Item
2. Management’s discussion and analysis of financial condition and results of
operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain statements contained in this Quarterly
Report constitute "forward-looking statements.” These statements,
identified by words such as “plan,” "anticipate,” "believe,”
"estimate,” "should,” "expect" and similar expressions
include our expectations and objectives regarding our future financial
position, operating results and business strategy. Forward-looking statements
involve known and unknown risks, uncertainties, assumptions and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors include, among others,
general business, economic, competitive, political and social uncertainties;
the actual results of current exploration activities; changes in project
parameters as plans continue to be refined; changes in labour costs or other
costs of production; future mineral prices; equipment or processes to operate as
anticipated; accidents, labour disputes and other risks of the mining industry,
including but not limited to environmental hazards, cave-ins, pit-wall
failures, flooding, rock bursts and other acts of God or unfavourable operating
conditions and losses; delays in obtaining governmental approvals or financing
or in the completion of development or construction activities, as well as
those factors discussed in the section titled "Risk Factors" in our Annual
Report on Form 10-K which was filed with the SEC on July 27, 2016.
Forward looking statements are based on a
number of material factors and assumptions, including the results of
exploration and drilling activities, the availability and final receipt of
required approvals, licenses and permits, that sufficient working capital is
available to complete proposed exploration and drilling activities, that
contracted parties provide goods and/or services on the agreed time frames, the
equipment necessary for exploration is available as scheduled and does not
incur unforeseen break downs, that no labour shortages or delays are incurred
and that no unusual geological or technical problems occur. While we consider
these assumptions may be reasonable based on information currently available to
it, they may prove to be incorrect. Actual results may vary from such
forward-looking information for a variety of reasons, including but not limited
to risks and uncertainties disclosed in the section titled “Risk Factors” in our
Annual Report on
Form 10-K which was filed with the SEC on July 27, 2016.
We intend to discuss in our Quarterly Reports
and Annual Reports any events or circumstances that occurred during the period
to which such documents relate that are reasonably likely to cause actual
events or circumstances to differ materially from those disclosed in this Quarterly
Report. New factors emerge from time to time, and it is not possible for
management to predict all of such factors and to assess in advance the impact
of each such factor on our business or the extent to which any factor, or
combination of such factors, may cause actual results to differ materially from
those contained in any forwarding looking statement.
CAUTIONARY
NOTE TO U.S. INVESTORS REGARDING ESTIMATES OF MEASURED, INDICATED AND INFERRED
RESOURCES AND PROVEN AND PROBABLE RESERVES
The terms “mineral reserve”, “proven mineral
reserve” and “probable mineral reserve” as used in this Quarterly Report are
Canadian mining terms as defined in accordance with Canadian National
Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”)
and the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) –
CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by
the CIM Council, as amended (the “CIM Definition Standards”). These definitions
differ from the definitions in the United States Securities and Exchange
Commission (“SEC”) Industry Guide 7 (“SEC Industry Guide 7”) under the United
States Securities Act of 1933, as amended (the “Securities Act”). Under SEC
Industry Guide 7 standards, a “final” or “bankable” feasibility study is
required to report reserves, the three-year historical average price is used in
any reserve or cash flow analysis to designate reserves, and the primary
environmental analysis or report must be filed with the appropriate
governmental authority.
In addition, the terms “mineral resource”,
“measured mineral resource”, “indicated mineral resource” and “inferred mineral
resource” are defined in and required to be disclosed by NI 43-101; however,
these terms are not defined terms under SEC Industry Guide 7 and are normally
not permitted to be used in reports and registration statements filed with the
SEC. Investors are cautioned not to assume that all or any part of a
mineral deposit in these categories will ever be converted into reserves.
“Inferred mineral resources” have a great amount of uncertainty as to their
existence, and great uncertainty as to their economic and legal feasibility. It
cannot be assumed that all, or any part, of an inferred mineral resource will
ever be upgraded to a higher category. Under Canadian rules, estimates of
inferred mineral resources may not form the basis of feasibility or
pre-feasibility studies, except in rare cases. Investors are cautioned not to
assume that all or any part of an inferred mineral resource exists or is
economically or legally mineable. Disclosure of unit measures in a resource is
permitted disclosure under Canadian regulations; however, the SEC only permits
issuers to report mineralization that does not constitute “reserves” by SEC
standards as in place tonnage and grade without reference to
unit measures.
