UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended AugustMay 31, 2019OR2020
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 1-35447
TRILOGY METALS INC.
(Exact Name of Registrant as Specified in Its Charter)
British Columbia | 98-1006991 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
Suite 1150, 609 Granville Street Vancouver, British Columbia | V7Y 1G5 |
(Address of Principal Executive Offices) | (Zip Code) |
(604) 638-8088
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares | TMQ | NYSE American Toronto Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes xNo No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filerx | Non-accelerated filer¨ | Smaller reporting companyx | Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 8, 2019,July 7, 2020, the registrant had 140,003,741140,965,583 Common Shares, no par value, outstanding.
TRILOGY METALS INC.
TABLE OF CONTENTS
ii
PART I - FINANCIAL INFORMATION
Item 1. | Financial Statements |
Trilogy Metals Inc.
Interim Consolidated Balance Sheets
(unaudited)
in thousands of US dollars
August 31, 2019 $ | November 30, 2018 $ | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | 26,852 | 22,991 | ||||||
Accounts receivable | 359 | 23 | ||||||
Deposits and prepaid amounts | 520 | 619 | ||||||
27,731 | 23,633 | |||||||
Rent deposit | 114 | 114 | ||||||
Plant and equipment (note 3) | 820 | 325 | ||||||
Mineral properties and development costs (note 4) | 30,587 | 30,587 | ||||||
59,252 | 54,659 | |||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities (note 5) | 4,512 | 1,657 | ||||||
4,512 | 1,657 | |||||||
Mineral properties purchase option (note 4(c)) | 31,000 | 20,800 | ||||||
35,512 | 22,457 | |||||||
Shareholders’ equity | ||||||||
Share capital (note 6)– unlimited common shares authorized, no par value Issued -138,905,097 (2018 – 131,585,612) | 176,970 | 164,069 | ||||||
Warrants (note 6(c)) | - | 2,253 | ||||||
Contributed surplus | 122 | 122 | ||||||
Contributed surplus – options (note 6(a)) | 21,183 | 19,076 | ||||||
Contributed surplus – units (note 6(b)) | 1,652 | 1,489 | ||||||
Deficit | (176,187 | ) | (154,807 | ) | ||||
23,740 | 32,202 | |||||||
59,252 | 54,659 |
May 31, 2020 $ | November 30, 2019 $ | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | 12,343 | 19,174 | ||||||
Accounts receivable (note 3) | 699 | 264 | ||||||
Deposits and prepaid amounts | 473 | 719 | ||||||
13,515 | 20,157 | |||||||
Equity method investment (note 4) | 175,261 | - | ||||||
Plant and equipment (note 5) | 239 | 715 | ||||||
Mineral properties and development costs (note 6) | - | 30,631 | ||||||
Rent deposit (note 8 (a)) | - | 114 | ||||||
Right of use asset (note 8 (a)) | 529 | - | ||||||
189,544 | 51,617 | |||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities (note 7) | 539 | 2,354 | ||||||
Current portion of lease liability | 139 | - | ||||||
678 | 2,354 | |||||||
Long-term portion of lease liability (note 8 (b)) | 460 | - | ||||||
Mineral properties purchase option | - | 31,000 | ||||||
1,138 | 33,354 | |||||||
Shareholders’ equity | ||||||||
Share capital (note 9) – unlimited common shares authorized, no par value Issued -140,922,886 (2019 – 140,427,761) | 178,650 | 177,971 | ||||||
Contributed surplus | 122 | 122 | ||||||
Contributed surplus – options (note 9(a)) | 22,661 | 21,123 | ||||||
Contributed surplus – units (note 9(b)) | 1,508 | 1,759 | ||||||
Deficit | (14,535 | ) | (182,712 | ) | ||||
188,406 | 18,263 | |||||||
189,544 | 51,617 |
Commitments and contingencies (note 8)
(note 11)
(See accompanying notes to the interim consolidated financial statements)
/s/ | /s/ Kalidas Madhavpeddi, Director | |
Approved on behalf of the Board of Directors
Trilogy Metals Inc.
Interim Consolidated Statements of Loss Income (Loss)
and Comprehensive LossIncome (Loss)
(unaudited)
in thousands of US dollars, except share and per share amounts
For the three months ended | For the nine months ended | For the three months ended | For the six months ended | |||||||||||||||||||||||||||||
August 31, 2019 $ | August 31, 2018 $ | August 31, 2019 $ | August 31, 2018 $ | May 31, 2020 $ | May 31, 2019 $ | May 31, 2020 $ | May 31, 2019 $ | |||||||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||||||
Amortization | 31 | 39 | 106 | 122 | 16 | 38 | 58 | 75 | ||||||||||||||||||||||||
Foreign exchange loss (gain) | 3 | 15 | (26 | ) | (29 | ) | ||||||||||||||||||||||||||
Feasibility study | 742 | - | 742 | - | ||||||||||||||||||||||||||||
Foreign exchange (gain) loss | (16 | ) | 5 | 7 | (29 | ) | ||||||||||||||||||||||||||
General and administrative | 435 | 376 | 1,363 | 1,175 | 433 | 436 | 1,084 | 928 | ||||||||||||||||||||||||
Investor relations | 164 | 59 | 456 | 261 | 101 | 175 | 227 | 292 | ||||||||||||||||||||||||
Mineral properties expense (note 4(d)) | 10,951 | 9,051 | 15,392 | 12,657 | ||||||||||||||||||||||||||||
Mineral properties expense (note 6(a)) | - | 2,906 | 1,545 | 4,441 | ||||||||||||||||||||||||||||
Professional fees | 414 | 13 | 658 | 286 | 198 | 153 | 866 | 244 | ||||||||||||||||||||||||
Salaries | 272 | 286 | 835 | 738 | 226 | 282 | 450 | 563 | ||||||||||||||||||||||||
Salaries – stock-based compensation | 402 | 204 | 3,005 | 1,277 | 770 | 664 | 1,966 | 2,603 | ||||||||||||||||||||||||
Total expenses | 12,672 | 10,043 | 21,789 | 16,487 | 2,470 | 4,659 | 6,945 | 9,117 | ||||||||||||||||||||||||
Other items | ||||||||||||||||||||||||||||||||
Loss on held for trading investments | - | 12 | - | 272 | ||||||||||||||||||||||||||||
Gain on derecognition of assets contributed to joint venture (note 4(a)) | - | - | (175,770 | ) | - | |||||||||||||||||||||||||||
Share of loss on equity investment (note 4(b)) | 561 | - | 739 | - | ||||||||||||||||||||||||||||
Interest and other income | (137 | ) | (135 | ) | (409 | ) | (229 | ) | (29 | ) | (150 | ) | (91 | ) | (272 | ) | ||||||||||||||||
Loss and comprehensive loss for the period | 12,535 | 9,920 | 21,380 | 16,530 | ||||||||||||||||||||||||||||
Basic and diluted loss per common share | $ | 0.09 | $ | 0.08 | $ | 0.16 | $ | 0.14 | ||||||||||||||||||||||||
Weighted average number of common shares outstanding | 136,981,179 | 131,470,146 | 133,677,437 | 118,530,242 | ||||||||||||||||||||||||||||
Comprehensive (loss) earnings for the period | (3,002 | ) | (4,509 | ) | 168,177 | (8,845 | ) | |||||||||||||||||||||||||
Basic (loss) earnings per common share | (0.02 | ) | (0.04 | ) | 1.20 | (0.07 | ) | |||||||||||||||||||||||||
Diluted (loss) earnings per common share | (0.02 | ) | (0.04 | ) | 1.13 | (0.07 | ) | |||||||||||||||||||||||||
Basic weighted average number of common shares outstanding | 140,785,082 | 132,095,920 | 140,701,337 | 132,007,414 | ||||||||||||||||||||||||||||
Diluted weighted average number of common shares outstanding | 140,785,082 | 132,095,920 | 148,705,482 | 132,007,414 |
(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
Number of shares outstanding | Share capital $ | Warrants $ | Contributed surplus $ | Contributed surplus – options $ | Contributed surplus – units $ | Deficit $ | Total shareholders’ equity $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – November 30, 2017 | 105,684,523 | 136,525 | 2,163 | 124 | 18,402 | 1,319 | (132,868 | ) | 25,665 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 50,753 | 29 | - | - | (29 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted share units | 800,000 | 457 | - | - | - | (457 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 484 | 438 | - | 922 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss for the period | - | - | - | - | - | - | (2,946 | ) | (2,946 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – February 28, 2018 | 106,535,276 | 137,011 | 2,163 | 124 | 18,857 | 1,300 | (135,814 | ) | 23,641 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bought deal financing | 24,784,482 | 28,750 | 90 | - | - | - | (90 | ) | 28,750 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share issuance costs | - | (1,819 | ) | - | - | - | - | - | (1,819 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 28,700 | 5 | - | - | (5 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 90 | 61 | - | 151 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss for the period | - | - | - | - | - | - | (3,664 | ) | (3,664 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – May 31, 2018 | 131,348,458 | 163,947 | 2,253 | 124 | 18,942 | 1,361 | (139,568 | ) | 47,059 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share issuance costs | - | 14 | - | - | - | - | - | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 184,475 | 71 | - | - | (71 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Novagold deferred share units | 1,020 | 2 | - | (2 | ) | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 140 | 64 | - | 204 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss for the period | - | - | - | - | - | - | (9,920 | ) | (9,920 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – August 31, 2018 | 131,533,953 | 164,034 | 2,253 | 122 | 19,011 | 1,425 | (149,488 | ) | 37,357 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number of shares outstanding | Share capital $ | Warrants $ | Contributed surplus $ | Contributed surplus – options $ | Contributed surplus – units $ | Deficit $ | Total shareholders’ equity $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – November 30, 2018 | 131,585,612 | 164,069 | 2,253 | 122 | 19,076 | 1,489 | (154,807 | ) | 32,202 | 131,585,612 | 164,069 | 2,253 | 122 | 19,076 | 1,489 | (154,807 | ) | 32,202 | ||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 44,230 | 28 | - | - | (28 | ) | - | - | - | 44,230 | 28 | - | - | (28 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted share units | 412,501 | 424 | - | - | - | (424 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Share Units | 412,501 | 424 | - | - | - | (424 