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.
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Background
and Overview
The
Company’s sole focus is the development and restart of its 100% owned flagship asset, the Bunker Hill mine (the “Mine”)
in Idaho, USA. The Mine remains the largest single producing mine by tonnage in the Silver Valley region of northwest Idaho, producing
over 165 million ounces of silver and 5 million tons of base metals between 1885 and 1981. The Bunker Hill Mine is located within Operable
Unit 2 of the Bunker Hill Superfund site (EPA National Priorities Listing IDD048340921), where cleanup activities have been completed.
The
Company purchased the Bunker Hill Mine on January 7, 2022 for $5,400,000 in cash. Prior to purchasing the Mine, the Company had entered
into a series of agreements with Placer Mining Corporation (“Placer Mining”), the prior owner, for the lease and option to
purchase the Mine. The first of these agreements was announced on August 28, 2017, with subsequent amendments and/or extensions announced
on November 1, 2019, July 7, 2020, and November 20, 2020.
Under
the most recent of these agreements, the Company was required to make payments pursuant to an agreement with the U.S. Environmental Protection
Agency (“EPA”) whereby for so long as the Company leases, owns and/or occupies the Mine, the Company would make payments
to the EPA on behalf of Placer Mining in satisfaction of the EPA’s claim for historical water treatment cost recovery in accordance
with the Settlement Agreement reached with the EPA in 2018. Immediately prior to the purchase of the Mine, the Company’s liability
to EPA in this regard totaled $11,000,000. Concurrent with the purchase of the Mine, the Company assumed incremental liabilities of $8,000,000
to the EPA, consistent with the terms of the amended Settlement Agreement with the EPA that was executed in December 2021 (see “EPA
2018 Settlement Agreement & 2021 Amended Settlement Agreement” in the “Our Business” section above).
In
early 2020, a new management team comprised of former executives from Barrick Gold Corp. assumed leadership of the Company. Since that
time, the Company conducted multiple exploration campaigns, published multiple economic studies and Mineral Resource Estimates, and advanced
the rehabilitation and development of the Mine. In December 2021, it announced a project finance package with Sprott Private Resource
Streaming & Royalty Corp., an amended Settlement Agreement with the EPA, and the purchase of the Bunker Hill Mine, setting the stage
for a rapid restart of the Mine.
In
January 2022, with the closing of the purchase of the Bunker Hill Mine, the funding of the $8,000,000 Royalty Convertible Debenture and
$6,000,000 Series Convertible Debenture, and the announcement of an MOU for the purchase of the Pend Oreille process plant from a subsidiary
of Teck Resources Limited, the Company embarked on a program of activities with the goal of achieving a restart of the Mine. Key milestones
and achievements from January 2022 onwards have included the closing of the purchase of the Pend Oreille process plant, the demobilization
of the process plant to the Bunker Hill site, the completion of demolition activities at the Pend Oreille site, a Prefeasibility Study
envisaging the restart of the Mine, and the completion of the primary portion of the ramp decline connecting the 5 and 6 Levels of the
Bunker Hill Mine.
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 years ended December 31, 2021 and 2022. Unless otherwise stated, all figures
herein are expressed in U.S. dollars, which is the Company’s functional currency.
Comparison
of the year ended December 31, 2022 and the year ended December 31, 2021
Revenue
During
the year ended December 31, 2022, the Company generated no revenue (year ended December 31, 2021 - $nil).
Expenses
During
the year ended December 31, 2022, the Company reported total operating expenses of $16,487,161 as compared to total operating expenses
of $18,752,504 for the year ended December 31, 2021.
The
decrease in operating expenses was impacted by a shift in focus by the company from exploration related activities prior to the purchase
of the Mine and process plant (purchased in January 2022 and June 2022 respectively) in 2021, to development related activities in 2022.
For financial accounting purposes, the Company reported all direct exploration expenses under the exploration expense line item in consolidated
statements of income (loss) and comprehensive income (loss) for the year ended December 31, 2021, which totalled $13,530,819. With the
purchase of the Mine in early January 2022 and concurrent shift to development related activities to advance mine restart efforts, the
Company reported exploration expenses of $nil for the year ended December 31, 2022, and reported $7,827,656 of mine preparation expenses
associated with these development activities. This excludes costs capitalized to property, plant and equipment during the year ended
December 31, 2022.
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The
increase in consulting fees and wages ( $5,477,765 for the
year ended December 31, 2022 compared to $1,533,954 for the year ended December 31, 2021) reflects (i) the engagement of
numerous engineering, geological and other professional firms to assist the Company in consummating several complex debt and equity
financings, the purchases of the mine and processing plant, the EPA financial assurance requirements, fair value measurements of
complex instruments, and advancement of project activities, and (ii) an increase in employees concurrent with a ramp-up in
development activities through 2022.
Upon
the release of the prefeasibility study dated September 30, 2022, the Company determined that the costs of the mine after this point
constituted mine development (capitalized to non-current assets) instead of mine preparation costs (expense) given the existence of
probable mineral reserves and an economic study incorporating them. Certain indirect expenses may be reported as operation and
administration expense or consulting expense on the consolidated statements of income and comprehensive income.
