Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Trilogy Metals Inc.
Management’s Discussion & Analysis
For the Quarter Ended May 31, 2021
(expressed in US dollars)
Cautionary notes
Forward-looking statements
This Management’s Discussion and Analysis contains “forward-looking information” and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other applicable securities laws. These forward-looking statements may include statements regarding the Company’s work programs and budgets; perceived merit of properties, exploration results and budgets, the Company and Ambler Metals’ funding requirements, mineral reserves and resource estimates, work programs, capital expenditures, operating costs, cash flow estimates, production estimates and similar statements relating to the economic viability of a project, timelines, strategic plans, statements regarding Ambler Metals’ plans and expectations relating to its Upper Kobuk Mineral Projects, sufficiency of the $145 million subscription price to fund the UKMP; impact of COVID-19 on the Company’s operations; market prices for precious and base metals; statements regarding the Ambler Road Project (also known as the Ambler Mining District Industrial Access Project); or other statements that are not statements of fact. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. Statements concerning mineral resource estimates may also be deemed to constitute “forward-looking statements” to the extent that they involve estimates of the mineralization that will be encountered if the property is developed.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, identified by words or phrases such as “expects”, “is expected”, “anticipates”, “believes”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”, “objectives”, “potential”, “possible” or variations thereof or stating that certain actions, events, conditions or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking statements.
Forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made, as well as on a number of material assumptions, which could prove to be significantly incorrect, including about:
● our ability to achieve production at the Upper Kobuk Mineral Projects;
● the accuracy of our mineral resource and reserve estimates;
● the results, costs and timing of future exploration drilling and engineering;
● timing and receipt of approvals, consents and permits under applicable legislation;
● the adequacy of our financial resources;
● the receipt of third party contractual, regulatory and governmental approvals for the exploration, development, construction and production of our properties and any litigation or challenges to such approvals;
● our expected ability to develop adequate infrastructure and that the cost of doing so will be reasonable;
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● continued good relationships with South32 Limited (‘South32”), our joint venture partner, as well as local communities and other stakeholders;
● there being no significant disruptions affecting operations, whether relating to labor, supply, power damage to equipment or other matter;
● the potential impact of the novel coronavirus (COVID-19);
● expected trends and specific assumptions regarding metal prices and currency exchange rates; and
● prices for and availability of fuel, electricity, parts and equipment and other key supplies remaining consistent with current levels.
We have also assumed that no significant events will occur outside of our normal course of business. Although we have attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. We believe that the assumptions inherent in the forward-looking statements are reasonable as of the date of this MD&A. However, forward-looking statements are not guarantees of future performance and, accordingly, undue reliance should not be put on such statements due to the inherent uncertainty therein.
Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those reflected in the forward-looking statements, including, without limitation:
● risks related to the COVID-19 pandemic;
● risks related to inability to define proven and probable reserves;
● risks related to our ability to finance the development of our mineral properties through external financing, strategic alliances, the sale of property interests or otherwise;
● uncertainty as to whether there will ever be production at the Company’s mineral exploration and development properties;
● risks related to our ability to commence production and generate material revenues or obtain adequate financing for our planned exploration and development activities;
● risks related to lack of infrastructure including but not limited to the risk whether or not the Ambler Access Project, (formerly, Ambler Mining District Industrial Access Project, or AMDIAP), will receive all the requisite permits and, if it does, whether the Alaska Industrial Development and Export Authority will build the AMDIAP;
● risks related to inclement weather which may delay or hinder exploration activities at our mineral properties;
● risks related to our dependence on a third party for the development of our projects;
● none of the Company’s mineral properties are in production or are under development;
● commodity price fluctuations;
● uncertainty related to title to our mineral properties;
● our history of losses and expectation of future losses;
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● risks related to increases in demand for equipment, skilled labor and services needed for exploration and
development of mineral properties, and related cost increases;
● uncertainties relating to the assumptions underlying our resource estimates, such as metal pricing, metallurgy, mineability, marketability and operating and capital costs;
● uncertainty related to inferred mineral resources;
● mining and development risks, including risks related to infrastructure, accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with or interruptions in development, construction or production;
● risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of our mineral deposits;
● risks related to governmental regulation and permits, including environmental regulation, including the risk that more stringent requirements or standards may be adopted or applied due to circumstances unrelated to the Company and outside of our control;
● the risk that permits and governmental approvals necessary to develop and operate mines at our mineral properties will not be available on a timely basis or at all;
● risks related to the need for reclamation activities on our properties and uncertainty of cost estimates related thereto;
● risks related to the acquisition and integration of operations or projects;
● our need to attract and retain qualified management and technical personnel;
● risks related to conflicts of interests of some of our directors and officers;
● risks related to potential future litigation;
● risks related to market events and general economic conditions;
● risks related to future sales or issuances of equity securities decreasing the value of existing Trilogy common
shares, diluting voting power and reducing future earnings per share;
● risks related to the voting power of our major shareholders and the impact that a sale by such shareholders may have on our share price;
● uncertainty as to the volatility in the price of the Company’s common shares;
● the Company’s expectation of not paying cash dividends;
● adverse federal income tax consequences for U.S. shareholders should the Company be a passive foreign investment company;
● risks related to global climate change;
● risks related to adverse publicity from non-governmental organizations;
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● uncertainty as to our ability to maintain the adequacy of internal control over financial reporting as per the requirements of Section 404 of the Sarbanes-Oxley Act; and
● increased regulatory compliance costs, associated with rules and regulations promulgated by the United States Securities and Exchange Commission, Canadian Securities Administrators, the NYSE American, the Toronto Stock Exchange, and the Financial Accounting Standards Boards, and more specifically, our efforts to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act;
This list is not exhaustive of the factors that may affect any of the Company’s forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in Trilogy’s Form 10-K dated February 12, 2021, filed with the Canadian securities regulatory authorities and the SEC, and other information released by Trilogy and filed with the appropriate regulatory agencies.
The Company’s forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made, and the Company does not assume any obligation to update forward-looking statements if circumstances or management’s beliefs, expectations or opinions should change, except as required by law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.
General
This Management’s Discussion and Analysis (“MD&A”) of Trilogy Metals Inc. (“Trilogy”, “Trilogy Metals”, “the Company” or “we”) is dated July 6, 2021 and provides an analysis of our unaudited interim financial results for the quarter ended May 31, 2021 compared to the quarter ended May 31, 2020.
The following information should be read in conjunction with our May 31, 2021 unaudited interim condensed consolidated financial statements and related notes which were prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The MD&A should also be read in conjunction with our audited consolidated financial statements and related notes for the year ended November 30, 2020. A summary of the U.S. GAAP accounting policies is outlined in note 2 of the audited consolidated financial statements. All amounts are in United States dollars unless otherwise stated. References to “Canadian dollars” and “C$” and “CAD$” are to the currency of Canada and references to “U.S. dollars”, “$” or “US$” are to the currency of the United States.
Richard Gosse, P.Geo., Vice President, Exploration of the Company, is a Qualified Person under National Instrument 43-101 - Standards of Disclosure for Mineral Projects (“NI 43-101”), and has approved the scientific and technical information in this MD&A.
Trilogy’s shares are listed on the Toronto Stock Exchange (“TSX”) and the NYSE American Stock Exchange (“NYSE American”) under the symbol “TMQ”. Additional information related to Trilogy, including our annual report on Form 10-K, is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
Description of business
We are a base metals exploration company focused on the exploration and development of mineral properties, through our equity investee, in the Ambler mining district located in Alaska, U.S.A. We conduct our operations through a wholly owned subsidiary, NovaCopper US Inc. which is doing business as Trilogy Metals US (“Trilogy Metals US”). Our Upper Kobuk Mineral Projects, (“UKMP” or “UKMP Projects”) were contributed into a 50/50 joint venture named Ambler Metals LLC (“Ambler Metals”) between Trilogy and South32 on February 11, 2020 (see below). The projects contributed to Ambler Metals consist of: i) the Ambler lands which host the Arctic copper-zinc-lead-gold-silver project (the “Arctic Project”); and ii) the Bornite lands being explored under a collaborative long-term agreement with NANA Regional
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Corporation, Inc. (“NANA”), a regional Alaska Native Corporation, which hosts the Bornite carbonate-hosted copper project (the “Bornite Project”) and related assets.
