(See accompanying notes to the interim consolidated financial statements)

Trilogy Metals Inc.

Interim Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)

in thousands of US dollars, except share amounts

(See accompanying notes to the interim consolidated financial statements)

Trilogy Metals Inc.

Interim Consolidated Statements of Changes in Shareholders’ EquityCash Flows

(unaudited)

in thousands of US dollars except share amounts

(See accompanying notes to the interim consolidated financial statements)

Trilogy Metals Inc.

Consolidated Statements of Cash Flows

(unaudited)

in thousands of US dollars

(See accompanying notes to the interim consolidated financial statements)

Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

Trilogy Metals Inc., formerly NovaCopper Inc., (“Trilogy”, or the “Company”, or “we”) was incorporated in British Columbia under theBusiness Corporations Act (BC) on April 27, 2011. The Company changed its name from NovaCopper Inc. to Trilogy Metals Inc. on September 1, 2016 to better reflect its diversified metals resource base. The Company is engaged in the exploration and development of mineral properties, through our equity investee (see note 4), 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”).

Basis of presentation

These interim 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-ownedwholly owned subsidiary, NovaCopper US Inc., doing business as Trilogy Metals US (“Trilogy (dba “Trilogy Metals US”). These consolidated financial statements included the accounts of Sunward Resources Ltd. (“Sunward”), Sunward Investments Ltd. (“Sunward Investments”) and Sunward Resources Limited (“Sunward BVI”) for the period June 19, 2015 to September 1, 2016, inclusive. Sunward BVI has registered a branch, Sunward Resources Sucursal Colombia, to do business in Colombia. All significant intercompany transactions are eliminated on consolidation.

On June 19, 2015, For variable interest entities (“VIEs”) where Trilogy is not the primary beneficiary, we completeduse the acquisitionequity method of Sunward, which held 100% ownership in the Titiribi gold-copper exploration project in Colombia through Sunward Investments. Sunward was converted to Sunward Resources Unlimited Liability Company on June 19, 2015 and wound-up on February 29, 2016. On September 1, 2016, we completed the sale of Sunward Investments and the Titiribi project.The Company classified the operations of Sunward Investments as discontinued operations, retrospectively.accounting.

All figures are in United States dollars unless otherwise noted. References to CDN$CAD$ 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 ourthe Company’s financial position as of AugustMay 31, 2017,2020 and our results of operations for the three months and nine months ended August 31, 2017 and 2016 and our cash flows for the ninesix months ended AugustMay 31, 20172020 and 2016.May 31, 2019. The results of operations for the three and ninesix months ended AugustMay 31, 20172020 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2017.2020.

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, 20162019, filed with the U.S. Securities and Exchange Commission (“SEC”) and Canadian securities regulatory authorities on February 3, 2017.13, 2020.

These interim consolidated financial statements were approved by the Company’s Audit Committee on behalf of the Board of Directors for issue on October 4, 2017.July 7, 2020.

Leases

In November 2016, the FASB issued guidance regarding the presentation of restricted cash in the statement of cash flows (“ASU 2016-18”). 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 clarification will not affect the Company’s presentation on its statement of cash flows. The Company early adopted the standard in the second quarter of 2017. As there was no impact on the Company’s statement of cash flows, there were no changes as a result of adopting the standard.

In February 2016, the FASB issued new accounting requirements for accounting for, presentation of, and classification of leases (“ASU 2016-02”). This will result which, together with subsequent amendments, is included in most leases being capitalizedASC 842, Leases. ASC 842 became effective for the Company as a right of use asset with a related liability onDecember 1, 2019.

The Company adopted ASC 842 using the modified retrospective transition method by applying the transition provision and recording our balance sheets. The requirementscumulative adjustment to opening deficit at the beginning of the new standard are effective for annual reporting periodsperiod of adoption on December 1, 2019, rather than at the beginning after December 15, 2018, and interim periods within those annual periods, which for us isof the first quarter of fiscal year 2020. We expect the adoption will have an impact as we expect to capitalize leases, specifically our office leases that are not currently recognized on the balance sheet and arecomparative period presented. Therefore, in the processcomparative periods, we continue to apply the legacy guidance in ASC 840, including its disclosure requirements. We elected to apply all of analyzing the quantitative impact of this guidance on our results of operations and financial position.transition practical expedients available, including:

In March 2016,addition, we elected to apply the FASB issuedshort-term lease recognition exemption and elected to apply the practical expedient to not separate lease and non-lease components for all applicable leases on transition. The adoption of this new guidance simplifyingstandard resulted in the recognition of right of use assets and lease liabilities of $786,000 as at December 1, 2019.

