Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL
NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this report, including statements in the following discussion, are what are known as “forward looking statements”,
which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately
predict the future. Words such as “plans,” “intends,” “will,” “hopes,” “seeks,”
“anticipates,” “expects “and the like often identify such forward looking statements, but are not the only indication
that a statement is a forward-looking statement. Such forward looking statements include statements concerning the company’s plans
and objectives with respect to the present and future operations of the company, and statements which express or imply that such present
and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the company to
change such plans and objectives or fail to successfully implement such plans or achieve such objectives, or cause such present and future
operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered
in light of the discussion of risks and other factors contained in this report and in the company’s other filings with the sec.
No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.
Background
and Overview
On
August 28, 2017, the Company announced that it signed the Lease and Option Agreement for the lease and option to purchase the Mine in
Idaho. The Lease and Option Agreement is between the Company and Placer Mining, the current owner of the Mine.
Highlights
of the Agreement are as follows:
●
Effective
date: November 1, 2017;
●
Initial
lease term: 24 months;
●
The
Company shall pay Placer Mining US$100,000 monthly mining lease payments, which shall be paid quarterly;
●
The
lease can be extended for another 12 months at any time by the Company by paying Placer Mining a US$600,000 bonus payment and by
continuing to pay the monthly US$100,000 lease payments;
●
The
option to purchase is exercisable at the Company’s discretion; and
●
Purchase
by the Company can be made at any time during lease period and any extension thereto.
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On
October 2, 2018, the Company announced that it was in default of the Lease and Option Agreement. The default arose as a result of missed
lease and operating cost payments, totaling $400,000, which were due at the end of September and on October 1, 2018. As per the Lease
and Option Agreement, the Company had 15 days, from the date the notice of default was provided (September 28, 2018), to remediate the
default by making the outstanding payment. While management worked with urgency to resolve this matter, management was ultimately unsuccessful
in remedying the default, resulting in the Lease and Option Agreement being terminated.
On
November 13, 2018, the Company announced that it was successful in renewing the Lease and Option Agreement, effectively with the original
Lease and Option Agreement intact, except monthly payments were reduced to $60,000 per month for 12 months, with the accumulated reduction
in payments of $140,000 per month added to the purchase price of the Mine should the Company choose to exercise its option.
On
November 1, 2019, the Amended Agreement became effective. The key terms of the Amended Agreement are as follows:
●
The
lease period was extended for an additional period of nine months to August 1, 2020, with the option to extend for a further 6 months
based upon payment of a one-time $60,000 extension fee;
●
The
Company will continue to make monthly care and maintenance payments to Placer Mining of $60,000 until exercising the option to purchase;
and
●
The
purchase price is set at $11,000,000 for 100% of the marketable assets of the Mine to be paid with $6,200,000 in cash, and $4,800,000
in Common Shares. The purchase price also includes the negotiable EPA costs of $20,000,000. The Amended Agreement provides for the
elimination of all royalty payments that were to be paid to the mine owner. Upon signing the amended agreement, the Company paid
a one-time, non-refundable cash payment of $300,000 to the mine owner. This payment will be applied to the purchase price upon execution
of the purchase option. In the event the Company elects not to exercise the purchase option, the payment shall be treated as an additional
care and maintenance payment.
On
November 20, 2020, the Company signed a further amendment to the Amended Agreement. Under the terms of the amendment:
●
The
Company will continue to make monthly care and maintenance payments to Placer Mining of $60,000 until exercising the option to purchase;
●
The
purchase price was reduced to $7,700,000, with $5,700,000 in cash (with an aggregate of $300,000 to be credited toward the purchase
price of the Mine as having been previously paid by the Company and an aggregate of $5,400,000 payable in cash outstanding) and $2,000,000
in Common Shares. The reference price for the payment in Common Shares will be based on the Common Share price of the Company’s
last equity raise before the option is exercised;
●
The
Company’s contingent obligation to settle $1,787,300 of accrued payments due to Placer Mining has been waived; and
●
The
Company is to make an advance payment of $2,000,000 (paid) to Placer Mining, which shall be credited toward the purchase price if
and when the Company elects to exercise its purchase right. In the event that the Company irrevocably elects not to exercise its
purchase right, the advance payment of $2,000,000 will be repaid to the Company within twelve months from the date of such election.
