Table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 28, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 1-35447
TRILOGY METALS INC.
(Exact Name of Registrant as Specified in Its Charter)
British Columbia
98-1006991
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
Suite 1150, 609 Granville Street
Vancouver, British Columbia Canada
V7Y 1G5
(Address of Principal Executive Offices)
(Zip Code)
(604) 638-8088
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares
TMQ
NYSE American
Toronto Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ◻
Non-accelerated filer ☒
Smaller reporting company☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 5, 2023, the registrant had 148,956,662 Common Shares, no par value, outstanding.
Trilogy Metals Inc.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
3
Item 1.
Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
22
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
23
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Item 1. Financial Statements
Interim Consolidated Balance Sheets
(unaudited)
in thousands of US dollars
February 28, 2023
November 30, 2022
$
Assets
Current assets
Cash
1,682
2,573
Accounts receivable
26
17
Deposits and prepaid amounts
163
320
Total current assets
1,871
2,910
Investment in Ambler Metals LLC (note 3)
141,380
142,754
Fixed assets
10
12
Right of use asset (note 5 (a))
276
319
Total assets
143,537
145,995
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 4)
670
345
Current portion of lease liability
176
189
Total current liabilities
846
534
Long-term portion of lease liability (note 5 (b))
—
33
Total liabilities
567
Shareholders’ equity
Share capital (note 6) – unlimited common shares authorized, no par value Issued – 148,722,699 (2022 – 146,225,035)
183,831
182,178
Contributed surplus
121
122
Contributed surplus – options (note 6(a))
27,872
27,352
Contributed surplus – units (note 6(b))
2,801
2,638
Deficit
(71,934)
(66,862)
Total shareholders' equity
142,691
145,428
Total liabilities and shareholders' equity
Commitments (note 8)
(See accompanying notes to the interim consolidated financial statements)
/s/ Tony Giardini, President, CEO and Director
/s/ Kalidas Madhavpeddi, Director
Approved on behalf of the Board of Directors
Trilogy Metals Inc.For the Quarter Ended February 28, 2023
`
Interim Consolidated Statements of Loss
and Comprehensive Loss
in thousands of US dollars, except share and per share amounts
For the three months ended
February 28, 2022
Expenses
Amortization
2
6
Exploration expenses
1
29
Foreign exchange (gain) loss
(4)
General and administrative
408
397
Investor relations
30
99
Professional fees
570
245
Salaries
237
414
Salaries and directors expense – stock-based compensation
2,362
1,922
Total expenses
3,606
3,115
Other items
Interest and other income
(19)
(2)
Share of loss on equity investment (note 3(b))
1,485
1,910
Loss and comprehensive loss for the period
(5,072)
(5,023)
Basic loss per common share
(0.03)
Diluted loss per common share
Basic weighted average number of common shares outstanding
147,768,741
145,286,456
Diluted weighted average number of common shares outstanding
4
Interim Consolidated Statements of Changes in Shareholders’ Equity
in thousands of US dollars, except share amounts
Contributed
Total
surplus –
shareholders’
Number of shares
Share capital
surplus
options
units
equity
outstanding
Balance – November 30, 2021
145,009,811
180,820
25,990
1,712
(42,605)
166,039
Exercise of options
31,674
50
(32)
18
Restricted Share Units
391,332
650
(650)
Joint venture contribution
31,469
51
Stock-based compensation
864
1,001
1,865
Loss for the period
Balance – February 28, 2022
145,464,286
181,571
26,822
2,063
(47,628)
162,950
Balance – November 30, 2022
146,225,035
2,346,366
1,538
(1)
(1,537)
143,505
111
Services settled by common shares
7,793
520
1,700
2,220
Balance – February 28, 2023
148,722,699
5
Interim Consolidated Statements of Cash Flows
Cash flows used in operating activities
Adjustments to reconcile net loss to cash flows in operating activities
Professional fees settled by common shares
21
Office lease accounting
Loss on equity investment in Ambler Metals LLC (note 4(b))
Unrealized foreign exchange loss
Net change in non-cash working capital
Decrease (increase) in accounts receivable
(9)
Decrease in deposits and prepaid amounts
157
43
(Decrease) increase in accounts payable and accrued liabilities
167
(281)
Total cash flows used in operating activities
(885)
(1,480)
Cash flows from financing activities
Proceeds from exercise of options
Total cash flows from financing activities
Cash flows from investing activities
Total cash flows from investing activities
Decrease in cash