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 1,586 | 353 | - | 1,939 | - | - | - | - | 1,586 | 353 | - | 1,939 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loss for the period | - | - | - | - | - | - | (4,336 | ) | (4,336 | ) | - | - | - | - | - | - | (4,336 | ) | (4,336 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance – February 28, 2019 | 132,042,343 | 164,521 | 2,253 | 122 | 20,634 | 1,418 | (159,143 | ) | 29,805 | 132,042,343 | 164,521 | 2,253 | 122 | 20,634 | 1,418 | (159,143 | ) | 29,805 | ||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 101,064 | 53 | - | - | (53 | ) | - | - | - | 101,064 | 53 | - | - | (53 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 355 | 309 | - | 664 | - | - | - | - | 355 | 309 | - | 664 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loss for the period | - | - | - | - | - | - | (4,509 | ) | (4,509 | ) | - | - | - | - | - | - | (4,509 | ) | (4,509 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance – May 31, 2019 | 132,143,407 | 164,574 | 2,253 | 122 | 20,936 | 1,727 | (163,652 | ) | 25,960 | 132,143,407 | 164,574 | 2,253 | 122 | 20,936 | 1,727 | (163,652 | ) | 25,960 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance – November 30, 2019 | 140,427,761 | 177,971 | - | 122 | 21,123 | 1,759 | (182,712 | ) | 18,263 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 57,818 | 41 | - | - | (41 | ) | - | - | - | 19,514 | 6 | - | - | (6 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted Share Units | 212,501 | 330 | - | - | - | (330 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 288 | 114 | - | 402 | - | - | - | - | 1,155 | 41 | - | 1,196 | ||||||||||||||||||||||||||||||||||||||||||||||||
Deferred share units | 182,132 | 189 | - | - | - | (189 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants | 6,521,740 | 12,166 | (2,253 | ) | - | - | - | - | 9,913 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss for the period | - | - | - | - | - | - | (12,535 | ) | (12,535 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – August 31, 2019 | 138,905,097 | 176,970 | - | 122 | 21,183 | 1,652 | (176,187 | ) | 23,740 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings for the period | - | - | - | - | - | - | 171,179 | 171,179 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – February 29, 2020 | 140,659,776 | 178,307 | - | 122 | 22,272 | 1,470 | (11,533 | ) | 190,638 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 63,110 | 31 | - | - | (31 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Share Units | 200,000 | 312 | - | - | - | (312 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 420 | 350 | - | 770 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings for the period | - | - | - | - | - | - | (3,002 | ) | (3,002 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – May 31, 2020 | 140,922,886 | 178,650 | - | 122 | 22,661 | 1,508 | (14,535 | ) | 188,406 |
(See accompanying notes to the interim consolidated financial statements)
Interim Consolidated Statements of Cash Flows
(unaudited)
in thousands of US dollars
in thousands of US dollars | ||||||||
For the nine months ended | ||||||||
August 31, 2019 $ | August 31, 2018 $ | |||||||
Cash flows used in operating activities | ||||||||
Loss for the period | (21,380 | ) | (16,530 | ) | ||||
Items not affecting cash | ||||||||
Amortization | 106 | 122 | ||||||
Loss on held for trading investments | - | 272 | ||||||
Unrealized foreign exchange loss (gain) | 3 | (52 | ) | |||||
Stock-based compensation | 3,005 | 1,277 | ||||||
Net change in non-cash working capital | ||||||||
(Increase) Decrease in accounts receivable | (336 | ) | 413 | |||||
Decrease in deposits and prepaid amounts | 99 | 191 | ||||||
Increase (Decrease) in accounts payable and accrued liabilities | 2,748 | (285 | ) | |||||
(15,755 | ) | (14,592 | ) | |||||
Cash flows from (used in) financing activities | ||||||||
Proceeds from exercise of warrants | 9,913 | - | ||||||
Proceeds from bought deal financing | - | 28,750 | ||||||
Share issuance cost | - | (1,805 | ) | |||||
9,913 | 26,945 | |||||||
Cash flows from investing activities | ||||||||
Acquisition of plant & equipment | (494 | ) | (7 | ) | ||||
Mineral properties funding (note 4 (c)) | 10,200 | 10,435 | ||||||
Proceeds from the sale of investments, net of fees | - | 2,297 | ||||||
9,706 | 12,725 | |||||||
Increase in cash and cash equivalents | 3,864 | 25,078 | ||||||
Effect of exchange rate on cash and cash equivalents | (3 | ) | (1 | ) | ||||
Cash and cash equivalents – beginning of period | 22,991 | 5,391 | ||||||
Cash and cash equivalents – end of period | 26,852 | 30,468 |
For the six months ended | ||||||||
May 31, 2020 $ | May 31, 2019 $ | |||||||
Cash flows used in operating activities | ||||||||
Earnings (loss) for the period | 168,177 | (8,845 | ) | |||||
Items not affecting cash | ||||||||
Amortization | 58 | 75 | ||||||
Right of use asset amortization | 86 | - | ||||||
Loss on working capital written-off upon joint venture formation | 18 | - | ||||||
Gain on derecognition of assets (note 4(a)) | (175,770 | ) | - | |||||
Loss on equity investment in Ambler Metals LLC. (note 4(b)) | 739 | - | ||||||
Unrealized foreign exchange loss | 11 | 8 | ||||||
Stock-based compensation | 1,966 | 2,603 | ||||||
Operating lease payments | (97 | ) | - | |||||
Net change in non-cash working capital | ||||||||
Increase in accounts receivable | (435 | ) | (148 | ) | ||||
Decrease (increase) in deposits and prepaid amounts | 246 | (894 | ) | |||||
Decrease in accounts payable and accrued liabilities | (1,815 | ) | (176 | ) | ||||
(6,816 | ) | (7,377 | ) | |||||
Cash flows from investing activities | ||||||||
Mineral properties funding | - | 10,200 | ||||||
- | 10,200 | |||||||
(Decrease) increase in cash and cash equivalents | (6,816 | ) | 2,823 | |||||
Effect of exchange rate on cash and cash equivalents | (15 | ) | (8 | ) | ||||
Cash and cash equivalents – beginning of period | 19,174 | 22,991 | ||||||
Cash and cash equivalents – end of period | 12,343 | 25,806 |
(See accompanying notes to the interim consolidated financial statements)
Notes to the Interim Consolidated Financial Statements
Nature of operations |
Trilogy Metals Inc. (“Trilogy” or the “Company”) was incorporated in British Columbia under theBusiness Corporations Act (BC)(British Columbia) 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”).
Summary of significant accounting policies |
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$ or CDN$ 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 AugustMay 31, 20192020 and our results of operations and cash flows for the ninesix months ended AugustMay 31, 20192020 and AugustMay 31, 2018.2019. The results of operations for the ninesix months ended AugustMay 31, 20192020 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 October 8, 2019.July 7, 2020.
Accounting standards adopted
Leases
In March 2016, the Financial Accounting Standards Board (“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 December 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 reported results.
Recent accounting pronouncements
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 mostASC 842, Leases. ASC 842 became effective for the Company as of December 1, 2019.
The Company adopted ASC 842 using the modified retrospective transition method by applying the transition provision and recording our cumulative adjustment to opening deficit at the beginning of the period of adoption on December 1, 2019, rather than at the beginning of the comparative period presented. Therefore, in the comparative periods, we continue to apply the legacy guidance in ASC 840, including its disclosure requirements. We elected to apply all of the transition practical expedients available, including:
· | the package of three practical expedients to (1) not reassess whether any expired or existing contracts are or contain leases, (2) not reassess the lease classification for any expired or existing leases, and (3) not reassess initial direct costs for any existing lease; |
· | the hindsight practical expedient to use hindsight when determining lease term and assessing impairment of right-of-use assets, if any; and |
· | the easements practical expedient to continue applying our current policy for accounting for any land easements expired before or existing as of December 1, 2019. |
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 being capitalized as aon transition. The adoption of this new standard resulted in the recognition of right of use asset withassets 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 under 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 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 liabilitycarrying 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 balance sheets. The requirementsdifference between the carrying amount of the new standard are effective for annual reporting periods beginning after December 15, 2018,investee and interim periods within those annual periods,its estimated fair value 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 and recognize lease obligations, specifically for 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.may be determined using a discounted cash flow model.
3) | Accounts receivable |
in thousands of dollars
May 31, 2020 | November 30, 2019 | |||||||
GST input tax credits | 31 | 42 | ||||||
Recoverable payments | - | 222 | ||||||
Ambler Metals LLC | 668 | - | ||||||
Accounts receivable | 699 | 264 |
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 quarter end.
4) | Equity method investment |
(a) | Formation of Ambler Metals LLC |
On February 11, 2020, the Company completed the formation of a 50/50 joint venture named Ambler Metals LLC with South32 Limited (“South32”). 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 Metals LLC.
