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, 2024
(expressed in US dollars)
Cautionary notes
Forward-looking statements
This Management’s Discussion and Analysis (“MD&A”) 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 impact of the Bureau of Land Management’s (“BLM”) suspension of permits on the right-of-way with the Alaska Industrial Development and Export Authority (“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 (as defined below), sufficiency of the Ambler Metals’ cash 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;
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For the Quarter Ended May 31, 2024
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● 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; 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 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 AMDIAP 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;
● commodity price fluctuations;
● uncertainty related to title to our mineral properties;
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● 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;
● the Company’s expectation of not paying cash dividends;
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● 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 for the fiscal year ended November 30, 2023, filed with the Canadian securities regulatory authorities and the SEC on February 9, 2024, 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 10, 2024 and provides an analysis of our unaudited condensed interim financial results for the quarter ended May 31, 2024 compared to the quarter ended May 31, 2023.
The following information should be read in conjunction with our May 31, 2024 unaudited condensed interim 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, 2023. 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 for the fiscal year ended November 30, 2023, is available on SEDAR+ at www.sedarplus.com and on EDGAR at www.sec.gov.
Trilogy Metals Inc.
For the Quarter Ended May 31, 2024
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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 may also conduct early-stage exploration through a wholly owned subsidiary, 995 Exploration Inc.
Corporate and project activities
The Company has a 2024 fiscal year cash budget totaling $2.8 million. For the six-month period ended May 31, 2024, we used $1.1 million in operating activities mainly for personnel costs, professional fees, regulatory and office expenses compared with budgeted cash expenditures totaling $1.5 million. The difference is due to the timing of paying our annual insurance premiums which occurred in June 2024.
Annual General Meeting
The Annual General Meeting of shareholders was held on May 22, 2024. All directors nominated by the Company were elected by shareholders of the Company, with each director receiving greater than 98% of the votes cast. The shareholders of the Company also approved the adoption of a new Fixed Deferred Share Unit Plan for non-employee directors to receive up to 1,200,000 common shares of the Company in lieu of cash compensation. Upon the approval of the new Fixed Deferred Share Unit Plan, the Company terminated the Ambler Metals Equity Plan which had 1,181,519 outstanding common shares available for future grants. The adoption of the new Fixed Deferred Share Unit Plan along with the termination of the Ambler Metals Equity Plan allows the Company to continue its cash preservation activities without significantly impacting potential dilution.
Ambler Metals LLC
The Board of Ambler Metals approved a 2024 fiscal year budget totaling $5.5 million to support external and community affairs, to maintain the State of Alaska mineral claims in good standing and for the maintenance of physical assets. During the six-month period ended May 31, 2024 Ambler Metals expended $2.4 million on salaries and wages, professional fees, engineering, project support costs and mineral property expenses, excluding Ambler Access Project costs compared with the budget of $2.6 million.
The Board of Ambler Metals also approved a 2024 fiscal year budget totaling $2.5 million to support the Ambler Access Project (“AAP”). During the six-month period ended May 31, 2024 Ambler Metals funded $1.1 million to the Alaska Industrial Development and Export Authority (“AIDEA”) in support of the AAP compared with the budget of $1.3 million.
During the second quarter of 2024, Trilogy and South32 agreed to return excess cash held by Ambler Metals to the owners for ease of cash management. The owners also agreed to maintain a minimum cash balance at Ambler Metals of $10 million which will be reviewed on a regular basis. Ambler Metals returned $25 million to Trilogy and South32 prior to the end of May 2024 and another $25 million during the first half of June 2024.
Trilogy Metals Inc.
For the Quarter Ended May 31, 2024
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Ambler Mining District Industrial Access Project (“AMDIAP” or “Ambler Access Project”)
On April 22, 2024, the Company announced that the United States Bureau of Land Management (“BLM”) had filed the Final Supplemental Environmental Impact Statement (“SEIS”) for the AAP on its website. The Final SEIS identifies “No Action” as the BLM’s preferred alternative. The proponent for the AAP is AIDEA which is a public corporation of the State of Alaska. AIDEA’s purpose is to promote, develop, and advance general prosperity and economic welfare of the people of Alaska. AIDEA strongly objected to both the process used by the BLM to reach a “No Build” decision and the effect of the decision which illegally blocks access to statehood lands, minerals, and federally patented mining claims. On May 8, 2024 NANA announced its withdrawal from further involvement with the AAP and stated intentions to not renew the surface access permit with AIDEA upon its expiry this year.
On June 28, 2024, the BLM issued the Record of Decision confirming their selection of the No Action Alternative and thus denies AIDEA’s application for a Right-Of-Way grant (“ROW Grant”) across BLM-managed lands and terminates the BLM ROW Grant issued to AIDEA on January 5, 2021.