(1,462)
Effect of exchange rate on cash
(6)
Cash – beginning of the period
6,308
Cash – end of the period
4,847
Notes to the Interim Consolidated Financial Statements
1) Nature of operations and Going Concern
Trilogy Metals Inc. (“Trilogy” or the “Company”) was incorporated in British Columbia under the Business Corporations Act (BC) on April 27, 2011. The Company is engaged in the exploration and development of mineral properties, through our equity investee (see note 3), with a focus on the Upper Kobuk Mineral Projects (“UKMP”), including the Arctic and Bornite Projects located in Northwest Alaska in the United States of America (“US”). The Company also conducts early-stage exploration through a wholly owned subsidiary, 995 Exploration Inc.
These interim consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. At February 28, 2023, we had a working capital surplus of $1.0 million (2022 - $2.4 million) and an accumulated deficit of $71.9 million (2022 - $66.9 million). The Company has no recurring source of cash inflows at its current stage. The Company’s cash outflow from operations was $0.9 million for the first quarter ended February 28, 2023. The Company intends to finance its future requirements through a combination of debt and/or equity issuance. There is no assurance that the Company will be able to obtain such financings or obtain them on favourable terms. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. These interim consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.
2) Summary of significant accounting policies
Basis of presentation
These interim consolidated financial statements have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Trilogy and its wholly owned subsidiaries, NovaCopper US Inc. (dba “Trilogy Metals US”) and 995 Exploration Inc. All intercompany transactions are eliminated on consolidation. For variable interest entities (“VIEs”) where Trilogy is not the primary beneficiary, we use the equity method of accounting.
All figures are in United States dollars unless otherwise noted. References to CDN$ refer to amounts in Canadian dollars.
These interim consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s financial position as of February 28, 2023 and our results of operations and cash flows for the three-month period ended February 28, 2023 and February 28, 2022. The results of operations for the three-month period ended February 28, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2023.
As these interim consolidated financial statements do not contain all of the disclosures required by U.S. GAAP for annual financial statements, these interim consolidated financial statements should be read in conjunction with the annual financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2022, filed with the U.S. Securities and Exchange Commission (“SEC”) and Canadian securities regulatory authorities on February 14, 2023.
These interim consolidated financial statements were approved by the Company’s Audit Committee on behalf of the Board of Directors for issue on April 4, 2023.
Use of estimates and measurement uncertainties
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions of future events that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenditures during the period. Significant
7
judgments include the assessment of potential indicators of equity method investments where key judgement is the delay on the Ambler Access Project is temporary and the delay was considered when assessing indicators of impairment. Significant estimates include the measurement of income taxes, and the valuation of stock-based compensation. Actual results could differ materially from those reported.
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 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.
3) Investment in Ambler Metals LLC
(a)
Formation of Ambler Metals LLC
On February 11, 2020, the Company completed the formation of a 50/50 joint venture named Ambler Metals LLC (“Ambler Metals”) with South32 Limited (“South32”). As part of the formation of the joint venture, Trilogy contributed all its assets associated with the UKMP, including the Arctic and Bornite Projects, while South32 contributed cash of $145 million, resulting in each party’s subsidiaries directly owning a 50% interest in Ambler Metals.
Ambler Metals is an independently operated company jointly controlled by Trilogy and South32 through a four-member board, of which two members are 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 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 Ambler Metals LLC 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 at February 28, 2023, totaled $141.4 million.
