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
The
Company’s sole focus is the development and restart of its 100% owned flagship asset, the Bunker Hill 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. Production is
expected to commence in 2024.
Since early 2020, the Company has conducted multiple
exploration campaigns, published multiple economic studies and mineral resource estimates, and advanced the rehabilitation and development
of the Mine. In December 2021, the Company 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. In 2022, the Company completed the purchase of
a package of equipment and parts inventory from Teck Resources Limited’s (“Teck”) Pend Oreille operation. The package
comprises substantially all the mineral processing equipment including complete crushing, grinding and flotation circuits suitable for
a planned ~1,500 ton-per-day operation at the Bunker Hill site, and total inventory of components and parts for the mill, assay lab, conveyer,
field instruments, and electrical spares.
The Company has moved into the development stage concurrent
with (i) purchasing the Mine and a process plant, (ii) completing successive technical and economic studies, including a Prefeasibility
Study, (iii) delineating mineral reserves, and (iv) conducting the program of activities to restart the mine.
In June 2023, the Company closed an upsized and improved
$67,000,000 project finance package with Sprott, consisting of a $46,000,000 stream and a $21,000,000 new debt facility. The Company believes
that this project finance package will be sufficient to complete the development and construction activities to restart the mine.
The Bunker Hill Mine restart is expected to take place in 2024, with first
concentrate production targeted for the fourth quarter of 2024. However, the estimated timing of Bunker Hill Mine restart is subject to
change based on factors beyond the Company’s control, including but not limited to supply chain dynamics.
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.
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Comparison
of the year ended December 31, 2023 and the year ended December 31, 2022
Revenue
During
the year ended December 31, 2023, the Company generated no revenue (year ended December 31, 2022 - $nil).
Expenses
During
the year ended December 31, 2023, the Company reported total operating expenses of $11,600,574 as compared to total operating expenses
of $16,487,161 for the year ended December 31, 2022.
The
decrease in total operating expenses was primarily due to (i) a decrease in mine preparation expenses of $7,827,656 (ii) a decrease
in consulting and wages expenses of $1,872,392 (iii) partially offset by an increase in operation and administration expenses of $4,112,443
in the year ended December 31, 2023 compared to the year ended December 31, 2022. Mine preparation expenses were $nil in the year
ended December 31, 2023, primarily as a result of the Company determining that all costs directly attributed to the mine after
September 30, 2022 (upon the release of the prefeasibility study) constituted mine development costs (capitalized to non-current
assets) instead of mine preparation costs (expense) given the existence of probable mineral reserves and an economic study
incorporating them. The decrease in consulting and wages expenses was impacted by a lower volume of transactions and a lower bonus
accrual in the year ended December 31, 2023, as compared to the year ended December 31, 2022. Operation and administration expenses increased
due to increased activities at site, such as maintenance.
Net
Income and Comprehensive Income
The
Company had net loss of $13,432,539 for the year ended December 31, 2023 (net income of $898,591 for the year ended December 31, 2022).
The decrease in net income was due to a decrease in the gain recorded due to change in derivative liability of $13,336,366 (gain of $2,360,025
and gain of $15,696,391 for the year ended December 31, 2023, and 2022 respectively). The decrease in net income was further increased
by a higher interest expense in the year ended December 31, 2023 ($7,124,527) compared to the year ended December 31, 2022 (3,382,559),
due to the issuance of the Stream obligation in June 2023. The change in net loss was also impacted by a decrease of $1,462,230 gain
on extinguishment in debt in the year ended December 31, 2023, compared to the year ended December 31, 2022. A gain of $7,151,873 was
recognized in the year ended December 31, 2023, relating to the sale of mineral properties, compared with a $8,614,103 gain on EPA settlement
in the year ended December 31, 2022. Net loss for the year ended December 31, 2023, included a loss on modification of debt of 3,228,525,
mostly relating to the Stream, compared to $nil for the year ended December 31, 2022. Net loss for the year ended December 31, 2023,
also included the initial recognition of a deferred tax liability and corresponding deferred tax expense relating to the closing of the
stream transaction ($2,588,590 for the year ended December 31, 2023, compared to $nil for the year ended December 31, 2022).
The
decrease in net income was offset by the inclusion of $1,107,093 of interest income for the year ended December 31, 2023, compared to
$nil for the year ended December 31, 2022. Additionally, items offsetting the decrease in net income was the decrease in operating expenses, as described above, and the decrease in debenture financing
costs of $1,230,540 ($nil for the year ended December 31, 2023, compared to $1,230,540 for the year ended December 31, 2022). The decrease
in net income was further offset by an increase in the gain recorded due to change in convertible debentures of $2,814,313 (gain of $1,673,776
and loss of $1,140,537 for the year ended December 31, 2023, and 2022 respectively). The gain in fair value that occurred in 2023 was
driven by a decline in the Company’s share price. The loss that occurred in 2022 was driven by the increase in likelihood of the
RCD being converted into a Royalty.