Ambler Metals LLC 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 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 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 following table summarizes the gain on recognition of the UKMP assets upon transfer to the Ambler Metals LLC joint venture on February 11, 2020.
in thousands of dollars
$ | ||||
Fair value ascribed to Ambler Metals LLC interest | 176,000 | |||
Less: carrying value of contributed /eliminated assets | ||||
Mineral properties | (30,587 | ) | ||
Property, plant and equipment | (618 | ) | ||
Elimination of Fairbanks warehouse right of use asset | (93 | ) | ||
Elimination of prepaid State of Alaska mining claim fees | (303 | ) | ||
Add: | ||||
Demobilization costs of drills | 278 | |||
Cancellation of Fairbanks warehouse lease liability | 93 | |||
Fair value of mineral properties purchase option | 31,000 | |||
Gain on derecognition | 175,770 |
(b) | Carrying value of equity method investment |
During the six-month period ended May 31, 2020, Trilogy recognized, based on 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 period 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 summarized on the following table.
in thousands of dollars
$ | ||||
February 11, 2020, fair value ascribed to Ambler Metals LLC interest | 176,000 | |||
Share of loss on equity investment for the six-month period ended May 31, 2020 | (739 | ) | ||
May 31, 2020, equity method investment | 175,261 |
(c) | The following table summarizes Ambler Metals LLC’s Balance Sheet as at May 31, 2020. |
in thousands of dollars
$ | ||||
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 |
(d) | The following table summarizes Ambler Metals LLC’s comprehensive loss from the formation of the joint venture on February 11, 2020 to the end of the reporting period on May 31, 2020. |
in thousands of dollars
February 11 – May 31, 2020 $ | ||||
Amortization | 50 | |||
Mineral properties expense | 1,080 | |||
General and administrative expense | 904 | |||
Interest income | (557 | ) | ||
Comprehensive loss | 1,477 |
5) | Plant and equipment |
in thousands of dollars
August 31, 2019 | ||||||||||||
Cost $ | Accumulated amortization $ |
Net $ | ||||||||||
British Columbia, Canada | ||||||||||||
Furniture and equipment | 63 | (26 | ) | 37 | ||||||||
Leasehold improvements | 53 | (16 | ) | 37 | ||||||||
Computer hardware and software | 115 | (111 | ) | 4 | ||||||||
Alaska, USA | ||||||||||||
Machinery and equipment | 3,779 | (3,038 | ) | 741 | ||||||||
Vehicles | 348 | (347 | ) | 1 | ||||||||
Computer hardware and software | 35 | (35 | ) | - | ||||||||
4,393 | (3,573 | ) | 820 |
May 31, 2020 | ||||||||||||||||
Cost $ | Accumulated amortization $ | Assets derecognized note 4(a) $ | Net $ | |||||||||||||
British Columbia, Canada | ||||||||||||||||
Furniture and equipment | 63 | (36 | ) | - | 27 | |||||||||||
Leasehold improvements | 253 | (43 | ) | - | 210 | |||||||||||
Computer hardware and software | 115 | (113 | ) | - | 2 | |||||||||||
Alaska, USA | ||||||||||||||||
Machinery, and equipment | 3,667 | (3,049 | ) | (618 | ) | - | ||||||||||
Vehicles | 348 | (348 | ) | - | - | |||||||||||
Computer hardware and software | 4 | (4 | ) | - | - | |||||||||||
4,450 | (3,593 | ) | (618 | ) | 239 |
in thousands of dollars
November 30, 2018 | ||||||||||||
Cost $ | Accumulated amortization $ |
Net $ | ||||||||||
British Columbia, Canada | ||||||||||||
Furniture and equipment | 63 | (17 | ) | 46 | ||||||||
Leasehold improvements | 53 | (10 | ) | 43 | ||||||||
Computer hardware and software | 115 | (109 | ) | 6 | ||||||||
Alaska, USA | ||||||||||||
Machinery and equipment | 3,178 | (2,964 | ) | 214 | ||||||||
Vehicles | 348 | (333 | ) | 15 | ||||||||
Computer hardware and software | 35 | (34 | ) | 1 | ||||||||
3,792 | (3,467 | ) | 325 |
November 30, 2019 | ||||||||||||
Cost $ | Accumulated amortization $ | Net $ | ||||||||||
British Columbia, Canada | ||||||||||||
Furniture and equipment | 63 | (29 | ) | 34 | ||||||||
Leasehold improvements | 53 | (17 | ) | 36 | ||||||||
Computer hardware and software | 115 | (112 | ) | 3 | ||||||||
Alaska, USA | ||||||||||||
Machinery, and equipment | 3,667 | (3,026 | ) | 641 | ||||||||
Vehicles | 348 | (348 | ) | - | ||||||||
Computer hardware and software | 4 | (3 | ) | 1 | ||||||||
4,250 | (3,535 | ) | 715 |
Mineral properties and development costs |
in thousands of dollars
November 30, 2018 $ | Acquisition costs $ | August 31, 2019 $ | ||||||||||
Alaska, USA | ||||||||||||
Ambler (a) | 26,587 | - | 26,587 | |||||||||
Bornite (b) | 4,000 | - | 4,000 | |||||||||
30,587 | - | 30,587 |
November 30, 2019 $ | Acquisition costs reimbursable from Ambler Metals LLC | Assets derecognized note 4(a) $ | May 31, 2020 $ | |||||||||||||
Alaska, USA | ||||||||||||||||
Ambler (a) | 26,631 | (44 | ) | (26,587 | ) | - | ||||||||||
Bornite (b) | 4,000 | - | (4,000 | ) | - | |||||||||||
30,631 | (44 | ) | (30,587 | ) | - |
in thousands of dollars
November 30, 2017 $ | Acquisition costs $ | November 30, 2018 $ | ||||||||||
Alaska, USA | ||||||||||||
Ambler (a) | 26,587 | - | 26,587 | |||||||||
Bornite (b) | 4,000 | - | 4,000 | |||||||||
30,587 | - | 30,587 |
November 30, 2018 $ | Acquisition costs $ | November 30, 2019 $ | ||||||||||
Alaska, USA | ||||||||||||
Ambler (a) | 26,587 | 44 | 26,631 | |||||||||
Bornite (b) | 4,000 | - | 4,000 | |||||||||
30,587 | 44 | 30,631 |
(a) |
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 property ownership or to the funds 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 an additional $1 million of 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 August 31, 2019.
Mineral properties expense |
The following table summarizes mineral properties expense for the noted periods.
In thousands of dollars
Three months August 31, 2019 $ | Three months August 31, 2018 $ | Nine months ended August 31, 2019 $ | Nine months ended August 31, 2018 $ | |||||||||||||
Alaska, USA | ||||||||||||||||
Community | 164 | 81 | 428 | 324 | ||||||||||||
Drilling | 4,760 | 3,624 | 4,933 | 3,804 | ||||||||||||
Engineering | 663 | 245 | 1,287 | 750 | ||||||||||||
Environmental | 153 | 313 | 424 | 482 | ||||||||||||
Geochemistry and geophysics | 252 | 420 | 1,010 | 1,066 | ||||||||||||
Land and permitting | 163 | 145 | 523 | 504 | ||||||||||||
Project support | 3,062 | 2,703 | 4,066 | 3,381 | ||||||||||||
Other income | - | - | (1 | ) | (20 | ) | ||||||||||
Wages and benefits | 1,734 | 1,520 | 2,722 | 2,366 | ||||||||||||
Mineral property expense | 10,951 | 9,051 | 15,392 | 12,657 |
Three months ended May 31, 2020 $ | Three months ended May 31, 2019 $ | Six months ended May 31, 2020 $ | Six months ended May 31, 2019 $ | |||||||||||||
Alaska, USA | ||||||||||||||||
Community | - | 146 | 137 | 264 | ||||||||||||
Drilling | - | 173 | - | 173 | ||||||||||||
Engineering | - | 303 | 723 | 624 | ||||||||||||
Environmental | - | 136 | 99 | 271 | ||||||||||||
Geochemistry and geophysics | - | 593 | 12 | 758 | ||||||||||||
Land and permitting | - | 174 | 134 | 360 | ||||||||||||
Project support | - | 778 | 249 | 1,004 | ||||||||||||
Other income | - | - | - | (1 | ) | |||||||||||
Wages and benefits | - | 603 | 191 | 988 | ||||||||||||
- | 2,906 | 1,545 | 4,441 |
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, 2019Ambler 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 $110.0 million and cumulative acquisition costs are $30.6 million totaling $140.6 million spent to date.for comparison purposes for the respective periods.
Derecognition |
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.
7) | Accounts payable and accrued liabilities |
in thousands of dollars
August 31, 2019 $ | November 30, 2018 $ | |||||||
Trade accounts payable | 3,271 | 400 | ||||||
Accrued liabilities | 901 | 503 | ||||||
Accrued salaries and vacation | 340 | 746 | ||||||
Due to related parties | - | 8 | ||||||
Accounts payable and accrued liabilities | 4,512 | 1,657 |
9
May 31, 2020 $ | November 30, 2019 $ | |||||||
Trade accounts payable | 232 | 902 | ||||||
Accrued liabilities | 214 | 721 | ||||||
Accrued salaries and vacation | 93 | 731 | ||||||
Accounts payable and accrued liabilities | 539 | 2,354 |
Leases |
(a) | Right-of-use asset |
in thousands of dollars
$ | ||||
ASC 842 transition as at December 1, 2019 | 681 | |||
Amortization | (86 | ) | ||
Lease accretion | 27 | |||
Derecognition of Fairbanks warehouse lease | (93 | ) | ||
529 |
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.
