognized was $0.25 million. This expense is expected to be recognized over the next two years.
A summary of the Company’s stock
option plan and changes during the six month period ended is as follows:
|
|
May 31, 2018
|
|
|
|
Number of options
|
|
|
Weighted
average
exercise
price
$
|
|
Balance – beginning of the year
|
|
|
7,127,500
|
|
|
|
0.54
|
|
Granted
|
|
|
2,125,000
|
|
|
|
0.80
|
|
Exercised
|
|
|
(135,844
|
)
|
|
|
0.59
|
|
Forfeited
|
|
|
(25,000
|
)
|
|
|
1.53
|
|
Balance –
end of period
|
|
|
9,091,656
|
|
|
|
0.59
|
|
The following table summarizes information
about the stock options outstanding at May 31, 2018.
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Unvested
|
|
Range of price
|
|
Number
of
outstanding
options
|
|
|
Weighted
average
years
to
expiry
|
|
|
Weighted
average
exercise
price
$
|
|
|
Number
of
exercisable
options
|
|
|
Weighted
average
exercise
price
$
|
|
|
Number
of
unvested
options
|
|
$0.34 to $0.50
|
|
|
4,169,989
|
|
|
|
2.20
|
|
|
|
0.40
|
|
|
|
4,169,989
|
|
|
|
0.40
|
|
|
|
|
|
$0.51 to $1.00
|
|
|
4,746,667
|
|
|
|
3.40
|
|
|
|
0.74
|
|
|
|
3,413,325
|
|
|
|
0.75
|
|
|
|
1,333,342
|
|
$1.01 to $1.49
|
|
|
175,000
|
|
|
|
3.83
|
|
|
|
1.19
|
|
|
|
105,000
|
|
|
|
1.25
|
|
|
|
70,000
|
|
|
|
|
9,091,656
|
|
|
|
2.60
|
|
|
|
0.59
|
|
|
|
7,688,314
|
|
|
|
0.57
|
|
|
|
1,403,342
|
|
The aggregate intrinsic value of vested
share options (the market value less the exercise price) at May 31, 2018 was $5.9 million (2017 - $1.2 million) and the aggregate
intrinsic value of exercised options for the six months ended May 31, 2018 was $0.1 million (2017 - $0.31 million).
|
(b)
|
Restricted Share Units and Deferred
Share Units
|
The Company has a Restricted Share Unit
Plan (“RSU Plan”) and a Non-Executive Director Deferred Share Unit Plan (“DSU Plan”) to provide long-term
incentives to employees, officers and directors. Awards under the RSU Plan and DSU Plan may be settled in cash and/or
common shares of the Company at the Company’s election with each restricted share unit (“RSU”) and deferred
share unit (“DSU”) entitling the holder to receive one common share of the Company or equivalent value. All
units are accounted for as equity-settled awards.
A summary of the Company’s unit
plans and changes during the six month period ended is as follows:
|
|
Number of RSUs
|
|
|
Number of DSUs
|
|
Balance – beginning of the year
|
|
|
600,002
|
|
|
|
1,041,231
|
|
Granted
|
|
|
600,000
|
|
|
|
95,398
|
|
Vested/paid
|
|
|
(800,000
|
)
|
|
|
-
|
|
Balance –
end of period
|
|
|
400,002
|
|
|
|
1,136,629
|
|
For the six months ended May 31, 2018,
Trilogy recognized a stock-based compensation charge of $0.49 million (2017- $0.22 million), net of estimated forfeitures.
As part of the annual incentive payout
for the 2017 fiscal year, 300,000 RSUs were granted to officers vesting immediately. In addition, 300,000 RSUs were granted to
officers vesting one third immediately, one third on the first anniversary of the grant date, and one third on the second anniversary.
On December 27, 2017, 800,000 RSUs vested and were settled through the issuance of 800,000 shares.
|
(c)
|
Share Purchase Warrants
|
A summary of the Company’s warrants
and changes during the six months ended May 31, 2018 is as follows:
|
|
Number
of
warrants
|
|
|
Years to expiry
|
|
|
Exercise
price
$
|
|
Balance – beginning
of the year
|
|
|
6,521,740
|
|
|
|
1.60
|
|
|
|
1.60
|
|
Balance –
end of period
|
|
|
6,521,740
|
|
|
|
1.10
|
|
|
|
1.52
|
|
The exercise price of the share purchase
warrants was adjusted downward as a result of the financing completed on April 20, 2018 from $1.60 to $1.52. The Company
measured the fair value of the warrants prior to the financing and after the financing and recorded the difference of $90,000
as an adjustment to the warrant value and to retained earnings in shareholders equity during the period. The warrants
expire on July 2, 2019.
The Company is exposed to a variety of
risks arising from financial instruments. These risks and management’s objectives, policies and procedures for managing
these risks are disclosed as follows.
The Company’s financial instruments
consist of cash and cash equivalents, accounts receivable, deposits, investments, and accounts payable and accrued liabilities.
The fair value of the Company’s financial instruments approximates their carrying value due to the short-term nature of
their maturity. The Company’s financial instruments initially measured at fair value and then held at amortized cost include
cash and cash equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities. The Company’s
investments are held for trading and are marked-to-market at each period end with changes in fair value recorded to the statement
of loss.
Financial risk management
The Company’s activities expose
it to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk.
Currency risk is the risk of a fluctuation
in financial asset and liability settlement amounts due to a change in foreign exchange rates. The Company operates in the United
States and Canada. The Company’s exposure to currency risk at May 31, 2018 is limited to the Canadian dollar consisting
of cash of CAD$1.8 million, deposit amounts of CAD$0.1 million, investments of CAD$0.3 million and accounts payable of CAD$0.4
million. Based on a 10% change in the US-Canadian exchange rate, assuming all other variables remain constant, the Company’s
net loss would change by approximately $0.2 million.