(b)
Carrying value of equity method investment
8
Trilogy recognized, based on its 50% ownership interest in Ambler Metals, an equity loss equivalent to its pro rata share of Ambler Metals’ comprehensive loss of $3.0 million for the three-month period ending February 28, 2023 (2022 - $3.8 million). During the three-month period ending February 28, 2023, Trilogy made a $111,000 equity contribution to Ambler Metals through the issuance of 143,505 common shares of the Company as part of the long-term incentive compensation for Ambler Metals executives. Likewise, South32 made an equivalent equity contribution to Ambler Metals for $111,000 in cash for their 50% share. The carrying value of Trilogy’s 50% investment in Ambler Metals as at February 28, 2023 is summarized on the following table.
in thousands of dollars
November 30, 2022, Investment in Ambler Metals
Joint venture equity contribution
Share of loss on equity investment for the three month period ending February 28, 2023
(1,485)
February 28, 2023, Investment in Ambler Metals
(c)
The following table summarizes Ambler Metals’ Balance Sheet as at February 28, 2023.
109,541
114,049
76,476
80,755
Mineral properties
30,899
(2,574)
(4,335)
Accounts payable and accrued liabilities
(1,962)
(3,664)
Members' equity (total assets less total liabilities)
106,967
109,714
Members’ cash is held at one bank, the majority of cash is uninsured as at February 28, 2023.
(d) The following table summarizes Ambler Metals' loss for the three-month period ending February 28, 2023.
Depreciation
37
Corporate salaries and wages
444
474
133
232
Mineral property expense
2,285
3,040
159
297
Foreign exchange (gain)/loss
Interest income
(89)
(248)
Comprehensive loss
2,969
3,820
9
4) Accounts payable and accrued liabilities
Trade accounts payable
251
188
Accrued liabilities
146
36
Accrued salaries and vacation
273
Included in accrued salaries and vacation approximately $155,000 was settled, subsequent to the end of the first quarter, on March 1, 2023 through the issuance of common shares of the Company.
5) Leases
Balance as at November 30, 2022
Net amortization
(43)
Balance as at February 28, 2023
The Company’s lease arrangements primarily consist of an operating lease for our office space ending in June 2024. There are no extension options.
Total lease expense recorded within general and administrative expenses was comprised of the following components:
Three months ended
Operating lease costs
47
Variable lease costs
35
Total lease expense
83
82
Variable lease costs consist primarily of the Company’s portion of operating costs associated with the office space lease as the Company elected to apply the practical expedient not to separate lease and non-lease components.
As of February 28, 2023, the weighted-average remaining lease term is 1.2 years and the weighted-average discount rate is 8%. Significant judgment was used in the determination of the incremental borrowing rate which included estimating the Company’s credit rating.
Supplemental cash and non-cash information relating to our leases during the three-month period ending February 28, 2023 are as follows:
Future minimum payments relating to the lease recognized in our balance sheet as of February 28, 2023 are as follows:
Fiscal year
2023
149
2024
2025
Total undiscounted lease payments
182
Effect of discounting
Present value of lease payments recognized as lease liability
6) Share capital
Authorized:
unlimited common shares, no par value
in thousands of dollars, except share amounts
Ascribed value
Joint venture equity contribution (note 4(b))
February 28, 2023, issued and outstanding
On April 30, 2012, under the NovaGold Arrangement, Trilogy committed to issue common shares to satisfy holders of NovaGold deferred share units (“NovaGold DSUs”), once vested, on record as of the close of business April 27, 2012. When vested, Trilogy committed to deliver one common share to the holder for every six shares of NovaGold the holder is entitled to receive, rounded down to the nearest whole number. As of February 28, 2023, a total of 9,293 NovaGold DSUs remain outstanding representing a right to receive 1,549 Common Shares in Trilogy, which will settle upon certain directors retiring from NovaGold’s board.