17
Accordingly, information contained in this Quarterly
Report and any documents incorporated by reference herein contain descriptions
of our mineral deposits that may not be comparable to similar information made
public by U.S. companies subject to the reporting and disclosure requirements
under the United States federal securities laws and the rules and
regulations thereunder.
As
used in this Quarterly Report, unless the context otherwise requires, “we,”
“us,” “our,” the “Company” and “I-Minerals” refers to I-Minerals Inc. All
dollar amounts in this registration statement are in U.S. dollars unless
otherwise stated.
General
We
were incorporated under the laws of British Columbia, Canada in 1984. In 2004,
we changed our corporate jurisdiction from a British Columbia company to a
Canadian corporation. At the Annual General and Special Meeting of the
Shareholders held on December 7, 2016, the shareholders approved the change of
jurisdiction of I-Minerals from the Federal Jurisdiction of Canada to the
Province of British Columbia. In December 2011, we amended our articles to
change our name from “i-minerals inc.” to “I-Minerals Inc.”
The
Company engaged in the development of our Helmer-Bovill industrial minerals
property (the “Helmer-Bovill Property”). The Helmer-Bovill Property, in which
we hold a 100% interest, is comprised of 11 mineral leases totaling 5,140.64
acres located approximately 6 miles southwest of Bovill, Latah County, Idaho.
We
acquired the Helmer-Bovill Property from Idaho Industrial Minerals (“IIM”)
pursuant to an Assignment Agreement with Contingent Right of Reverter (the “IIM
Agreement”) dated August 12, 2002, as amended August 10, 2005, August 10, 2008
and January 21, 2010, between I-Minerals USA (formerly Alchemy Kaolin
Corporation), our wholly owned subsidiary, and IIM. Under the terms of the IIM
Agreement, we issued a total of 1,800,000 common shares to IIM.
Our
principal executive office is located at Suite 880, 580 Hornby Street,
Vancouver, British Columbia, Canada and our telephone number is (877) 303-6573.
To
date, we
have
not
earned significant revenues from the operation of our mineral properties. Accordingly, we are dependent on debt
and equity financing as our primary source of operating working capital. Our capital resources
are largely determined by the strength of the junior resource markets and by
the status of our projects in relation
to these markets, and its ability to compete for investor support of its
projects.
Our
Principal Projects
Our
activities at the Helmer-Bovill Property are focused on developing the Bovill Kaolin
Project and the WBL Tailings Project.
The
Bovill Kaolin Project
Our
lead project, the Bovill Kaolin Project, is a strategically located long term
resource of high purity quartz, potassium feldspar (“K-spar”), halloysite and
kaolinite formed through weathering of a border phase of the Idaho Batholith
causing all minerals to be contained within a fine white clay-sand mixture
referred to as “primary clay.” The Bovill Kaolin Project
is located within 5 miles of state highways with electricity and natural gas
already at the property boundary.
Since
2010, our exploration work has focused diamond drilling on the Bovill Kaolin
Project. To date, a total of 258 diamond drill holes have been drilled
totaling 28,251 feet. As a result of these drill campaigns, four deposits have
been identified: Kelly’s Hump, Kelly’s Hump South, Middle Ridge and WBL.
In
June 2014, we completed an updated pre-feasibility study on the Bovill Kaolin
Project (the “2014 PFS”) and on March 8, 2016, we announced the economic
results of our full feasibility study (the “2016 FS”), which included the
following highlights:
●
Updated
Measured and Indicated Resource Estimate
|
● Measured Resources of 5.7 million tons containing 76.5% quartz/K-spar sand, 12.3% Kaolinite and 4.0% Halloysite.
|
|
● Indicated Resources of 15.5 million tons containing 57.0% quartz/K-spar sand, 15.5% Kaolinite and 2.8% Halloysite.
|
|
● 667,000 tons of contained halloysite, 3,119,000 tons of contained kaolinite and 13,235,000 tons of contained quartz/K-spar.
|
18
●
Updated Mineral Reserves. All figures are in
thousands of tons.
Reserve
|
Proven
|
Probable
|
Total
P&P
|
Tons
(1000s)
|
4,155
|
4,548
|
8,702
|
Halloysite
%
|
4.8
|
4.0
|
4.4
|
Halloysite
Tons (1000s)
|
200
|
182
|
382
|
Kaolinite
%
|
11.1
|
12.5
|
11.8
|
Kaolinite
Tons (1000s)
|
460
|
568
|
1,028
|
Sand %
|
77.8
|
76.8
|
77.3
|
Sand
Tons (1000s)
|
3,234
|
3,491
|
6,725
|
Note that values
presented here have been rounded to reflect the level of accuracy.