Credit risk is the risk of an unexpected
loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company holds cash
and cash equivalents with Canadian Chartered financial institutions. The Company’s accounts receivable consist of Canadian
Goods and Services Tax receivable from the Federal Government of Canada and other receivables for recoverable expenses. The Company’s
exposure to credit risk is equal to the balance of cash and cash equivalents and accounts receivable as recorded in the financial
statements.
Liquidity risk is the risk that the Company
will encounter difficulties raising funds to meet its financial obligations as they fall due. The Company is in the exploration
stage and does not have cash inflows from operations; therefore, the Company manages liquidity risk through the management of
its capital structure and financial leverage.
Contractually obligated cash flow requirements
as at May 31, 2018 are as follows.
in thousands of dollars
|
|
Total
$
|
|
|
< 1
Year
$
|
|
|
1–2
Years
$
|
|
|
2–5
Years
$
|
|
|
Thereafter
$
|
|
Accounts payable and accrued liabilities
|
|
|
2,567
|
|
|
|
2,567
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Office lease (note 9)
|
|
|
1,181
|
|
|
|
175
|
|
|
|
374
|
|
|
|
614
|
|
|
|
18
|
|
|
|
|
3,748
|
|
|
|
2,742
|
|
|
|
374
|
|
|
|
614
|
|
|
|
18
|
|
Interest rate risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company
is exposed to interest rate risk with respect to interest earned on cash and cash equivalents. Based on balances as at May 31,
2018, a 1% change in interest rates would result in a change in net loss of $0.1 million, assuming all other variables remain
constant.
Fair value accounting
Financial instruments measured at fair
value are classified into one of three levels in the fair value hierarchy according to the significance of the inputs used in
making the measurement. The three levels of the fair value hierarchy are as follows:
Level 1
— Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
— Quoted
prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full
term of the asset or liability; and
Level 3
— Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported
by little or no market activity)
The levels in the fair value hierarchy
into which the Company’s financial assets and liabilities that are measured and recognized at fair value on a recurring
basis were categorized as follows:
in thousands of dollars
|
|
May
31, 2018
$
|
|
|
November
30, 2017
$
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Current investments – shares
|
|
|
229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,516
|
|
|
|
-
|
|
|
|
-
|
|
The Company’s investments consist
of shares and warrants in a publicly-held mineral exploration company. The share investments are recorded as current investments
and are valued using quoted market prices in active markets and as such are classified as a Level 1 financial instrument.
The Company has commitments in respect
of its office lease (denominated in Canadian dollars converted at the foreign exchange rate at the end of the quarter) requiring
future minimum lease payments from the date as follows:
in thousands of dollars
|
|
May
31, 2018
$
|
|
One year
|
|
|
175
|
|
Years 2 through 5
|
|
|
988
|
|
Beyond 5 years
|
|
|
18
|
|
Total
|
|
|
1,181
|
|
|
Item 2.
|
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
|
Cautionary notes
Forward-looking statements
This Management’s Discussion
and Analysis contains “forward-looking information” and “forward-looking statements” within the meaning
of Canadian Securities laws, Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the Exchange Act, and
other applicable securities laws (collectively, “forward-looking statements”). These forward-looking statements may
include statements regarding perceived merit of properties, exploration results and budgets, mineral reserves and resource estimates,
work programs, capital expenditures, operating costs, cash flow estimates, production estimates and similar statements relating
to the economic viability of a project, timelines, strategic plans, statements relating to anticipated activity with respect to
the Ambler Mining District Industrial Access Project, including the Company’s plans and expectations relating to its Upper
Kobuk Mineral Projects, market prices for precious and base metals, or other statements that are not statements of fact. These
statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet
determinable and assumptions of management. Statements concerning mineral resource estimates may also be deemed to constitute
“forward-looking statements” to the extent that they involve estimates of the mineralization that will be encountered
if the property is developed.
Any statements that express or involve
discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or
performance (often, but not always, identified by words or phrases such as “expects”, “is expected”, “anticipates”,
“believes”, “plans”, “projects”, “estimates”, “assumes”, “intends”,
“strategy”, “goals”, “objectives”, “potential”, “possible” or variations
thereof or stating that certain actions, events, conditions or results “may”, “could”, “would”,
“should”, “might” or “will” be taken, occur or be achieved, or the negative of any of these
terms and similar expressions) are not statements of historical fact and may be forward-looking statements.
Forward-looking statements are based
on a number of material assumptions, including those listed below, which could prove to be significantly incorrect:
|
·
|
assumptions
made in the interpretation of drill results, and of the geology, grade, and continuity
of the Company’s mineral deposits;
|
|
·
|
our
ability to achieve production at any of the Company’s mineral exploration and development
properties;
|
|
·
|
our
expected ability to develop adequate infrastructure and that the cost of doing so will
be reasonable;
|
|
·
|
assumptions
that all necessary permits and governmental approvals will be obtained;
|
|
·
|
estimated
capital costs, operating costs, production and economic returns;
|
|
·
|
estimated
metal pricing, metallurgy, mineability, marketability and operating and capital costs,
together with other assumptions underlying the Company’s resource and reserve estimates;
|
|
·
|
continued
good relationships with local communities and other stakeholders;
|
|
·
|
our
expectations regarding demand for equipment, skilled labour and services needed for exploration
and development of mineral properties;
|
|
·
|
assumptions
regarding the merit of litigation; and
|
|
·
|
that
our activities will not be adversely disrupted or impeded by development, operating or
regulatory risks.