New accounting policy

Investment in affiliates

Investments in unconsolidated ventures over which the Company has the ability to exercise significant influence, but does not control, are accounted for stock-based compensation transactions, including income tax consequences, classificationunder the equity method and include the Company’s investment in the Ambler Metals project. We identified Ambler Metals LLC as a VIE as the entity is dependent on funding from its owners. All funding, ownership, voting rights and power to exercise control is shared equally on a 50/50 basis between the owners of awards asthe VIE. Therefore, the Company has determined that it is not the primary beneficiary of the VIE. The Company’s maximum exposure to loss is its investment in Ambler Metals LLC.

Ambler Metals LLC is a non-publicly traded equity investee holding exploration and development projects. The Company reviews and evaluates its investment in affiliates for other than temporary impairment when events or liabilities, forfeitures,changes in circumstances indicate that the related carrying amounts may not be recoverable. Events that could indicate impairment of an investment in affiliates include a significant decrease in long-term expected commodity prices, a significant increase in expected operating or capital costs, unfavorable exploration results or technical studies, a significant decrease in reserves, a loss of significant mineral claims or a change in the development plan or strategy for the project. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. If the underlying assets are not recoverable, an impairment loss is measured and classificationrecorded based 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 analyzeddifference between the impactcarrying amount of the updateinvestee and its estimated fair value which may be determined thatusing a discounted cash flow model.

in thousands of dollars

The balance due from Ambler Metals LLC (see note 4 below) consists of services rendered by Trilogy and reimbursements for invoices paid by Trilogy on behalf of Ambler Metals LLC per a service agreement. The balance was paid in full by Ambler Metals LLC subsequent to the simplification applied to accounting for forfeitures will affect the results of operations and financial position as it will alter the timing of recognition of forfeitures. The Company is currently considering its policy choice. The remaining changes in the update do not have an effect on the Company’s accounting for stock-based compensation.quarter end.

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. It expects there could be an impact to how the Company accounts for assets acquired in the future.

On September 1, 2016, Trilogy completed the sale to GoldMining Inc. (“GMI”), formerly Brazil Resources Inc., a public company listed on the TSX-Venture exchange, of all of the issued and outstanding shares of Sunward Investments for consideration of 5,000,000 common shares of GMI valued at $7.8 million and 1,000,000 warrants, with each warrant exercisable into one common share of GMI for a period of two years at an exercise price of CDN$3.50, valued at $0.3 million, for total consideration of $8.1 million. Of the common shares received, 2,500,000 common shares were saleable immediately with the remaining 2,500,000 common shares saleable six months following the close. Sunward Investments, through a subsidiary, owns 100% of the Titiribi gold-copper exploration project.

The common shares and warrants received have been designated as held-for-trading financial assets, with the classification as current investments and long-term investments, respectively.

in thousands of dollars

The fair value of the common shares is determined based on the closing price at each period end. The fair value of the BRI warrants is determined using the Black-Scholes option pricing model at each period end.

During the nine months ended August 31, 2017, the Company sold 1,519,000 common shares of GMI during the period for proceeds of $2.2 million and realized a loss on sale of $0.2 million. For the nine months ended August 31, 2017, the Company recorded an unrealized loss on the common shares and warrants of GMI of $1.3 million.

in thousands of dollars

in thousands of dollars

On JanuaryFebruary 11, 2010, NovaGold Resources Inc.2020, the Company completed the formation of a 50/50 joint venture named Ambler Metals LLC with South32 Limited (“NovaGold”South32”), through Alaska Gold Company (“AGC”), at the time a wholly-owned subsidiary, purchased 100%. As part of the formation of the joint venture, Trilogy contributed all its assets associated with the UKMP, including the Arctic and Bornite Projects, while South32 contributed US$145 million, resulting in each party’s subsidiaries directly owning a 50% interest in Ambler lands in Northwest Alaska, which contains the copper-zinc-lead-gold-silver Arctic ProjectMetals LLC.