The
Company had comprehensive loss of $12,877,752 for the year ended December 31, 2023 (comprehensive income of $1,152,466 for the year ended
December 31, 2022). Comprehensive loss for the year ended December 31, 2023, is inclusive of a $554,787 gain on change in fair value on
own credit risk ($253,875 for the year ended December 31, 2022) relating to the convertible debentures outstanding into during the year ended
December 31, 2023, due to the Company’s credit rating improving in the same period
primarily due to the closing of the $46,000,000 Stream.
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Liquidity
and Capital Resources
Current
Assets and Total Assets
As
of December 31, 2023, the Company had total current assets of $27,176,997, compared to total current assets of $7,741,052 at December
31, 2022 – an increase of $19,435,945; and total assets of $61,989,678, compared to total assets of $32,929,892 at December 31,
2022 – an increase of $29,059,786. The increase in current assets and total assets was primarily due to the closing of the $46,000,000
Stream, net of repayment of the $5,000,000 Bridge Loan, Promissory note and transaction related costs, the exercise of 10,416,667 warrants at an exercise price of C$0.11, for
aggregate gross proceeds of $837,460 (C$1,145,834) and the closing of the March 2023 Offering for gross proceeds of $4,536,020 (C$6,196,047).
Current
Liabilities and Total Liabilities
As
of December 31, 2023, the Company had total current liabilities of $7,472,326 and total liabilities of $88,356,840, compared to total
current liabilities of $10,155,582 and total liabilities of $59,106,835 at December 31, 2022. Current liabilities decreased primarily
as a result of the repayment of the promissory note, and settlement of accounts payable and accrued liabilities from the proceeds of
the Stream. Total liabilities increased primarily as a result of closing of the $46,000,000 Stream and recognition of deferred tax liability,
partially offset by a decrease in the carrying values of convertible debenture 1, convertible debenture 2, warrants, and the settlement
of royalty convertible debenture and the bridge loan.
Working
Capital and Shareholders’ Deficit
As
of December 31, 2023, the Company had a working capital balance of $19,704,671 and a shareholders’ deficiency of $26,367,162 compared
to a working capital deficit of $2,414,530 and a shareholders’ deficiency of $26,176,943 as of December 31, 2022. The working capital
balance increased during the year ended December 31, 2023, primarily due to cash received from closing of the $46,000,000 Stream (net
of repayment of the $5,000,000 Bridge Loan and transaction related costs) and cash received from the closing of a brokered private placement
of special warrants of the Company, partially offset by operating expenses and capital expenditures incurred during the period. The shareholders’
deficiency decreased due to proceeds received from the equity financing in the year ended December 31, 2023, partially offset by the
net loss the same period.
Cash
Flow
During
the year ended December 31, 2023, the Company had a net cash increase of $19,394,491, primarily due to the closing of a brokered private
placement of special warrants of the Company and proceeds received from the exercise of warrants and closing of the Stream agreement
with Sprott. Cash expenditures during the year ended December 31, 2023, were primarily related to process plant and general working capital requirements.
Subsequent
Events
Share
Issuance
On
January 09, 2024, the Company issued 7,392,859 shares of common stock in connection with its election to satisfy interest payments under
the outstanding convertible debentures for the three months ending December 31, 2023.
On
January 29, 2024, the Company granted 672,450 RSUs to a certain member of management of the Company. The RSUs vest on January 29, 2025.
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:
40
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.
Convertible
Loans, Promissory Notes, Stream Obligation and Warrants
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 derivative liability, volatility and dividend yield and making assumptions about them.
The
fair value estimates of the convertible loans use inputs to the valuation model that include risk-free rates, equity value per share
of common stock, USD-CAD exchange rates, spot and futures prices of minerals, expected equity volatility, expected volatility in minerals
prices, discount for lack of marketability, credit spread, expected mineral production over the life of the mine, and project risk/estimation
risk factors.
The
stream obligation inputs used to determine the future cash flows and effective interest for the amortized cost calculation include futures
prices of minerals and expected mineral production over the life of the mine.
The
fair value estimates may differ from actual fair values and these differences may be significant and could have a material impact on
the Company’s balance sheets and the consolidated statements of operations. Assets are reviewed for an indication of impairment
at each reporting date. This determination requires significant judgment. Factors that could trigger an impairment review include, but
are not limited to, significant negative industry or economic trends, interruptions in exploration activities or a significant drop in
precious metal prices.
Accrued
liabilities
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.
Incremental Borrowing rate
The Company estimates the incremental borrowing rate
to determine the present value of future lease payments. Actual results may be different from estimates.
Borrowing Cost Capitalization rate
The Company makes estimates to determine the percentage
of borrowing costs that are capitalized into property plant and equipment. Actual results may be different.
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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