|
Forward-looking statements are subject
to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from
those reflected in the forward-looking statements, including, without limitation:
|
·
|
risks
related to the inability to define proven and probable reserves;
|
|
·
|
risks
related to our ability to finance the development of our mineral properties through external
financing, strategic alliances, the sale of property interests or otherwise;
|
|
·
|
none
of the Company’s mineral properties are in production or are under development;
|
|
·
|
uncertainties
relating to the assumptions underlying our resource estimates, such as metal pricing,
metallurgy, mineability, marketability and operating and capital costs;
|
|
·
|
risks
related to lack of infrastructure including but not limited to the risk whether or not
the AMDIAP will receive the requisite permits and, if it does, whether AIDEA will build
the AMDIAP;
|
|
·
|
uncertainties
related to the Company’s exploration programs, metallurgical studies and other
activities at its properties;
|
|
·
|
uncertainty
as to whether there will ever be production at the Company’s mineral exploration
and development properties;
|
|
·
|
uncertainty
as to estimates of capital costs, operating costs, production and economic returns;
|
|
·
|
risks
related to our ability to commence production and generate material revenues or obtain
adequate financing for our planned exploration and development activities;
|
|
·
|
risks
related to future sales or issuances of equity securities decreasing the value of existing
Trilogy common shares, diluting voting power and reducing future earnings per share;
|
|
·
|
risks
related to market events and general economic conditions;
|
|
·
|
uncertainty
related to inferred mineral resources;
|
|
·
|
uncertainty
related to the economic projections contained herein derived from the Arctic PFS;
|
|
·
|
risks
related to inclement weather which may delay or hinder exploration activities at its
mineral properties;
|
|
·
|
risks
and uncertainties relating to the interpretation of drill results, the geology, grade,
and continuity of our mineral deposits;
|
|
·
|
mining
and development risks, including risks related to infrastructure, accidents, equipment
breakdowns, labor disputes or other unanticipated difficulties with or interruptions
in development, construction or production;
|
|
·
|
the
risk that permits and governmental approvals necessary to develop and operate mines at
our mineral properties will not be available on a timely basis or at all;
|
|
·
|
commodity
price fluctuations;
|
|
·
|
risks
related to governmental regulation and permits, including environmental regulation, including
the risk that more stringent requirements or standards may be adopted or applied due
to circumstances unrelated to the Company and outside of its control;
|
|
·
|
risks
related to the need for reclamation activities on our properties and uncertainty of cost
estimates related thereto;
|
|
·
|
uncertainty
related to title to our mineral properties;
|
|
·
|
our
history of losses and expectation of future losses;
|
|
·
|
risks
related to increases in demand for equipment, skilled labor and services needed for exploration
and development of mineral properties, and related cost increases;
|
|
·
|
our
need to attract and retain qualified management and technical personnel;
|
|
·
|
risks
related to conflicts of interests of some of our directors;
|
|
·
|
risks
related to potential future litigation;
|
|
·
|
risks
related to the voting power of our major shareholders and the impact that a sale by such
shareholders may have on our share price;
|
|
·
|
risks
related to global climate change;
|
|
·
|
risks
related to adverse publicity from non-governmental organizations;
|
|
·
|
uncertainty
as to the volatility in the price of the Company’s shares;
|
|
·
|
the
Company’s expectation of not paying cash dividends;
|
|
·
|
adverse
federal income tax consequences for U.S. shareholders should the Company be a passive
foreign investment company;
|
|
·
|
uncertainty
as to our ability to maintain the adequacy of internal control over financial reporting
as per the requirements of Section 404 of the Sarbanes-Oxley Act; and
|
|
·
|
increased
regulatory compliance costs, associated with rules and regulations promulgated by the
United States Securities and Exchange Commission (the “SEC”), Canadian Securities
Administrators, the NYSE American, the TSX, and the Financial Accounting Standards Boards,
and more specifically, our efforts to comply with the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
|
This list is not exhaustive of the
factors that may affect any of the Company’s forward-looking statements. Forward-looking statements are statements about
the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ
materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors,
including, without limitation, those referred to in Trilogy’s annual report on Form 10-K filed with the Canadian securities
regulatory authorities and the SEC on February 2, 2018, and other information released by Trilogy and filed with the appropriate
regulatory agencies.
The Company’s forward-looking
statements are based on the beliefs, expectations, and opinions of management on the date the statements are made, and the Company
does not assume any obligation to update forward-looking statements if circumstances or management’s beliefs, expectations
or opinions should change, except as required by law. For the reasons set forth above, investors should not place undue reliance
on forward-looking statements.
Cautionary note to United States investors
Reserve and resource estimates
This Management’s Discussion
and Analysis has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from
the requirements of U.S. securities laws. Unless otherwise indicated, all resource and reserve estimates included in this Management’s
Discussion and Analysis have been prepared in accordance with National Instrument 43-101 Standards of Disclosure for Mineral
Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy, and Petroleum Definition Standards on Mineral
Resources and Mineral Reserves. NI 43-101 is a rule developed by the Canadian Securities Administrators which establishes standards
for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Canadian standards,
including NI 43-101, differ significantly from the requirements of the SEC, and resource and reserve information contained herein
may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting the generality of
the foregoing, the term “resource” does not equate to the term “reserves”. Under U.S. standards, mineralization
may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically
and legally produced or extracted at the time the reserve determination is made. The SEC’s disclosure standards normally
do not permit the inclusion of information concerning “measured mineral resources”, “indicated mineral resources”
or “inferred mineral resources” or other descriptions of the amount of mineralization in mineral deposits that do
not constitute “reserves” by U.S. standards in documents filed with the SEC. Investors are cautioned not to assume
that any part or all of mineral deposits in these categories will ever be converted into reserves. U.S. investors should also
understand that “inferred mineral resources” have a great amount of uncertainty as to their existence and great uncertainty
as to their economic and legal feasibility. It cannot be assumed that all or any part of an “inferred mineral resource”
will ever be upgraded to a higher category. Under Canadian rules, estimated “inferred mineral resources” may not form
the basis of feasibility or pre-feasibility studies except in rare cases. Investors are cautioned not to assume that all or any
part of an “inferred mineral resource” exists or is economically or legally mineable. Disclosure of “contained ounces”
in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization
that does not constitute “reserves” by SEC standards as in-place tonnage and grade without reference to unit measures.
