in thousands of dollars

in thousands of dollars

in thousands of dollars

The following table summarizes mineral properties expense for the noted periods.

In thousands of dollars

Mineral propertyNo additional mineral properties 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. Expenseswere incurred during the first quarterthree-month period ended February 29,May 31, 2020, consisted mainly of engineering studies in preparation of the Arctic feasibility study and care and maintenance of the camp during the winter season. Cumulative mineral properties expense in Alaska from the initial earn-in agreementas on the property in 2004 to February 29, 2020 is $115.3 million and cumulative acquisition costs were $30.6 million. Cumulative spend to date totaled $145.9 million through to February 29, 2020. On February 11, 2020, upon the formation of the joint venture with South 32, all mineral properties previously held by the acquisitionCompany were contributed to Ambler Metals LLC. The Company continues to fund the Arctic Project feasibility study, costs of $30.6for which were $0.7 million were derecognized uponsince the contributionformation of the mineral properties to Ambler Metals.joint venture on February 11, 2020. The table above is for comparison purposes for the respective periods.

As part of the formation of the joint venture with South32 on February 11, 2020, Trilogy contributed all of its assets associated with the UKMP, including the Arctic and Bornite projects. As a result, $0.62 million of machinery and equipment as well as $30.6 million of mineral properties related to the UKMP were derecognized in Trilogy on February 11, 2020.

in thousands of dollars

in thousands of dollars

The pre-transition rent deposit of $114 thousand was transferred to the Right-of-use asset upon adoption of ASC 842 on December 1, 2019 and is included in the opening balance of $681 thousand.

The Company’s lease arrangements primarily consist of an operating lease for our office space ending in June 2024. There are no extension options.

Total lease expense recorded within general and administrative expenses was comprised of the following components:

in thousands of dollars

Variable lease costs consist primarily of the Company’s portion of operating costs associated with the office space lease as the Company elected to apply the practical expedient not to separate lease and non-lease components.

As of February 29,May 31, 2020, the weighted-average remaining lease term was 4.34.1 years and the weighted-average discount rate is 8%. Significant judgment was used in the determination of the incremental borrowing rate which included estimating the Company’s credit rating.

Supplemental cash and non-cash information relating to our leases during the threesix months ended February 29,May 31, 2020 are as follows:

Future minimum payments relating to the lease recognized in our balance sheet as of February 29,May 31, 2020 are as follows:

in thousands of dollars

Authorized:

unlimited common shares, no par value

in thousands of dollars, except share amounts

On April 30, 2012, under the NovaGold Arrangement, Trilogy committed to issue common shares to satisfy holders of NovaGold deferred share units (“NovaGold DSUs”) on record as of the close of business April 27, 2012. When vested, Trilogy committed to deliver one common share to the holder for every six shares of NovaGold the holder is entitled to receive, rounded down to the nearest whole number. As of February 29,May 31, 2020, 11,927 NovaGold DSUs remained outstanding representing a right to receive 1,988 common shares in Trilogy, which will settle upon certain directors retiring from NovaGold’s board.

During the period ended February 29,May 31, 2020, the Company granted 2,050,0002,325,000 options (2019 – 2,430,0002,527,500 options) at a weighted-average exercise price of CAD$3.022.93 (2019 – CAD$2.94)2.96) to employees, consultants and directors exercisable for a period of five years with various vesting terms from immediate vesting to vesting over a two-year period. The weighted-average fair value attributable to options granted in the period was $0.99$0.96 (2019 - $1.08).

For the period ended February 29,May 31, 2020, Trilogy recognized a stock-based compensation charge of $1.16$1.58 million (2019 – $1.59$1.94 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.

As of February 29,May 31, 2020, there were 1,453,338 non-vested options outstanding with a weighted average exercise price of $2.21;$2.15; the non-vested stock option expense not yet recognized was $0.95$0.71 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 period ended February 29,May 31, 2020 is as follows:

The following table summarizes information about the stock options outstanding at February 29, 2019.May 31, 2020.

The aggregate intrinsic value of vested share options (the market value less the exercise price) at February 29,May 31, 2020 was $5.9$8.3 million (2019 - $13$17.6 million) and the aggregate intrinsic value of exercised options for the three months ended February 29,May 31, 2020 was $0.04$0.18 million (2019 - $0.08$0.30 million).

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 period ended February 29,May 31, 2020 is as follows:

For the period ended February 29,May 31, 2020, Trilogy recognized a stock-based compensation charge of $0.04$0.39 million (2019- $0.35$0.66 million), net of estimated forfeitures.

