Ivanhoe Electric Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with the condensed interim consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with our audited consolidated and combined carve-out financial statements and the related notes for the fiscal year ended December 31, 2022 included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2023 (the “2022 Form 10-K”). S pecial Note Regarding Forward-Looking Statements This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Those statements include, but are not limited to, statements with respect to: estimated calculations of mineral reserves and resources at our properties including changes in those estimated calculations, anticipated results of exploration activities, plans and objectives, industry trends, our requirements for additional capital, treatment under applicable government regimes for permitting or attaining approvals, government regulation, environmental risks, title disputes or claims, synergies of potential future acquisitions, and our anticipated uses of the net proceeds from our initial public offering. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “could,” “should,” “would,” “achieve,” “budget,” “scheduled,” “forecasts,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry. All forward-looking statements speak only as of the date on which they are made. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. We believe that the factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include the following: our mineral projects are all at the exploration stage; we have no mineral reserves, other than at the San Matias project; we have a limited operating history on which to base an evaluation of our business and prospects; we depend on our material projects for our future operations; our mineral resource calculations at the Santa Cruz Project are only estimates; actual capital costs, operating costs, production and economic returns may differ significantly from those we have anticipated; the title to some of the mineral properties may be uncertain or defective; our business is subject to changes in the prices of copper, gold, silver, nickel, cobalt, vanadium and platinum group metals; we have claims and legal proceedings against two of our subsidiaries; our business is subject to significant risk and hazards associated with future mining operations; we may fail to identify attractive acquisition candidates or joint ventures with strategic partners or be unable to successfully integrate acquired mineral properties or successfully manage joint ventures; our business is extensively regulated by the United States and foreign governments as well as local governments; the requirements that we obtain, maintain and renew environmental, construction and mining permits are often a costly and time-consuming process; our non-U.S. operations are subject to additional political, economic and other uncertainties not generally associated with domestic operations; and our operations may be impacted by the COVID-19 pandemic, including impacts to the availability of our workforce, government orders that may require temporary suspension of operations, and the global economy. You should carefully consider these risks, as well as the additional risks described in other documents we file with the SEC. We also operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. These factors should not be construed as exhaustive and should be read in conjunction with the risks described under the heading “Risk Factors” in our 2022 Form 10-K. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” in the 2022 Form 10-K. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. 15 Business Overview We are a United States domiciled minerals exploration and development company with a focus on developing mines from mineral deposits principally located in the United States in order to support domestic supply chain independence and to deliver the critical metals necessary for electrification of the economy. We believe the United States is significantly underexplored and will yield major new discoveries of these metals. Our mineral exploration efforts focus on copper, nickel, vanadium, cobalt, platinum group elements, gold and silver. All of our mineral properties are in the exploration stage. “Our” mineral projects refers to our interests in such projects which may be a direct ownership interest in mineral titles (including through subsidiary entities), a right to acquire mineral titles through an earn-in or option agreement, or, in the case of our investments in publicly listed companies in Canada, through our ownership of the equity of those companies, that have an interest in such mineral projects. Our two material mineral projects are the Santa Cruz Copper Project (“Santa Cruz” or the “Santa Cruz Project”) in Arizona and the Tintic Copper-Gold Project (“Tintic” or the “Tintic Project”) in Utah. We have the option to acquire 100% of the mineral rights constituting the Santa Cruz and Tintic projects. On May 11, 2023, we announced the signing of a binding purchase and sale agreement for the acquisition of 6,205 acres of surface title and associated water rights at the Santa Cruz Project for a total purchase price of $120.5 million to be paid in installments over a 4.5-year period. We also hold the option to acquire all the mineral titles contiguous with the acquired surface lands. Those mineral rights will be formally acquired upon the completion of scheduled option payments in August 2023 and 2024. At that time, we will have a unified