The requirements of NI 43-101 for identification of “reserves” are also not the same as those of the SEC, and reserves
reported by the Company in compliance with NI 43-101 may not qualify as “reserves” under SEC standards. Accordingly,
information concerning mineral deposits set forth herein may not be comparable with information made public by companies that
report in accordance with U.S. standards.
General
This Management’s Discussion and
Analysis (“MD&A”) of Trilogy Metals Inc. (“Trilogy”, “Trilogy Metals”, “the Company”
or “we”) is dated July 16, 2018 and provides an analysis of our unaudited interim financial results for the quarter
ended May 31, 2018 compared to the quarter ended May 31, 2017.
The following information should be read
in conjunction with our May 31, 2018 unaudited interim consolidated financial statements and related notes, including recent accounting
pronouncements, which were prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).
The MD&A should also be read in conjunction with our audited consolidated financial statements and related notes for the year
ended November 30, 2017. A summary of the U.S. GAAP accounting policies are outlined in note 2 of the audited
consolidated financial statements. All amounts are in United States dollars unless otherwise stated. References to “Canadian
dollars” and “C$” and “CDN$” are to the currency of Canada and references to “U.S. dollars”,
“$” or “US$” are to the currency of the United States.
Andrew W. West, P.Geo., an employee and
Exploration Manager of Trilogy, is a Qualified Person under National Instrument 43-101 -
Standards of Disclosure for Mineral
Projects
(“NI 43-101”), and has approved the scientific and technical information in this MD&A.
Trilogy’s shares are listed on the
Toronto Stock Exchange (“TSX”) and the NYSE American Stock Exchange (“NYSE American”) under the symbol
“TMQ”. Additional information related to Trilogy, including our annual report on Form 10-K, is available on SEDAR
at
www.sedar.com
and on EDGAR at
www.sec.gov
.
Description of business
We are a base metals exploration company
focused on exploring and developing our mineral holdings in the Ambler mining district located in Alaska, U.S.A. We conduct our
operations through a wholly-owned subsidiary, NovaCopper US Inc., which is doing business as Trilogy Metals US (“Trilogy
Metals US”). Our Upper Kobuk Mineral Projects, (“UKMP” or “UKMP Projects”), consist of: i) the 100%
owned Ambler lands which host the Arctic copper-zinc-lead-gold-silver Project (the “Arctic Project”); and ii) the Bornite
lands being explored under a collaborative long-term agreement with NANA Regional Corporation, Inc. (“NANA”), a regional
Alaska Native Corporation, which host the Bornite carbonate-hosted copper Project (the “Bornite Project”).
Project activities
Arctic Project
In a press release dated January 18, 2018
the Company announced additional in-fill drill results at its Arctic Project from the 2017 field program which included 785.2
meters of diamond drilling to collect representative sample material to conduct bulk ore sorting studies for the Arctic deposit.
An additional 273.8 meters of sonic drilling was completed to collect geotechnical, hydrological, geothermal, and hydrogeological
information for the tailings management facilities and waste rock dump for the project in support of the Pre-Feasibility Study
titled “Arctic Project, Northwest Alaska, USA, NI 43-101 Technical Report on Pre-Feasibility Study” with an effective
date of February 20, 2018 and a release date of April 6, 2018 (the “ArcticPFS”).
In a press release dated February 20,
2018, the Company announced the positive results of its PFS for the Arctic PFS. These results convert indicated mineral resources
at Arctic to probable mineral reserves.
Highlights of the Arctic PFS study are
as follows:
|
·
|
Pre-tax
Net Present Value (“NPV”)
8%
of $1,935.2 million calculated at
the beginning of the three-year construction period and an Internal Rate of Return (“IRR”)
of 38.0% for the base case.
|
|
·
|
After-tax
NPV
8%
of $1,412.7 million and after-tax IRR of 33.4% for the base case.
|
|
·
|
Initial
capital expenditure of $779.6 million and sustaining capital of $65.9 million for total
estimated capital expenditures of $845.5 million over the estimated 12-year mine life.
In addition, closure and reclamation costs are estimated at $65.3 million.
|
|
·
|
Estimated
pre-tax and after-tax payback of initial capital within 2 years for the base case at
$3.00/lb copper. At $2.00/lb copper, pre-tax and after-tax payback of initial
capital is 3 years.
|
|
·
|
Minimum
12-year mine life supporting a maximum 10,000 tonne-per-day conventional grinding mill-and-flotation
circuit to produce copper, zinc and lead concentrates containing significant gold and
silver by-products.
|
|
·
|
Life
of mine strip ratio of 6.9 to 1.
|
|
·
|
Average
annual payable production projected to be more than 159 million pounds of copper, 199
million pounds of zinc, 33 million pounds of lead, 30,600 ounces of gold and 3.3 million
ounces of silver for life of mine.
|
|
·
|
A
capital intensity ratio on initial capital of approximately $6,200 per tonne of average
annual copper equivalent produced.
|
|
·
|
Estimated
cash costs of $0.15/lb of payable copper (C1 cash costs include on-site mining and processing
costs, road tolls and maintenance, transport, royalties, and is net of by-product credits).
|
|
·
|
Total
“all-in” cash costs (initial/sustaining capital, operating, transportation,
treatment and refining charges, road toll, and by-product metal credits) estimated at
$0.63/lb of payable copper.
|
|
·
|
Economic
indicators justify moving forward with permitting and a feasibility study.
|
The Arctic PFS was prepared under National
Instrument 43-101 standards by independent consultant, Ausenco Engineering Canada Inc. (“Ausenco”) of Vancouver, Canada
and the full technical report was filed on SEDAR on April 6, 2018 and on EDGAR on April 12, 2018. The Company also
engaged Amec Foster Wheeler (“Amec”) to complete mine planning and SRK Consulting (Canada) Inc. (“SRK”)
to complete tailings and waste design, hydrology and water management studies.
