Bunker Hill Mining Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition or Plan of Operation 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. Description of Business Corporate Information The Company was incorporated under the laws of the State of Nevada, U.S.A on February 20, 2007, under the name Lincoln Mining Corp. On February 11, 2010, the Company changed its name to Liberty Silver Corp and subsequently, on September 29, 2017, the Company changed its name to Bunker Hill Mining Corp. The Company’s registered office is located at 1802 N. Carson Street, Suite 212, Carson City Nevada 89701, and its head office is located at 300-1055 West Hastings Street Vancouver, British Columbia, V6E 2E9, and its telephone number is 604.417.7952. The Company’s website is www.bunkerhillmining.com. Information appearing on the website is not incorporated by reference into this report. Overview The Company’s primary focus is the development and restart of its 100% owned flagship asset, the Bunker Hill mine (the “Bunker Hill Mine” or the “Mine”) in Kellogg, 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 was incorporated for the initial purpose of mineral exploration at the Mine. 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) commencing the construction of the facilities required to move into commissioning in December of 2024. The Company also initiated a resource expansion and exploration drilling program in support of the staged restart plan. This limited and precise program is fully funded within the existing restart budget. The program includes 8,975 feet of core to be drilled from underground to further define and expand the existing resource. The initial drill targets are in close proximity to where the initial mining phase will take place. 21 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 three and six months ended June 30, 2024, and June 30, 2023. Unless otherwise stated, all figures herein are expressed in U.S. dollars, which is the Company’s functional currency. Comparison of the three and six months ended June 30, 2024 and 2023 Revenue During the three and six months ended June 30, 2024, and 2023, respectively, the Company generated no revenue. Expenses During the three months ended June 30, 2024, and 2023, the Company reported total operating expenses of $4,150,114 and $3,336,973, respectively. The increase in total operating expenses was primarily due to increase in the volume of transactions and head count associated with construction of the process plant commencing in the quarter. The company continues to move closer to production. During the six months ended June 30, 2024, and 2023, the Company reported total operating expenses of $7,937,745 and $5,522,461, respectively. The increase in total operating expenses was primarily due to increase in the volume of transactions and head count associated with construction of the process plant commencing in the six months ended June 30, 2024. The company continues to move closer to production. Net Income and Comprehensive Income The Company had net loss of $3,902,404 for the year three months ended June 30, 2024 (compared to net loss of $16,857,782 for the three months ended June 30, 2023). In addition to the increase in operating expenses (as described above), net loss for the three months ended June 30, 2024 was impacted by an increase in interest expense of $788,448 ($2,176,868 and $1,388,420 for the three months ended June 30, 2024 and 2023 respectively), a decrease in financing costs, $nil of financing costs for the three months ended June 30, 2024 compared to $524,130 for the three months ended June 30, 2023 and $nil of gain on debt settlement for the three months ended June 30, 2024 compared to $7,117,420 of gain on debt settlement relating to the conversion of royalty convertible debenture into a royalty during the three months ended June 30, 2023. The loss in the current period is lower than the comparable period because of a decrease in the loss due change in derivative liability of $12,895,159 (loss of $351,402 for the three months ended June 30, 2024 compared to a loss of $13,246,561 for the three months ended June 30, 2023), which was driven by a proportionally greater appreciation in the Company’s share price in Q2 2023 relative to Q2 2024. Additionally, a loss on fair value of the convertible debenture of $498,263 was recognized for the three months ended June 30, 2024, compared to a loss of $1,884,232 for the three months ended June 30, 2023. Additionally, the three months ended June 30, 2024, includes $2,748,000 ($nil for the three months ended June 30, 2023) gain on revaluation of the stream debenture due to updated key assumptions such as commodity prices. Net loss for the three months ending June 30, 2024, includes a deferred tax recovery of $504,798 compared to deferred tax expense of $3,508,741 for the three months ended June 30, 2023. The Company had a net loss of $9,484,440 for the year six months ended June 30, 2024 (compared to a net loss of $15,066,635 for the six months ended June 30, 2023). In addition to the increase in operating expenses (as described above), net loss for the six months ended June 30, 2024 was impacted by an increase in interest expense of $1,547,554 ($4,260,603 and $2,713,049 for the six months ended June 30, 2024 and 2023 respectively), a decrease in financing costs, $nil of financing costs for the six months ended June 30, 2024 compared to $1,100,881 for the six months ended June 30, 2023 and $nil of gain on debt settlement for the six months ended June 30, 2024 compared to $7,117,420 of gain on debt settlement relating to the conversion of royalty convertible debenture into a royalty during the six months ended June 30, 2023. The loss in the current period is lower than the comparable period because of a decrease in the loss due change in derivative liability of $8,404,642 (loss of $615,345 for the six months ended June 30, 2024 compared to a loss of $9,019,987 for the six months ended June 30, 2023), which was driven by a proportionally greater appreciation in the Company’s share price in first six months of 2023 relative to first six months of 2024. Additionally, the six months ended June 30, 2024, includes $2,531,000 ($nil for the six months ended June 30, 2023) gain on revaluation of the stream debenture due to updated key assumptions such as commodity prices. Net loss for the six months ending June 30, 2024, includes a deferred tax recovery of $1,204,718 compared to deferred tax expense of $3,508,741 for the six months ended June 30, 2023. 