land and mineral package encompassing the entire Santa Cruz Project. Our other key mineral projects include the Hog Heaven Project, located in Montana (the “Hog Heaven Project”), and the Ivory Coast Project located in the Ivory Coast, West Africa, which is held through our 22.8% equity interest in Sama Resources Inc. (“Sama”) and our 30% direct interest in the Sama Nickel Corporation Inc. joint venture. We also have investments in publicly traded companies in Canada, and through our ownership of equity in those companies, we have an indirect interest in mineral projects in the United States, Canada, Colombia and Peru. In addition to our mineral projects, we also own controlling interests in two technology companies: VRB and CGI. As of March 31, 2023, we owned 90.0% of the outstanding shares of VRB. VRB and its subsidiary companies are primarily engaged in the design, manufacture, installation, and operation of energy storage systems. As of March 31, 2023, we owned 94.3% of CGI’s outstanding shares. CGI has developed technology that consists of sophisticated codes to process geophysical data and build 3D subsurface images that could indicate the presence of various natural resources, including metallic minerals and water. CGI offers mineral prospectivity and drill target identification services, data analytic tools and optimization of operational processes. CGI provides fee-for-service and licensing agreements for one-off technology applications to customers in the area of critical minerals, energy and water exploration. On May 15, 2023, we signed a definitive agreement with Saudi Arabian Mining Company Ma’aden (“Ma’aden”) which finalized the terms of the transactions previously announced on January 11, 2023. The transactions include the establishment of a 50/50 exploration joint venture between Ma’aden and Ivanhoe Electric to explore approximately 48,500 km2 of prospective land in Saudi Arabia, and a $126.5 million strategic investment by Ma'aden in Ivanhoe Electric common stock. We expect to issue approximately 10.2 million common shares to Ma’aden, representing 9.9% of common shares outstanding, at a purchase price of $12.38 per share. Of the $126.5 million total proceeds from the private placement, $66 million will go to the joint venture to fund exploration activities, including the purchase of three new-generation Typhoon TM machines. The remaining $60 million will be retained by Ivanhoe Electric to advance our portfolio of US mineral projects, and for working capital and general corporate purposes. The transactions are expected to close by the end of June 2023 subject to the approval of a supplemental listing application by the New York Stock Exchange and the corporate and regulatory formalities required in Saudi Arabia to incorporate the joint venture entity. On June 30, 2022, we completed an initial public offering and the Company’s shares were listed on the NYSE American and the TSX under the ticker symbol “IE”. Reverse Stock Split On June 16, 2022, we effected a reverse stock split of our outstanding common stock at a ratio of 3-for-1 (the “Reverse Stock Split”). The number of authorized shares and the par value of the common stock were not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, per share data and related information have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. 16 Impact of the COVID-19 Pandemic The COVID-19 global pandemic has caused governments worldwide to implement measures to slow the spread of the outbreak through quarantines, travel restrictions, business shutdowns, and other measures. The COVID-19 pandemic has negatively affected the global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly affected global supply chains, all of which have and are expected to continue to affect our future exploration activities and business. To the extent the COVID-19 pandemic adversely affects our business prospects, financial condition, and results of operation, it may also have the effect of exacerbating many of the other risks described in the Item 1A. Risk Factors section in our 2022 Form 10-K. Segments We account for our business in three business segments – (i) critical metals, (ii) data processing and software licensing services and (iii) energy storage systems. Significant Components of Results of Operations Revenue, Cost of Sales and Gross Profit We generate revenue from our technology businesses CGI and VRB, which are included in the data processing and software licensing business segment and the energy storage systems business segment, respectively. We have not generated any revenue from our mining projects because they are in the exploration stage. We do not expect to generate any revenue from our mining projects for the foreseeable future. Exploration Expenses Exploration expenses include topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling and activities in relation to identifying a mineral resource and then evaluating the technical feasibility and commercial viability of extracting the mineral resource, as well as value-added taxes in relation to these direct exploration and evaluation costs incurred in foreign jurisdictions where recoverability of those taxes is uncertain. Exploration expenses also include salaries, benefits and stock-based compensation expenses of the employees performing these activities. Exploration expenses also include payments under earn-in and option agreements where the option right is with respect to ownership interests in legal entities owning the underlying mineral project in the exploration