Project Activities
Development Funding Agreement with the Alaska Industrial Development and Export Authority (AIDEA)
In a press release dated April 19, 2021, the Company announced that the Alaska Industrial Development and Export Authority (“AIDEA”) had formally approved the proposed plan and budget for the 2021 summer field season activities and services of up to $13 million for the Ambler Access Project (“AAP”). The cost will be shared 50/50 by AIDEA and Ambler Metals. The Board of AIDEA has authorized up to $6.5 million for field season activities. These funds will be matched by up to another $6.5 million from Ambler Metals under the terms of the Ambler Access Development Agreement that was approved by the AIDEA Board on February 10, 2021 and subsequently executed by both parties, resulting in a total budget for 2021 of up to $13 million. The AAP is a proposed 211-mile, east-west running controlled industrial access road that would provide industrial access to the Ambler Mining District in northwestern Alaska.
2021 Exploration Season for the Upper Kobuk Mineral Projects
In a press release dated May 17, 2021, the Company announced that Ambler Metals had finalized the details of the 2021 exploration field program at the UKMP for the previously approved $27 million exploration budget. The exploration program is aligned with a strategy developed by the Company and South32 which prioritizes the exploration budget within the UKMP. The strategy defines a program that advances the highest priority projects and exploration targets, both volcanogenic Massive Sulphide (“VMS”) and Carbonate-Hosted Copper (“CHC”), ranging from early-stage geophysical anomalies that were identified during the 2019 airborne Versatile Time Domain Electromagnetic (“VTEM”) survey to advanced VMS and CHC prospects with historical resources. The site camp opened on June 1, 2021, and drilling has now commenced.
Arctic Project
Exploration activities planned for the 2021 field season at the Arctic Project include geotechnical drilling (8 holes – 2,000 meters), conversion/metallurgical drilling (28 holes – 4,800 meters) and condemnation drilling (4 holes – 800 meters). The condemnation drilling will target areas proximal to the Arctic Project that may host additional VMS-style mineralization but also provide condemnation information for the processing plant and tailings management facility. The goal of this summer’s campaign at Arctic is to advance and de-risk the project so the joint venture partners can make a future construction decision. In total, there is expected to be approximately 7,600 meters of drilling at Arctic during the summer campaign. In addition, approximately 2,250 meters of drilling is planned for three high-priority target areas that are within 5 kilometers of the Arctic project.
Regional Exploration Project
During the 2021 field season, Ambler Metals plans to focus approximately 2,900 meters of drilling on the three drill-ready VMS Belt prospects that have the best potential for shallow open-pit mineralization. These targets consist of the Sunshine, Snow and Cliff prospects, all of which are within 30 km from the Arctic Project. Ambler Metals plans to perform additional geological mapping and soil sampling at several other VMS prospects in the belt, including Ambler, Dead Creek, South Cliff and Nora, as well as at approximately 10 high-priority VTEM anomalies that were identified from the 2019 VTEM survey.
Included in the 2021 field season is exploration, including drilling, for carbonate-hosted copper-cobalt mineralization in the Cosmos Hills, host to the Bornite deposit, and along strike in the Ambler Lowlands. Outside of exploration work on the Bornite deposit itself, the Cosmos Hills have not been systematically explored since historical work was carried out by Kennecott in the 1990s. Mapping and soil sampling planned for 2021 cover an area approximately 10 kilometers in length, from the Aurora and Pardner Hill copper prospects in the west to Bornite East and will be used to define drill
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targets for 2022. The Ambler Lowlands form a 10-kilometer-wide glaciated valley separating Arctic and Bornite that is virtually unexplored despite its proximity to Bornite.
COVID Safety Measures
During the 2021 field season, we will be adhering to a strict COVID safety protocol regime which includes limited personnel rotations, COVID-19 testing, stringent sanitation and disinfection procedures and contact tracing. These protocols will be followed throughout the summer field season in strict observance to Government of Alaska guidelines.
Corporate Developments
Annual General Meeting
The Annual General Meeting of shareholders was held on May 19, 2021. At the Annual General Meeting, all directors nominated by the Company and standing for election were elected by shareholders of the Company, with each director receiving no less than 99.77% of the votes cast.
Joint Venture
Option agreement
On April 10, 2017, Trilogy and Trilogy Metals US entered into an Option Agreement to form a Joint Venture with South32 Group Operations Pty Ltd., a wholly-owned subsidiary of South32, which agreement was later assigned by South32 Operations Pty Ltd. to its affiliate, South32 USA Exploration Inc. on the UKMP (“Option Agreement”). Under the terms of the Option Agreement, as amended, Trilogy Metals US granted South32 the right to form a 50/50 joint venture to hold all of Trilogy Metals US’ Alaskan assets. South32 exercised its option on December 19, 2019.
Formation of joint venture
On February 11, 2020, Trilogy completed the formation of the 50/50 joint venture with South32. Trilogy contributed all its assets associated with the UKMP, including the Arctic and Bornite Projects, while South32 contributed a subscription price of US$145 million (the “Subscription Price”), resulting in each party owning a 50% interest in Ambler Metals. The Subscription Price will be used to advance the Arctic and Bornite Projects, along with exploration in the Ambler mining district. With Ambler Metals being well funded, with access to $145 million, Trilogy does not expect to fund programs and budgets to advance the UKMP until the Subscription Price is spent by Ambler Metals. To assist Ambler Metals during the initial set up phase, Trilogy paid all of Ambler Metals’ invoices and was being reimbursed pursuant to a services agreement (the “Services Agreement”) until the back office was fully transitioned to a new team employed by Ambler Metals. The Services Agreement ended on December 31, 2020.
Ambler Metals is an independently operated company controlled by Trilogy and South32 through a four-member board of which two members are currently appointed by Trilogy based on its 50% equity interest. All significant decisions related to the UKMP require the approval of both companies. We determined that Ambler Metals is a variable interest entity, or VIE, because it is expected to need additional funding from its owners for its significant activities. However, we concluded that we are not the primary beneficiary of Ambler Metals as the power to direct its activities, through its board, is shared under the limited liability company agreement. As we have significant influence over Ambler Metals through our representation on its board, we use the equity method of accounting for our investment in Ambler Metals. Our investment in Ambler Metals was initially measured at its fair value of $176 million upon recognition. Our maximum exposure to loss in this entity is limited to the carrying amount of our investment in Ambler Metals, which, as of May 31, 2021, totaled $170 million.
During the three-month period ended May 31, 2020, Ambler Metals loaned $57.5 million back to South32 and retained $87.5 million of the cash subscription price. The loan has a 7-year maturity date, but Ambler Metals has begun drawing
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down on the loan with cash calls to South32 to fund its 50% share of the 2021 budget to advance development studies, resource drilling and regional exploration programs. The loan is secured by South32’s membership interest in Ambler Metals and guaranteed by South32 International Investment Holdings Pty Ltd. Trilogy currently estimates that the Subscription Price, which includes the funds to be repaid under the loan, will fund the UKMP through feasibility and the permitting of the first mine to be developed in the Ambler mining district. Once the full amount of the Subscription Price payment of $145 million is expended, the parties will contribute funding pro rata, as contemplated by the operating agreement which governs Ambler Metals.
Summary of results
in thousands of dollars,
except for per share amounts
Three months ended
Six months ended
May 31, 2021
May 31, 2020
May 31, 2021
May 31, 2020
Selected expenses
$
$
$
$
Mineral properties and feasibility study expenses
—
—
—
1,545
General and administrative
306
407
669
998
Investor relations
116
101
270
227
Professional fees
275
198
504
866
Salaries
407
226
846
450
Salaries – stock-based compensation
524
770
2,672
1,966
Gain on derecognition of assets contributed to joint venture
—
—
—
(175,770)
Share of loss on equity investment
1,700
561
2,820
739
Comprehensive earnings (loss) for the year
(3,413)
(3,002)
(7,929)
168,177
Basic earnings (loss) per common share
(0.02)
(0.02)
(0.05)
1.20
Diluted earnings (loss) per common share
(0.02)
(0.02)
(0.05)
1.13
For the three-month period ended May 31, 2021, Trilogy reported a net loss of $3.4 million (or $0.02 basic and diluted loss per common share). For the comparable period in 2020, we reported a net loss of $3.0 million (or $0.02 basic and diluted loss per common share). This second quarter difference is primarily due to a $1.1 million increase in our 50% pro rata share of Ambler Metals’ comprehensive loss. This was offset by a one-time amount of $0.7 million in feasibility study costs incurred during the second quarter of 2020. The share of loss in equity investment is higher versus the comparative period as the current quarter includes costs incurred to ready the camp for the 2021 field season. These set up costs were not incurred in the comparative period as the 2020 field season had been cancelled due to the COVID-19 pandemic.
Other variances noted for the comparable period were: i) a decrease in general and administrative expenses of $0.10 million primarily due to recruiting fees incurred in the comparative period for which there are no current period costs as well as the elimination of travel costs due to COVID-19 travel restrictions; ii) an increase of $0.07 million in professional fees primarily driven by an increase of $0.12 million for geological consulting, offset by $0.04 million in savings for auditing and legal services as the comparative period included charges for new accounting standard implementation and joint venture set up; iii) an increase of $0.18 million in salaries as the current period cost reflects additions to the executive team during the third quarter of 2020 for which there are no prior year second quarter comparatives; and iv) a decrease of $0.30 million in stock-based compensation driven primarily by RSUs that vested during the second quarter of 2020, for which there are no current quarter comparatives.
For the six-month period ended May 31, 2021, Trilogy reported a net a loss of $7.9 million (or $0.05 basic and diluted loss per common share). For the comparable period in 2020, we reported net earnings of $168 million (or $1.20 basic and $1.13 diluted earnings per common share). The difference for the six-month period ended May 31, 2021, when compared to the same period in 2020, is primarily due to the $176 million gain on derecognition of mineral property assets contributed to Ambler Metals upon formation of the joint venture on February 11, 2020. This variance is offset by $1.5 million of mineral property expenses and $0.7 million of feasibility study cost incurred during the comparable prior
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period for which there are no current period comparatives. Furthermore, our share of loss on equity investment was $2 million higher for the six-month period ended May 31, 2021, and reflects costs incurred by Ambler Metals to ready the project site for the 2021 field season. These set up costs were not incurred by Ambler Metals in 2020 as the field season was cancelled due to the COVID-19 pandemic.
Other variances noted for the comparative six-month period ended May 31, 2021 consist of: i) a decrease of $0.3 million in general and administrative expenses, primarily due to additional stock exchange fees of $0.1 million as well as $0.2 million in recruiting fees incurred in the comparative prior year period; ii) a decrease of $0.4 million in professional fees as the comparative period includes one-time charges for the implementation of new accounting standards and legal and accounting fees in relation to the formation of the joint venture; iii) an increase of $0.4 million in salaries reflecting additions to the executive team during the third quarter of 2020; iv) an increase of $0.7 million in stock-based compensation, driven primarily by a $1.0 million increase in stock based compensation due to a higher fair value per award (2021 -$0.97/option; 2021 - $0.65/option) and an increase in total awards vested during the period (2021 - 2.7 million; 2020 – 2.4 million), offset by a $0.3 million reduction in stock based compensation from DUSs that vested during the prior year comparative period.
Selected financial data
Quarterly information
in thousands of dollars,
except per share amounts
Q2 2021
Q1 2021
Q4 2020
Q3 2020
Q2 2020
Q1 2020
Q4 2019
Q3 2019
5/31/21
02/28/21
11/30/20
08/31/20
05/31/20
02/29/20
11/30/19
08/31/19
$
$
$
$
$
$
$
$
Interest and other income
5
5
5
8
12
62
91
137
Mineral properties and feasibility study expenses
—
—
91
232
742
1,545
3,819
10,951
Share of loss on equity investment
1,700
1,120
1,022
1,094
561
178
—
—
Earnings (loss) for the period
(3,413)
(4,516)
(3,226)
(3,184)
(3,002)
171,179
(6,525)
(12,535)
Earnings (loss) per common share – basic
(0.02)
(0.03)
(0.04)
(0.02)
(0.02)
1.22
(0.05)
(0.09)
Earnings (loss) per common share – diluted
(0.02)
(0.03)
(0.01)
(0.01)
(0.02)
1.16
(0.05)
(0.09)
Factors that can cause fluctuations in our quarterly results include the length of the exploration field season at the properties, the type of program conducted, stock option vesting, and issuance of shares. Subsequent to the formation
of the Joint Venture on February 11, 2020, project related costs may cause fluctuations in our quarterly results through our 50% share of the Joint Venture’s net operating loss.
For the second quarter of 2021, we reported a comprehensive loss of $3.4 million, which consisted of $1.7 million in operating expenses and $1.7 million for Trilogy’s 50% share of Ambler Metals’ operating loss. In the second quarter of 2020, we recognized a comprehensive loss of $3.0 million which consisted of $2.5 million in operating expenses and $0.6 million for Trilogy’s share of Ambler Metals’ operating loss. When compared to the second quarter of 2020, our pro rata share of the joint venture’s operating loss is $1.1 million higher for the second quarter of 2021. The increase is due to camp set up costs in relation to the 2021 field season. Ambler Metals did not incur these costs during the second quarter of 2020 due to the cancellation of the 2020 field season as a result of the COVID-19 pandemic. The $0.8 million decrease in operating expenses for the current period versus the comparative was primarily due to the Arctic project feasibility study costs that were incurred by Trilogy during the second quarter of 2020 for which there are no current period comparatives.
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For the first quarter of 2021, we reported comprehensive loss of $4.5 million, which consists of $3.4 million in operating expenses and $1.1 million for Trilogy’s 50% share of Ambler Metals’ operating loss. In the first quarter of 2020, we recognized a gain of $176 million from the contribution of our Alaskan mineral properties to the joint venture for which there is no current period comparative. Other variances, when compared to the three-month period ended February 29, 2020, include our pro rata share of the joint venture’s operating loss, which is $0.9 million higher in the current period and operating expenses, which are $1.1 million lower for the current period. The decrease in the operating expenses is primarily due to the elimination of $1.5 million in mineral properties expenses as the mineral properties were contributed to the joint venture during the first quarter of 2020 and a cost savings of $0.4 million from professional fees, offset by an increase of $1.0 million in stock-based compensation.
For the fourth quarter ended November 30, 2020, we incurred a loss of $3.2 million, which consists of $3.1 million in operating expense and $1.0 million for Trilogy’s share of Ambler Metals’ operating loss. When compared to the fourth quarter of 2019, the operating expenses were $3.5 million lower. The decrease is primarily due to the elimination of $3.8 million in mineral property expenses, a decrease of $0.4 million in professional fees, $0.3 million lower stock‐based compensation and a decrease of $0.2 million in general and administrative expenses. These cost savings were offset by a loss of $1.0 million on the equity method investment for which there is no comparative amounts for the fourth quarter of 2019, and an increase of $0.3 million in salaries due to new hires to the management team in the fourth quarter 2020.