In a press release dated May 29, 2018,
the Company announced that our board of directors approved a $6.7 million budget to advance the Arctic Project towards feasibility
and permitting. The focus of the Arctic work program for the remainder of the year is to be on geotechnical and hydrological engineering
studies at the Arctic Project’s proposed waste and tailings sites with the objective to advance the engineering design for
these facilities to a feasibility level of study. A number of geotechnical and hydrological drill holes are to be completed to
support this effort. The Company also expects to gather extensive environmental data for a variety of studies to support the submission
of a mine permit application in 2019.
Bornite Project
In a press release dated December 4, 2017,
the Company announced the final set of drill results at the Bornite Project from the 2017 exploration drill program and in a press
release dated January 10, 2018 the Company announced the results of a metallurgical test work program demonstrating that a high
quality, 30% copper concentrate containing no deleterious metals can be produced at the currently defined in-pit resource at the
Bornite Project.
In a press release dated December 14,
2017, the Company announced that South32 Limited (“South32”) had committed to fund the second tranche of $10 million
under an Option Agreement on the UKMP entered into on April 10, 2017 (“Option Agreement”). The funds necessary
to maintain the Option Agreement in good standing were fully received during the first quarter.
On May 3, 2018 the Company announced work
had been initiated to estimate a cobalt resource for the Bornite Project and on June 5, 2018 the Company announced a maiden cobalt
resource with the following highlights:
|
·
|
At
a base case 0.50% copper cut-off grade, and within the combined Indicated and Inferred
Cu resource pit shell, the Bornite Project is estimated to contain in-pit Inferred Resources
of 124.6 million tonnes grading 0.017% Co for 45 million pounds of contained cobalt (see
Table 1 for details).
|
|
·
|
Below
the resource limiting pit shell and at a base case cut-off grade of 1.5% copper, the
Bornite Project is estimated to contain additional Inferred Resources of 57.8 million
tonnes grading 0.025% Co for 32 million pounds of contained cobalt.
|
|
·
|
Total
Inferred Resources (in-pit and below-pit) of 182.4 million tonnes grading 0.019% Co for
77 million pounds of contained cobalt (see Table 1 for details).
|
Table 1: Estimate
of Cobalt Mineral Resources for the Bornite Deposit
Type
|
|
Cut-off
(Cu%)
|
|
|
Tonnes
(million)
|
|
|
Average Grade
Co (%)
|
|
|
Contained Metal
Co (Mlbs)
|
|
In-Pit
|
|
|
0.5
|
|
|
|
124.6
|
|
|
|
0.017
|
|
|
|
45
|
|
Below-Pit
|
|
|
1.5
|
|
|
|
57.8
|
|
|
|
0.025
|
|
|
|
32
|
|
Total Inferred
|
|
|
|
|
|
|
182.4
|
|
|
|
0.019
|
|
|
|
77
|
|
|
1.
|
Resources stated as contained within
a pit shell developed using a metal price of $3.00/lb Cu, mining costs of $2.00/tonne,
milling costs of $11/tonne, G&A cost of $5.00/tonne, 87% metallurgical recoveries
and an average pit slope of 43 degrees.
|
|
2.
|
Mineral Resources are not Mineral
Reserves and do not have demonstrated economic viability. There is no certainty that
all or any part of the Mineral Resources will be converted into Mineral Reserves.
|
|
3.
|
It is reasonably expected that the
majority of Inferred mineral resources could be upgraded to Indicated mineral resources
with additional exploration.
|
Corporate developments
Financing
On April 16, 2018, the Company entered
into an underwriting agreement with a syndicate of underwriters (the "Underwriters") led by Cantor Fitzgerald Canada
Corporation, acting as sole lead underwriter and book-running manager, and including Cormark Securities Inc., BMO Capital Markets
and Roth Capital Partners, LLC, under which the Underwriters agreed to buy, on a bought deal underwritten basis, 21,551,724 common
shares of the Company at a price of $1.16 per common share for aggregate gross proceeds of approximately $25 million
(the "Offering"). On April 20, 2018, we announced the closing of the Offering of 24,784,482 common shares,
including the exercise in full by the Underwriters of the over-allotment option, at a price of $1.16 per common share for aggregate
gross proceeds of approximately $28.7 million.
Certain large shareholders participated
in the Offering with South32 purchasing approximately 40% or $11.5 million, Electrum Strategic Opportunities Fund L.P. taking
approximately 20% or $5.8 million, The Baupost Group LLC taking approximately 10% or $2.8 million, and Selz Capital LLC taking
approximately 4% or $1.2 million of the common shares. South32’s involvement in this financing represented the maximum allocation
of their rights to participate to a minimum of 20% to a maximum of 40% in future financings, private or public, subject to a maximum
aggregate ownership of 19.9% in the Company.
The Company intends to use the net proceeds
from the Offering for an anticipated period of three years (i) to finance advancing the Arctic Project towards feasibility and
permitting, (ii) for exploration in the Ambler mining district, and (iii) for general corporate purposes.
Annual General Meeting
The Annual General Meeting of shareholders
was held on May 15, 2018. In a press release dated May 15, 2018, we were pleased to report all directors nominated
by the Company and standing for election were resoundingly elected by shareholders of the Company.