project phase. Through our earn-in and option agreements, we have the right (and in some cases, the obligation) to fund and conduct exploration on the underlying mineral project prior to determining whether to acquire a minority or majority ownership interest through further funding the costs of such exploration and, in some cases, through direct payments to the owners of the project. In the event we cease making expenditures on an exploration mineral project or fail to incur the agreed level of exploration expenditures, we will not obtain an ownership right beyond any which may have been acquired as of the date of termination. Included in exploration expenses are exploration costs that we incur in relation to generating new projects. These activities may or may not proceed to earn-in agreements depending on our evaluation. These are categorized as “Generative exploration and other”. General and Administrative Expenses Our general and administrative expenses consist of salaries and benefits, stock-based compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses have increased significantly now that we are operating as a public company and have added to our management team. In particular, we expect to incur increased general and administrative expenses costs in 2023 compared to 2022 for salaries, non-cash stock-based compensation, compliance related costs and directors’ and officers’ insurance expense. Research and Development Expenses Expenditures on research and development activities are recognized as an expense in the period in which they are incurred. We expect research and development expenses to increase as our technology-based businesses continue to grow. 17 Since 2018, the majority of our research and development expenses came from CGI’s data processing business, which includes amortization expenses related to its artificial intelligence intellectual property acquired in 2018. VRB also conducts research and development activities to continue to advance its energy storage system technology. We also have research and development expenses that we incur in relation to Typhoon TM . In 2023, we have commenced design and development activities for our next generation of Typhoon TM equipment. Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 For the three months ended March 31, 2023 we recorded a net loss attributable to common stockholders of $36.1 million ($0.39 per share), compared to $15.5 million ($0.24 per share) for the three months ended March 31, 2022, which was an increase of $20.6 million. Significant contributors to this increase for the three months ended March 31, 2023 included an increase of $9.2 million in exploration expenditures, an increase of $5.4 million in general and administrative expenses, and a decrease of $6.1 million in revenue compared to the three months ended March 31, 2022. Exploration expenses were $26.6 million for the three months ended March 31, 2023, an increase of $9.2 million from $17.3 million for the three months ended March 31, 2022. Exploration expenses consisted of the following: Three months ended March 31, (In thousands) 2023 2022 Exploration Expenses: Santa Cruz, USA $ 14,682 $ 9,798 San Matias, Colombia 4,658 2,376 Tintic, USA 1,121 289 Hog Heaven, USA 638 560 White Hill, USA 491 — Lincoln, USA 295 13 Carolina, USA 238 — Pinaya, Peru 157 686 Generative exploration and other 4,279 3,601 Total $ 26,559 $ 17,323 During the three months ended March 31, 2023, exploration expenditures largely focused on activities at: • the Santa Cruz Project where $14.7 million of exploration expenditure was incurred in the three months ended March 31, 2023 compared to $9.8 million incurred in the three months ended March 31, 2022. Activities during the three months ended March 31, 2023 at Santa Cruz were focused on a program of exploration and infill resource, geotechnical, hydrological and metallurgical drilling, advancing technical studies, completing an updated mineral resource estimate and beginning an Initial Assessment Study for the Santa Cruz Copper Project. • the San Matias Project where $4.7 million of exploration expenditure was incurred by Cordoba Minerals for the three months ended March 31, 2023 focused on continuing work on the feasibility study on the Alacran deposit. Activities during the three months ended March 31, 2023 included ongoing infill geotechnical, metallurgical, hydrological and infill resource drilling to advance the feasibility study. During the three months ended March 31, 2023 a total of 3,946 meters of infill diamond drilling was completed. To date, a total of approximately 40,000 meters out of the planned 42,000 meter infill diamond drilling campaign have been completed; and • the Tintic Project where $1.1 million of exploration expenditure was incurred in the three months ended March 31, 2023 compared to $0.3 million incurred in the three months ended March 31, 2022. Activities during the three months ended March 31, 2023 at Tintic were focused on completing an initial diamond drill hole which we commenced drilling in November 2022 and completed in February 2023 in challenging snowy conditions. We expect to execute a more extensive drilling campaign at Tintic during the spring of 2023 when operating conditions improve; and General and administrative expenses were $10.6 million for the three months ended March 31, 2023, an increase of $5.4 million from $5.2 million in three months ended March 31, 2022. Several items contributed to the increase, including: 18 • a $3.8 million increase in stock-based compensation