For the third quarter ended August 31, 2020, we reported a comprehensive loss of $3.2 million, which consists of $2.1 million in operating expenses and $1.1 million for Trilogy’s 50% share of Ambler Metals’ operating loss. When compared to the three-month period ended August 31, 2019, the operating expenses for the third quarter was $10.6 million lower. The decrease is primarily due to the elimination of $11 million in mineral properties expenses due to the formation of the joint venture for which there are no comparable expenses in the third quarter of 2020, offset by $1 million in feasibility study costs in the same period.
Liquidity and capital resources
At May 31, 2021, we had $8.4 million in cash and working capital of $8.1 million, which is sufficient to fund our ongoing operations for at least the next 12 months. The projects are fully funded by Ambler Metals and we do not anticipate needing to fund our 50% share of future expenditures to advance the projects until the subscription price paid by South32 into Ambler Metals of $145 million is spent.
Contractual obligations
Contractually obligated undiscounted cash flow requirements as at May 31, 2021 are as follows.
In thousands of dollars
Total
<1 Year
1–2 Years
2–5 Years
Thereafter
$
$
$
$
$
Accounts payable and accrued liabilities
907
907
—
—
—
Office lease
582
213
369
—
—
1,489
1,120
369
—
—
Off-balance sheet arrangements
We have no material off-balance sheet arrangements.
Outstanding share data
At July 6, 2021, we had 144,446,485 common shares issued and outstanding. At July 6, 2021, we had outstanding, 11,123,316 stock options with a weighted-average exercise price of $1.98, no RSUs, as well as 1,265,275 DSUs and 11,927
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NovaGold Resources Inc. (“NovaGold”) DSUs for which the holder is entitled to receive one common share for every six NovaGold shares received. Upon exercise of all the foregoing convertible securities, the Company would be required to issue an aggregate of 12,390,580 common shares.
New accounting pronouncements
There are no new accounting pronouncements affecting the Company.
Critical accounting estimates
The most critical accounting estimates upon which our financial status depends are those requiring estimates of the
recoverability of our equity method investment in Ambler Metals, income taxes and valuation of stock‐based compensation.
Impairment of Investment in Ambler Metals LLC
Management assesses the possibility of impairment in the carrying value of its equity method investment in Ambler Metals whenever events or circumstances indicate that the carrying amount of the investment may not be recoverable. Significant judgments are made in assessing the possibility of impairment. Factors that may be indicative of an impairment include a loss in the value of an investment that is not temporary. Management considers several factors in considering if an indicator of impairment has occurred, including but not limited to, significant changes in the legal, business or regulatory environment, adverse changes in the use or physical condition of the underlying mineral properties asset, changes in the market interest rates or other market rates of return that are likely to significantly affect the discount rate used in the impairment assessment, significant adverse changes impacting the investee and internal reporting indicating the economic performance of an investment is, or will be, worse than expected.
These factors are subjective and require consideration at each period end. If an indicator of impairment is determined
to exist, the fair value of the impaired investment is determined based on the valuation of cohort companies with similar projects or upon the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants and observed market earnings multiples of comparable companies.
Management’s estimates of mineral prices, mineral resources, foreign exchange rates and projected future production
levels and operating capital are subject to risk and uncertainties that may affect the determination of the recoverability
of the equity method investment.
Income taxes
We must make estimates and judgments in determining the provision for income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized charges including interest and penalties. We are subject to income tax law in the United States and Canada. The evaluation of tax liabilities involving uncertainties in the application of complex tax regulation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues. The evaluation of an uncertain tax position requires significant judgment, and a change in such recognition would result in an additional charge to the income tax expense and liability.
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 considers, as of the grant date, the fair market value of the shares, expected volatility, expected life, expected forfeiture rate, expected dividend yield and the risk-free interest rate over the expected life of the option. The use of the Black-Scholes
Trilogy Metals Inc.
For the Quarter Ended May 31, 2021
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option pricing model requires input estimation of the expected life of the option, volatility, and forfeiture rate which can have a significant impact on the valuation model, and resulting expense recorded.
Additional information
Additional information regarding the Company, including our annual report on Form 10-K, is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov and on our website at www.trilogymetals.com. Information contained on our website is not incorporated by reference.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.