Additions to the Senior Management
Team
On May 31, 2018, we announced the additions
of Patrick (“Pat”) Donnelly as Vice President, Corporate Communications and Development and Robert (“Bob”)
Jacko as Vice President, Projects to the Company’s senior management team.
Outlook
The 2018 program and budget at the Bornite
Project of $10 million, which includes in-fill and off-set drilling to better define and expand the high grade copper resources
at Bornite, is currently underway. Camp opened mid-May and a seismic program was completed in early June. Three
drill rigs have started up in June to complete a planned field program of approximately 8,000 meters of drilling. Assay
results from the drilling program are anticipated to be released throughout the fall. The Company also anticipates
filing an updated technical report for the Bornite Project by July 20, 2018 incorporating the Company’s cobalt resources
and updated from the 2017 drill program at Bornite.
The 2018 program and budget at the Arctic
Project of $6.7 million includes the work performed to date on the Arctic PFS and work to advance the Arctic Project towards feasibility
and permitting. In May 2018, the Company completed an ore sorting test at the Steinert facility in Kentucky, Ohio and results are
being incorporated into a final ore sorting study expected by the end of the third quarter. One drill has started up in June at
Arctic for feasibility level geotechnical drilling at the sites identified in the Arctic PFS for the tailings dam and waste storage
facilities. We are anticipating drilling 580 meters for geotechnical and hydrological studies. Engineering studies are planned
to include additional metallurgical, tailings and waste dump design, water treatment and water balance studies for the feasibility
study and permitting. We will also continue with baseline environmental studies which include hydrology, meteorological, sampling
and archeology data collection.
We will be continuing to work closely
with The Alaska Industrial Development and Export Authority (“AIDEA”) (the proponent for the Ambler Mining District
Industrial Access Project (“AMDIAP”)) to advance the permitting process on the AMDIAP throughout 2018. On
April 30, 2018 the Bureau of Land Management (“BLM”) released the Ambler Road Environmental Impact Statement Scoping
Summary Report. Permitting of the AMDIAP under the National Environmental Policy Act (“NEPA”) Environmental
Impact Statement (“EIS”) process has now concluded the “Scoping Phase” of permitting and has moved to
the “Draft EIS Phase”. Per the BLM’s website, the Draft EIS is scheduled for the end of March 2019.
Property review
Our principal assets, the UKMP Projects,
are located in the Ambler mining district in Northwest Alaska. Our UKMP Projects comprise approximately 355,323 acres (143,794 hectares)
consisting of the Ambler and Bornite lands.
Arctic Project
The Ambler lands, which host a number
of deposits, including the high-grade copper-zinc-lead-gold-silver Arctic Project, and other mineralized targets within a 100
kilometer long volcanogenic massive sulfide (“VMS”) belt, are owned by NovaCopper US. The Ambler lands are located
in Northwestern Alaska and consist of 114,500 acres (46,337 hectares) of Federal patented mining claims and State of Alaska
mining claims, within which VMS mineralization has been found.
We have recorded the Ambler lands as a
mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.
Bornite Project
On October 19, 2011, Trilogy Metals
US and NANA signed a collaborative agreement to explore and develop the Ambler mining district. Under the Exploration Agreement
and Option to Lease (the “NANA Agreement”), we acquired, in exchange for, among other things, a $4.0 million cash
payment to NANA, the exclusive right to explore the Bornite Project property and lands deeded to NANA through the Alaska Native
Claims Settlement Act (“ANCSA”), located adjacent to the Arctic Project, and the non-exclusive right to access and
entry onto NANA’s lands. The agreement establishes a framework for any future development of either the Bornite Project
or the Arctic Project. Both projects are included as part of a larger area of interest set forth in the NANA Agreement. The agreement
with NANA created a total land package incorporating our Ambler lands with the adjacent Bornite and ANCSA lands with a total area
of approximately 355,323 acres (143,794 hectares).
Upon the decision to proceed with development
of a mine within the area of interest, NANA maintains the right to purchase an ownership interest in the mine equal to between
16%-25% or retain a 15% net proceeds royalty which is payable after we have recovered certain historical costs, including capital
and cost of capital. Should NANA elect to purchase an ownership interest in the mine, consideration will be payable based on the
elected percentage purchased and all the costs incurred on the properties less $40.0 million, not to be less than zero. The
parties would form a joint venture and be responsible for all future costs incurred in connection with the mine, including capital
costs of the mine, based on each party’s pro-rata share.
NANA would also be granted a net smelter
return royalty between 1% and 2.5% upon the execution of a mining lease or a surface use agreement, the amount of which is determined
by the particular area of land from which production originates.
We have accounted for the Bornite Project
as a mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.
Summary of results
in thousands of dollars,
except for per share amounts
|
Three months ended
|
|
|
Six months ended
|
|
Selected expenses
|
|
May
31, 2018
$
|
|
|
May
31, 2017
$
|
|
|
May
31, 2018
$
|
|
|
May
31, 2017
$
|
|
General and administrative
|
|
|
454
|
|
|
|
407
|
|
|
|
799
|
|
|
|
785
|
|
Mineral properties expense
|
|
|
2,475
|
|
|
|
1,297
|
|
|
|
3,606
|
|
|
|
1,936
|
|
Professional fees
|
|
|
114
|
|
|
|
193
|
|
|
|
273
|
|
|
|
318
|
|
Salaries
|
|
|
223
|
|
|
|
224
|
|
|
|
452
|
|
|
|
466
|
|
Salaries – stock-based compensation
|
|
|
151
|
|
|
|
106
|
|
|
|
1,073
|
|
|
|
499
|
|
Investor relations
|
|
|
138
|
|
|
|
93
|
|
|
|
202
|
|
|
|
156
|
|
Loss and comprehensive loss for the period
|
|
|
3,664
|
|
|
|
2,390
|
|
|
|
6,610
|
|
|
|
5,387
|
|
Basic and diluted loss per common
share
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
For the three months ended May 31, 2018,
Trilogy reported a net loss of $3.7 million (or $0.03 basic and diluted loss per common share) compared to a net loss of $2.4
million for the corresponding period in 2017 (or $0.02 basic and diluted loss per common share). This variance was
primarily due to the difference in mineral properties expense with the preparation of the Arctic PFS in 2018 with no comparable
activity in 2017. An increase of $1.2 million of mineral property expenses occurred during the three months ended May
31, 2018 compared to the three months ended May 31, 2017.