(b) | Lease liabilities |
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
Six months ended May 31, 2020 $ | ||||
Operating lease costs | 86 | |||
Variable lease costs | 64 | |||
Total lease expense | 150 |
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
Fiscal year | May 31, 2020 | |||
2020 | 90 | |||
2021 | 184 | |||
2022 | 173 | |||
2023 | 211 | |||
2024 | 116 | |||
Total undiscounted lease payments | 774 | |||
Effect of discounting | (175 | ) | ||
Present value of lease payments recognized as lease liability | 599 |
9) | Share capital |
Authorized:
unlimited common shares, no par value
in thousands of dollars, except share amounts
Number of shares | Ascribed value $ | |||||||
November 30, 2017 | 105,684,523 | 136,525 | ||||||
Bought deal financing | 24,784,482 | 28,750 | ||||||
Share issuance costs | - | (1,805 | ) | |||||
Exercise of options | 315,148 | 140 | ||||||
Restricted share units | 800,000 | 457 | ||||||
NovaGold DSU conversion | 1,459 | 2 | ||||||
November 30, 2018 | 131,585,612 | 164,069 | ||||||
Exercise of options | 203,112 | 122 | ||||||
Restricted share units | 412,501 | 424 | ||||||
Deferred share units | 182,132 | 189 | ||||||
Exercise of warrants | 6,521,740 | 12,166 | ||||||
August 31, 2019, issued and outstanding | 138,905,097 | 176,970 |
Number of shares
| Ascribed value $ | |||||||
November 30, 2018 | 131,585,612 | 164,069 | ||||||
Exercise of options | 1,725,776 | 1,123 | ||||||
Restricted Share Units | 412,501 | 424 | ||||||
Deferred Share Units | 182,132 | 189 | ||||||
Exercise of warrants | 6,521,740 | 12,166 | ||||||
November 30, 2019 | 140,427,761 | 177,971 | ||||||
Exercise of options | 82,624 | 38 | ||||||
Restricted Share Units | 412,501 | 642 | ||||||
May 31, 2020, issued and outstanding | 140,922,886 | 178,651 |
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 on 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 AugustMay 31, 2019, there remains2020, 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.
(a) | Stock options |
During the nine - monthsperiod ended AugustMay 31, 2019,2020, the Company granted 2,527,5002,325,000 options (2018(2019 – 2,395,0002,527,500 options) at a weighted-average exercise price of CAD$2.96 (20182.93 (2019 – CAD$1.15)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 $1.08 (2018$0.96 (2019 - $0.43)$1.08).
For the nine - month period ended AugustMay 31, 2019,2020, Trilogy recognized a stock-based compensation charge of $2.23$1.58 million (2018(2019 – $0.71$1.94 million) for options granted to directors, employees and service providers, net of estimated forfeitures.
The recognized fair value of the stock options granted duringrecognized in the nine - month period ended August 31, 2019 has been estimated using the Black-Scholes option pricing model.
Assumptions used in the pricing model for the period are as provided below.
Risk-free interest rates | % | |||
Exercise price | CAD$ | |||
Expected life | 3.0 years | |||
Expected volatility | % | |||
Expected dividends | Nil |
As of AugustMay 31, 2019,2020, there were 1,775,0051,453,338 non-vested options outstanding with a weighted average exercise price of $1.82;$2.15; the non-vested stock option expense not yet recognized was $0.63$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 AugustMay 31, 20192020 is as follows:
August 31, 2019 | May 31, 2020 | ||||||||||||||||
Number of options | Weighted average $ | Number of options | Weighted average exercise price $ | ||||||||||||||
Balance – beginning of the period | 8,821,434 | 0.60 | 9,205,600 | 1.05 | |||||||||||||
Granted | 2,527,500 | 2.22 | 2,325,000 | 2.13 | |||||||||||||
Exercised | (306,432 | ) | 0.84 | (151,667 | ) | 0.56 | |||||||||||
Forfeited | (260,000 | ) | 2.15 | ||||||||||||||
Balance – end of period | 11,042,502 | 0.97 | 11,118,933 | 1.25 |
The following table summarizes information about the stock options outstanding at AugustMay 31, 2019.2020.
Outstanding | Exercisable | Unvested | Outstanding | Exercisable | Unvested | |||||||||||||||||||||||||||||||||||||||||||||
Range of price | Number of outstanding options | Weighted average years to expiry | Weighted $ | Number of exercisable options | Weighted $ | Number of unvested options | Number of outstanding options | Weighted average years to expiry | Weighted $ | Number of exercisable options | Weighted $ | Number of unvested options | ||||||||||||||||||||||||||||||||||||||
$0.33 to $0.50 | 3,876,433 | 0.97 | 0.39 | 3,876,433 | 0.39 | - | ||||||||||||||||||||||||||||||||||||||||||||
$0.32 to $0.50 | 3,901,433 | 0.81 | 0.40 | 3,901,433 | 0.81 | - | ||||||||||||||||||||||||||||||||||||||||||||
$0.51 to $1.00 | 4,333,569 | 2.21 | 0.72 | 3,885,233 | 0.71 | 448,336 | 1,845,000 | 2.48 | 0.73 | 1,845,000 | 2.48 | - | ||||||||||||||||||||||||||||||||||||||
$1.01 to $1.50 | 225,000 | 3.62 | 1.32 | 175,000 | 1.29 | 50,000 | 225,000 | 2.87 | 1.29 | 175,000 | 2.83 | 50,000 | ||||||||||||||||||||||||||||||||||||||
$1.51 to $2.00 | 90,000 | 3.87 | 1.83 | 73,333 | 1.82 | 16,667 | 915,000 | 4.41 | 1.72 | 898,333 | 4.43 | 16,667 | ||||||||||||||||||||||||||||||||||||||
$2.01 to $2.52 | 2,517,500 | 4.27 | 2.21 | 1,257,498 | 2.22 | 1,260,002 | ||||||||||||||||||||||||||||||||||||||||||||
$2.01 to $2.54 | 4,232,500 | 4.03 | 2.17 | 2,895,829 | 3.92 | 1,336,671 | ||||||||||||||||||||||||||||||||||||||||||||
11,042,502 | 2.29 | 0.96 | 9,267,497 | 0.80 | 1,775,005 | 11,118,933 | 2.65 | 1.25 | 9,715,595 | 2.43 | 1,403,338 |
The aggregate intrinsic value of vested share options (the market value less the exercise price) at AugustMay 31, 20192020 was $10.6$8.3 million (2018(2019 - $9.2$17.6 million) and the aggregate intrinsic value of exercised options for the ninethree months ended May 31, 2020 was $0.18 million (2019 - month period ended August 31, 2019 was $0.5 million (2018 - $0.4$0.30 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 nine - month period ended AugustMay 31, 20192020 is as follows:
Number of RSUs | Number of DSUs | Number of RSUs | Number of DSUs | ||||||||||||||
Balance – beginning of the period | 400,002 | 1,182,106 | 212,501 | 1,137,488 | |||||||||||||
Granted | 225,000 | 119,139 | 200,000 | 44,903 | |||||||||||||
Vested/paid | (412,501 | ) | (182,132 | ) | (412,501 | ) | - | ||||||||||
Balance – end of period | 212,501 | 1,119,113 | - | 1,182,391 |
For the nine - month period ended AugustMay 31, 2019,2020, Trilogy recognized a stock-based compensation charge of $0.78$0.39 million (2018 - $0.56(2019- $0.66 million), net of estimated forfeitures.
As partThe 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 for the annual incentive payout for the 2018 fiscal year 225,000 RSUs were granted to officers during the three – month period ended February 28, 2019, 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.
During the three - month period ended August 31, 2019, all the 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.
Financial instruments |
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.
(a) | Currency 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, 20192020 is limited to the Canadian dollar balances consisting of cash of CDN$205,000,87,000, accounts receivable of CDN$62,00042,000 and accounts payable of CDN$1,283,000.347,000. 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 $76,000.$16,000.
(b) | Credit risk |
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.
(c) | Liquidity risk |
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 AugustMay 31, 20192020 are as follows:
in thousands of dollars
Total | <1 Year | 1–2 Years | 2–5 Years | Thereafter | ||||||||||||||||
Accounts payable and accrued liabilities | 4,512 | 4,512 | - | - | - | |||||||||||||||
4,512 | 4,512 | - | - | - |
Total $ | <1 Year $ | 1–2 Years $ | 2–5 Years $ | Thereafter $ | ||||||||||||||||
Accounts payable and accrued liabilities | 539 | 539 | - | - | - | |||||||||||||||
539 | 539 | - | - | - |
(d) | Interest rate risk |
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 AugustMay 31, 2019,2020, a 1% change in interest rates would result in a change in net loss of $0.2$0.1 million, assuming all other variables remain constant.
Commitment |
The Company has commitments with respect to an office and warehouse leaseslease requiring future minimum lease payments as follows:summarized in note 8(b) above.
in thousands of dollars
12) |
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Subsequent event |
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. | 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, the timing and filing of updated technical reports, the timing of permitting,exploration results and budgets, the Company and Ambler 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 the Company’sAmbler 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 2020 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, including those listed below, which could prove to be significantly incorrect:incorrect, including about:
· | our ability to achieve production at |
· | the accuracy of our mineral resource and reserve estimates; |
· | the |
· | timing and receipt of approvals, consents and permits under applicable legislation; |
· | the adequacy of our financial resources; |
· | the receipt of third party contractual, regulatory and governmental approvals for the exploration, development, construction and production of our properties; |
· | our expected ability to develop adequate infrastructure and that the cost of doing so will be reasonable; |
· | continued good relationships with South32 Limited (“South32”), our joint venture partner, as well as local communities and other stakeholders; |
· |
· | expected trends and specific assumptions regarding |
· |
· | prices for and availability of fuel, electricity, parts and equipment and other key supplies remaining consistent with current levels. |
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:
· | risks related to 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; |
· | uncertainty as to whether |
· | 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 lack of infrastructure including but not limited to the risk whether or not the Ambler Mining District Industrial Access Project, or AMDIAP, will receive the requisite permits and, if it does, whether the Alaska Industrial Development and Export Authority will build the AMDIAP; |
· | risks related to inclement weather which may delay or hinder exploration activities at our mineral properties; |
· | risks related to our dependence on a third party for the development of our projects; |
· | commodity price fluctuations; |
· | our history of losses and expectation of future losses; |
· | uncertainties relating to the assumptions underlying our resource estimates, such as metal pricing, metallurgy, mineability, marketability and operating and capital costs; |
· | uncertainty related to inferred mineral resources; |
· | 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; |
· |
· |
· | risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of our mineral deposits; |
· | 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 |
· | 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; |
· | 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; |
· |
· | 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 and officers; |
· | 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 our ability to maintain the adequacy of internal control over financial reporting as per the requirements of Section 404 of the Sarbanes-Oxley Act; |
· | increased regulatory compliance costs, associated with rules and regulations promulgated by the United States Securities and Exchange Commission, |
· | uncertainty as to the volatility in the price of the Company’s common shares; |
· | the Company’s expectation of not paying cash dividends; and |
· | adverse federal income tax consequences for U.S. shareholders should the Company be a passive foreign investment company. |
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 11, 2019,13, 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.