expense largely due to impact of the additional non-cash stock-based compensation expense of the additional Ivanhoe Electric stock option and RSU grants that occurred in November 2022 and during the three months ended March 31, 2023; and • a $1.6 million increase in directors and officers insurance expenses for the three months ended March 31, 2023 in relation to the new director and officers insurance policy we entered into when we became a public company in June 2022. There was no similar expense in the three months ended March 31, 2022. CGI’s software licensing and data processing services to the mining and oil and gas industries represented 100.0% of our revenue for the three months ended March 31, 2023 ($0.7 million) and 100.0% for the three months ended March 31, 2022 ($6.8 million). VRB generated no revenue during these periods. Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 Percentage Change (In thousands) Software licensing and data processing services: Revenue $ 679 $ 6,762 (90) % Cost of sales (184) (52) 254 % Gross profit $ 495 $ 6,710 (93) % CGI’s revenue for the three months ended March 31, 2023 was $0.7 million a decrease of $6.1 million from $6.8 million for the three months ended March 31, 2022. The decrease in CGI’s revenue was a result of revenue for the three months ended March 31, 2022 including a one-time amount of $6.5 million relating to a new contract that CGI entered into with one of its customers upon the expiration of a previous three-year contract. Under that agreement with this customer, CGI agreed to license certain software for a one-time fee of $6.5 million, which was received and recognized in the first quarter of 2022. CGI’s revenue for the three months ended March 31, 2023 consisted of $0.4 million of software licensing revenue and $0.3 million in revenue from processing data. CGI’s gross profit for the three months ended March 31, 2023 was $0.5 million, a decrease of $6.2 million from $6.7 for the three months ended March 31, 2022. The licensing of certain software for a one-time fee of $6.5 million had a direct impact on gross profit for the three months ended March 31, 2022 as the licenses had no underlying carrying value and therefore resulted in a $6.5 million gross profit being recognized. Research and development expenses for the three months ended March 31, 2023 were $1.8 million, an increase of $0.5 million from the same period in 2022 primarily attributable to incurring $0.6 million of expenditure in the first quarter of 2023 on commencing research and development activities for our next generation of Typhoon TM equipment. Stock-Based Compensation During the three months ended March 31, 2023, we granted stock options to certain new employees of the Company. In February 2023, we granted 500,000 stock options at an exercise price of $13.23 per share and in March 2023, we granted 100,000 stock options at an exercise price of $15.46. The fair value of the option grants was determined using the Black-Scholes option-pricing model as $7.22 and $8.53 per share, respectively. In addition, in January 2023, we granted 750,000 RSUs to a new senior officer of the Company which had a fair value on the grant date of $12.15 per share. Liquidity, Capital Resources and Capital Requirements Cash Resources We have recurring net losses and negative operating cash flows and we expect that we will continue to operate at a loss for the foreseeable future. We generate revenue from our technology businesses. We have not generated any revenue from our mining projects and do not expect to generate any revenue from our mining projects for the foreseeable future. We have funded our operations primarily through the sale of our equity and convertible securities. At March 31, 2023 and December 31, 2022, we had cash and cash equivalents of $107.0 million and $139.7 million, respectively, and a working capital of $100.8 million and $133.6 million, respectively. Of the total cash and cash 19 equivalents at March 31, 2023 and December 31, 2022, $10.2 million and $20.7 million, respectively, was not available for the general corporate purposes of the Company as these amounts were held by non-wholly-owned subsidiaries. We believe that we will have sufficient cash resources to carry out our business plans for at least the next 12 months. We have based these estimates on our current assumptions which may require future adjustments based on our ongoing business decisions as well as, in particular, exploration success at our mineral projects. Accordingly, we may require additional cash resources earlier than we currently expect or we may need to curtail currently planned activities. Our significant operational expenses include the payments that we anticipate making under the various earn-in and option agreements to which we are a party. These agreements are structured to provide us with flexibility whereby our ability to continue to explore on a mineral project is contingent on funding agreed specified levels over specified time intervals. Cash Balances as of March 31, 2023 The table below discloses the amounts of cash disaggregated by currency denomination as of March 31, 2023 in each jurisdiction that our affiliated entities are domiciled. Currency by Denomination (in USD Equivalents) US dollars Canadian dollars Chinese Renminbi Colombian Pesos Other Total (In thousands) Jurisdiction of Entity: USA $ 95,456 $ 776 $ — $ — $ — $ 96,232 Colombia — — — 123 — $ 123 Cayman Islands 5,843 4 — — — $ 5,847 Canada 3,041 917 — — — $ 3,958 China — — 336 — — $ 336 British