This payment had the effect of decreasing the remaining amount payable to purchase the Mine to an aggregate of $3,400,000 payable
in cash and $2,000,000 in Common Shares of the Company.
On December 20, 2021, the Company announced its intention purchase of the
mine complex, which was consummated subsequent to the close of the period. With the execution of the EPA settlement agreement amendment
and the expected receipt of $8,000,000 proceeds from the Royalty Convertible Debenture, the Company contracted to purchase the Bunker
Hill Mine from Placer Mining Corp. and a definitive agreement was signed by both parties. The terms of the purchase were modified to $5,400,000
in cash, from $3,400,000 of cash and $2,000,000 of common shares in the Company. Purchase of the mine consists of over 400 patented mining
claims and 5,800 acres of private land.
Closing of the transaction occurred on January
7, 2022, concurrent with funding of the Royalty Convertible Debenture, approval of the transaction by Placer Mining Corp. shareholders,
and satisfaction of other closing conditions. See Subsequent Events.
Results
of Operations
The
following discussion and analysis provide information that is believed to be relevant to an assessment and understanding of the results
of operation and financial condition of the Company for the year ended December 31, 2021, the six-month period ended December 31, 2020,
and the fiscal year ended June 30, 2020. Unless otherwise stated, all figures herein are expressed in U.S. dollars, which is the Company’s
functional currency.
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Comparison of the year ended December 31,
2021 and the six months ended December 31, 2020
Revenue
During
the year ended December 31, 2021 the Company generated no revenue (six months ended December 31, 2020 - $nil).
Expenses
During
the year ended December 31, 2021, the Company reported total operating expenses of $18,752,504 (six months ended December 31,
2020 - $9,454,396).
The
increase in total operating expenses is due to an increase in operation and administration expenses, exploration expenses, legal and
accounting expenses and consulting expenses when compared to the six-month period ended December 31, 2020.
For
financial accounting purposes, the Company reports all direct exploration expenses under the exploration expense line item of the statement
of operations. Certain indirect expenses may be reported as operation and administration expense or consulting expense on the statement
of operations.
Net
Loss and Comprehensive Loss
The
Company had a net loss and comprehensive loss of $6,402,277 for the year ended December 31, 2021 (six months ended December 31,
2020 - $2,164,454). The increase in net loss compared to the six-month period ended December 31, 2020 was a result of increased operating
expenses during the twelve-month period when compared to the six-month period. Additionally, there was accretion and interest from debt and a loss on debt settlement during the year ended June 30, 2020.
Special note should be made of the fact that the
period ended December 31, 2021 was a twelve-month year, while the comparative transition period ended December 31, 2020 was a six-month
period, with variations in all categories of expense varying as a natural function of the differences in length of time periods.
Comparison of the six months ended December
31, 2020 and the year ended June 30, 2020
Revenue
During the six months ended December 31, 2020
and June 30, 2020, the Company generated no revenue.
Expenses
During the six months ended December 31, 2020,
the Company reported total operating expenses of $9,454,396 as compared to $10,793,823 during the year ended June 30, 2020. Increases
in operation and admin expenses, legal and accounting expenses and consulting expenses for the six-month period was offset by a decrease
in exploration expenses and recognition of a gain on settlement of accounts payable.
Net Loss and Comprehensive Loss
The Company had a net loss and comprehensive
loss of $2,164,454 for the six months ended December 31, 2020, as compared to a net loss and comprehensive loss of $31,321,791 for
the year ended June 30, 2020. The change in net loss between the two periods was largely affected by the change in derivative
liabilities. A gain related to the change in derivative liability for the six-month period ended December 31, 2020 was $10,503,941
compared to a loss related to the change in derivative liability for the year ended June 30, 2020 of $18,843,947, a total change of
$29,347,888 between the two comparative periods.
Special note should be made of the fact that the
transition period ended December 31, 2020 was a six-month period, while the comparative period ended June 30, 2020 was a twelve-month
year, with variations in all categories of expense varying as a natural function of the differences in length of time periods.