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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 October 8, 2019July 7, 2020 and provides an analysis of our unaudited interim financial results for the quarter ended AugustMay 31, 20192020 compared to the quarter ended AugustMay 31, 2018.2019.
The following information should be read in conjunction with our AugustMay 31, 20192020 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, 2018.2019. 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 43-101,43-101”), 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-ownedwholly 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 on February 11, 2020 (see below). The projects contributed to Ambler Metals consist of: i) the 100% owned Ambler lands which host the Arctic copper-zinc-lead-gold-silver Projectproject (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 Projectproject (the “Bornite Project”). and related assets.
Corporate developmentsProject Activities
AppointmentDeferral of Interim CEOthe 2020 Summer Exploration Programs at the UKMP
Through 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 September 5, 2019, weFebruary 26, 2020, the Company announced that Ambler Metals had approved a 2020 program budget of $22.8 million for the resignationadvancement of Rick Van Nieuwenhuyse as CEO, Presidentthe 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 Massive Sulphide (“VMS”) Belt and director of Trilogy Metalsgeological mapping and geochemical soil sampling at the appointment of James Gowans as President and CEO on an interim basis.Mr. Van Nieuwenhuyse will remain as a consultantBornite Project. However, due to the Company until January 31, 2020 and will assist with transitional matters and with advancingCoronavirus outbreak, the Company’s interests in Alaska. Mr. Gowans is a directordrilling programs have been deferred, see “Deferral of the Company2020 Summer Exploration Programs at the UKMP” above and was President“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 CEO of Arizona Mining Inc. from 2016updates to 2018 when Arizona Mining was purchased by South32 Limited. Previously he was a Senior Advisor to the Chairman, Co-President and EVP and COO at Barrick Gold Corporation from 2014 to 2015. Mr. Gowans has extensive experience in Alaska. He completed the feasibility study for the Red Dog Mine, oversaw the design and construction of that mine and then operated Red Dog for three years after commissioning.geological models.
Exercise of Warrants
During the three-month period ended August 31, 2019, all our outstanding warrants were exercised. Three of the Company’s largest shareholders exercised 6,521,740 in outstanding warrants. As a result of the warrant exercise, we issued a total of 6,521,740 common shares of the Company and received cash proceeds of approximately $9.9 million.
Outlook & Project activities
Ambler Mining District Industrial Access Project (“AMDIAP”)
In a press release dated August 23, 2019, we announced the public release of the draft Environmental Impact Statement (“EIS”) for the Ambler access road by the United States Bureau of Land Management (“BLM”). This is a critical milestone for the permitting of the AMDIAP in relation to further exploration and development of the Ambler Mining District. The BLM, which is the lead agency for the permitting of the AMDIAP, has now completed the draft EIS which has been posted on the BLM website. The next step is a public comment period. Comments on the draft EIS will be accepted through October 29, 2019.
Arctic Project
During the third quarter ended August 31, 2019, we drilled 11 holesActivities at the Arctic Project resulting in approximately 2,411 meters drilled, utilizing two rigs from Tuuq Drilling LLC (“Tuuq”). Tuuq is owned by NANA Development Corporation. We anticipate announcing drill results fromduring the 2019second 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 advance the project towards permitting and development. Work on the feasibility study for the Arctic project continued during the fourthsecond quarter, with an expected completion date early in the third quarter of 2019. Work at the Arctic deposit commenced in late June with a view of completing feasibility level geotechnical and hydrology work. The main goal of this year’s work program was to complete engineering and environmental studies to prepare a NI 43-101 compliant feasibility study which results are anticipated to be released in the first half of 2020. Work is also being done to prepare the Arctic Project for permitting, which we expect to commence in 2020. The permitting preparation work being carried out will support Federal, State and Borough permitting requirements.
Bornite Project
The main goal ofBornite geological model was updated during the second quarter incorporating the 2019 drill program results. Additional sample collection from Bornite 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 metallurgical work was started during the quarter.
Regional Exploration Project
Regional project activities during the second 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 will continue through the third quarter. The Company also continued its review of historical exploration data collected for the Ambler Mining District.
Impact of Coronavirus (COVID-19)
With respect to drill approximately 8,000 meters within 12 holes, including both infillthe outbreak of COVID-19, Trilogy recognizes that the situation is extremely fluid and expansion drilling. Explorationis 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 have significantly impacted our ability to conduct the planned work programs during the fiscal 2020 field season. Our 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, have determined it prudent to defer the planned exploration drilling activities commenced at the beginning of June with 7,598 meters of drilling completed through to August 31, 2019. UKMP for this season.
Ambler Mining District Industrial Access Project (AMDIAP)
In a press release dated September 10, 2019, weMarch 27, 2020, the Company announced assay results on 4 holes comprising approximately 3,014 meters from the recently completed 7,610-meter drill campaign. We anticipate announcing further drill results fromrelease of the 2019 Bornite drill program duringfinal Environmental Impact Statement (EIS) by the fourth quarterUnited States Bureau of 2019.Land Management (BLM). The final step in the permitting process for the AMDIAP is the issuance of the Record of Decision by the BLM, which is expected to be issued in July 2020.
Corporate developments
Regional ExplorationAnnual General Meeting
District-wide Versatile Time Domain Electromagnetic (“VTEM”) and Z – Axis Tipper Electromagnetic (“ZTEM”) helicopter airborne geophysical surveys were completed this spring along the entire 100-kilometer long belt of the favorable stratigraphy hosting known polymetallic volcanogenic-massive sulphide (“VMS”) deposits, as well as the areas around the Bornite deposit and the surrounding Cosmos Hills area. The surveys were flown by Geotech Ltd. and the data is currently being re-processed by Resource Potential PTY Ltd. The new VTEM and ZTEM surveys have been integrated into our dataset of historical drilling accumulated over a 40-year period of exploration, all of which have been geo-referenced into an integrated GIS database.
17
The exploration drilling completed during the field season targeted the Sunshine prospect, which is approximately eight miles (13 kilometers) from the Arctic Project. In a press release dated September 10, 2019, we announced assay results for one drill hole from the Sunshine prospect comprising 161 meters of the 1,357 meter, six-hole drill campaign at this prospect. We anticipate announcing further drill results from the 2019 regional exploration program during the fourth quarter of 2019.
Property review
Our principal assets, the UKMP Projects, are located in the Ambler mining district in Northwest Alaska. Our UKMP Projects comprise approximately 355,400 acres (143,825 hectares) consisting of the Ambler and Bornite lands.
Arctic Project
The Ambler lands, which host several deposits, includingAnnual General Meeting of shareholders was held on May 28, 2020. At the high-grade copper-zinc-lead-gold-silver Arctic Project,Annual General Meeting, all directors nominated by the Company and other mineralized targets within a 100-kilometer-long VMS belt, are ownedstanding for election were elected by NovaCopper US. The Ambler lands are in Northwestern Alaskashareholders of the Company, with each director receiving no less than 99.75% of the votes cast.
Appointment of New President and consistCEO
Tony Giardini was appointed as President and CEO of 114,500 acres (46,337 hectares) of Federal patented mining claims and State of Alaska mining claims, within which VMS mineralizationthe Company effective June 1, 2020. Mr. Giardini has been found.a director of the Company since 2012 and will continue to be an executive director. Mr. Giardini has extensive experience as an executive officer and key leadership team member with his previous roles as President of Ivanhoe Mines Ltd. (“Ivanhoe”), a base metals development and exploration company, and as Chief Financial Officer at Kinross Gold Corporation, a senior gold producer. Mr. Giardini has extensive experience with joint ventures and large capital projects, including Ivanhoe’s three large development assets, Platreef, Kipushi and Kamoa-Kakula.
Joint Venture
We have recorded the Ambler lands as a mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.Option agreement
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 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 355,400 acres (143,825 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 a range 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 property as a mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.
South32 Option Agreement
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 exerciseSouth32 exercised its option on December 19, 2019.
Formation of joint venture
On February 11, 2020, Trilogy completed the formation of the option,50/50 joint venture with South32. Trilogy Metals US will transfercontributed all its Alaskan assets associated with the 172,675-hectare UKMP, including the UKMP,Arctic and Bornite Projects, while South32 will contributecontributed a minimumsubscription price of $150US$145 million to(the “Subscription Price”), resulting in each party owning a newly formed and jointly held, limited liability company (“LLC”).
To maintain the option50% interest in good standing, South32 is required to fund a minimum of $10 million per year for up to a three-year period, which fundsAmbler Metals. The Subscription Price will be used to execute a mutually agreed upon program atadvance the UKMP. The funds providedArctic and Bornite Projects, along with exploration in the Ambler mining district. With Ambler Metals being well funded, with access to $145 million, Trilogy does not expect to fund programs and budgets to advance the UKMP until the Subscription Price is spent by South32 may only be expended in accordance with an approved program by a technical committee with equal representation fromAmbler Metals. To assist Ambler Metals during the initial set up phase, Trilogy is paying all of Ambler Metals’ invoices 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 fundingbeing reimbursed pursuant to a maximum of $16 million overservices agreement (the “Services Agreement”) until the three year period and (ii) $5 million if the optionback office is 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 contributedfully transitioned to a new team employed by South32 (the “Subscription Price”). South32 has now funded the full three-year option period. South32 has untilAmbler Metals, which will be no longer than the end of January 2020 to exercise the option to form the JV LLC and make the subscription payment.year.