Proven and Probable
Mineral Reserves are presented using a $57.00 NSR cutoff grade.
●
Economic
Analysis
|
●
|
US$386 million Pre-Tax NPV; US$250 million After Tax NPV using a 6% discount rate.
|
|
●
|
31.6% Pre-Tax IRR; 25.8% After Tax IRR.
|
|
●
|
Initial Capital Cost of $108.3 million and Total Life of Mine capital costs $120.0 million.
|
|
●
|
Life of Mine in excess of 25 years with a stripping ratio of 0.54:1 (waste:ore).
|
|
●
|
3.7 year estimated after tax payback.
|
The
full Feasibility Study was filed on www.sedar.com on April 20, 2016
and is available on the Company’s website. Going forward our focus is to
complete the longer lead time components of the detailed engineering, complete
the permitting process with the Idaho Department of Lands (the “IDL”) and
commence efforts to raise the capital necessary to build the mine.
The
WBL Tailings Project
We
also plan to continue limited seasonal mining operations at the WBL Tailings
Project. The WBL Tailings Project is feldspathic sands deposited as tailings
from clay mining operations during the period from 1961 to 1974. In September
2012, we received approval of our Mine Plan of Operations (“MPO”) from the
Idaho Department of Lands. The MPO allows us to mine up to 50,000 tons per
annum of feldspathic sands from June to October for a period of 10 years. Since
2013, approximately 5,000 tons of tailings was extracted and sold to a local
cement company and a local contractor.
Plan
of Operation
During the next twelve months, our plan of operation is to
complete the mine permitting and get all of the longer lead time engineering
tasks such as the electricity and gas planning underway. The Company is on its
fourth iteration of the Operation and Reclamation Plan with the IDL and the
list of outstanding items is relatively short. Avista, the local utility, has
started the initial scoping studies to bring electricity and gas the last five
miles from its current terminus to the proposed mill site. In the interim we
will continue to strengthen our customer list and continue discussions to raise
the capital to fund the mine construction
Engineering work on the Bovill Kaolin Project
As recommended in the 2016 FS, we are about to begin the contemplated utility surveys and are undertaking additional pilot plant work to produce customer samples for marketing purposes and the related testwork for final equipment selection,. Two pilot plants are currently ongoing with the first producing metakaolin and halloysite and the second producing quartz and K-spar. Additional work is also ongoing to finalize the process plant water balance and utilities consumptions. This work together with the General and Administrative expenses related in part to our continuing financing efforts are estimated to cost about US$2,000,000 before taking into consideration any possible land swap with the IDL.
Outlook
Our focus continues to be the detailed assessment of all of our mineral assets and advancing the Bovill Kaolin Project towards production. With the FS now completed, the next steps are the final permitting activities. Strong progress has been made with the Idaho Department of Lands, the lead permitting agency, but there remain a few minor unforeseen information requests to complete. At this point the expectation is that final plan approval should be received in Q2 calendar 2017.
19
A second bulk sample has been sent to Ginn Mineral Technologies (“GMT”) with separation of the clay minerals (kaolin and halloysite) nearing completion. The sand fraction from the second bulk sample will be sent to Minerals Research Laboratory at North Carolina State University (“MRL”). Processing of the sand fraction (quartz and K-spar) from the initial bulk sample is now completed at MRL. Samples of all quartz and K-spar products, including fine grind products, have been delivered to the Company for distribution to prospective customers for testing purposes. The earlier processing of the bulk samples at GMT created halloysite and metakaolin product samples for marketing purposes that are also being distributed for testing purposes. The first phase of our third pilot plant is nearing completion of the K-spar segment which has generated the highest K2O grades to date with results consistently in excess of 14% K2O. Additional material for the third pilot plant is being processed at GMT to make additional volumes of metakaolin for larger scale testing and additional halloysite for an increasing number of customers requesting halloysite for testing. Sample requests for halloysite have come from North America, Europe, the Middle East, South America and Asia showing both the scarcity of halloysite in general and the quality of I-Minerals halloysite in particular. Interest from companies pursuing research and development of life science and polymer applications with our halloysite is particularly encouraging. Once the clay portion of the pilot plant has been completed at GMT, the sand fraction will be sent to MRL for K-spar and quartz separation.
Based
upon opportunities identified in the Charles Rivers report, internal marketing
efforts and customer leads generated through the website, strong interest has
been generated in all of the Company’s mineral products with ever increasing
interest in the K-spar. Samples continue to be sent to customers for testing
and the response has generally been very favorable.