33
Liquidity
and Capital Resources
At December 31, 2021, the Company had total assets
of $4,071,796 and total liabilities of $38,314,164. This compares to total assets of $6,709,016 and total liabilities of $38,246,613
at December 31, 2020. The decrease in current assets is primarily related to a $3,082,598 net decrease in cash in 2021 which was the
result of an $11,372,153 cash use for operating activities, which was partially offset by the proceeds from the issuance of common
stock and warrants for net proceeds of $6,013,439 in February 2021 and $2,500,000 of proceeds from a promissory note in September 2021.
As of December 31, 2021, the Company had negative
working capital of $19,172,729 compared to negative working capital of $10,132,935 as of December 31, 2020. This increase is primarily
the result of the $3,082,598 net decrease in cash and an increase in the amount due to the EPA of $5,945,280.
In December 2021, the Company executed a non-binding
term sheet with Sprott Resource Streaming and Royalty (“SRSR”) and other investors outlining a $50,000,000 project
finance package that the Company expects to fulfill the majority of its funding requirements to restart the mine and reach commercial
production in mid-2023. The package consists of an $8,000,000 Royalty Convertible Debenture, a $5,000,000 Convertible Debenture, and
a multi-metals stream of up to $37,000,000 (the “Stream”). In January 2022, subject to settlement of definitive documentation
with SRSR, the $8,000,000 was advanced under the Royalty Convertible Debenture and $6,000,000 was advanced under the Convertible Debenture,
which was increased from $5,000,000.
Subject to SRSR internal approvals, further technical
and other diligence (including confirmation of full project funding by an independent engineer appointed by SRSR), and satisfactory definitive
documentation, the Company expects to close the Stream concurrent with a formal construction decision being made by Q2 2022. A minimum
of $27,000,000 and a maximum of $37,000,000 (the “Stream Amount”) will be made available under the Stream, at the Company’s
option, once the conditions for availability of the Stream have been satisfied. There can be no assurance that the Stream will close
as anticipated. See Notes 8 and 16 to the consolidated financial statements for further information regarding this project finance package.
In December 2021, in conjunction with its intention
to purchase the Bunker Hill mine complex, the Company entered into an amended Settlement Agreement (the “Amendment”) between
the Company, Idaho Department of Environmental Quality, US Department of Justice and the EPA, modifying the payment schedule and payment
terms for recovery of historical environmental response costs at Bunker Hill Mine incurred by the EPA. Upon the purchase of the Bunker
Hill mine complex, the remaining payments of the EPA cost recovery liability would be assumed by the Company, resulting in a total of
$19,000,000 liability to the Company, an increase of $8,000,000. The new payment schedule includes a $2,000,000 payment to the EPA within
30 days of execution of this amendment, which was paid subsequent to December 31, 2021. The remaining $17,000,000 will be paid on the
following dates:
Date
Amount
November 1, 2024
$ 3,000,000
November 1, 2025
$ 3,000,000
November 1, 2026
$ 3,000,000
November 1, 2027
$ 3,000,000
November 1, 2028
$ 3,000,000
November 1, 2029
$ 2,000,000
plus accrued interest
The resumption of payments in 2024 were agreed
in order to allow the Company to generate sufficient revenue from mining activities at the Bunker Hill Mine to address remaining payment
obligations from free cash flow.
In addition to the cost recovery payments outlined
above, the Amendment includes an initial payment of $2,900,000 of outstanding water treatment costs that have been incurred over the
period from 2018 through 2021, to be made within 90 days of the execution of the Amendment. On March 22, 2022, the Company reported that
in consultation with the EPA, it has committed to meet the $2,900,000 payment and Financial Assurance obligations by 180 days from the
effective date of the Amended Settlement Agreement.
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The changes in payment terms and schedule, are
contingent upon the Company securing Financial Assurance in the form of performance bonds or letters of credit deemed acceptable to the
EPA totaling $17,000,000. These assurances correspond to the Company’s cost recovery obligations to be paid in 2024 through 2029
as outlined above. Should the Company fail to make its scheduled payment, the EPA can draw against this financial assurance. The amount
of the bonds or letters of credit will decrease over time as individual payments are made. If the Company fails to post the Final Financial
Assurance within 180 days of the execution of the Amendment, the terms of the original agreement as described above will be reinstated
(see Note 6 to the consolidated financial statements).
Following
the approval of the transaction by Placer Mining Corp. shareholders and satisfaction of other closing conditions, the purchase of the
Bunker Hill Mine closed on January 7, 2022. Mine assets were purchased for $7,700,000, with $300,000 of previous lease payments
and a deposit of $2,000,000 applied to the purchase, resulting in cash paid at closing of approximately $5,400,000. Concurrently,
definitive documentation and all closing conditions were met for the $8,000,000 Royalty Convertible Debenture. The Royalty Convertible
Debenture funded the purchase of the Bunker Hill Mine, the $2,000,000 payment to the EPA, and near-term working capital requirements.
In January 2022, the Company also closed the $6,000,000 Convertible Debenture, which will fund near-term working capital requirements,
mine development, and the advancement of its Prefeasibility Study, including engineering studies for the demobilization and construction
of the Pend Oreille Process Plant at Bunker Hill. See Note 16 to the consolidated financial statements for further detail regarding these
two financings and the purchase of the Bunker Hill Mine.
On
March 9, 2022, the Company entered into an agreement with a syndicate of agents led by Echelon Wealth Partners Inc. (collectively, the
“Agents”), which have agreed to act as agents for and on behalf of the Company, on a commercially reasonable “best
efforts” agency basis, without underwriter liability, in connection with a proposed private placement (the “Offering”)
of up to C$15,000,000 of special warrants of the Company (the “Special Warrants”) which will entitle the holders to receive
up to 50,000,000 units of the Company at a price of C$0.30 (the “Issue Price”) per Special Warrant, subject to adjustment
in certain events.
Each
Special Warrant shall be exercisable, for no additional consideration and with no further action on the part of the holder thereof, into
one unit (each, a “Unit”) of the Company, subject to adjustment described below, on the earlier of: (i) the third business
day after the date upon which both (A) a receipt for a (final) prospectus (the “Qualification Prospectus”) qualifying the
distribution of the Units issuable upon exercise of the Special Warrants has been issued by the applicable securities regulatory authorities
in the Canadian jurisdictions in which purchasers of the Special Warrants are resident (the “Canadian Jurisdictions”), and
(B) the registration statement (the “Registration Statement”) of the Company filed with the Securities and Exchange Commission
(the “SEC”) registering the Units issuable upon exercise of the Special Warrants has been declared effective by the SEC;
and (ii) the date that is six months following the Closing Date (as defined below).
Each
Unit will consist of one common share of the Company (a “Common Share”) and one common share purchase warrant (each whole
common share purchase warrant, a “Warrant”). Each Warrant will entitle the holder to acquire one Common Share for C$0.37
for a period of 36 months following the Closing Date. The Warrants shall also be exercisable on a cashless basis in the event the Registration
Statement has not been made effective by the SEC prior to the date of exercise. In the event that a receipt for the Qualification Prospectus
has not been obtained and the Registration Statement has not been deemed effective on or before 5:00 p.m. (EST) on the date that is 60
days following the Closing Date, each unexercised Special Warrant will thereafter entitle the holder thereof to receive, upon the exercise
thereof, at no additional cost 1.1 Units (instead of one Unit).
This
financing is expected to close on March 31, 2022, after which public disclosure will be made as soon as practicable thereafter by means
of a news release and Form 8-K filed with the Securities and Exchange Commission. See Note 16 to the consolidated financial statements
for further information.
In support of plans to rapidly restart the Mine,
the Company worked systematically through 2020 and 2021 to delineate mineral resources and conduct various technical studies. Executing
this strategy may require securing additional financing, which may include additional indebtedness of $15,000,000 and a cost over-run
facility of $13,000,000.