NoThe 200,000 RSUs granted and fully vested during the period were granted as partsettled on April 16, 2020 through the issuance of the annual incentive payout for the 2019 fiscal year to officers.200,000 common shares. The 225,000 RSUs granted for the annual incentive payout for the 2018 fiscal year vested half on the grant date and half on the first anniversary of the grant date. RSUs vesting in December 2019 were settled on December 17, 2019 through the issuance of 212,501 common shares.

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, 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.

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 February 29,May 31, 2020 is limited to the Canadian dollar balances consisting of cash of CDN$540,000,87,000, accounts receivable of CDN$49,00042,000 and accounts payable of CDN$865,000.347,000. 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 $21,000.$16,000.

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 consists 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 February 29,May 31, 2020 are as follows:

in thousands of dollars

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 February 29,May 31, 2020, a 1% change in interest rates would result in a change in net loss of $0.1 million, assuming all other variables remain constant.

The Company has commitments with respect to an office lease requiring future minimum lease payments as summarized in note 8(b) above.

Subsequent to the end of the second quarter, on June 1, 2020, the newly appointed CEO was granted a one-time stock option grant, per his employment agreement, of 1.6 million stock options vesting equally in thirds on the grant date, the first anniversary of the grant date, and the second anniversary of the grant date. In addition to this grant, the new CEO was also granted 170,000 stock options in lieu of salary for the June 1, 2020 to September 30, 2020 employment period. These options fully vest on September 30, 2020.

Item 2.  

Trilogy Metals Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Trilogy Metals Inc.

Management’s Discussion and Analysis

(expressed in US dollars)

Cautionary notes

Forward-looking statements

This Management’s Discussion and Analysis contains “forward-looking information” and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other applicable securities laws. These forward-looking statements may include statements regarding the Company’s work programs and budgets; perceived merit of properties, exploration results and budgets, the Company and Ambler Metals’Metals LLC’s funding requirements, 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 regarding Ambler Metals’ plans and expectations relating to its Upper Kobuk Mineral Projects, sufficiency of the $145 million subscription price to fund the UKMP (as defined below) through feasibility and the permitting of the first mine; impact of COVID-19 on the upcoming2020 field season; market prices for precious and base metals,metals; the timing of the feasibility study on the Arctic project; timing of the issuance of the Record of Decision by the BLM and the issuance of the Clean Water Act (CWA) Section 404 permit from the United States Army Corp. of Engineers, 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 the beliefs, expectations and opinions of management on the date the statements are made, as well as on a number of material assumptions, which could prove to be significantly incorrect, including about:

We have also assumed that no significant events will occur outside of our normal course of business. Although we have attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. We believe that the assumptions inherent in the forward-looking statements are reasonable as of the date of this MD&A. However, forward-looking statements are not guarantees of future performance and, accordingly, undue reliance should not be put on such statements due to the inherent uncertainty therein.

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:

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 Form 10-K dated February 13, 2020, filed with the Canadian securities regulatory authorities and the SEC, 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 AprilJuly 7, 2020 and provides an analysis of our unaudited interim financial results for the quarter ended February 29,May 31, 2020 compared to the quarter ended February 28,May 31, 2019.

The following information should be read in conjunction with our February 29,May 31, 2020 unaudited interim condensed consolidated financial statements and related notes 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, 2019. A summary of the U.S. GAAP accounting policies is 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, 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 atwww.sedar.com and on EDGAR atwww.sec.gov.

Description of business

We are a base metals exploration company focused on exploringthe exploration and developingdevelopment of mineral properties, through our mineral holdingsequity investee, 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”) were contributed into a 50/50 joint venture named Ambler Metals LLC (‘(“Ambler Metals”) between Trilogy and South32 Limited (‘South32”) on February 11, 2020 (see below). The projects contributed to the joint ventureAmbler Metals consist of: i) the 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”) and related assets.

