Commitments and contingencies(note 8)11)

(See accompanying notes to the interim consolidated financial statements)

Trilogy Metals Inc.

Interim Consolidated Statements of LossIncome (Loss) and Comprehensive LossIncome (Loss)

(unaudited)

in thousands of US dollars, except share and per share amounts

(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

(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 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. (“Trilogy” or the “Company”) was incorporated in British Columbia under theBusiness Corporations Act (BC) on April 27, 2011. 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. (dba “Trilogy Metals US”). All significant intercompany transactions are eliminated on consolidation. For variable interest entities (“VIEs”) where Trilogy is not the primary beneficiary, we use the equity method of accounting.

All figures are in United States dollars unless otherwise noted. References to CAD$ refer to amounts in Canadian dollars.

TheseThe 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, 2019February 29, 2020 and our results of operations and cash flows for the sixthree months ended May 31, 2019February 29, 2020 and May 31, 2018.February 28, 2019. The results of operations for the sixthree months ended May 31, 2019February 29, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2019.2020.

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, 20182019, filed with the U.S. Securities and Exchange Commission (“SEC”) and Canadian securities regulatory authorities on February 11, 2019.13, 2020.

These interim consolidated financial statements were approved by the Company’s Audit Committee on behalf of the Board of Directors for issue on July 8, 2019.April 7, 2020.

Accounting standards adopted

In March 2016, the FASB issued new guidance on classifying and measuring financial instruments (“ASU 2016-01”). This update is effective for annual reporting periods beginning after December 15, 2017. The Company adopted the provisions of this guidance effective November 1, 2018. As the Company’s investments in equity instruments were previously classified at fair value with the change in fair value recorded to the statement of loss and comprehensive loss, the new guidance does not impact the Company’s accounting or reporting results.

Recent accounting pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”)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 balance sheets. The requirementsmodified retrospective transition method by applying the transition provision and recording our cumulative 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 Trilogy 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 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. The impact of this adoption will increase asset and liability balances as part of recognizing the leases on the balance sheet.transition practical expedients available, including:

In addition, we elected to apply the short-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 standard resulted in the recognition of right of use assets and lease liabilities of $786,000 as at December 1, 2019.

Investments in unconsolidated ventures over which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity method and include the Company’s investment in the Ambler Metals project. We identified Ambler Metals LLC as a Variable Interest Entity (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 the 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 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 recorded based on the difference between the carrying amount of the investee and its estimated fair value which may be determined using a discounted cash flow model.

in thousands of dollars

The balance due from Ambler Metals LLC (“Ambler Metals”) (see note 4 below) consists of $110 thousand for services rendered by Trilogy per a service agreement (the “Service Agreement”) between Trilogy and Ambler Metals, $120 thousand for additional staking costs and $130 thousand for invoices paid by Trilogy on behalf of Ambler Metals LLC, per the Service Agreement.

On February 11, 2020, the Company completed the formation of a 50/50 joint venture named Ambler Metals with South32 Limited (“South32”). As part of the formation of the joint venture, Trilogy contributed all of its assets associated with the Upper Kobuk Mineral Projects (“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 Metals.

Ambler Metals is an independently operated company jointly controlled by Trilogy and South32 through a four-member board, of which 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 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 as the power to direct its activities, through its board, is shared under the Ambler Metals limited liability company agreement. As we have significant influence over Ambler Metals through our representation on its board, we use the equity method of accounting for our investment in Ambler Metals. Our investment in Ambler Metals was initially measured at its fair value of $176 million upon recognition. Our maximum exposure to loss in this entity is limited to the carrying amount of our investment in Ambler Metals, which totaled $176 million, as well as $0.4 million of amounts receivable per the Service Agreement. The following table summarizes the gain on recognition of the UKMP assets upon transfer to the Ambler Metals joint venture on February 11, 2020.

in thousands of dollars

During the three-month period ended February 29, 2020, Trilogy recognized, based on its 50% ownership interest in Ambler Metals, an equity pick-up equivalent to its pro rata share of Ambler Metals’ operating loss of $0.4 million for the period between February 11, 2020 (date of joint venture formation) to February 29, 2020. The carry value of Trilogy’s 50% investment in Ambler Metals as at February 29, 2020 is summarized on the following table.

in thousands of dollars

in thousands of dollars

in thousands of dollars

in thousands of dollars

in thousands of dollars

in thousands of dollars

in thousands of dollars

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., a wholly-owned subsidiary of South32 Limited, which agreement was later assigned by South32 Operations to its affiliate, South32 USA Exploration Inc. (“South32”) on the UKMP (“Option Agreement”). Under the terms of the Option Agreement, as amended, Trilogy Metals US granted South32 the right to form a 50/50 joint venture to hold all 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 and jointly held, limited liability company (“LLC”).