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The Company has incurred losses since inception
resulting in an accumulated deficit of $72,491,150 and further losses are anticipated in the development of its business. Additionally,
as of December 31, 2021, the Company owes a total of $16,417,208 to the EPA that is classified as current liability unless the Company
can consummate financial assurances that would reclassify $11,000,000 of this liability to long-term debt. Additionally, the Company
expects to close the Stream in 2022 in order to fulfill the majority of its remaining funding requirements to restart the mine and reach
commercial production, but there can be no assurance that this financing transaction will close as expected. In order to continue to
meet its fiscal obligations in the current fiscal year and beyond, the Company must consummate these transactions as anticipated to meet
its financial obligations over the next twelve months. This raises substantial doubt about the Company’s ability to continue as
a going concern. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations
in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business
operations when they come due. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability
and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
Subsequent
Events
Events occurring subsequent to December 31, 2021
as disclosed above in the Liquidity and Capital Resources section. In addition, the Company had the following subsequent events.
On January 7, 2022, the Company closed the purchase
of the Bunker Hill Mine. See Note 6 Mining Interests. Mine assets were purchased for $7,700,000, with $300,000 of previous lease payments
and a deposit of $2,000,000 applied to the purchase, resulting in cash paid at closing of approximately $5,400,000. The EPA obligation
of $19,000,000 was assumed by Bunker Hill as part of the acquisition. The restructuring of the EPA Settlement payment stream under the
Amendment does not occur unless and until the Company puts the financial assurances in place. On March 22, 2022, the Company reported
that in consultation with the EPA, it has committed to meet the approximately $2,900,000 and Financial Assurance obligations by 180 days
from the effective date of the Amended Settlement Agreement.
On January 31, 2022, the Company entered into
a non-binding Memorandum of Understanding (“MOU”) with Teck Resources Limited (“Teck”) for the purchase of a
comprehensive package of equipment and parts inventory from its Pend Oreille site (the “Pend Oreille Process Plant”) in eastern
Washington State, approximately 145 miles from the Bunker Hill Mine by road. The package comprises substantially all processing equipment
of value located at the site, including complete crushing, grinding and flotation circuits suitable for a planned ~1,500 ton-per-day
operation at Bunker Hill, and total inventory of nearly 10,000 components and parts for mill, assay lab, conveyer, field instruments,
and electrical spares. The MOU outlines a purchase price under two scenarios, at Teck’s option: an all-cash $2,750,000 purchase
price, or a $3,000,000 purchase price comprised of cash and Bunker Hill shares. Each option includes a $500,000 non-refundable deposit,
which has been paid by the Company subsequent to the end of the year. On March 7, 2022, the Company announced the signing of an Asset
Purchase agreement for the purchase of the Pend Oreille Process Plant. Closing of the transaction remains subject to certain conditions,
including payment of the remaining purchase price by May 15, 2022.
On March 3, 2022, the Company closed the purchase
of a 225-acre surface land parcel for a cash payment of approximately $200,000.
Critical accounting estimates
The preparation of the interim condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities and contingent liabilities at the date of the financial statements and reported amounts of expenses during the
reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes can differ from these
estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized
in the financial statements are:
Share-based payments
Management
determines costs for share-based payments using
market-based valuation techniques. The fair value of the share awards and warrant liabilities are determined at the date of grant using
generally accepted valuation techniques and for warrant liabilities at each balance sheet date thereafter. Assumptions are made and judgment
used in applying valuation techniques. These assumptions and judgments include estimating the future volatility of the stock price and
expected dividend yield. Such judgments and assumptions are inherently uncertain. Changes in these assumptions affect the fair value
estimates.
Warrants and accrued liabilities
Estimating the fair value of derivative warrant
liability requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the issuance.
This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the warrants
and conversion feature derivative liability, volatility and dividend yield and making assumptions about them.
The Company has to make estimates to accrue for
certain expenditures due to delay in receipt of third-party vendor invoices. These accruals are made based on trends, history and knowledge
of activities. Actual results may be different.
The Company makes monthly estimates of its water
treatment costs, with a true-up to the annual invoice received from the IDEQ. Using the actual costs in the annual invoice, the Company
will then reassess its estimate for future periods. Given the nature, complexity and variability of the various actual cost items included
in the invoice, the Company has used the most recent invoice as its estimate of the water treatment costs for future periods.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
Applicable.
36
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