Option Funding PhaseAmbler Metals is an independently operated company 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 variable interest entity, or 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 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 $175 million as well as $0.7 million of amounts receivable per a Service Agreement between Trilogy and Ambler Metals. The amounts receivable as at May 31, 2020 has been subsequently collected.
Provided that allDuring the exploration data and information has been made availablethree-month period ended May 31, 2020, Ambler Metals loaned $57.5 million back to South32 by no later than December 31 of each year,and retained $87.5 million. The loan has a 7-year maturity date, but Ambler Metals will begin to draw down on the loan with cash calls to South32 must decide by the end of Januaryto fund its 50% share of the following year whether; (i)2021 budget to fund a further tranche of a minimum of $10 million, or (ii) to withdrawadvance development studies, resource drilling and not provide any further annual funding. In years 1regional exploration programs. The loan is secured by South32’s membership interest in Ambler Metals and 2, 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 LLC and make the subscription payment. If South32 elects to exercise the option, the Subscription Price shall be paid in one tranche within 45 business days. 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. The option payment for the first year was paidguaranteed by South32 in April 2017 and expended on the Year 1 exploration program at the Bornite Project. Early in December 2017, South32 committed to fund the $10 million 2018 program for the Bornite Project. The funds, which represent the second tranche, maintain the Option Agreement in good standing, and were fully received on January 24, 2018. An additional $0.80 million was received during the year ended November 30, 2018 from South32 as an advance on the year three funding.
On January 31, 2019, we announced the 2019 program and budgets with South32 committing to fund the $9.2 million budget for the Bornite Project. The funds, which represent the third and final tranche, maintain the Option Agreement in good standing, and were fully received during the quarter ended February 28, 2019.
Subscription Funding Phase
At any time during the option funding phase of the agreement, South32 may elect to subscribe for a 50% interest in a newly formed LLC which will take transfer of, and hold, Trilogy Metals US’ Alaskan assets. As part of the Subscription Price, South32 will match any spending expended by us at the Arctic Project over 3 years (2017, 2018 and 2019), to a cumulative maximum of $16 million. Depending on when the option is exercised, certain amounts of the Initial Funding will be deducted from the Subscription Price.
International Investment Holdings Pty Ltd. Trilogy currently estimates that the Subscription Price, wouldwhich includes the funds to be repaid under the loan, will fund the UKMP through feasibility and the permitting of the first mine to be developed in the Ambler mining district. Once the full amount of the subscriptionSubscription Price payment of approximately $150$145 million is expended, the parties will contribute funding pro rata, as contemplated by the operating agreement which will govern the LLC (the “LLC Agreement”). The LLC Agreement anticipates a General Manager, Chief Financial Officer and Chief Operating and Technical Officer to be appointed by the LLC’s Board, which will have equal representation from Trilogy and South32.
As the initial option payments received to date are credited against the future subscription price upon exercise, we have accounted for the payments 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 our contribution of the Alaska assets, including the UKMP, into the joint venture. If South 32 withdraws from the Option Agreement, the consideration will be recognized in the statement of loss at that time.
governs Ambler Metals.
Summary of results
in thousands of dollars,
except for per share amounts
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
Three months ended | Three months ended | Six months ended | ||||||||||||||||||||||||||||||
Selected expenses | August 31, 2019 | August 31, 2018 | August 31, 2019 | August 31, 2018 | May 31, 2020 $ | May 31, 2019 $ | May 31, 2020 $ | May 31, 2019 $ | ||||||||||||||||||||||||
General and administrative | 435 | 376 | 1,363 | 1,175 | 433 | 436 | 1,084 | 928 | ||||||||||||||||||||||||
Mineral properties expense | 10,951 | 9,051 | 15,392 | 12,657 | - | 2,906 | 1,545 | 4,441 | ||||||||||||||||||||||||
Feasibility study | 742 | - | 742 | - | ||||||||||||||||||||||||||||
Professional fees | 414 | 13 | 658 | 286 | 198 | 153 | 866 | 244 | ||||||||||||||||||||||||
Salaries | 272 | 286 | 835 | 738 | 226 | 282 | 450 | 563 | ||||||||||||||||||||||||
Salaries – stock-based compensation | 402 | 204 | 3,005 | 1,277 | 770 | 664 | 1,966 | 2,603 | ||||||||||||||||||||||||
Investor relations | 164 | 59 | 456 | 261 | 101 | 175 | 227 | 292 | ||||||||||||||||||||||||
Loss and comprehensive loss for the period | 12,535 | 9,920 | 21,380 | 16,530 | ||||||||||||||||||||||||||||
Basic and diluted loss per common share | $ | 0.09 | $ | 0.08 | $ | 0.16 | $ | 0.14 | ||||||||||||||||||||||||
Gain on derecognition of assets contributed to joint venture | - | - | (175,770 | ) | - | |||||||||||||||||||||||||||
Equity in investee | 561 | - | 739 | - | ||||||||||||||||||||||||||||
Comprehensive earnings (loss) for the period | (3,002 | ) | (4,509 | ) | 168,177 | (8,845 | ) | |||||||||||||||||||||||||
Basic earnings (loss) per common share | ($ | 0.02 | ) | ($ | 0.04 | ) | $ | 1.20 | ($ | 0.07 | ) | |||||||||||||||||||||
Diluted earnings (loss) per common share | ($ | 0.02 | ) | ($ | 0.04 | ) | $ | 1.13 | ($ | 0.07 | ) |
For the three - month periodmonths ended AugustMay 31, 2019,2020, Trilogy reported a net loss of $12.5$3.0 million (or $0.09 basic and diluted loss per common share) which was higher than the net loss of $9.9 million for the comparative period in 2018 (or $0.08$0.02 basic and diluted loss per common share). This variance was primarily due to an increase in mineral properties expense due to the size, scope and timing of the field program versus the comparative three – month period.
The $1.9 million difference in mineral properties expense consists of the following changes. During the three months ended August 31, 2019, we completed 2,411 meters (2018 – 593 meters) of drilling at the Arctic project, 7,598 meters (2018 – 7,707 meters) at the Bornite project and executed a new regional exploration drilling program of approximately 1,357 meters. As a result, we incurred increased drilling costs of $1.1 million and increased project supporting costs of $0.6 million (including camp operation, logistics and personnel). The remaining variance in mineral properties expense consists of an increase of $0.4 million in engineering costs related to the feasibility study and the geotechnical study for the Arctic project, an increase of $0.1 million in geochemistry costs associated with drill assay testing, all offset by a $0.3 million decrease in geophysics and environment related costs.
Other differences noted forFor the comparable periods were: i) a slight increaseperiod in general and administrative expenses in the current period; ii) an increase of $0.4 million in professional fees due to increased legal fees; iii) an increase of $0.2 million in stock-based compensation due to a higher share price contributing to a higher fair value vesting for previously granted stock options, RSUs and DSUs; and iv) an increase of $0.1 million in investor relations expenses due to our increased level of marketing activity including attendance at more investor conferences and meetings in the current period.
For the nine - month period ended August 31, 2019, Trilogywe reported a net loss of $21.4$4.5 million (or $0.16 basic and diluted loss per common share) compared to a net loss of $16.5 million for the corresponding period in 2018 (or $0.14$0.04 basic and diluted loss per common share).
The $2.7decrease in comprehensive loss is primarily due to the elimination of mineral properties expense as these expenditures became the responsibility of Ambler Metals subsequent to the formation of the joint venture with South32 on February 11, 2020. For the three-month period ended May 31, 2019, Trilogy spent $2.9 million increase in mineral properties expense, mostly consisting of internal engineering studies for the Bornite and Arctic Projects, meteorological and air quality studies for the Arctic Project and costs associated with preparing the camp for the field season.
Other variances in relation to the comparative nine - monththree-month period ended AugustMay 31, 2018 consist2020 consists of the following changes. Duefollowing: i) feasibility study expenses of $0.7 million were related to the increased sizeArctic Project, and scope of the 2019 field program, we drilled 3,066 more meters for the nine - months ended August 31, 2019 in contrastinclude costs incurred subsequent to the comparative period, resulting in an increaseformation of $1.1 million in drilling costs. Project support and personnel costs increased by $1.1 million and includes $0.5 million in VTEM and ZTEM airborne survey costs,Ambler Metals on February 11, 2020, for which there are no prior year comparatives.comparatives; ii) share of loss in equity investment in Ambler Metals of $0.6 million, amounts for which do not exist in the comparable second quarter of 2019; iii) an increase of $0.1 million in stock-based compensation primarily due to option and restricted share unit (“RSU”) awards that were granted and fully vested during the quarter; and iv) a decrease of $0.07 million in investor relations as marketing events scheduled during the quarter were postponed due to the impact of COVID-19.
For the six- month period ended May 31, 2020, Trilogy reported comprehensive earnings of $168 million (or $1.20 basic and $1.13 diluted earnings per common share). For the comparable period in 2019, we reported a comprehensive loss of $8.8 million (or $0.07 basic and diluted loss per common share). The remaining variancedifferences for the six-month period ended May 31, 2020, when compared to the same period in 2019, are primarily due to the gain of $176 million recognized from the contribution of mineral property assets to the joint venture with South32 upon formation of the Ambler Metals on February 11, 2020. This gain was offset by a $0.7 million loss reflecting the Company’s 50% equity share of Ambler Metals operating loss for the six-month period ended May 31, 2020. There is no comparable amount in the second quarter of 2019.