Results
of Operation
Nine months ended January
31, 2017
We recorded a loss of $3,724,839
for the nine months ended January 31, 2017 as compared to a loss of $3,734,529
for the nine months ended January 31, 2016.
The decrease in the loss recorded for the nine months
ended January 31, 2017 as compared to the nine
months ended January 31, 2016 is the net result of
changes to a number of expenses. Of note are the following items:
-
Management and consulting fees of $247,047 (2015 - $150,346) are
comprised of fees to manage our Company and stock-based compensation. The
stock-based compensation recognized in the current period was $155,223 (2016 -
$34,900). Approximately half of the fees to manage our Company are charged to
management and consulting fees and the other half is charged to mineral
property expenditures.
-
Mineral property expenditures of $1,055,024 (2016 - $2,386,611)
are costs incurred on our Helmer-Bovill Property. The main expenses incurred
during the current period included engineering and consulting ($204,122),
mineral analysis and processing ($240,222) and environmental ($141,600). We
were working on completing permitting work and final pilot plant processing
during the current period. In the prior period, the Company incurred $1,493,890
of engineering and consulting expenditures and mineral analysis and processing
of $391,395 as part of updating the feasibility study.
-
General and miscellaneous expenses of $523,486 (2016 - $412,267)
are comprised of office and telephone expenses, payroll taxes, medical
benefits, insurance premiums, travel expenses, promotional expenses,
shareholder communication fees, transfer agent fees and filing fees. The
increase during the current period was due primarily to an increase in mineral marketing
activities as well as investor relations activities.
-
Professional fees recovery of $133,157 (2016 – expense of $309,150)
include legal fees, audit fees and financial consulting fees. The fees in the
current period are negative as the Company recovered legal fees after
settlement of a legal action.
-
Accretion expense of $363,386 (2016 - $261,743) is the
amortization of the fair value of bonus shares and bonus warrants issued to the
lender of the promissory notes. The bonus shares and bonus warrants are
amortized over the life of the promissory notes.
-
Interest expense of $1,159,725 (2016 - $843,229) is from
promissory notes that bear interest at a rate of 12% per year. Interest increased
as additional funds were advanced.
-
We recorded a loss on change in fair value of derivative
liabilities of $504,426 (2016 – gain of $659,687). The change in fair value of
derivative liabilities is based on the change in remaining term of derivative
instruments and our stock price. The derivatives include warrants as well as
stock options granted to non-employees. The derivative liabilities do not
represent cash liabilities.
20
Three months ended January
31, 2017
We recorded a loss of $1,155,246
for the three months ended January 31, 2017 as compared to a loss of $962,265
for the three months ended January 31, 2016.
The increase in the loss recorded for the three
months ended January 31, 2017 as compared to the three months ended January 31,
2016 is the net result of changes to a number of expenses as noted above under
the nine months ended January 31, 2017 and 2016.
In particular, professional fees recovery of $377,824 was a result of
recovering legal fees from settling an ongoing legal action.
Liquidity and Capital
Resources
Our aggregate operating, investing and financing
activities during the nine months ended January 31, 2017 resulted in a net cash
inflow of $280,122 (2016 – outflow of $65,103). As at January 31, 2017, we had
a working capital deficiency of $14,841,210, including cash of $408,475.
During the nine months ended January 31, 2017, $2,700,138
was used in operations before changes in non-cash operating working capital
items (2016 - $4,063,064). The decrease in these cash flows was due primarily
to a decrease in mineral property expenditures. During the nine months ended January
31, 2017, we spent $nil on investing activities (2016 - $nil) and we received $1,920,574
from financing activities (2016 - $3,044,449).
Currently, we are being financed by advances pursuant to promissory
notes advanced by BV Lending LLC, an entity controlled by Allen L. Ball, a
member of our Board of Directors and our largest shareholder (the “Lender”). During
the year ended April 30, 2016, the Company was receiving advances pursuant to
the First Promissory Notes and the Second Promissory Notes. As at April 30,
2016, the balance of the promissory notes was $11,044,280. The final tranche
pursuant to the Second Promissory Notes was received in May 2016. Effective
August 31, 2016, the Company entered into an agreement with the Lender pursuant
to which up to an additional $2,965,000 will be advanced to the Company in
tranches (the “Third Promissory Notes”), of which we have received $1,545,000
as at March 15, 2017. The August 31, 2016 agreement also amended the maturity
date of the First Promissory Notes and the Second Promissory Notes. The
promissory notes have a modified maturity date of December 2, 2017. Certain
conditions may result in early repayment.