Summary of results
in thousands of US dollars, except per share amounts
Three months ended
Six months ended
May 31, 2024
May 31, 2023
May 31, 2024
May 31, 2023
Selected expenses
$
$
$
$
General and administrative
319
328
734
736
Investor relations
19
23
31
53
Professional fees
192
188
392
758
Salaries
178
193
369
430
Salaries and directors expense – stock-based compensation
509
491
2,508
2,853
Share of loss on equity investment
602
1,603
1,394
3,088
Comprehensive loss for the period
(1,759)
(2,803)
(5,360)
(7,875)
Basic and diluted loss per common share
(0.01)
(0.02)
(0.03)
(0.05)
For the three-month period ended May 31, 2024, we reported a net loss of $1.8 million compared to a net loss of $2.8 million for the three-month period ended May 31, 2023. The decrease in comprehensive loss in the second quarter of 2024 compared to the same quarter in 2023 is due to the decrease in general and administrative, professional fees, our share of loss of Ambler Metals, and stock-based compensation and salaries. The decrease of our share of losses of Ambler Metals is mainly due to the decrease in corporate wages and in mineral property expenses partially offset from the increase in professional fees. The primary drivers in decrease in mineral property expenses over the comparative quarter in the prior year were from a reduction in activities both at the project level and at the AAP.
For the six-month period ended May 31, 2024, we reported a net loss of $5.4 million compared to a net loss of $7.9 million for the six-month period ended May 31, 2023. The decrease for the six-month period ended May 31, 2024 when compared to the same period in 2023, is primarily due to the decrease in our share of loss of Ambler Metals, professional fees and stock-based compensation and salaries. The decrease of our share of losses of Ambler Metals is mainly due to the decrease in corporate wages due to a reduction in staffing and a reduction in mineral property expenses due to a reduction in project activities which was partially offset by the increase in professional consulting fees related to government and external affairs.
Trilogy Metals Inc.
For the Quarter Ended May 31, 2024
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Liquidity and capital resources
We expended $1.1 million on operating activities during the six-month period ending May 31, 2024 with the majority of cash spent on professional fees and American and Canadian securities commission fees related to our annual regulatory filings, annual fees paid to the Toronto Stock Exchange and the NYSE American Exchange and corporate salaries.
As at May 31, 2024, we had cash and cash equivalents of $14.0 million and working capital of $13.6 million. At the end of the fiscal quarter, Trilogy received $12.5 million from Ambler Metals as a return of excess cash to the owners. Although the Company has a strong cash position, Management continues with cash preservation strategies to reduce 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 continue to take all of their fees in deferred share units in an effort to preserve cash. The Company’s senior management team is also continuing to take a portion of their base salaries in shares of the Company to preserve cash.
All project related costs are funded by Ambler Metals. Amber Metals had $35.1 million in cash and cash equivalents and $34.9 million in working capital as at May 31, 2024. During the first half of June, Ambler Metals retuned $25 million to the owners, resulting in a cash position of approximately $11 million which is sufficient for Ambler Metals to fund this fiscal year’s budget for the UKMP and the Ambler Access Project.
Off-balance sheet arrangements
We have no material off-balance sheet arrangements.
Outstanding share data
As at July 10, 2024, we had 160,552,808 common shares issued and outstanding. As at July 10, 2024, we had 14,316,900 stock options outstanding with a weighted-average exercise price of CDN$1.78, 2,980,377 Deferred Share Units (“DSUs”), and 2,318,339 Restricted Share Units (“RSUs”) outstanding. As at July 10, 2024 we hold 5,144 NovaGold Resources Inc. (“NovaGold”) DSUs for which the NovaGold director is entitled to receive one common share of Trilogy for every six NovaGold shares to be received upon their retirement from the NovaGold board. A total of 859 common shares will be issued upon redemption of the NovaGold DSUs. Upon the exercise of all the foregoing convertible securities, the Company would be required to issue an aggregate of 19,616,475 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.
Trilogy Metals Inc.
For the Quarter Ended May 31, 2024
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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. Ambler Metals is a non-publicly traded equity investment owning exploration and development projects. Significant judgments are made in assessing the possibility of impairment. The Company assesses whether there has been a potential triggering event for other-than-temporary impairment by assessing the underlying assets of Ambler Metals for recoverability and assessing whether there has been a change in the development plan or strategy for the projects. If the Company concludes there is sufficient evidence for an other-than-temporary impairment, an assessment of fair value is performed. If the underlying assets are not recoverable, the Company will record an impairment charge equal to the difference between the carrying amount of the equity investment and its fair value. This assessment is subjective and require consideration at each period end.
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 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 for the fiscal year ended November 30, 2023, is available on SEDAR+ at www.sedarplus.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.
Trilogy Metals Inc.
For the Quarter Ended May 31, 2024
22
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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.