Stock options
During the three-month period ended February 28, 2023, the Company granted 3,230,000 stock options (2022 - 1,734,500 stock options) at an exercise price of CDN$0.78 (2022 - CDN$2.21) to employees, consultants and directors exercisable for a period of five years with various vesting terms from immediate vesting to vesting over a two-year period. The fair value attributable to options granted in the period was CDN$0.37 (2022 - CDN$0.90).
For the three-month period ended February 28, 2023, Trilogy recognized a stock-based compensation charge of $0.5 million (2022 - $0.86 million) for options granted to directors, employees and service providers, net of estimated forfeitures.
11
The fair value of the stock options recognized in the period has been estimated using the Black-Scholes option pricing model.
Assumptions used in the pricing model for the three-month period ended February 28, 2023 are as provided below.
Risk-free interest rates
3.49%
Exercise price
CDN$0.78
Expected life
3 years
Expected volatility
67.7%
Expected dividends
Nil
As of February 28, 2023, there were 2,148,424 non-vested options outstanding with a weighted average exercise price of CDN$1.03; the non-vested stock option expense not yet recognized was $0.47 million. This expense is expected to be recognized over the 22 months.
A summary of the Company’s stock option plan and changes during the three-month period ended February 28, 2023 is as follows:
Weighted average
exercise price
Number of options
CDN$
Balance – beginning of the period
11,225,400
2.49
Granted
3,230,000
0.78
Expired
(870,000)
1.05
Balance – end of the period
13,585,400
2.18
There were no stock options exercised during the first quarter 2023.
The following table summarizes information about the stock options outstanding at February 28, 2023.
Outstanding
Exercisable
Unvested
Weighted
Number of
average
average years
exercisable
unvested
Range of exercise price - CDN
to expiry
$0.75 to $1.00
4.77
1,463,328
1,766,672
$2.00 to $2.50
2,396,250
2.96
2.27
2,014,498
2.28
381,752
$2.51 to $3.00
6,411,650
2.14
2.64
$3.01 to $3.41
1,547,500
1.81
3.03
2.87
11,436,976
2.39
2,148,424
The aggregate intrinsic value of vested stock options (the market value less the exercise price) at February 28, 2023 was $0.02 million (2022 - $0.15 million) and the aggregate intrinsic value of exercised options for the three-month period ending February 28, 2023 was $Nil million (2022 - $0.03 million).
Restricted Share Units and Deferred Share Units
The Company has a Restricted Share Unit Plan (“RSU Plan”) to provide long-term incentives to employees and consultants and a Non-Executive Director Deferred Share Unit Plan (“DSU Plan”) to offset cash payments for fees to directors. Awards under the RSU Plan and DSU Plan have been settled in common shares of the Company with each restricted share unit
(“RSU”) and deferred share unit (“DSU”) entitling the holder to receive one common share of the Company. All units are accounted for as equity-settled awards.
A summary of the Company’s unit plans and changes during the three-month period ending February 28, 2023 is as follows:
Number of RSUs
Number of DSUs
257,268
1,560,734
3,699,297
760,519
Vested
(2,345,927)
1,610,638
2,321,253
For the three-month period ending February 28, 2023, Trilogy recognized a combined RSU and DSU stock-based compensation charge of $1.1 million (2022 - $1.0 million), net of estimated forfeitures.
7) Financial instruments
The Company is exposed to a variety of risks arising from financial instruments. These risks and management’s objectives, policies and procedures for managing these risks are disclosed as follows.
The Company’s financial instruments consist of cash, accounts receivable, deposits, and accounts payable and accrued liabilities. The fair value of the Company’s financial instruments approximates their carrying value due to the short-term nature of their maturity. The Company’s financial instruments initially measured at fair value and then held at amortized cost include cash, accounts receivable, deposits, and accounts payable and accrued liabilities.
Financial risk management
The Company’s activities expose it to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk.
Currency risk
Currency risk is the risk of a fluctuation in financial asset and liability settlement amounts due to a change in foreign exchange rates. The Company operates in the United States and Canada. The Company’s exposure to currency risk at February 28, 2023 is limited to the Canadian dollar balances consisting of cash of approximately CDN$71,000, accounts receivable of approximately CDN$35,000 and accounts payable of approximately CDN$320,000. Based on a 10% change in the US-Canadian exchange rate, assuming all other variables remain constant, the Company’s net loss would change by approximately $35,000.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company holds cash with a Canadian chartered financial institution of which the majority is uninsured as at February 28, 2023. The Company’s only significant exposure to credit risk is equal to the balance of cash as recorded in the financial statements.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties raising funds to meet its financial obligations as they fall due. The Company is in the exploration stage and does not have cash inflows from operations; therefore, the Company manages liquidity risk through the management of its capital structure and financial leverage.
13
Contractually obligated undiscounted cash flow requirements as at February 28, 2023 are as follows:
< 1 Year
1–2 Years
2–5 Years
Thereafter
Office lease
852
Included in accounts payable and accrued liabilities approximately $155,000 is for accrued salaries that were settled, subsequent to the end of the first quarter, on March 1, 2023 through the issuance of common shares of the Company (note 9).
(d)
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk with respect to interest earned on cash. Based on balances as at February 28, 2023, a 1% change in interest rates would result in a negligible change in net loss, assuming all other variables remain constant.
As we are currently in the exploration phase none of our financial instruments are exposed to commodity price risk; however, our ability to obtain long-term financing and its economic viability could be affected by commodity price volatility.
8) Commitment
The Company has commitments with respect to an office lease requiring future minimum lease payments as summarized in note 5(b) above.
9) Subsequent event
On March 1, 2023 the Board of Directors and senior management were granted 213,463 RSUs and 162,469 DSUs in settlement of approximately $247,000 of director fees and accrued salaries, all vesting immediately. The grants were in support of an effort to preserve cash and increase share ownership by settling director fees and a portion of senior management salaries in shares of the Company.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion & Analysis
For the Quarter Ended February 28, 2023
(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 2023 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:
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:
16
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 14, 2023, 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 April 4, 2023 and provides an analysis of our unaudited interim financial results for the quarter ended February 28, 2023 compared to the quarter ended February 28, 2022.
The following information should be read in conjunction with our February 28, 2023 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, 2022. 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.
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.
Project activities
The Company announced the second and third set of drilling results from the 2022 field season at the Upper Kobuk Mineral Projects (“UKMP”) on January 25, 2023 and February 27, 2023, respectively. On April 4, 2023, the Company announced the final set of drilling results from the 2022 field season at the UKMP.
On February 14, 2023, the Company announced an updated feasibility study technical report for the Arctic Project and an updated resource for the Bornite Project, and filed NI 43-101 technical reports for both projects with the Canadian securities regulators. In addition, the Company announced technical report summaries for both projects prepared in accordance with S-K 1300, which were filed as exhibits with the annual report on Form 10-K.
Ambler Mining District Industrial Access Project (“AMDIAP” or “Ambler Access Project”)
On November 15, 2022, the United States Bureau of Land Management ("USBLM") submitted a status report announcing the anticipation of publishing a draft Supplemental Environmental Impact Statement (“SEIS”) in the second quarter of calendar 2023 and a final SEIS in the fourth quarter of calendar 2023. On January 17, 2023, the USBLM submitted a status report reaffirming the timing of the draft and final SEIS.
In March 2023, the Board of Ambler Metals approved a budget totaling $12.3 million for the Ambler Access Project, to include funding for 2023 field season work consisting of field studies, permitting and data collection to assist the USBLM in completing the additional work to support the SEIS.
