Trilogy Metals Inc. 10-Q

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 August 31, 2022 (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, including statements about the plans and budget for the 2022 field exploration program ; perceived merit of properties, exploration results and budgets, the impact of the BLM’s suspension of permits on the right-of-way with AIDEA relating to the Ambler Road Project; 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 Access 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; ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2022 15 ​ Table of contents ● our expected ability to develop adequate infrastructure and that the cost of doing so will be reasonable; ● continued good relationships with 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; ● expected trends and specific assumptions regarding metal prices and currency exchange rates; ● the potential impact of the novel coronavirus (COVID-19); 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 Mining District Industrial Access Project, or AMDIAP, will receive the requisite permits and, if it does, whether the Alaska Industrial Development and Export Authority will build the AMDIAP; ● Risks related to the suspension by the BLM of the right-of-way permits with AIDEA relating to the Ambler access road to permit the Department of the Interior to carry out additional work on the environmental impact statement, and associated delays relating to such suspension; ● 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; ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2022 16 ​ Table of contents ● commodity price fluctuations; ● uncertainty related to title to our mineral properties; ● our history of losses and expectation of future losses; ● risks related to increases in demand for equipment, skilled labor and services needed for exploration and development of mineral properties, and related cost increases; ● risks related to increases in costs of fuel and other required supplies and concerns relating to supply chain and the ability to obtain needed supplies at a reasonable cost, or at all; ● risks related to global economic instability, including global supply chain issues, inflation and fuel and energy costs may affect the Company’s business; ● 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; ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2022 17 ​ Table of contents ● 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; ● 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 11, 2022, 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 October 4, 2022 and provides an analysis of our unaudited interim financial results for the quarter ended August 31, 2022 compared to the quarter ended August 31, 2021. The following information should be read in conjunction with our August 31, 2022 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, 2021. 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 “CDN$” 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. ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2022 18 ​ Table of contents 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 Limited (“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 Corporation, Inc. (“NANA”), a regional Alaska Native Corporation, which hosts the Bornite carbonate-hosted copper project (the “Bornite Project”) and related assets. The Company also conducts early-stage exploration through a wholly owned subsidiary, 995 Exploration Inc. Joint venture project activities 2022 Exploration Season for the Upper Kobuk Mineral Projects Field season activities at the UKMP Projects commenced in late May, with the camp opening on May 20 and drilling was completed on September 16. The Bornite camp is expected to be fully shut down during the first week of October. The $26.2 million approved budget for Ambler Metals LLC, our 50/50 joint venture with South32 Limited, for this year was mainly spent on the summer field program, which included 10,739 meters of diamond drilling that prioritized advancing the Arctic Project with additional infill drilling to further improve the confidence in the resource and the completion of a geotechnical study to further de-risk the Arctic Project. Exploration outside of the Arctic deposit focused on discovering copper-rich satellite deposits near Arctic in the VMS Belt and the Cosmos Hills. The forecasted spend at Ambler Metals for the fiscal year is estimated to be approximately $28.5 million which is $2.3 million or 8.8% higher than budget. For the 2022 Arctic field program, Ambler Metals completed 8,376 meters in 47 holes as part of an 8,400-meter infill program to increase confidence of the resource from the Indicated to Measured category. This includes five holes totaling 815 meters completed for the geotechnical assessment of Arctic that was initiated last year and two infill holes instrumented for the ongoing geohydrological assessment. The 2022 exploration program for the Cosmos Hills and Ambler VMS Belt includes drilling of approximately 7 holes totaling 2,363 meters as well as detailed mapping and soil sampling to build on the work performed during the prior year. In addition, 1,350 meters of trenching was completed around Pardner Hill. The Company expects to begin announcing drill results during the fourth quarter of 2022. Ambler Mining District Industrial Access Project (“AMDIAP” or “Ambler Access Project”) In a press release dated September 21, 2022, the Company provided an update on the AMDIAP. The BLM published in the Federal Register a Notice of Intent (“NOI”) that it will prepare a Supplemental Environmental Impact Statement (“SEIS”) for the proposed AMDIAP. The NOI includes a 45-day comment period on the SEIS, which will allow the BLM to determine if any additional impacts and resources related to previously identified deficiencies should be more thoroughly assessed. The NOI also indicated that input by Alaska Native Tribes and Corporations will continue to be of critical importance and that the BLM will continue to consult with these entities under applicable guidance. The BLM anticipates publishing a Draft SEIS during the second quarter of 2023, after which it will accept public comments on the Draft SEIS. ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2022 19 ​ Table of contents Summary of results ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of US dollars ​ ​ ​ Three months ended ​ ​ Nine months ended ​ ​ ​ August 31, 2022 ​ ​ August 31, 2021 ​ ​ August 31, 2022 ​ ​ August 31, 2021 ​ Selected expenses $ ​ $ ​ $ $ General and administrative ​ ​ 279 ​ ​ ​ 425 ​ ​ ​ 1,014 ​ ​ ​ 1,188 ​ Investor relations ​ ​ 18 ​ ​ ​ 170 ​ ​ ​ 155 ​ ​ ​ 440 ​ Professional fees ​ ​ 131 ​ ​ ​ 123 ​ ​ ​ 568 ​ ​ ​ 627 ​ Salaries ​ ​ 172 ​ ​ ​ 365 ​ ​ ​ 847 ​ ​ ​ 1,210 ​ Share of loss on equity investment ​ ​ 8,925 ​ ​ ​ 6,072 ​ ​ ​ 13,295 ​ ​ ​ 8,892 ​ ​ For the three-month period ended August 31, 2022, cash preservation strategies resulted in overall cash savings of $0.5 million in general and administrative expenses, investor relations, professional fees and salaries when compared to the three-month period ended August 31, 2021. The increase in our share of losses of Ambler Metals of $2.9 million was mainly due to an increase in mineral property expenses over the comparative quarter in the prior year from higher drilling and project support costs as well as higher pre-development costs for the Ambler Access Project. For the nine-month period ended August 31, 2022, cash preservation strategies resulted in overall cash savings of $0.9 million in general and administrative expenses, investor relations, professional fees and salaries when compared to the nine-month period ended August 31, 2021. The increase in our share of losses of Ambler Metals of $4.4 million was mainly due to an increase in mineral property expenses over the comparative period in the prior year from higher drilling and project support costs as well as higher pre-development costs for the Ambler Access Project. ​ Liquidity and capital resources We expended $3.4 million on operating activities during the nine-month period ending August 31, 2022 with the majority of cash spent on corporate salaries, professional fees related to our annual regulatory filings, annual insurance renewal, annual fees paid to the Toronto Stock Exchange and the NYSE American Exchange and with the American and Canadian securities commissions. ​ At August 31, 2022, we had $3.1 million in cash and cash equivalents and working capital of $2.9 million. The Company continues to manage its cash expenditures through its working capital. Management continues to review the fiscal 2022 budget for cash preservation opportunities and has reduced cash expenditures where feasible, including but not limited to, reductions in marketing and investor conferences and office expenses. In addition, the Company’s Board of Directors have agreed to take all of their fees in shares of the Company in an effort to preserve cash and increase share ownership. The Company’s senior management team are also taking a portion of their base salaries in shares of the Company to preserve cash. Management believes that the combination of these cost reduction efforts results in sufficient cash to fund the Company’s operations for the next twelve months. ​ All project related costs are funded by the joint venture. Amber Metals is well funded to advance the UKMP with $93.5 million in cash and $85.8 million in working capital as at August 31, 2022. There are sufficient funds at the joint venture to fund this fiscal year’s budget for the UKMP and the Ambler Access Project. Trilogy does not anticipate having to fund the activities of Ambler Metals until the current cash balance $93.5 million is expended. ​ Future cash requirements may vary materially from current expectations. The Company will need to raise additional funds in the future to support its operations and administration expenses. Future sources of liquidity are likely in the form of an equity financing but may include debt financing, convertible debt, exercise of options, or other means. The continued operations of the Company are dependent on its ability to obtain additional financing or to generate future cash flows. ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2022 20 ​ Table of contents Off-balance sheet arrangements We have no material off-balance sheet arrangements. Outstanding share data At October 4, 2022, we had 146,225,035 common shares issued and outstanding. At October 4, 2022, we had outstanding, 12,151,150 stock options with a weighted-average exercise price of CDN$2.51, as well as 1,560,737 DSUs, 257,268 RSUs, and 11,927 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 13,971,142 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, sustained losses by the investment, the absence of the ability to recover the carrying amount of the investment, significant changes in the legal, business or regulatory environment, significant adverse changes impacting the investee including the status of the Ambler Access Project 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 calculates the estimated undiscounted future net cash flows relating to the asset or asset group using estimated future prices, proven and probable reserves and other mineral resources, and operating, capital and reclamation costs. When the carrying value of an asset exceeds the related undiscounted cash flows, the asset is written down to its estimated fair value, which is usually determined using discounted future cash flows. Management’s estimates of mineral prices, mineral resources, foreign exchange rates, production levels operating, capital and reclamation costs are subject to risk and uncertainties that may affect the determination of the recoverability of the long-lived asset. It is possible that material changes could occur that may adversely affect management’s estimates. 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 tax benefits including interest and penalties. We are subject to income tax law ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2022 21 ​ Table of contents 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 takes into account, 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 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.