Other variances noted for the comparative six-month period ended May 31, 2020 consist of the following: i) an increase in general and administrative expenses of $0.2 million, primarily due to executive recruiting fees; ii) an elimination of $2.9 million in mineral properties expense consistsas all mineral property assets were contributed to Ambler Metals upon formation of an increase of $0.5 million in engineering costs and an increase of $0.3 million in geochemistry costs, all offset by a decrease of $0.3 million in geophysics costs.
Other differences noted for the comparable periods were: i) an increase of $0.2 million in general and administration costs primarily due to increased stock exchange fees, office computer hardware and software, and travel costs; ii) a slight increase in salaries;joint venture on February 11, 2020; iii) an increase of $0.2 million in investor relations expenses due to our increased level of marketing activity including attendance at more investor conferences and meetings during the nine - month period ended August 31, 2019; iv) an increase of $0.4$0.6 million in professional fees dueprimarily attributed to increasedthe implementation of new lease accounting standards, legal fees;fees related to the formation of the joint venture and v) an increaseconsulting fees for the former CEO Rick Van Nieuwenhuyse who remained as a consultant to Trilogy through to February 29, 2020; iv) the inclusion of $1.7$0.1 million in salaries in stock based compensation for the interim CEO; and iv) a decrease of $0.6 million in stock-based compensation due todriven primarily by a highercombination of a 200,000 unit reduction in the number of stock options granted as well as a lower share price contributing to a greaterlower fair value amortization offor stock options, RSUs and DSUsdeferred share units (“DSU”) granted during the nine - monthsix-month period ended AugustMay 31, 2019.
2020.
Selected financial data
Quarterly information
in thousands of dollars,
except per share amounts
Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018 | Q3 2018 | Q2 2018 | Q1 2018 | Q4 2017 | |||||||||||||||||||||||||
08/31/19 $ | 05/31/19 $ | 02/28/19 $ | 11/30/18 $ | 08/31/18 $ | 05/31/18 $ | 02/28/17 $ | 11/30/17 $ | |||||||||||||||||||||||||
Interest and other income | 137 | 150 | 122 | 117 | 135 | 77 | 17 | 13 | ||||||||||||||||||||||||
Mineral property expenses | 10,951 | 2,906 | 1,535 | 3,833 | 9,051 | 2,475 | 1,131 | 4,693 | ||||||||||||||||||||||||
Earnings (loss) for the period | (12,535 | ) | (4,509 | ) | (4,336 | ) | (5,319 | ) | (9,920 | ) | (3,664 | ) | (2,946 | ) | (6,726 | ) | ||||||||||||||||
Earnings (loss) per common share – basic and diluted | (0.09 | ) | (0.04 | ) | (0.03 | ) | (0.04 | ) | (0.08 | ) | (0.03 | ) | (0.03 | ) | (0.06 | ) |
Q2 2020 | Q1 2020 | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018 | Q3 2018 | |||||||||||||||||||||||||
05/31/20 $ | 02/28/20 $ | 11/30/19 $ | 08/31/19 $ | 05/31/19 $ | 02/28/19 $ | 11/30/18 $ | 08/31/18 $ | |||||||||||||||||||||||||
Interest and other income | 29 | 62 | 91 | 137 | 150 | 122 | 117 | 135 | ||||||||||||||||||||||||
Mineral property expenses | - | 1,545 | 3,819 | 10,951 | 2,906 | 1,535 | 3,833 | 9,051 | ||||||||||||||||||||||||
Share of loss on equity investment | 561 | 178 | - | - | - | - | - | - | ||||||||||||||||||||||||
Earnings (loss) for the period | (3,002 | ) | 171,179 | (6,525 | ) | (12,535 | ) | (4,509 | ) | (4,336 | ) | (5,319 | ) | (9,920 | ) | |||||||||||||||||
Earnings (loss) per common share – basic | (0.02 | ) | 1.22 | (0.05 | ) | (0.09 | ) | (0.04 | ) | (0.03 | ) | (0.04 | ) | (0.08 | ) | |||||||||||||||||
Earnings (loss) per common share – diluted | (0.02 | ) | 1.16 | (0.05 | ) | (0.09 | ) | (0.04 | ) | (0.03 | ) | (0.04 | ) | (0.08 | ) |
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. Other factors that have caused fluctuations in the quarterly results that would not be expected to re-occur include the acquisition and disposition of Gold Mining Inc. (“GMI”) shares (which were not fully disposed of in fiscal 2018)assets and financing activities.
OurFor the three-month period ended May 31, 2020, we reported a comprehensive loss of $12.5$3.0 million, which consists of $2.4 million in operating expenses and $0.6 million for Trilogy’s 50% share of Ambler Metals’ operating loss, from the formation of the joint venture on February 11, 2020, to May 31, 2020. There is no prior period comparative for the pro rata share of Ambler Metals operating loss as the joint venture formation was completed during fiscal 2020. When compared to the three-month period ended May 31, 2019, the current period operating expenses was $2.1 million lower. The decrease is primarily due to the elimination of $2.9 million of mineral properties expense for which there are no comparable expenses in the current period, offset by $0.7 million in feasibility study costs in the current period.
For the first quarter of 2020, we reported comprehensive earnings of $171 million which consisted of a gain of $176 million arising from the derecognition of our Alaskan mineral properties upon contribution to the joint venture with South32, offset by Trilogy’s 50% share of Ambler Metals’ operating loss for the period from February 11, 2020 to February 29, 2020 and total expenses of $4.5 million for the period. There are no prior period comparatives for the gain on contribution of Alaskan assets or the pro rata share of Ambler Metals’ operating loss. The expense of $4.4 million incurred for the first quarter of 2020 was slightly higher than the loss of $4.3 million for the first quarter of 2019 primarily due to higher professional fees, general and administrative expense, share of loss on equity investment offset by a lower stock-based compensation cost.
The loss of $6.5 million for the fourth quarter ended November 30, 2019 is higher when compared to the net loss of $5.3 million incurred in the fourth quarter ended November 30, 2018. The primary drivers for the difference were $0.7 million higher stock-based compensation, $0.6 million higher professional fees and $0.1 million increase in general and administrative expenses, all offset by $0.2 million in decreased salaries and benefits in the fourth quarter 2019.
Our net loss for the third quarter ended August 31, 2019 isof $12.5 million was significantly higher thanversus the secondcomparative loss of $9.9 million for the same quarter ended May 31, 2019, primarily due to mineral property expenditures. During the quarter ended August 31, 2019, mineral properties expense increased by $8.0 million when compared toin the prior quarter, reflecting the increased activity at the projects as the 2019 drilling program became fully operational.year. The current period loss is $2.6 million higher than the third quarter ended August 31, 2018,increase is primarily due to an increase in mineral properties expenditures due to the size and scope of the 2019 field season resulting in an increase in mineral properties expenditures of $1.9 million and $0.4 million additional professional feesprogram which included the new regional exploration program which did not exist in the currentcomparative period.
During the quarter ended May 31, 2019, mineral property expense increased by $1.4 million when compared to the prior quarter as we prepared for the commencement of the 2019 drill program and field season. Our loss of $4.5 million for the quarter ended May 31, 2019 is consistent with the prior quarter as the increase in the second quarter mineral property expenses were offset by higher first quarter stock-based compensation due to the fair value amortization of new option grants during the first quarter. The loss during the three - month period ended May 31, 2019 was $0.9 million higher when compared to the loss for the comparative three - month period ended May 31, 2018 of $3.7 million, due mostly to an increase in mineral properties expense and stock-based compensation.
Our loss for the first quarter ended February 28, 2019 of $4.3 million was lower when compared to the two prior quarterly periods and reflects the seasonality of the mineral property expenses which are mostly incurred during the summer and fall season. The $1.4 million increase in loss when compared to the first quarter ended February 28, 2018 is primarily due to higher first quarter 2019 stock-based compensation from the higher fair value amortization of new option grants during the first quarter of 2019.
During the fourth quarter of 2018, we had a loss of $5.3 million compared to a loss of $6.7 million in the fourth quarter of 2017. The primary drivers for the difference were $0.9 million lower mineral properties expenses, loss on disposition of investments of $0.8 million in the fourth quarter of 2017 for which the comparative is nil in the fourth quarter 2018, all offset by $0.5 million in increased salaries benefits in the fourth quarter 2018. We incurred $3.8 million of mineral property expenses in the fourth quarter of 2018 compared to $4.7 million of mineral property expenses in the fourth quarter of 2017 as the camp closed earlier in the 2018 program (October 13, 2018) versus the 2017 program (October 31, 2017).
Liquidity and capital resources
At AugustMay 31, 2019,2020, we had $26.9$12.3 million in cash and cash equivalents and working capital of $23.2 million. During the three-month period ended August 31, 2019, we received proceeds of approximately $9.9$12.8 million, as a result of an exercise of 6,521,740 warrants.
The increase in cash was a result of fully receiving the $9.2 million Year 3 funding from South32, an additional $1.0 million for the regional exploration program and $9.9 million upon exercise of all warrants. These cash inflows were offset by $15.4 million in mineral properties expense, $3.3 million in cumulative general and administrative expenses, investor relations, professional fees, salaries and $2.5 million in cash savings from changes in net non-cash working capital. The increase in working capital for the period was a result of higher accounts payable and prepaid balances, offset by a higher accounts receivable balance as at August 31, 2019.
We expended $15.8 million on operating activities during the nine months ended August 31, 2019 compared with $14.6 million for operating activities for the same period in 2018. Most cash spent on operating activities during all periods was expended on mineral property expenses, general and administrative costs, salaries and professional fees.