We have not as yet put into commercial production
any mineral properties and as such have no operating revenues. Accordingly, we are dependent on debt
and equity financing as its primary source of operating working capital. Our capital resources
are largely determined by the strength of the junior resource markets and by
the status of our projects in relation
to these markets, and our ability to compete for investor support of our
projects.
We
remain dependent on additional financing to fund development requirements on
the Helmer-Bovill property and for general corporate costs. With respect to
funds required for capital cost items, State-sponsored debt financing
instruments may be available on attractive terms, and we intend to pursue such
financial instruments to cover portions of the capital costs associated with
placing the Bovill Kaolin deposits into production. We have commenced efforts
to raise the capital necessary to build the mine.
We
do not have the ability to internally generate sufficient cash flows to support
our operations for the next twelve months. We are currently receiving funds
from a company controlled by a director of the Company through promissory
notes. We have no formal plan in place to address this going concern issue but
consider that we will be able to obtain additional funds by equity financing
and/or debt financing; however, there is no assurance of additional funding
being available. As a result, our auditors included an emphasis of matter note
in their report on the financial statements for the year ended April 30, 2016
about our ability to continue as a going concern.
Off-Balance Sheet
Arrangements
We have no significant off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to shareholders.
Critical Accounting Policies
Measurement Uncertainty
The
preparation of these consolidated financial statements in conformity with US
GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. We
regularly evaluate estimates and assumptions related to the useful life and
recoverability of long lived assets, stock-based compensation, valuation of
convertible debentures and derivative liabilities, and deferred income tax
asset valuation allowances.
21
We base our estimates and assumptions on current
facts, historical experience and various other factors that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities and the
accrual of costs and expenses that are not readily apparent from other
sources. The actual results experienced by us may differ materially and adversely
from our estimates. To the extent there are material differences between the
estimates and the actual results, future results of operations will be
affected. The most significant estimates with regard to our condensed
consolidated financial statements relate to the determination of fair values of
derivative liabilities and stock-based transactions.
Stock-based
Compensation
We
account for all stock-based payments and awards under the fair value based
method. Stock-based payments to non-employees are measured at the fair value
of the consideration received, or the fair value of the equity instruments
issued, or liabilities incurred, whichever is more reliably measurable.
The
fair value of stock-based payments to non-employees is periodically re-measured
until the counterparty performance is complete, and any change therein is
recognized over the vesting period of the award and in the same manner as if we
had paid cash instead of paying with or using equity based instruments. The
cost of the stock-based payments to non-employees that are fully vested and
non-forfeitable as at the grant date is measured and recognized at that date,
unless there is a contractual term for services in which case such compensation
would be amortized over the contractual term.
We
account for the granting of stock options to employees using the fair value
method whereby all awards to employees will be recorded at fair value on the
date of the grant. The fair value of all stock options is expensed over their
vesting period with a corresponding increase to additional paid-in capital.
Compensation
costs for stock-based payments that do not include performance conditions are
recognized on a straight-line basis. Compensation cost associated with a share
based award having a performance condition is recognized on the probable
outcome of that performance condition during the requisite service period.
Share based awards with a performance condition are accrued on an award by
award basis.
We
use the Black-Scholes option valuation model to calculate the fair value of
stock options at the date of the grant. Option pricing models require the input
of highly subjective assumptions, including the expected price volatility.
Changes in these assumptions can materially affect the fair value estimates.
Derivative Liabilities
We
evaluate our financial instruments and other contracts to determine if those
contracts or embedded components of those contracts qualify as derivatives to
be separately accounted for in accordance with ASC 815. The result of this
accounting treatment is that the fair value of the embedded derivative is
marked-to-market at each balance sheet date and recorded as a liability and the
change in fair value is recorded in the consolidated statement of loss. Upon
conversion or exercise of a derivative instrument, the instrument is marked to
fair value at the conversion date and then that fair value is reclassified to
equity.
The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Derivative instruments that become subject to
reclassification are reclassified at the fair value of the instrument on the
reclassification date. Derivative instrument liabilities will be classified in
the balance sheet as current or non-current based on whether or not settlement
of the derivative instrument is expected within 12 months of the balance sheet
date.
We
use the Black-Scholes option valuation model to value derivative liabilities.
This model uses Level 3 inputs in the fair value hierarchy established by ASC
820 Fair Value Measurement.