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Summary of results
in thousands of US dollars, except per share amounts
Selected expenses
Share of loss on equity investment
Comprehensive loss for the period
Basic and diluted loss per common share
For the three-month period ended February 28, 2023, we reported a net loss of $5.1 million compared to a net loss of $5.0 million for the three-month period ended February 28, 2022. The increase in comprehensive loss in the first quarter of 2023 compared to first quarter of 2022 is due to increase in stock based compensation and professional fees and partially offset from the decrease in our share of losses of Ambler Metals, investor relations and salaries. The decrease in our share of losses of Ambler Metals is mainly due to decrease in mineral property expenses.
Liquidity and capital resources
We expended $0.9 million on operating activities during the three-month period ending February 28, 2023 with the majority of cash spent on corporate salaries, professional fees related to our annual regulatory filings, and annual fees paid to the Toronto Stock Exchange and the NYSE American Exchange with the American and Canadian securities commissions.
As at February 28, 2023, we had $1.7 million in cash and working capital of $1.0 million. 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 have agreed to take all of their fees in DSUs in an effort to preserve cash. The Company’s senior management team is also taking a portion of their base salaries in shares of the Company to preserve cash.
All project related costs are funded by the Joint Venture. Amber Metals is well funded to advance the UKMP with $76.5 million in cash and $74.9 million in working capital as at February 28, 2023. 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 $76.5 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 expected to be 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.
There is no assurance that the Company will be able to obtain such financings or obtain them on favourable terms. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.
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Off-balance sheet arrangements
We have no material off-balance sheet arrangements.
Outstanding share data
As at April 5, 2023, we had 148,956,662 common shares issued and outstanding. As at April 5, 2023, we had 13,281,400 stock options outstanding with a weighted-average exercise price of CDN$2.17, 2,483,722 Deferred Share Units (“DSUs”), and 1,610,638 Restricted Share Units (“RSUs”) outstanding. As at April 5, 2023 we hold 9,293 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 1,549 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 17,377,309 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.
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.
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.
Item 4. Controls and Procedures
Disclosure controls and procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted by the Company under U.S. and Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in those rules, including providing reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to permit timely decisions regarding public disclosure. Management, including the CEO and CFO, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules of Canadian Securities Administration, as of February 28, 2023. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act and National Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim filings. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in internal control over financial reporting
There have been no changes in our internal controls over financial reporting during the fiscal quarter ended February 28, 2023 which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We continue to evaluate our internal control over financial reporting on an ongoing basis to identify improvements.
Item 1. Legal Proceedings
From time to time, we are a party to routine litigation and proceedings that are considered part of the ordinary course of its business. We are not aware of any material current, pending, or threatened litigation.
Item 1A. Risk Factors
Trilogy and its future business, operations and financial condition are subject to various risks and uncertainties due to the nature of its business and the present stage of exploration of its mineral properties. Certain of these risks and uncertainties are under the heading “Risk Factors” under Trilogy’s Form 10-K dated February 14, 2023 (“Form 10-K”) which is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov and on our website at www.trilogymetals.com. There have been no material changes to the risk factors set forth in Trilogy’s Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
These disclosures are not applicable to us.
Item 5. Other Information
Item 6. Exhibits
Exhibit No.
Description
3.1
Certificate of Incorporation, dated April 27, 2011 (incorporated by reference Exhibit 99.2 to the Registration Statement on Form 40-F as filed on March 1, 2012, File No. 001-35447)
3.2
Articles of Trilogy Metals Inc., effective April 27, 2011, as altered March 20, 2011 (incorporated by reference to Exhibit 99.3 to Amendment No. 1 to the Registration Statement on Form 40-F as filed on April 19, 2012, File No. 001-35447)
3.3
Notice of Articles and Certificate of Change of Name, dated September 1, 2016 (incorporated by reference to Exhibit 3.1 to the Form 8-K dated September 8, 2016)
31.1
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350
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Interactive Data Files
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 5, 2023
By:
/s/ Tony Giardini
Tony Giardini
President and Chief Executive Officer
/s/ Elaine M. Sanders
Elaine M. Sanders
Vice President and Chief Financial Officer
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