Net Income and Comprehensive Income
The Company had net income of $898,591 for the year ended December
31, 2022 (net loss of $6,402,277 for the year ended December 31, 2021). In addition to the decrease in operating expenses (as
described above), net income in the year ended December 31, 2022 was positively impacted by a gain on EPA settlement of $8,614,103 (year
ended December 31, 2021: $nil) resulting from the reclassification of $17,000,000 of current liabilities to non-current liabilities, and
a $3,395,938 increase in the gain due to change in derivative liability ($15,696,391 for the year ended December 31, 2022 compared to
$12,300,453 for the year ended December 31, 2021) driven by a proportionally greater decline in the Company’s share price in 2022
relative to 2021. This was partially offset by impacts from the $29,000,000 of convertible debenture financings that were entered into
during the year ended December 31, 2022, including an increase in interest expense of $3,279,819 ($3,382,559 for the year ended December
31, 2022 compared to $102,740 for the year ended December 31, 2021), an increase in debenture finance costs of $1,230,540 (year ended
December 31, 2021: $nil) and an increase in the loss on fair value of convertible debentures of $1,140,537 (year ended December 31, 2021:
$nil) and increase in finance costs $945,507 (year ended December 31, 2021: $nil).
The Company
had comprehensive income of $1,152,466 for the year ended December 31, 2022 (comprehensive loss of $6,402,277 for the year ended
December 31, 2021). Comprehensive income for the year ended December 31, 2022 is inclusive of a $253,875 gain on change in fair
value on own credit risk ($nil for the year ended December 31, 2021) relating to the convertible debentures entered into during the
year ended December 31, 2022.
Liquidity
and Capital Resources
Going
Concern
These consolidated financial statements have been prepared on a going concern basis. The Company has incurred losses
since inception resulting in an accumulated deficit of $71,592,559 and further losses are anticipated in the development of its business.
The Company does not have sufficient cash to fund normal operations and meet debt obligations for the next 12 months without deferring
payment on certain current liabilities and/or raising additional funds. In order to continue to meet its fiscal obligations in the current
fiscal year and beyond, the Company must seek additional financing. 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
that might result from the outcome of this uncertainty.
Management
is considering various financing alternatives including, but not limited to, raising capital through the capital markets, debt and closing
on the multi-metals stream transaction. These 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.
Debt
and Equity Financings
As described above, during year ended December 31, 2022, the Company closed
on three convertible debentures totaling $29,000,000, a loan facility of $5,000,000, and equity financings (net of issuance costs) totaling
$7,767,849. The proceeds of these financings were primarily used to purchase the Bunker Hill Mine and the processing plant, the satisfaction
of short-term obligations to the EPA (including financial assurance commitments, cost recovery and water treatment payments), advancement
of mine restart activities and the funding of working capital requirements.
Current
Assets and Total Assets
As of December 31, 2022, the Company’s balance sheet reflects that
the Company had: (i) total current assets of $7,741,052, compared to total current assets of $3,622,548 at December 31, 2021 – an
increase of $4,118,504; and (ii) total assets of $32,929,892, compared to total assets of $4,071,796 at December 31, 2021 – an increase
of $28,858,096. The increase in current assets was primarily due to an increase in restricted cash as a result of the proceeds from the
convertible debentures and equity financings, and from increases in prepaid expenses and deposits. Total assets increased principally
due to the purchase of, and costs capitalized to, the Bunker Hill Mine and process plant.
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Current
Liabilities and Total Liabilities
As
of December 31, 2022, the Company’s balance sheets reflects that the Company had total current liabilities of $10,155,582 and total
liabilities of $59,106,835, compared to total current liabilities of $22,795,277 and total liabilities of $38,314,164 as of December
31, 2021. The decrease in current liabilities is primarily reflective of financing and assurance activities that moved the EPA cost recovery
liability from current to long-term liabilities. Total liabilities increased as a result of the closing of the three convertible
debentures, one loan facility and movement of the EPA cost recovery liability from current to long term, offset by the decrease in the
long-term derivative warrant liability and promissory note.
Working
Capital and Shareholders’ Deficit
As of December 31, 2022,
the Company had a working capital deficit of $2,414,530 and a shareholders’ deficiency of $26,176,943 compared to a working capital
deficit of $19,172,729 and a shareholders’ deficiency of $34,242,368 as of December 31, 2021. The working capital deficit decreased
during the year ended December 31, 2022 primarily due to funding from debt and equity financings, and the reclassification of cost recovery
liabilities from current to long-term. The shareholders’ deficiency decreased primarily due to proceeds from equity financing in
the second quarter of 2022, and comprehensive net income in 2022.
Cash
Flow
During the year ended December
31, 2022, unrestricted cash increased by $222,042 as a result of cash provided from the closing of the convertible debentures, loan facility
and equity financings, with proceeds used to satisfy short-term obligations with the EPA, purchase of the Bunker Hill Mine and a processing
plant, partial repayment of the outstanding promissory note, advancement of mine restart activities, and funding of working capital requirements.