We continuewhich is sufficient to fund our cashongoing operations for at least the next 12 months. The projects are fully funded by Ambler Metals and we do not anticipate needing to fund our 50% share of future expenditures through our working capital. As we are not currently in production, we will need to raise additional funds to support our operations and administration expenses inadvance the future. Future sources of liquidity may include debt financing, equity financing, convertible debt, exercise of options, or other means. Our continued operations are dependent on our ability to obtain additional financing or to generate future cash flows.
All cash generated from investing activities during the nine months ended August 31, 2019 were from the South 32 Option Agreement funding of $10.2projects until Ambler Metals’ $145 million (2018 - $10.4 million) and there were no proceeds from the sale of investments (2018 - $2.3 million) as all GMI shares were full disposed during fiscal 2018. During the nine months ended August 31, 2019, $9.9 million in cash was generated from financing activities (2018 - $26.9 million).is spent.
Contractual obligations
Contractual obligated undiscounted cash flow requirements as at AugustMay 31, 20192020 are as follows.
In thousands of dollars
Total $ | <1 Year $ | 1–2 Years $ | 2–5 Years $ | Thereafter $ | ||||||||||||||||
Accounts payable and accrued liabilities | 4,512 | 4,512 | - | - | - | |||||||||||||||
Office lease | 936 | 179 | 385 | 372 | - | |||||||||||||||
Office and warehouse lease | 125 | 57 | 68 | - | - | |||||||||||||||
5,573 | 4,748 | 453 | 372 | - |
Total $ | <1 Year $ | 1–2 Years $ | 2–5 Years $ | Thereafter $ | ||||||||||||||||
Accounts payable and accrued liabilities | 539 | 539 | - | - | - | |||||||||||||||
Office lease | 774 | 181 | 379 | 214 | - | |||||||||||||||
1,313 | 720 | 379 | 214 | - |
Off-balance sheet arrangements
We have no material off-balance sheet arrangements. We have lease commitments for office and warehouse spaces with a remaining total commitment of $1.1 million.
Outstanding share data
At October 8, 2019,July 7, 2020, we had 140,003,741140,965,583 common shares issued and outstanding. At October 8, 2019,July 7, 2020, we had outstanding, 9,295,60012,848,538 stock options with a weighted-average exercise price of $1.02. We also had, 1,137,485 deferred share units (“DSUs”),$1.37 as well as 1,204,170 DSUs and 11,927 NovaGold deferred share units entitlingDSUs for which the holder is entitled to receive one common share for every six NovaGold shares received, and 212,501 RSUs.received. Upon exercise of all the foregoing convertible securities, the Company would be required to issue an aggregate of 10,647,46814,054,695 common shares.
New accounting pronouncements
Certain recent accounting pronouncements have been included under note 2 in our AugustMay 31, 20192020 unaudited interim consolidated financial statements
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, equity method investment, 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. We haveThe Company has taken steps, in accordance with industry standards, to verify the title to mineral properties in which it has an interest. Although we havethe Company has made efforts to ensure that legal title to ourits 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 orof 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.
South32 Option AgreementInvestment in affiliates
The optionInvestments in unconsolidated ventures over which the Company has the ability to formexercise significant influence, but does not control, are accounted for under the JV LLC is recognizedequity method and include the Company’s investment in Ambler Metals. We identified Ambler Metals as a financial instrument at inceptionVariable 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 arrangement withVIE. 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.
Ambler Metals 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 initialinvestment in affiliates include a significant decrease in long-term expected copper price, 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 of $nil. This optionwhich may be determined using a discounted cash flow model.
Additional information
Additional information regarding the Company, including our annual report on Form 10-K, is required to be re-measuredavailable on SEDAR at fair valuewww.sedar.com and EDGAR at each reporting date with any changes in fair value recorded in loss for the period.www.sec.gov and on our website at www.trilogymetals.com. Information contained on our website is not incorporated by reference.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our financial instruments consist of cash and cash equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities. The fair value of the financial instruments approximates their carrying value due to the short-term nature of their maturity. Our 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.
Currency risk |
Currency risk is the risk of a fluctuation in financial asset and liability settlement amounts due to a change in foreign exchange rates. We operateThe Company operates in the United States and Canada. OurThe Company’s exposure to currency risk at AugustMay 31, 20192020 is limited to the Canadian dollar consisting of cash of CDN$205,000,87,000, accounts receivable of CDN$62,00042,000 and accounts payable of CDN$1,283,000.347,000. Based on a 10% change in the US-Canadian exchange rate, assuming all other variables remain constant, ourthe Company’s net loss would change by approximately $76,000.$16,000.
Credit risk |
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. We hold cash and cash equivalents with Canadian Chartered financial institutions. Our accounts receivable consists of Canadian Goods and Services Tax receivable from the Federal Government of Canada and other receivables for recoverable expenses. Our 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 |
Liquidity risk is the risk that we will encounter difficulties raising funds to meet our financial obligations as they fall due. We are in the exploration stage and do not have cash inflows from operations; therefore, we manage liquidity risk through the management of the capital structure and financial leverage. Future financingfinancings may be obtained through debt financing, equity financing, sales of investments, convertible debt, exercise of options, or other means. Continued operations are dependent on our ability to obtain additional financing or to generate future cash flows. Our contractually obligated cash flow is disclosed under the section titled “Contractual Obligations.”
Interest rate risk |
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. We are exposed to interest rate risk with respect to interest earned on cash and cash equivalents. Based on balances as at August 31, 2019,May 31,2020, a 1% change in interest rates would result in a change in net loss of $0.2$0.1 million, assuming all other variables remain constant.
As we are currently in the exploration phase none of our financial instruments are exposed to commodity price risk; however, our ability to obtain long-term financing and its economic viability could be affected by commodity price volatility.volatility
Item 4. | Controls and Procedures |
Disclosure controls and procedures
Management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of August 31, 2019. On the basis of this review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosureDisclosure controls and procedures are effectivedesigned to ensure that the information we are required to disclosebe disclosed in reports that we filefiled or submitsubmitted by the Company under the Exchange ActU.S. and Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in thethose rules, including providing reasonable assurance that material information is gathered and forms of the SEC andreported to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to oursenior management, including our President andthe Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allowpermit timely decisions regarding requiredpublic disclosure. Management, including the CEO and CFO, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules of Canadian Securities Administration, as of May 31, 2020. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective.
There have not been any changes in the Company’sInternal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (asas defined in RulesRule 13a-15(f) and 15d-15(f) promulgated by the SEC underof the Exchange Act) during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Act and National Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim filings. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in internal control over financial reporting
Except for the implementation of certain internal controls over the formation of the Ambler Metals joint venture, there have been no changes in our internal controls over financial reporting during the fiscal quarter ended May 31, 2020 which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We continue to evaluate our internal control over financial reporting on an ongoing basis to identify improvements. In connection with the formation of the Ambler Metals joint venture in February 2020, we modified our internal control over financial reporting to reflect the impact of the formation of the joint venture, which modifications were finalized prior to the filing of the Form 10-Q for the period ended May 31, 2020.
Item 1. | Legal Proceedings |
From time to time, we are a party to routine litigation and proceedings that are considered part of the ordinary course of its business. We are not aware of any material current, pending, or threatened litigation.
Item 1A. | Risk Factors |
Trilogy and its future business, operations and financial condition are subject to various risks and uncertainties due to the nature of its business and the present stage of exploration of its mineral properties. Certainproperties and the formation of the joint venture. Except as set forth below, certain of these risks and uncertainties are under the heading “Risk Factors” under Trilogy’s Form 10-K dated February 11, 2019,13, 2020 which is available on SEDAR at www.sedar.comand, EDGAR atwww.sec.gov and on our website atwww.trilogymetals.comwww.trilogymetals.com..
The outbreak of the coronavirus (COVID-19) may affect our operations.
The Company faces risks related to health epidemics and other outbreaks of communicable diseases, which could significantly disrupt its operations and may materially and adversely affect its business and financial conditions.
The Company’s business could be adversely impacted by the effects of the coronavirus or other epidemics. In December 2019, a novel strain of the coronavirus emerged in China and the virus has now spread to several other countries, including Canada and the U.S., and infections have been reported globally. The extent to which the coronavirus impacts the Company’s business, including exploration and development activities at Ambler Metals and the market for its securities, will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak. In particular, the continued spread of the coronavirus and travel and other restrictions established to curb the spread of the coronavirus, could materially and adversely impact the Company’s business including without limitation, the planned exploration programs at Ambler Metals during the 2020 field season, employee health, workforce productivity, increased insurance premiums, limitations on travel, the availability of industry experts and personnel, the timing to process drill and other metallurgical testing, and other factors that will depend on future developments beyond the Company’s control, which may have a material and adverse effect on the its business, financial condition and results of operations.
There can be no assurance that the Company's personnel will not be impacted by these pandemic diseases and ultimately see its workforce productivity reduced or incur increased medical costs or insurance premiums as a result of these health risks.
In addition, a significant outbreak of coronavirus could result in a widespread global health crisis that could adversely affect global economies and financial markets resulting in an economic downturn that could have an adverse effect on the demand for precious metals and our future prospects.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
These disclosures are not applicable to us.
Item 5. | Other Information. |
None.
Item 6. | Exhibits |
Exhibits
See Exhibit Index.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Exhibit No. | ||
3.1 | ||
EXHIBIT INDEX
10.2 | Amendment Agreement between Trilogy Metals Inc. and James Gowans dated April 9, 2020 https://www.sec.gov/Archives/edgar/data/1543418/000110465920045204/tm2015554d1_ex10-1.htm | |
31.1 | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) | |
31.2 | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) | |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | |
101 | Interactive Data Files | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 8, 2020 | TRILOGY METALS INC. | |
By: | /s/ Tony Giardini | |
Tony Giardini | ||
President and Chief Executive Officer |
By: | /s/ Elaine M. Sanders | |
Elaine M. Sanders | ||
Vice President and Chief Financial Officer |