22 The Company had comprehensive loss of $3,426,642 and $8,720,306 for the three and six months ended June 30, 2024, respectively (comprehensive loss of $17,231,197 and $14,633,038 for the month three and six ended June 30, 2023, respectively). Comprehensive (loss) income for the three and six months ended June 30, 2024, is inclusive of a $475,762 and $764,134 gain on change in fair value on own credit risk (loss of $373,415 and income of $433,597 for the three and six months ended June 30, 2023, respectively). Liquidity and Capital Resources Current Assets and Total Assets As of June 30, 2024, the Company had total current assets of $9,624,431, compared to total current assets of $27,176,997 at December 31, 2023 – a decrease of $17,552,566; and total assets of $63,831,898, compared to total assets of $61,989,678 at December 31, 2023 – a increase of $1,842,220. During the six months ended June 30, 2024, the Company’s current assets decreased due to cash expenditures on the process plant, purchasing of equipment and additions to the Bunker Hill Mine. Total assets increased slightly constant as the increase in property plant and equipment was offset mostly by the decrease in cash. Current Liabilities and Total Liabilities As of June 30, 2024, the Company had total current liabilities of $18,688,789 and total liabilities of $97,242,585, compared to total current liabilities of $7,472,326 and total liabilities of $88,356,840 at December 31, 2023. Total liabilities increased because of accretion on the stream debenture and environmental protection agency payable as well as an increase in accounts payable and accruals due to timing of invoices and payments. Working Capital and Shareholders’ Deficit As of June 30, 2024, the Company had working capital deficit of $9,064,358 and a shareholders’ deficiency of $33,410,687 compared to a working capital of $19,704,671 and a shareholders’ deficiency of $26,367,162 as of December 31, 2023. The working capital balance decreased during the six months ended June 30, 2024, primarily due to cash expenditures on the process plant, purchasing of equipment, and additions to the Bunker Hill Mine. The shareholders’ deficiency increased primarily due to the net loss in the six months ended June 30, 2024. Cash Flow During the six months ended June 30, 2024, the Company had a net cash decrease of $18,564,172, primarily due to cash expenditures on the process plant, purchasing of equipment, and additions to the Bunker Hill Mine. Financing Term Sheet On June 7, 2024, The Company signed a non-binding term sheet with Monetary Metals & Co. to provide financing in the form of a silver loan (the “Loan”) of up to 1.2 million ounces of silver in support of the re-start and ongoing development of the Bunker Hill Mine. The Loan will be for a term of three years, secured against the Company’s assets and repayable in silver ounces. The Loan will bear interest at the rate of 15% per annum, payable in silver ounces on the last day of each quarterly interest period. The Loan is expected to close in August 2024. Subsequent Events AGM Results and Amendments to Equity Compensation Plans The Company held its Annual General Meeting (the “Meeting”) on June 20, 2024. The nominees for the Board of Directors listed in the Company’s management information circular dated July 6, 2023 (the “Circular”), being (i) Sam Ash, (ii) Mark Cruise, (iii) Dickson Hall, (iv) Pamela Saxton, (v) Paul Smith and (vi) Richard Williams, were elected to the board of directors of the Company (the “Board”) to hold office until the next annual meeting of shareholders or until their successors are duly appointed or elected. In addition, at the Meeting, the shareholders of the Company approved: (ii) the re-appointment of MNP LLP Chartered Professional Accountants as auditor of the Company for the ensuing year; (ii) the Company’s amended and restated stock option plan (the “Amended and Restated Stock Option Plan”); and (iii) the Company’s amended and restated restricted stock unit incentive plan (the “Amended and Restated RSU Plan” and, together with the Stock Option Plan, the “Security Based Compensation Plans”). 23 The Amended and Restated Stock Option Plan is a rolling plan meaning that the maximum number of Common Shares issuable thereunder is 10% of the issued and outstanding Common Shares (on a non-diluted basis) at the time of the grant of options. The Amended and Restated RSU Plan is a fixed plan meaning the maximum number of Common Shares issuable thereunder is fixed at 33,909,921, being 10% of the issued and outstanding Common Shares (on a non-diluted basis as at May 8, 2024. Additional information regarding the Security Based Compensation Plans, including details regarding the amendments, can be found in the Circular posted on Bunker Hill’s SEDAR+ profile at www.sedarplus.ca. Share Issuance On July 8, 2024, the Company issued 4,653,409 shares of common stock in connection with its election to satisfy interest payments under the outstanding convertible debentures for the three months ending June 30, 2024. 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. 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. 24 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 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 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.