In addition to the above, restricted cash increased $6,476,000 during the year end December 31, 2022.
During
the year ended December 31, 2022, $22,498,307 was used in operating activities, primarily due to the securing of the Company’s
financial assurance obligations with the EPA, payments made to the EPA in satisfaction of cost recovery and water treatment payables,
funding of mine restart activities, and other working capital requirements. This compares with cash used in operating activities of $11,372,153
for the year ended December 31, 2021.
During
the year ended December 31, 2022, cash of $11,174,672 was used in investing activities primarily for the purchase of the Bunker Hill
Mine, a process plant, equipment, and real estate, compared with $94,693 used for investing activities in the year ended December 31,
2021.
During
the year ended December 31, 2022, cash of $40,371,021 was provided by financing activities primarily due to proceeds from the three convertible
debentures, one loan facility and the equity financings, partially offset by cash used for repayment of a promissory note, compared with
cash of $8,384,248 provided by financing activities in the year ended December 31, 2021.
Subsequent
Events
Events
occurring subsequent to December 31, 2022, as disclosed above in the Liquidity and Capital Resources section. In addition, the Company
had the following subsequent events.
Share
Issuance
On
January 10, 2023, the Company issued 6,377,272 common shares in connection with its election to satisfy interest payments under the outstanding
convertible debentures for the three months ending December 31, 2022.
On
March 31, 2023, the Company issued 8,464,288 common shares in connection with its election to satisfy interest payments under the outstanding
convertible debentures for the three months ending March 31, 2023.
Corporate
Update
On
Feb 28, 2023, the Company reported that it had temporarily paused discretionary projects and procurement activities until the completion
of its financing initiatives. Primarily due to the inability to procure certain long-lead items that were planned to be ordered by February
2023, and longer estimated delivery times thereof, the Company now expects the Bunker Hill Mine restart to be achieved in 2024. Total
project capital expenditures are not expected to be materially impacted given the Company’s ability to reschedule discretionary
expenditures and manage a modest fixed cost base.
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Teck
Warrant Amendment
On
March 15, 2023, the Company amended the exercise price of 10,416,667 common stock purchase warrants of the Company (the “Warrants”)
and the expiry date of the warrants to March 31, 2023. The Warrants comprise units of the Company issued to Teck Resources Limited (“Teck”)
on a private placement basis on May 13, 2022, in consideration for the Company’s acquisition of the Pend Oreille process plant.
Each Warrant entitles the holder thereof to purchase one share of common stock of the Company (each, a “Warrant Share”) at
an exercise price of C$0.37 per Warrant Share at any time on or prior to May 12, 2025. The Company amended the exercise price of the
Warrants from C$0.37 to C$0.11 per Warrant Share (the “Amended Exercise Price”) and amend the expiry date from May 12, 2025,
to March 31, 2023. Following the amendment of the terms of the warrants, Teck exercised all 10,416,667 warrants at an exercise price
of C$0.11, for aggregate gross proceeds of approximately C$1,145,834 to the Company.
Prospectus
Offering Termination and Private Placement
On
February 15, 2023, the Company reported that it intended to terminate its previously announced prospectus offering of Common Shares following
its determination that effectiveness of a registration statement on Form S-1 would not be achievable in a time frame consistent with
its capital requirements. Concurrently, the Company announced that it had entered into an agreement with a syndicate of agents in connection
with a proposed private placement of up to $9,000,000 of special warrants of the Company (the “Special Warrants”).
On
March 28, 2023, the Company announced the closing of its private placement of the Special Warrants by issuing 51,633,727 Special Warrants
at a price of C$0.12 per Special Warrant, for aggregate gross proceeds of C$6,196,047. Each Unit consists of one share of common stock
of the Company (each, a “Unit Share”) and one common stock purchase warrant of the Company (each, a “Warrant”).
Each whole Warrant entitles the holder thereof to acquire one share of common stock of the Company (a “Warrant Share”, and
together with the Unit Shares, the “Underlying Shares”) at an exercise price of $0.15 per Warrant Share until March 27, 2026.
In consideration for their services in connection with the Offering, a cash commission in the amount of $211,461 is payable to the
Agents. The Agents were also issued 2,070,258 compensation options (the “Compensation Options”). Each Compensation Option
is exercisable to acquire one unit of the Company (a “Compensation Unit”) at the Issue Price for a period of 36 months from
March 27, 2023, subject to adjustment in certain events. Each Compensation Unit consists of one share of common stock of the Company
and one common stock purchase warrant of the Company (an “Agents’ Compensation Warrant”) Each Agents’ Compensation
Warrant entitles the holder thereof to acquire one share of common stock of the Company (an “Agents’ Compensation Warrant
Share”) at a price of C$0.15 per Agents’ Compensation Warrant Share until March 27, 2026.
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 sheets 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.
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