Other differences noted for the comparable
periods were i) an increase in general and administrative expenses to support the increased field program at the UKMP; ii) a decrease
in professional fees as the main activity in the second quarter of 2018 was related to the financing completed on April 20, 2018
with the associated legal fees recorded as issuance costs in shareholders equity; and iii) an increase in investor
relations expenses due to the Company’s increased level of marketing activity including attendance at more investor conferences
in 2018 compared with 2017.
The basic and diluted loss per common
share of $0.03 for the three months ended May 31, 2018 is increased from the basic and diluted loss per common share of $0.02
for the three months ended May 31, 2017 due to the increased activities affecting the loss for the period as described above.
For the six months ended May 31, 2018,
Trilogy reported a net loss of $6.6 million (or $0.06 basic and diluted loss per common share) compared to a net loss of $5.4
million for the corresponding period in 2017 (or $0.05 basic and diluted loss per common share). This variance was
primarily due to the increased activity level at our projects which amounts are recorded as mineral properties expense. An
increase of $1.7 million of mineral property expenses occurred during the six months ended May 31, 2018 compared to the six months
ended May 31, 2017 due to the work performed for the Arctic PFS in 2018 with no comparable activity in 2017. Similar
to the activity levels for the three months ended May 31, 2018, other differences noted relate to i) a small increase in general
and administrative expenses; ii) a decrease in professional fees due to the legal costs related to the financing completed on
April 20, 2018 are recorded as issuance costs in shareholders equity; and iii) an increase in investor relations expenses due
to an increase in the number of investor conferences attended in 2018 compared with 2017.
The basic and diluted loss per common
share of $0.06 for the six months ended May 31, 2018 is increased from the basic and diluted loss per common share of $0.05 for
the six months ended May 31, 2017 due to the increased activities affecting the loss as described above.
Selected financial data
Quarterly information
in thousands of dollars,
except per share amounts
|
|
Q2 2018
|
|
|
Q1 2018
|
|
|
Q4 2017
|
|
|
Q3 2017
|
|
|
Q2 2017
|
|
|
Q1 2017
|
|
|
Q4 2016
|
|
|
Q3 2016
|
|
|
|
05/31/18
$
|
|
|
02/28/18
$
|
|
|
11/30/17
$
|
|
|
08/31/17
$
|
|
|
05/31/17
$
|
|
|
02/28/17
$
|
|
|
11/30/16
$
|
|
|
08/31/16
$
|
|
Interest and other income
|
|
|
77
|
|
|
|
17
|
|
|
|
13
|
|
|
|
23
|
|
|
|
12
|
|
|
|
11
|
|
|
|
10
|
|
|
|
16
|
|
Mineral property expenses
|
|
|
2,475
|
|
|
|
1,131
|
|
|
|
4,693
|
|
|
|
8,471
|
|
|
|
1,297
|
|
|
|
639
|
|
|
|
970
|
|
|
|
3,077
|
|
Income (loss) from discontinued operations
for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,561
|
|
|
|
(352
|
)
|
Earnings (loss) for the period
|
|
|
(3,664
|
)
|
|
|
(2,946
|
)
|
|
|
(6,726
|
)
|
|
|
(8,992
|
)
|
|
|
(2,390
|
)
|
|
|
(2,996
|
)
|
|
|
2,736
|
|
|
|
(4,255
|
)
|
Earnings (loss) per common share –
basic and diluted
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
|
|
(0.09
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
0.03
|
|
|
|
(0.04
|
)
|
Factors that can cause fluctuations in
our quarterly results include the length of the exploration field season at the properties, the type of program conducted, stock
option vesting and issuance of shares. Realized and unrealized losses or gains on held for trading investments had significant
movements period-to-period which affect the quarterly earnings or loss for the period. The investments consist of common shares
and warrants in GoldMining Inc. (“GMI”) acquired as consideration for the sale of Sunward Investments Limited (“Sunward”)
and its Titiribi gold-copper exploration project in Colombia on September 1, 2016. Other factors that have caused fluctuations
in the quarterly results that would not be expected to re-occur include the acquisition and disposition of Sunward and financing
activities.
Our loss for the second quarter ended
May 31, 2018 of $3.7 million has increased over the loss for the first quarter ended February 28, 2017 of $3.0 million due to
an increase in mineral property expenses related specifically to the work performed on the Arctic PFS results of which were released
on February 20, 2018 with work related to writing and filing of the technical report performed during the second quarter prior
to filing on April 6, 2018. Our loss for the first quarter ended February 28, 2018 of $2.9 million was lower compared
to two prior quarterly periods and is a reflection of the seasonality of the mineral property expenses which are mostly incurred
during the summer and fall field season.
Our loss for the fourth quarter ended November
30, 2017 of $6.7 million and third quarter ended August 31, 2017 of $9.0 million respectively, significantly increased compared
to prior quarterly periods due to the size and length of the 2017 field program which was more than double the 2016 field program.
The loss of $6.7 million for the fourth quarter ended November 30, 2017 is significantly increased compared to the earnings of
$2.7 million recognized for the fourth quarter ended November 30, 2016. In 2016, a gain of $4.4 million was recognized on the sale
of Sunward Investments. The loss for the fourth quarter ended November 30, 2017 of $6.7 million also increased significantly due
to the length of the field program undertaken in 2017 which operated during the majority of the fourth quarter. In 2016, the field
program did not extend into the fourth quarter and as such, mineral property expenses of $1.0 million incurred were related to
engineering and other desktop studies undertaken during the comparable period.
Liquidity and capital resources
At May 31, 2018, we had $37.5 million
in cash and cash equivalents and working capital of $36.1 million. The increase in cash and working capital was a result of fully
receiving the $10.0 million Year 2 funding from South32 and closing of a bought-deal financing for net proceeds of $26.9 million.
We expended $6.6 million on operating
activities during the three months ended May 31, 2018 compared with $3.6 million for operating activities for the same period
in 2017. A majority of cash spent on operating activities during all periods was expended on mineral property expenses,
general and administrative, salaries and professional fees. During the three months ended May 31, 2018, we generated
$2.1 million (2017 - $0.9 million) in proceeds from the sale of investments. As at May 31, 2018 we have sold a total of 4,720,000
GoldMining Inc. (“GMI”) shares and subsequent to the end of the quarter, in June 2018 we sold the remaining 280,000
GMI shares that we held for a grand total of 5 million GMI shares sold for gross proceeds of C$7.6 million. The proceeds
were used for general operating activities.
As at May 31, 2018 the Company continues
to manage its cash expenditures and management believes that the working capital available is sufficient to meet its operational
requirements for the next three years.
Contractual obligations
Contractual obligated undiscounted cash
flow requirements as at May 31, 2018 are as follows.
in thousands of dollars
|
|
Total
$
|
|
|
< 1
Year
$
|
|
|
1–2
Years
$
|
|
|
2–5
Years
$
|
|
|
Thereafter
$
|
|
Accounts payable and accrued liabilities
|
|
|
2,567
|
|
|
|
2,567
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Office lease
|
|
|
1,181
|
|
|
|
175
|
|
|
|
374
|
|
|
|
614
|
|
|
|
18
|
|
|
|
|
3,748
|
|
|
|
2,742
|
|
|
|
374
|
|
|
|
614
|
|
|
|
18
|
|
Off-balance sheet arrangements
We have no material off-balance sheet
arrangements. The Company has lease commitments for office spaces with a remaining total commitment of $1.2 million.
Outstanding share data
At July 16, 2018, we had 131,467,266 common
shares issued and outstanding. At July 16, 2018, we had outstanding 6,521,740 warrants with an exercise price of $1.52 each, 9,076,043
stock options with a weighted-average exercise price of $0.61, 1,136,629 deferred share units, and 400,002 restricted share units.
Upon exercise of all of the foregoing convertible securities, the Company would be required to issue an aggregate of 17,150,027
common shares.
New accounting pronouncements
Certain recent accounting pronouncements
have been included under note 2 in our May 31, 2018 unaudited interim consolidated financial statements which are available on
the Company’s SEDAR profile at www.sedar.com and on the Company’s EDGAR profile at www.sec.gov.
Critical accounting estimates
The most critical accounting estimates
upon which our financial status depends are those requiring estimates of the recoverability of our capitalized mineral properties,
impairment of long-lived assets, accounting for business combinations, income taxes and valuation of stock-based compensation.
Mineral properties and development
costs
All direct costs related to the acquisition
of mineral property interests are capitalized. The acquisition of title to mineral properties is a complicated and uncertain process.
The Company has taken steps, in accordance with industry standards, to verify the title to mineral properties in which it has
an interest. Although the Company has made efforts to ensure that legal title to its mining assets is properly recorded, there
can be no assurance that such title will be secured indefinitely.
Impairment of long-lived assets
Management assesses the possibility of
impairment in the carrying value of its long-lived assets whenever events or circumstances indicate that the carrying amounts
of the asset or asset group may not be recoverable. Significant judgments are made in assessing the possibility of impairment.
Management considers several factors in considering if an indicator of impairment has occurred, including but not limited to,
indications of value from external sources, significant changes in the legal, business or regulatory environment, and adverse
changes in the use or physical condition of the asset. These factors are subjective and require consideration at each period end.
If an indicator of impairment is determined to exist, management calculates the estimated undiscounted future net cash flows relating
to the asset or asset group using estimated future prices, mineral resources, and operating, capital and reclamation costs. When
the carrying value of an asset exceeds the related undiscounted cash flows, the asset is written down to its estimated fair value,
which is usually determined using discounted future cash flows. Management’s estimates of mineral prices, mineral resources,
foreign exchange rates, production levels and operating capital and reclamation costs are subject to risk and uncertainties that
may affect the determination of the recoverability of the long-lived asset.
Income taxes
We must make estimates and judgments in
determining the provision for income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits
including interest and penalties. We are subject to income tax law in the United States and Canada. The evaluation of tax liabilities
involving uncertainties in the application of complex tax regulation is based on factors such as changes in facts or circumstances,
changes in tax law, new audit activity, and effectively settled issues. The evaluation of an uncertain tax position requires significant
judgment, and a change in such recognition would result in an additional charge to the income tax expense and liability.
Stock-based compensation
Compensation expense for options granted
to employees, directors and certain service providers is determined based on estimated fair values of the options at the time
of grant using the Black-Scholes option pricing model, which takes into account, as of the grant date, the fair market value of
the shares, expected volatility, expected life, expected forfeiture rate, expected dividend yield and the risk-free interest rate
over the expected life of the option. The use of the Black-Scholes option pricing model requires input estimation of the expected
life of the option, volatility, and forfeiture rate which can have a significant impact on the valuation model, and resulting
expense recorded.