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 in accordance with an approved program by a technical committee with equal representation from Trilogy and South32. South32 may exercise its option at any time over the three-year period to enter into the 50/50 joint venture. To subscribe for 50% of the JV, South32 must contribute a minimum of $150 million, plus (i) any amounts Trilogy spends on matched parallel funding to a maximum of $16 million over the three year period and (ii) $5 million if the option had been exercised between April 1, 2018 and March 31, 2019 or $10 million if the option is exercised between April 1, 2019 and the expiration date of the option, less the amount of the initial funding contributed by South32 (the “Subscription Price”). South32 has now funded the full three-year option period. South32 has until the end of January 2020 to exercise the option to form the JV LLC and make the subscription payment. Should South32 not make its annual minimum payment or elect to withdraw, the option will lapse and South32 will have no claim to ownership or the funds it had already spent

During the year ended November 30, 2017, the Company received the first payment of $10.0 million and these funds were expended on the year 1 program at the Bornite Project. In October 2017, the Company received $0.4 million as a first instalment towards the year 2 program and budget to begin preparatory work. During the year ended November 30, 2018, the Company received payments totaling $10.4 million following the approval of the year 2 program and budget in January 2018, including a $0.80 million advance on South32’s year three funding obligation per the Option Agreement. During the quarter ended February 28, 2019, the Company received payments totaling $10.2 million following the approval of the year 3 program and budget, including $1 million funding for the approved regional exploration program. The receipt of the year 3 funding represents receipt of the final tranche of funding from South32. 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 payments received from South32 as deferred consideration for the purchase of the UKMP interest. At such time as the option is exercised, the $31.0 million of payments received will be recognized as part of the consideration received for the Company’s contribution of the UKMP into JV LLC. If South32 withdraws from the Option Agreement, the consideration will be recognized as income 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 remains $nil as at May 31, 2019.

The following table summarizes mineral properties expense for the noted 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. Expenses during the first quarter ended February 29, 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 agreement on the property in 2004 to May 31, 2019February 29, 2020 is $99.0$115.3 million and cumulative acquisition costs arewere $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, the acquisition costs of $30.6 million totaling $129.6 million spentwere derecognized upon the contribution of the mineral properties to date.Ambler Metals.

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 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, 2020, the weighted-average remaining lease term was 4.3 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 three months ended February 29, 2020 are as follows:

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

in thousands of dollars

Authorized:

unlimited common shares, no par value

Inin 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 Sharecommon 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 May 31, 2019, there remainsFebruary 29, 2020, 11,927 NovaGold DSUs remained outstanding representing a right to receive 1,988 Common Sharescommon shares in Trilogy, which will settle upon certain directors retiring from NovaGold’s board.

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.

During the period ended May 31, 2019,February 29, 2020, the Company granted 2,527,5002,050,000 options (2018(2019 – 2,125,0002,430,000 options) at a weighted-average exercise price of CAD$2.96 (20183.02 (2019 – CAD$1.04)2.94) to employees, consultants and directors exercisable for a period of five years with various vesting terms from immediate vesting to over a two-year period. The weighted-average fair value attributable to options granted in the period was $1.08 (2018$0.99 (2019 - $0.37)$1.08).

For the period ended May 31, 2019,February 29, 2020, Trilogy recognized a stock-based compensation charge of $1.94$1.16 million (2018– $0.58(2019 – $1.59 million) for options granted to directors, employees and service providers, net of estimated forfeitures.

The recognized fair value of the stock options grantedrecognized 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 May 31, 2019,February 29, 2020, there were 1,841,6721,453,338 non-vested options outstanding with a weighted average exercise price of $1.79;$2.21; the non-vested stock option expense not yet recognized was $0.90$0.95 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 May 31, 2019February 29, 2020 is as follows:

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

The aggregate intrinsic value of vested share options (the market value less the exercise price) at May 31, 2019February 29, 2020 was $17.6$5.9 million (2018(2019 - $5.9$13 million) and the aggregate intrinsic value of exercised options for the sixthree months ended May 31, 2019February 29, 2020 was $0.3$0.04 million (2018(2019 - $0.1$0.08 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 May 31, 2019February 29, 2020 is as follows:

For the period ended May 31, 2019,February 29, 2020, Trilogy recognized a stock-based compensation charge of $0.66$0.04 million (2018- $0.49(2019- $0.35 million), net of estimated forfeitures.

AsNo RSUs were granted as part of the annual incentive payout for the 2019 fiscal year to officers. The 225,000 RSUs granted for the annual incentive payout for the 2018 fiscal year 225,000 RSUs were granted to officers, vestingvested half on the grant date and half on the first anniversary of the grant date. RSUs vesting in December 20182019 were settled on December 21, 201817, 2019 through the issuance of 412,501212,501 common shares.

A summary of the Company’s warrants and changes during the period ended May 31, 2019 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, 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 were held for trading and were 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, 2019February 29, 2020 is limited to the Canadian dollar consisting of cash of CDN$244,000,540,000, accounts receivable of CDN$26,00049,000 and accounts payable of CDN$442,000.865,000. 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 $13,000.$21,000.

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 May 31, 2019February 29, 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 May 31, 2019,February 29, 2020, a 1% change in interest rates would result in a change in net loss of $0.3$0.1 million, assuming all other variables remain constant.

The Company has commitments with respect to an office and warehouse leaseslease requiring future minimum lease payments as follows:

summarized in thousands of dollars

On June 28, 2019, the Company announced all its outstanding warrants were exercised in advance of the July 2, 2019 expiry date.  As a result of the warrants exercised, the Company issued a total of 6,521,740 common shares and received cash proceeds of approximately $9.9 million.

note 8(b) above.

Trilogy Metals Inc.