Ambler Metals LLC is an independently operated company jointly controlled by Trilogy and other mineralized targets within the volcanogenic massive sulfide belt,South32 through a seriesfour-member board, of cash and share payments. Totalwhich two members are currently appointed by Trilogy based on its 50% equity interest. All significant decisions related to the UKMP require the approval of both companies. We determined that Ambler Metals LLC is a VIE because it is expected to need additional funding from its owners for its significant activities. However, we concluded that we are not the primary beneficiary of Ambler Metals LLC as the power to direct its activities, through its board, is shared under the Ambler Metals LLC limited liability company agreement. As we have significant influence over Ambler Metals LLC through our representation on its board, we use the equity method of accounting for our investment in Ambler Metals LLC. Our investment in Ambler Metals LLC was initially measured at its fair value of $176 million upon recognition. Our maximum exposure to loss in this entity is limited to the consideration was $26.6 million.carrying amount of our investment in Ambler Metals LLC, which totaled $176 million, as well as $668 thousand of amounts receivable per a service agreement. The vendor retained a 1% net smelter return royalty thatfollowing table summarizes the ownergain on recognition of the property can purchase at any time for a one-time payment of $10.0 million.UKMP assets upon transfer to the Ambler Metals LLC joint venture on February 11, 2020.

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    in thousands of Trilogy Metals US to the Company, then a wholly owned subsidiary of NovaGold, which was subsequently spun-out to NovaGold shareholders and publicly listed on April 30, 2012 (“NovaGold Arrangement”).dollars  

On October 19, 2011,During the six-month period ended May 31, 2020, Trilogy Metals  US acquired the exclusive right to explore and the non-exclusive right to access and enterrecognized, based 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%its 50% ownership interest in Ambler Metals LLC, an equity loss equivalent to its pro rata share of Ambler Metals LLC’s comprehensive loss of $1.48 million for the mine or retain a 15% net proceeds royalty whichperiod between February 11, 2020 (date of joint venture formation) to May 31, 2020. The carrying value of Trilogy’s 50% investment in Ambler Metals LLC as at May 31, 2020 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 incurredsummarized 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.

following table.

NANA would also be granted a net smelter return royalty  in thousands 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.dollars  

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”) on the UKMP (“Option Agreement”). Trilogy Metals US has granted South32 the right to form a 50/50 joint venture to hold allin thousands of Trilogy Metals US’ Alaskan assets. Upon exercise of the option, 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.dollars  

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.

The Company received $10.0 million for the first payment following the approval of the year 1 program and budget in April 2017. As at August 31, 2017, the Company held $2.7 million in a segregated bank account for spending on the approved year 1 program at Bornite. 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. 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 the 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.

		May 31, 2020 $
Current assets: Cash, deposits and prepaid expenses			86,490
Non - current assets: Property, equipment and mineral properties			31,359
Loan receivable from South32			57,876
Current liabilities: Accounts payable and accrued liabilities			(917	)
Non - current liabilities: Lease obligation			(79	)
Net assets			174,729

in thousands of dollars

in thousands of dollars

in thousands of dollars

in thousands of dollars

in thousands of dollars

The following table summarizes mineral properties expense for the noted periods and includes expenditures funded by South32.periods.

In thousands of dollars

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. CumulativeNo additional mineral properties expense in Alaska fromexpenses were incurred during the initial earn-in agreementthree-month period ended May 31, 2020, as on February 11, 2020, upon the property in 2004formation of the joint venture with South 32, all mineral properties previously held by the Company were contributed to August 31, 2017Ambler Metals LLC. The Company continues to fund the Arctic Project feasibility study, costs for which were $0.7 million since the formation of the joint venture on February 11, 2020. The table above is $73.4 million and cumulative acquisition costs are $30.6 million totaling $104.0 million spent to date.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 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 May 31, 2020, the weighted-average remaining lease term was 4.1 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 six months ended May 31, 2020 are as follows:

Future minimum payments relating to the lease recognized in our balance sheet as of 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 once vested, 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 AugustMay 31, 2017, 20,6852020, 11,927 NovaGold DSUs remainremained outstanding representing a right to receive 3,4471,988 common shares in Trilogy, which will settle upon certain directors retiring from NovaGold’s board.

During the nine month period ended AugustMay 31, 2017, 1,695,0002020, the Company granted 2,325,000 options (August 31, 2016(2019 – 1,785,0002,527,500 options) at a weighted-average exercise price of CDN$0.72 (August 31, 2016CAD$2.93 (2019 – CDN$0.44) were grantedCAD$2.96) to employees, consultants and directors exercisable for a period of five years with various vesting terms between nil and two years.from immediate vesting to vesting over a two-year period. The weighted-average fair value attributable to options granted in the period was $0.22 per option.$0.96 (2019 - $1.08).

For the nine month period ended AugustMay 31, 2017,2020, Trilogy recognized a stock-based compensation charge of $0.31$1.58 million (August 31, 2016– $0.33(2019 – $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 AugustMay 31, 2017,2020, there were 1,405,8431,453,338 non-vested options outstanding with a weighted average exercise price of $0.48;$2.15; the non-vested stock option expense not yet recognized was $0.1$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 nine month period ended May 31, 2020 is as follows:

The following table summarizes information about the stock options outstanding at AugustMay 31, 2017.2020.

The aggregate intrinsic value of vested share options (the market value less the exercise price) at AugustMay 31, 20172020 was $2.8$8.3 million (August 31, 2016(2019 - $0.49$17.6 million) and the aggregate intrinsic value of exercised options for the ninethree months ended AugustMay 31, 20172020 was $0.15$0.18 million (August 31, 2016(2019 - $0.09$0.30 million).

Under the NovaGold Arrangement, holders of NovaGold stock options received one option in Trilogy for every six options held in NovaGold (“NovaGold Arrangement Options”). All NovaGold Arrangement Options remaining expired during the nine months ended August 31, 2017.

A summary of the NovaGold Arrangement Options and changes during the nine month period ended is as follows:

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. TheAwards under the RSU Plan and DSU Plan may be settled in cash and/or Common Sharescommon shares of the Company at the Company’s election with each RSUrestricted share unit (“RSU”) and DSUdeferred 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 nine month period ended AugustMay 31, 20172020 is as follows:

For the nine monthsperiod ended AugustMay 31, 2017,2020, Trilogy recognized a stock-based compensation charge of $0.29$0.39 million (August 31, 2016- $0.22(2019- $0.66 million), net of estimated forfeitures.

On December 15, 2016, 600,000The 200,000 RSUs granted and fully vested during the period were settled on April 16, 2020 through the issuance of 200,000 common shares. The 225,000 RSUs granted to officers vesting one third immediately, one thirdfor 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, and one thirddate. RSUs vesting in December 2019 were settled on the second anniversary. On December 23, 2016, 399,999 RSUs vested and were settled17, 2019 through the issuance of 209,198 shares and a cash payment of $90,000 to cover tax withholdings.212,501 common shares.

A summary of the Company’s warrants and changes during the nine months ended August 31, 2017 is as follows:

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. The South32 purchase option is a derivative financial liability measured at fair value with changes in value recorded to the statement of loss.

The Company’s activities expose themit 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 AugustMay 31, 20172020 is limited to the Canadian dollar balances consisting of cash of CDN$2,596,000,87,000, accounts receivable of CDN$421,000, deposit amounts of CDN$116,000, investments of CDN$5,833,00042,000 and accounts payable of CDN$859,000.347,000. 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 $647,000.

$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 consistconsists of GSTCanadian 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. Management does expect to monetize its investments held over the next year to assist in meeting its operational requirements. Future financings are anticipated through the sale of investments, equity financing, the exercise of mineral properties option, debt financing, convertible debt, or other means.

Contractually obligated cash flow requirements as at AugustMay 31, 20172020 are as follows.follows:

in thousands of dollars