Corporate developmentsProject Activities

Long-term incentives

On December 19, 2019,Deferral of the Board of Directors approved2020 Summer Exploration Programs at the granting of 2,050,000 stock options to employees and directors with various vesting terms.UKMP

Project ActivitiesThrough Ambler Metals, we and our joint venture partner, South32 Limited (“South32”) have decided not to proceed with the 2020 exploration program after assessing the current novel coronavirus (COVID-19) environment. Ambler Metals gave due consideration to the merits of carrying out an abridged work program at the UKMP. However, given the continued uncertainty resulting from COVID-19, ongoing safety concerns (despite added safety protocols including physical distancing, protective equipment and testing)and the fact that, due to COVID-19, the planned field season had already been delayed to the point at which any field season would provide limited critical path benefits, the decision has been made not to proceed with a 2020 field season. The safety of our employees, contractors and the communities where we work is paramount. We are disappointed as we know delay affects everyone involved, including our partner NANA and our NANA shareholder hires. 

2020 Operating Budget for the Upper Kobuk Mineral Projects

In a press release dated February 26, 2020, the Company announced that Ambler Metals had approved a 2020 program budget of $22.8 million for the advancement of the UKMP. The budget is 100% funded by Ambler Metals. The 2020 program budget includes 10,000 meters of drilling at the Arctic Project, 2,500 meters of drilling within the Ambler Volcanogenic massiveMassive Sulphide (“VMS”) Belt and geological mapping and geochemical soil sampling at the Bornite Project. However, due to the timingCoronavirus outbreak, the drilling programs have been deferred, see “Deferral of these programs may be delayed,see “Impactthe 2020 Summer Exploration Programs at the UKMP” above and “Impact of Coronavirus (COVID-19)” below. Project activities during the second quarter consisted of non-drilling, off-site analytical activities focused on updating drilling data, composite sample collection and updates to geological models.

Arctic Project

Activities at the Arctic Project will continueduring the second quarter focused mainly on updating the 2020 Arctic resource and metallurgical drill program for resource definition and variability testing and planning for the next stages of engineering studies to focusadvance the project towards permitting and development. Work on advancing studies and preparingthe feasibility study for permit applications. Ambler Metals plans to conduct a 10,000-meter drilling program at the Arctic Projectproject continued during the summer field season to gather additional drill data forsecond quarter, with an expected completion date early in the conversionthird quarter of resources to the measured category, the next phase of metallurgical studies, including pilot plant testing, and geotechnical drilling for infrastructure placement. The drill program is expected to commence in mid-June and finish at the end of August. Studies are expected to continue throughout the year.2020.

Bornite Project

The 2020 fieldBornite geological model was updated during the second quarter incorporating the 2019 drill program at theresults. Additional sample collection from Bornite Project will consist of geological mapping and geochemical soil sampling over the northern Cosmos Hills and review of drill core was completed during the quarter for age determinations on certain mineral species. Five additional composite samples from the potential underground resource area were collected and surface exposures to determine controls on high grade zones of copper mineralization. Although there is no planned drilling atmetallurgical work was started during the Bornite Project in 2020, the Bornite geological database will be updated and the team will identify priority drill targets for the 2021 field season.quarter.

Regional Exploration Project

Following up fromRegional project activities during the 2019 work performed by Trilogy along the 70-mile (100 kilometer) Ambler VMS belt, Ambler Metals will continue exploration efforts within the Ambler VMS belt to discover and define potential deposits that can provide additional feed to a future Arctic mill. Ambler Metals plans to conduct a 2,500-meter drill campaign in the VMS belt, following up from last year’s drilling atsecond quarter consisted mainly of updating the Sunshine prospect geologic model incorporating the 2019 drill results. In addition, metallurgical work began on five composite samples from the Sunshine prospect. Test work is ongoing and at other identified targets.will continue through the third quarter. The drill program is expected to commence in mid-July and finish atCompany also continued its review of historical exploration data collected for the end of August. The drilling will be preceded by detailed geologic mapping, geochemical soil sampling, and ground geophysics.Ambler Mining District.

Impact of Coronavirus (COVID-19)

With respect to the outbreak of the novel coronavirus (COVID-19),COVID-19, Trilogy recognizes that the situation is extremely fluid and is monitoring the State of Alaska Health Department and Federal Centers for Disease Control and Prevention (“CDC”) recommendations and restrictions on travel. These recommendations and restrictions mayhave significantly impactimpacted our ability to conduct the planned work programs during the upcomingfiscal 2020 field season. So, although the work programs discussed above are still currently scheduled to commence as originally planned, ourOur highest priority is the health, safety and welfare of our employees, contractors and community members. As a result, we and our joint venture partner, through Ambler Metals, will make the necessary adjustmentshave determined it prudent to the work programs, including extending the timeline or scope for the remainder of the programs, or even cancellingdefer the planned exploration drilling activities at the UKMP for this season, if itseason.