Virgin Islands 422 1 — — — $ 423 Other 42 1 — — 33 76 Total $ 104,804 $ 1,699 $ 336 $ 123 $ 33 $ 106,995 Our subsidiary VRB, domiciled in the Cayman Islands, is subject to certain foreign exchange restrictions with respect to its People's Republic of China ("PRC") subsidiaries. There are foreign exchange policies in the PRC that limit the amount of capital that can be directly transmitted offshore from VRB’s PRC subsidiaries to VRB. Since their incorporation, these PRC subsidiaries have had accumulated losses and have not declared or paid any dividends or made any distribution of earnings. There were no cash transfers to or from our PRC subsidiaries in the form of intercompany loans during the three months ended March 31, 2023. Refer to Note 18 of our consolidated and combined carve-out financial statements in our 2022 Form 10-K which outlines other restrictions on transfers of net assets from our consolidated subsidiaries to the Company. Convertible Bond — VRB. In 2021, VRB issued a convertible bond for gross proceeds of $24.0 million. The bond has a five-year term and interest accrues at a rate of 8% per annum. Prior to the maturity date, the convertible bond will be automatically converted into equity of VRB upon an equity financing or sale event, at a price per share equal to the lower of (A) the transaction price of the equity financing or sale event, and (B) the valuation cap price of $158.0 million divided by the total shares outstanding at the time of the event. If no equity financing or sale event occurs, VRB must repay the outstanding principal and interest on maturity. Bridge Loan — Cordoba Minerals. In December 2022, JCHX advanced a bridge loan of $10 million to Cordoba Minerals in connection with the strategic arrangement for the joint development of Cordoba Mineral’s Alacran Project. The bridge loan is for an 18-month term and bears interest at 12% per annum during the first 12 months of the term and 14% per annum during the remaining six months, calculated on the basis of a 365-day year. Upon closing the strategic arrangement on May 8, 2023, all of the principal and interest outstanding on the bridge loan was applied towards the first installment as a payment in kind. 20 Cash Flows The following table presents our sources and uses of cash for the periods indicated: Three Months Ended March 31, 2023 2022 Net cash (used in) provided by: Operating activities (30,019) (14,619) Investing activities (2,666) (5,600) Financing activities 3 — Effect of foreign exchange on cash 17 138 Total change in cash (32,665) (20,081) Operating activities. Net cash used in operating activities for all periods presented largely was spent on our exploration expenses and our general and administrative costs. We do not generate adequate cash from operations to cover our operating expenses and therefore rely on our financing activities to provide the cash resources to fund our operating and investing activities. Net cash used in operating activities for the three months ended March 31, 2023 was $30.0 million, an increase of $15.4 million from the $14.6 million of net cash used for the three months ended March 31, 2022. Investing activities. Our investing activities generally relate to acquisitions of mineral property interests, purchases of public company shares in companies that we may partner with and capital expenditures at our projects. To date, due to our mining projects being in the exploration stage we have not incurred material capital expenditures. Net cash used in investing activities for the three months ended March 31, 2023 of $2.7 million was mainly attributable to $1.8 million related to payments for mineral interests and $0.6 million for the purchase of investments that are subject significant influence. The $1.8 million of cash used for purchases of mineral interests related to option payments at our Tintic Project. The $0.6 million for the purchase of investments that are subject to significant influence relates to the funding of our 30% interest in the Sama Nickel Corporation Inc. joint venture in the Ivory Coast. Financing activities. During the three months ended March 31, 2023, there were no significant financing activities as we continued to fund our operations with proceeds from our IPO. Contractual Obligations As of March 31, 2023, there have been no material changes, outside the ordinary course of business, in our contractual obligations since December 31, 2022. Refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 14, 2023, for information regarding our contractual obligations. Off Balance Sheet Arrangements As of March 31, 2023, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity. Related Party Transactions See Note 11 of our consolidated and combined carve-out financial statements for the three months ended March 31, 2023. Critical Accounting Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated and combined carve-out financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of 21 assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities as of the date of our financial statements. Below are the accounting matters that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue, expense, gain or loss being reported. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting estimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our financial statements. We base our assumptions and estimates on historical experience and various other sources that we believe to be reasonable under the circumstances. Actual results may differ from the estimates we calculate due to changes in circumstances, global economics and politics and general business conditions. A summary of our significant accounting policies are detailed in Note 3 to our consolidated and combined carve-out financial statements included in our 2022 Form 10-K. We have outlined below those policies identified as being critical to the understanding of our business and results of operations and that require the application of significant management judgment in developing estimates. Recoverable value of exploration mineral interests We review and evaluate exploration mineral interests for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of our exploration mineral interests and intangible assets did not involve significant estimation in the periods presented as circumstances did not indicate the carrying amount of our assets may not be recoverable. However, the recoverability of our recorded mineral interests is subject to market factors that could significantly affect the recoverability of our assets, such as commodity prices, results of exploration activities that may affect our intentions to continue under option or earn-in agreements and geopolitical circumstances, particularly in Colombia. By nature, significant changes in these factors are reasonably possible to occur periodically, which could materially impact our financial statements. 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 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 and volatility, which can have a significant impact on the valuation model and resulting expense recorded. In February 2023, we granted 500,000 stock options at an exercise price of $13.23 per share and in March 2023, we granted 100,000 stock options at an exercise price of $15.46. The fair value of the option grants was determined using the Black-Scholes option-pricing model as $7.22 and $8.53 per share, respectively. The following assumptions were used to compute the fair value of the options granted: February 1, 2023 Grant Date March 1, 2023 Grant Date Risk-free interest rate 3.7% 4.5% Dividend yield nil nil Estimated volatility 69.8% 69.5% Expected option life 4 years 4 years The risk-free interest rate assumption was based on the U.S. treasury constant maturity yield at the date of the grant over the expected life of the option. No dividends are expected to be paid. We calculated the estimated volatility based on the historical volatility of a group of peer companies’ common stock and a group of relevant stock market indices over the expected option life as we only commenced publicly trading in June 2022. The computation of expected option life was determined based on a reasonable expectation of the option life prior to the option being exercised or forfeited. 22 Income taxes We 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 laws in many jurisdictions, including the United States, Canada, Colombia, Peru, Australia, the Ivory Coast and the PRC. We report income tax in accordance with U.S. GAAP, which requires the establishment of deferred tax accounts for all temporary differences between the financial reporting and tax bases of assets and liabilities, using currently enacted tax rates. In addition, deferred tax accounts must be adjusted to reflect new rates if enacted into law. Realization of deferred tax assets is contingent on the generation of future taxable income. As a result, we consider whether it is more likely than not that all or a portion of such assets will be realized during periods when they are available, and if not, we provide a valuation allowance for amounts not likely to be recognized. In determining our valuation allowance, we have not assumed future taxable income from sources other than the reversal of existing temporary differences. The extent to which a valuation allowance is warranted may vary as a result of changes in our estimates of future taxable income. In addition to the potential generation of future taxable income through the establishment of economic feasibility, development and operation of mines on our exploration assets, estimates of future taxable income could change in the event of disposal of assets, the identification of tax-planning strategies or changes in tax laws that would allow the benefits of future deductible temporary differences in certain entities or jurisdictions to be offset against future taxable temporary differences in other entities or jurisdictions. We recognize the effect of uncertain income tax positions if those positions are more likely than not of being sustained. The amount recognized is subject to estimates and our judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately incurred for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. We had no uncertain tax positions as of March 31, 2023. Emerging Growth Company Status We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (the (“JOBS Act"). The JOBS Act exempts emerging growth companies from being required to comply with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated and combined carve-out financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The accounting policies applied in our consolidated and combined carve-out financial statements included elsewhere in this Quarterly Report reflect the early adoption of certain accounting standards as the JOBS Act does not preclude an emerging growth company from early adopting a new or revised accounting standard to the extent early adoption is allowed by the accounting standard. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable.