|
Item 1.
|
Financial Statements
|
Trilogy Metals Inc.
Consolidated Balance Sheets
(unaudited)
in thousands of US dollars
|
|
May 31, 2019
$
|
|
|
November 30, 2018
$
|
|
Assets
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
25,806
|
|
|
|
22,991
|
|
Accounts receivable
|
|
|
171
|
|
|
|
23
|
|
Deposits and prepaid amounts
|
|
|
1,513
|
|
|
|
619
|
|
|
|
|
27,490
|
|
|
|
23,633
|
|
|
|
|
|
|
|
|
|
|
Rent deposit
|
|
|
114
|
|
|
|
114
|
|
Plant and equipment (note 3)
|
|
|
250
|
|
|
|
325
|
|
Mineral properties and development costs (note 4)
|
|
|
30,587
|
|
|
|
30,587
|
|
|
|
|
58,441
|
|
|
|
54,659
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities (note 5)
|
|
|
1,481
|
|
|
|
1,657
|
|
|
|
|
1,481
|
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
Mineral properties purchase option (note 4(c))
|
|
|
31,000
|
|
|
|
20,800
|
|
|
|
|
32,481
|
|
|
|
22,457
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Share capital (note 6)
– unlimited common shares authorized, no par value
Issued -132,143,407 (2018 – 131,585,612)
|
|
|
164,574
|
|
|
|
164,069
|
|
Warrants (note 6(c))
|
|
|
2,253
|
|
|
|
2,253
|
|
Contributed surplus
|
|
|
122
|
|
|
|
122
|
|
Contributed surplus – options (note 6(a))
|
|
|
20,936
|
|
|
|
19,076
|
|
Contributed surplus – units (note 6(b))
|
|
|
1,727
|
|
|
|
1,489
|
|
Deficit
|
|
|
(163,652
|
)
|
|
|
(154,807
|
)
|
|
|
|
25,960
|
|
|
|
32,202
|
|
|
|
|
58,441
|
|
|
|
54,659
|
|
Commitments and contingencies
(note
8)
(See accompanying
notes to the interim consolidated financial statements)
/s/ Rick Van Nieuwenhuyse,
Director
|
|
/s/ Kalidas Madhavpeddi,
Director
|
|
|
|
Approved on behalf of the Board of Directors
|
|
|
Trilogy Metals Inc.
Consolidated Statements of Loss and
Comprehensive Loss
(unaudited)
in thousands of US dollars, except share
and per share amounts
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
May 31, 2019
$
|
|
|
May 31, 2018
$
|
|
|
May 31, 2019
$
|
|
|
May 31, 2018
$
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
38
|
|
|
|
42
|
|
|
|
75
|
|
|
|
83
|
|
Foreign exchange loss (gain)
|
|
|
5
|
|
|
|
19
|
|
|
|
(29
|
)
|
|
|
(44
|
)
|
General and administrative
|
|
|
436
|
|
|
|
454
|
|
|
|
928
|
|
|
|
799
|
|
Investor relations
|
|
|
175
|
|
|
|
138
|
|
|
|
292
|
|
|
|
202
|
|
Mineral properties expense (note 4(d))
|
|
|
2,906
|
|
|
|
2,475
|
|
|
|
4,441
|
|
|
|
3,606
|
|
Professional fees
|
|
|
153
|
|
|
|
114
|
|
|
|
244
|
|
|
|
273
|
|
Salaries
|
|
|
282
|
|
|
|
223
|
|
|
|
563
|
|
|
|
452
|
|
Salaries – stock-based compensation
|
|
|
664
|
|
|
|
151
|
|
|
|
2,603
|
|
|
|
1,073
|
|
Total expenses
|
|
|
4,659
|
|
|
|
3,616
|
|
|
|
9,117
|
|
|
|
6,444
|
|
Other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on held for trading investments
|
|
|
-
|
|
|
|
125
|
|
|
|
-
|
|
|
|
260
|
|
Interest and other income
|
|
|
(150
|
)
|
|
|
(77
|
)
|
|
|
(272
|
)
|
|
|
(94
|
)
|
Loss and comprehensive loss for the period
|
|
|
4,509
|
|
|
|
3,664
|
|
|
|
8,845
|
|
|
|
6,610
|
|
Basic and diluted loss per common share
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
Weighted average number of common shares outstanding
|
|
|
132,095,920
|
|
|
|
117,583,238
|
|
|
|
132,007,414
|
|
|
|
111,989,192
|
|
(See accompanying
notes to the interim consolidated financial statements)
Trilogy Metals Inc.
Consolidated Statements of Changes in
Shareholders’ Equity
(unaudited)
in thousands of US dollars, except share
amounts
|
|
Number
of
shares
outstanding
|
|
|
Share
capital
$
|
|
|
Warrants
$
|
|
|
Contributed
surplus
$
|
|
|
Contributed
surplus –
options
$
|
|
|
Contributed
surplus –
units
$
|
|
|
Deficit
$
|
|
|
Total
shareholders’
equity
$
|
|
Balance – November 30, 2017
|
|
|
105,684,523
|
|
|
|
136,525
|
|
|
|
2,163
|
|
|
|
124
|
|
|
|
18,402
|
|
|
|
1,319
|
|
|
|
(132,868
|
)
|
|
|
25,665
|
|
Exercise of options
|
|
|
50,753
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted share units
|
|
|
800,000
|
|
|
|
457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(457
|
)
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
484
|
|
|
|
438
|
|
|
|
-
|
|
|
|
922
|
|
Loss
for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,946
|
)
|
|
|
(2,946
|
)
|
Balance
– February 28, 2018
|
|
|
106,535,276
|
|
|
|
137,011
|
|
|
|
2,163
|
|
|
|
124
|
|
|
|
18,857
|
|
|
|
1,300
|
|
|
|
(135,814
|
)
|
|
|
23,641
|
|
Bought deal financing
|
|
|
24,784,482
|
|
|
|
28,750
|
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(90
|
)
|
|
|
28,750
|
|
Share issuance costs
|
|
|
-
|
|
|
|
(1,819
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,819
|
)
|
Exercise of options
|
|
|
28,700
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
|
|
61
|
|
|
|
-
|
|
|
|
151
|
|
Loss
for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,664
|
)
|
|
|
(3,664
|
)
|
Balance
– May 31, 2018
|
|
|
131,348,458
|
|
|
|
163,947
|
|
|
|
2,253
|
|
|
|
124
|
|
|
|
18,942
|
|
|
|
1,361
|
|
|
|
(139,568
|
)
|
|
|
47,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– November 30, 2018
|
|
|
131,585,612
|
|
|
|
164,069
|
|
|
|
2,253
|
|
|
|
122
|
|
|
|
19,076
|
|
|
|
1,489
|
|
|
|
(154,807
|
)
|
|
|
32,202
|
|
Exercise of options
|
|
|
44,230
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted share units
|
|
|
412,501
|
|
|
|
424
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(424
|
)
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,586
|
|
|
|
353
|
|
|
|
-
|
|
|
|
1,939
|
|
Loss
for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,336
|
)
|
|
|
(4,336
|
)
|
Balance
– February 28, 2019
|
|
|
132,042,343
|
|
|
|
164,521
|
|
|
|
2,253
|
|
|
|
122
|
|
|
|
20,634
|
|
|
|
1,418
|
|
|
|
(159,143
|
)
|
|
|
29,805
|
|
Exercise of options
|
|
|
101,064
|
|
|
|
53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(53
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355
|
|
|
|
309
|
|
|
|
-
|
|
|
|
664
|
|
Loss
for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,509
|
)
|
|
|
(4,509
|
)
|
Balance
– May 31, 2019
|
|
|
132,143,407
|
|
|
|
164,574
|
|
|
|
2,253
|
|
|
|
122
|
|
|
|
20,936
|
|
|
|
1,727
|
|
|
|
(163,652
|
)
|
|
|
25,960
|
|
(See accompanying
notes to the interim consolidated financial statements)
Trilogy Metals Inc.
Consolidated Statements of Cash Flows
(unaudited)
in thousands of
US dollars
|
|
For the six months ended
|
|
|
|
May 31, 2019
$
|
|
|
May 31, 2018
$
|
|
Cash flows used in operating activities
|
|
|
|
|
|
|
|
|
Loss for the period
|
|
|
(8,845
|
)
|
|
|
(6,610
|
)
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
75
|
|
|
|
83
|
|
Loss on held for trading investments
|
|
|
-
|
|
|
|
260
|
|
Unrealized foreign exchange loss (gain)
|
|
|
8
|
|
|
|
(64
|
)
|
Stock-based compensation
|
|
|
2,603
|
|
|
|
1,073
|
|
Net change in non-cash working capital
|
|
|
|
|
|
|
|
|
Decrease (Increase) in accounts receivable
|
|
|
(148
|
)
|
|
|
441
|
|
Increase in deposits and prepaid amounts
|
|
|
(894
|
)
|
|
|
(67
|
)
|
Decrease in accounts payable and accrued liabilities
|
|
|
(176
|
)
|
|
|
(1,682
|
)
|
|
|
|
(7,377
|
)
|
|
|
(6,566
|
)
|
Cash flows from (used in) financing activities
|
|
|
|
|
|
|
|
|
Proceeds from bought deal financing
|
|
|
-
|
|
|
|
28,750
|
|
Share issuance cost
|
|
|
-
|
|
|
|
(1,819
|
)
|
|
|
|
-
|
|
|
|
26,931
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of plant & equipment
|
|
|
-
|
|
|
|
(13
|
)
|
Mineral properties funding (note 4 (c))
|
|
|
10,200
|
|
|
|
9,635
|
|
Proceeds from the sale of investments, net of fees
|
|
|
-
|
|
|
|
2,080
|
|
|
|
|
10,200
|
|
|
|
11,702
|
|
Increase in cash and cash equivalents
|
|
|
2,823
|
|
|
|
32,067
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(8
|
)
|
|
|
11
|
|
Cash and cash equivalents – beginning of period
|
|
|
22,991
|
|
|
|
5,391
|
|
Cash and cash equivalents – end of period
|
|
|
25,806
|
|
|
|
37,469
|
|
(See accompanying notes
to the interim consolidated financial statements)
Trilogy Metals Inc.
Notes to the Consolidated Financial
Statements
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 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”).
|
2
|
Summary of significant accounting policies
|
Basis of presentation
These 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 subsidiary, NovaCopper US Inc. (dba “Trilogy Metals US”). All
significant intercompany transactions are eliminated on consolidation.
All figures are in United States dollars
unless otherwise noted. References to CAD$ refer to amounts in Canadian dollars.
These unaudited interim consolidated financial
statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial
position as of May 31, 2019 and our results of operations and cash flows for the six months ended May 31, 2019 and May 31, 2018.
The results of operations for the six months ended May 31, 2019 are not necessarily indicative of the results to be expected for
the fiscal year ending November 30, 2019.
As these interim consolidated financial
statements do not contain all of the disclosures required by U.S. GAAP for annual financial statements, these unaudited 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, 2018 filed with the U.S. Securities and Exchange Commission
(“SEC”) on February 11, 2019.
These financial statements were approved
by the Company’s Audit Committee on behalf of the Board of Directors for issue on July 8, 2019.
Accounting standards adopted
In March 2016, the FASB issued new guidance
on classifying and measuring financial instruments (“ASU 2016-01”). This update is effective for annual reporting
periods beginning after December 15, 2017. The Company adopted the provisions of this guidance effective November 1, 2018. As
the Company’s investments in equity instruments were previously classified at fair value with the change in fair value recorded
to the statement of loss and comprehensive loss, the new guidance does not impact the Company’s accounting or reporting
results.
Recent accounting pronouncements
In February 2016, the Financial
Accounting Standards Board (“FASB”) issued new accounting requirements for accounting for, presentation of, and classification
of leases (“ASU 2016-02”). This will result in most leases being capitalized as a right of use asset with a related
liability on the balance sheets. The requirements of the new standard are effective for annual reporting periods beginning after
December 15, 2018, and interim periods within those annual periods, which for Trilogy is the first quarter of the fiscal
year ending November 30, 2020. We expect the adoption will have an impact as we expect to capitalize leases, specifically our
office leases which are not currently recognized on the balance sheets. We are in the process of analyzing the quantitative impact
of this guidance on our results of operations and financial position. The impact of this adoption will increase asset and liability
balances as part of recognizing the leases on the balance sheet.
in thousands of dollars
|
|
May 31, 2019
|
|
|
Cost
$
|
|
|
Accumulated
amortization
$
|
|
|
Net
$
|
|
British Columbia, Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
63
|
|
|
|
(23
|
)
|
|
|
40
|
|
Leasehold improvements
|
|
|
53
|
|
|
|
(14
|
)
|
|
|
39
|
|
Computer hardware and software
|
|
|
115
|
|
|
|
(111
|
)
|
|
|
4
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, and equipment
|
|
|
3,178
|
|
|
|
(3,014
|
)
|
|
|
164
|
|
Vehicles
|
|
|
348
|
|
|
|
(346
|
)
|
|
|
2
|
|
Computer hardware and software
|
|
|
35
|
|
|
|
(34
|
)
|
|
|
1
|
|
|
|
|
3,792
|
|
|
|
(3,542
|
)
|
|
|
250
|
|
in thousands of dollars
|
|
November 30, 2018
|
|
|
Cost
$
|
|
|
Accumulated
amortization
$
|
|
|
Net
$
|
|
British Columbia, Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
63
|
|
|
|
(17
|
)
|
|
|
46
|
|
Leasehold improvements
|
|
|
53
|
|
|
|
(10
|
)
|
|
|
43
|
|
Computer hardware and software
|
|
|
115
|
|
|
|
(109
|
)
|
|
|
6
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, and equipment
|
|
|
3,178
|
|
|
|
(2,964
|
)
|
|
|
214
|
|
Vehicles
|
|
|
348
|
|
|
|
(333
|
)
|
|
|
15
|
|
Computer hardware and software
|
|
|
35
|
|
|
|
(34
|
)
|
|
|
1
|
|
|
|
|
3,792
|
|
|
|
(3,467
|
)
|
|
|
325
|
|
|
4
|
Mineral properties and development
costs
|
in thousands of dollars
|
|
November 30, 2018
$
|
|
|
Acquisition costs
$
|
|
|
May 31, 2019
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambler (a)
|
|
|
26,587
|
|
|
|
-
|
|
|
|
26,587
|
|
Bornite (b)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
|
30,587
|
|
|
|
-
|
|
|
|
30,587
|
|
in thousands of dollars
|
|
November 30, 2017
$
|
|
|
Acquisition costs
$
|
|
|
November 30, 2018
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambler (a)
|
|
|
26,587
|
|
|
|
-
|
|
|
|
26,587
|
|
Bornite (b)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
|
30,587
|
|
|
|
-
|
|
|
|
30,587
|
|
On January 11, 2010,
NovaGold Resources Inc. (“NovaGold”), through Alaska Gold Company (“AGC”), at the time a wholly-owned
NovaGold subsidiary, purchased 100% of the Ambler lands in Northwest Alaska, which contains the copper-zinc-lead-gold-silver Arctic
Project and other mineralized targets within the volcanogenic massive sulfide belt, through a series of cash and share payments.
Total fair value of the consideration was $26.6 million. The vendor retained a 1% net smelter return royalty that the Company
can purchase at any time for a one-time payment of $10.0 million.
The Ambler lands were acquired
on October 17, 2011 by Trilogy Metals US through a purchase and sale agreement with AGC. On October 24, 2011, NovaGold
transferred its ownership of Trilogy Metals US to the Company, then itself a wholly owned subsidiary of NovaGold, which was subsequently
spun-out to NovaGold shareholders and publicly listed on April 30, 2012 (“NovaGold Arrangement”).
On October 19, 2011, Trilogy
Metals US acquired the exclusive right to explore and the non-exclusive right to access and enter on the Bornite lands, and lands
deeded to NANA Regional Corporation, Inc. (“NANA”) through the Alaska Native Claims Settlement Act, located adjacent
to the Ambler lands in Northwest Alaska. As consideration, Trilogy Metals US paid $4 million to acquire the right to explore
and develop the combined Upper Kobuk Mineral Projects through an Exploration Agreement and Option to Lease with NANA. Upon a decision
to proceed with construction of a mine on the lands, NANA maintains the right to purchase between a 16%-25% ownership interest
in the mine or retain a 15% net proceeds royalty which is payable after Trilogy Metals US has recovered certain historical costs,
including capital and cost of capital. Should NANA elect to purchase an ownership interest, consideration will be payable equal
to all historical costs incurred on the properties at the elected percentage purchased less $40 million, not to be less than
zero. The parties would form a joint venture and be responsible for all future costs, including capital costs of the mine based
on their pro-rata share.
NANA would also be granted
a net smelter return royalty of between 1% and 2.5% upon the execution of a mining lease or a surface use agreement, the amount
of which is determined by the classification of land from which production originates.
On April 10, 2017, Trilogy and Trilogy
Metals US entered into an Option Agreement to form a Joint Venture with South32 Group Operations Pty Ltd., a wholly-owned subsidiary
of South32 Limited, which agreement was later assigned by South32 Operations to its affiliate, South32 USA Exploration Inc. (“South32”)
on the UKMP (“Option Agreement”). Under the terms of the Option Agreement, as amended, Trilogy Metals US granted South32
the right to form a 50/50 joint venture to hold all of Trilogy Metals US’ Alaskan assets. Upon exercise of the option, Trilogy
Metals US will transfer its Alaskan assets, including the UKMP, and South32 will contribute a minimum of $150 million, to a newly
formed and jointly held, limited liability company (“LLC”).
To maintain the option in good
standing, South32 is required to fund a minimum of $10 million per year for up to a three-year period, which funds will be used
to execute a mutually agreed upon program at the UKMP. The funds provided by South32 may only be expended in accordance with an
approved program by a technical committee with equal representation from Trilogy and South32. South32 may exercise its option at
any time over the three-year period to enter into the 50/50 joint venture. To subscribe for 50% of the JV, South32 must contribute
a minimum of $150 million, plus (i) any amounts Trilogy spends on matched parallel funding to a maximum of $16 million over the
three year period and (ii) $5 million if the option had been exercised between April 1, 2018 and March 31, 2019 or $10 million
if the option is exercised between April 1, 2019 and the expiration date of the option, less the amount of the initial funding
contributed by South32 (the “Subscription Price”). South32 has now funded the full three-year option period. South32
has until the end of January 2020 to exercise the option to form the JV LLC and make the subscription payment. Should South32 not
make its annual minimum payment or elect to withdraw, the option will lapse and South32 will have no claim to ownership or the
funds it had already spent
During the year ended November
30, 2017, the Company received the first payment of $10.0 million and these funds were expended on the year 1 program at the Bornite
Project. In October 2017, the Company received $0.4 million as a first instalment towards the year 2 program and budget to begin
preparatory work. During the year ended November 30, 2018, the Company received payments totaling $10.4 million following the approval
of the year 2 program and budget in January 2018, including a $0.80 million advance on South32’s year three funding obligation
per the Option Agreement. During the quarter ended February 28, 2019, the Company received payments totaling $10.2 million following
the approval of the year 3 program and budget, including $1 million funding for the approved regional exploration program. The
receipt of the year 3 funding represents receipt of the final tranche of funding from South32. The Company is responsible for the
disbursement of these funds in accordance with the approved program and budget and accordingly has not classified the funds as
restricted cash.
As the initial option payments
are credited against the future subscription price upon exercise, the Company has accounted for the payments received from South32
as deferred consideration for the purchase of the UKMP interest. At such time as the option is exercised, the $31.0 million of
payments received will be recognized as part of the consideration received for the Company’s contribution of the UKMP into
JV LLC. If South32 withdraws from the Option Agreement, the consideration will be recognized as income in the statement of loss
at that time.
The option to form the JV LLC
is recognized as a financial instrument at inception of the arrangement with an initial fair value of $nil. This option is required
to be re-measured at fair value at each reporting date with any changes in fair value recorded in loss for the period. The Company
determined that the fair value of the option remains $nil as at May 31, 2019.
|
(d)
|
Mineral properties expense
|
The following table summarizes
mineral properties expense for the noted periods.
In thousands of dollars
|
|
Three months
ended
May 31, 2019
$
|
|
|
Three months
ended
May 31, 2018
$
|
|
|
Six months
ended
May 31, 2019
$
|
|
|
Six months
ended
May 31, 2018
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
|
|
|
146
|
|
|
|
154
|
|
|
|
264
|
|
|
|
244
|
|
Drilling
|
|
|
173
|
|
|
|
180
|
|
|
|
173
|
|
|
|
180
|
|
Engineering
|
|
|
303
|
|
|
|
186
|
|
|
|
624
|
|
|
|
505
|
|
Environmental
|
|
|
136
|
|
|
|
81
|
|
|
|
271
|
|
|
|
169
|
|
Geochemistry and geophysics
|
|
|
593
|
|
|
|
591
|
|
|
|
758
|
|
|
|
646
|
|
Land and permitting
|
|
|
174
|
|
|
|
166
|
|
|
|
360
|
|
|
|
359
|
|
Project support
|
|
|
778
|
|
|
|
601
|
|
|
|
1,004
|
|
|
|
677
|
|
Other income
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(20
|
)
|
Wages and benefits
|
|
|
603
|
|
|
|
518
|
|
|
|
988
|
|
|
|
846
|
|
Mineral property expense
|
|
|
2,906
|
|
|
|
2,475
|
|
|
|
4,441
|
|
|
|
3,606
|
|
Mineral property expenses consist
of direct drilling, personnel, community, resource reporting and other exploration expenses as outlined above, as well as indirect
project support expenses such as fixed wing charters, helicopter support, fuel, and other camp operation costs. Cumulative mineral
properties expense in Alaska from the initial earn-in agreement on the property in 2004 to May 31, 2019 is $99.0 million
and cumulative acquisition costs are $30.6 million totaling $129.6 million spent to date.
|
5
|
Accounts payable and accrued liabilities
|
in thousands of dollars
|
|
May 31, 2019
$
|
|
|
November 30, 2018
$
|
|
Trade accounts payable
|
|
|
834
|
|
|
|
400
|
|
Accrued liabilities
|
|
|
474
|
|
|
|
503
|
|
Accrued salaries and vacation
|
|
|
173
|
|
|
|
746
|
|
Due to related parties
|
|
|
-
|
|
|
|
8
|
|
Accounts payable and accrued liabilities
|
|
|
1,481
|
|
|
|
1,657
|
|
Authorized:
unlimited common shares, no par
value
In thousands of dollars, except
share amounts
|
|
Number of shares
|
|
|
Ascribed value
$
|
|
November 30, 2017
|
|
|
105,684,523
|
|
|
|
136,525
|
|
Bought deal financing
|
|
|
24,784,482
|
|
|
|
28,750
|
|
Share issuance costs
|
|
|
-
|
|
|
|
(1,805
|
)
|
Exercise of options
|
|
|
315,148
|
|
|
|
140
|
|
Restricted share units
|
|
|
800,000
|
|
|
|
457
|
|
NovaGold DSU conversion
|
|
|
1,459
|
|
|
|
2
|
|
November 30, 2018
|
|
|
131,585,612
|
|
|
|
164,069
|
|
Exercise of options
|
|
|
145,294
|
|
|
|
81
|
|
Restricted share units
|
|
|
412,501
|
|
|
|
424
|
|
May 31, 2019, issued and outstanding
|
|
|
132,143,407
|
|
|
|
164,574
|
|
On April 30, 2012, under the NovaGold
Arrangement, Trilogy committed to issue common shares to satisfy holders of NovaGold deferred share units (“NovaGold DSUs”)
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 May 31, 2019,
there remains 11,927 NovaGold DSUs outstanding representing a right to receive 1,988 Common Shares in Trilogy, which will settle
upon certain directors retiring from NovaGold’s board.
On April 20, 2018, the Company completed
a bought-deal financing for gross proceeds of $28.7 million by issuing 24,784,482 common shares at $1.16 per common share. Expenses
including bank commissions, legal fees, stock exchange and other fees totaled $1.8 million for net proceeds of $26.9 million.
During the period ended May 31, 2019,
the Company granted 2,527,500 options (2018 – 2,125,000 options) at a weighted-average exercise price of CAD$2.96 (2018
– CAD$1.04) to employees, consultants and directors exercisable for a period of five years with various vesting terms from
immediate vesting to over a two-year period. The weighted-average fair value attributable to options granted in the period was
$1.08 (2018 - $0.37).
For the period ended May 31, 2019, Trilogy
recognized a stock-based compensation charge of $1.94 million (2018– $0.58 million) for options granted to directors,
employees and service providers, net of estimated forfeitures.
The recognized fair value of the stock
options granted in the period has been estimated using the Black-Scholes option pricing model.
Assumptions used in the pricing model
for the period are as provided below.
|
|
May 31, 2019
|
|
Risk-free interest rates
|
|
|
2.03
|
%
|
Exercise price
|
|
|
CAD$
3.01
|
|
Expected life
|
|
|
3.0 years
|
|
Expected volatility
|
|
|
75.0
|
%
|
Expected dividends
|
|
|
Nil
|
|
As of May 31, 2019, there were 1,841,672
non-vested options outstanding with a weighted average exercise price of $1.79; the non-vested stock option expense not yet recognized
was $0.90 million. This expense is expected to be recognized over the next two years.
A summary of the Company’s stock
option plan and changes during the period ended May 31, 2019 is as follows:
|
|
May 31, 2019
|
|
|
|
Number of options
|
|
|
Weighted average
exercise price
$
|
|
Balance – beginning of the period
|
|
|
8,821,434
|
|
|
|
0.60
|
|
Granted
|
|
|
2,527,500
|
|
|
|
2.19
|
|
Exercised
|
|
|
(219,153
|
)
|
|
|
0.77
|
|
Balance – end of period
|
|
|
11,129,781
|
|
|
|
0.95
|
|
The following table summarizes information
about the stock options outstanding at May 31, 2019.
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Unvested
|
|
Range of price
|
|
Number of
outstanding
options
|
|
|
Weighted
average years
to expiry
|
|
|
Weighted
average
exercise price
$
|
|
|
Number of
exercisable
options
|
|
|
Weighted
average
exercise price
$
|
|
|
Number of
unvested
options
|
|
$0.33 to $0.50
|
|
|
3,920,614
|
|
|
|
1.22
|
|
|
|
0.38
|
|
|
|
3,920,614
|
|
|
|
0.38
|
|
|
|
-
|
|
$0.51 to $1.00
|
|
|
4,346,667
|
|
|
|
2.45
|
|
|
|
0.71
|
|
|
|
3,898,331
|
|
|
|
0.70
|
|
|
|
448,336
|
|
$1.01 to $1.50
|
|
|
225,000
|
|
|
|
3.87
|
|
|
|
1.31
|
|
|
|
125,000
|
|
|
|
1.22
|
|
|
|
100,000
|
|
$1.51 to $2.00
|
|
|
120,000
|
|
|
|
4.11
|
|
|
|
1.79
|
|
|
|
86,666
|
|
|
|
1.76
|
|
|
|
33,334
|
|
$2.01 to $2.52
|
|
|
2,517,500
|
|
|
|
4.53
|
|
|
|
2.19
|
|
|
|
1,257,498
|
|
|
|
2.19
|
|
|
|
1,260,002
|
|
|
|
|
11,129,781
|
|
|
|
2.53
|
|
|
|
0.95
|
|
|
|
9,288,109
|
|
|
|
0.79
|
|
|
|
1,841,672
|
|
The aggregate intrinsic value of vested
share options (the market value less the exercise price) at May 31, 2019 was $17.6 million (2018 - $5.9 million) and the aggregate
intrinsic value of exercised options for the six months ended May 31, 2019 was $0.3 million (2018 - $0.1 million).
|
(b)
|
Restricted Share Units and Deferred Share Units
|
The Company has a Restricted Share Unit
Plan (“RSU Plan”) and a Non-Executive Director Deferred Share Unit Plan (“DSU Plan”) to provide long-term
incentives to employees, officers and directors. Awards under the RSU Plan and DSU Plan may be settled in cash and/or common shares
of the Company at the Company’s election with each restricted share unit (“RSU”) and deferred share unit (“DSU”)
entitling the holder to receive one common share of the Company or equivalent value. All units are accounted for as equity-settled
awards.
A summary of the Company’s unit
plans and changes during the period ended May 31, 2019 is as follows:
|
|
Number of RSUs
|
|
|
Number of DSUs
|
|
Balance – beginning of the period
|
|
|
400,002
|
|
|
|
1,182,106
|
|
Granted
|
|
|
225,000
|
|
|
|
104,489
|
|
Vested/paid
|
|
|
(412,501
|
)
|
|
|
-
|
|
Balance – end of period
|
|
|
212,501
|
|
|
|
1,286,595
|
|
For the period ended May 31, 2019, Trilogy
recognized a stock-based compensation charge of $0.66 million (2018- $0.49 million), net of estimated forfeitures.
As part of the annual incentive payout
for the 2018 fiscal year, 225,000 RSUs were granted to officers, vesting half on the grant date and half on the first anniversary
of the grant date. RSUs vesting in December 2018 were settled on December 21, 2018 through the issuance of 412,501 common shares.
|
(c)
|
Share Purchase Warrants
|
A summary of the Company’s warrants
and changes during the period ended May 31, 2019 is as follows:
|
|
Number of
warrants
|
|
|
Years to expiry
|
|
|
Exercise price
$
|
|
Balance – beginning of the period
|
|
|
6,521,740
|
|
|
|
0.59
|
|
|
|
1.52
|
|
Balance – end of period
|
|
|
6,521,740
|
|
|
|
0.09
|
|
|
|
1.52
|
|
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 and cash equivalents, 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 and cash
equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities. The Company’s investments were
held for trading and were marked-to-market at each period end with changes in fair value recorded to the statement of loss.
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 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 May 31, 2019 is limited to Canadian dollar consisting of cash
of CDN$244,000, accounts receivable of CDN$26,000 and accounts payable of CDN$442,000. 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 $13,000.
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
and cash equivalents with Canadian Chartered financial institutions. The Company’s accounts receivable consists of Canadian
Goods and Services Tax receivable from the Federal Government of Canada and other receivables for recoverable expenses. The Company’s
exposure to credit risk is equal to the balance of cash and cash equivalents and accounts receivable as recorded in the financial
statements.
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.
Contractually obligated cash flow requirements
as at May 31, 2019 are as follows:
in thousands of dollars
|
|
Total
$
|
|
|
< 1 Year
$
|
|
|
1–2 Years
$
|
|
|
2–5 Years
$
|
|
|
Thereafter
$
|
|
Accounts payable and accrued liabilities
|
|
|
1,481
|
|
|
|
1,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,481
|
|
|
|
1,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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 and cash equivalents. Based on balances as at May 31,
2019, a 1% change in interest rates would result in a change in net loss of $0.3 million, assuming all other variables remain
constant.
The Company has commitments with respect
to office and warehouse leases requiring future minimum lease payments as follows:
in thousands of dollars
|
|
May 31, 2019
$
|
|
One year
|
|
|
231
|
|
Years 2 through 5
|
|
|
457
|
|
Beyond 5 years
|
|
|
414
|
|
Total
|
|
|
1,102
|
|
On June 28, 2019, the Company announced
all its outstanding warrants were exercised in advance of the July 2, 2019 expiry date. As a result of the warrants exercised,
the Company issued a total of 6,521,740 common shares and received cash proceeds of approximately $9.9 million.
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
Trilogy Metals Inc.
Management’s Discussion and Analysis
(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 perceived merit of properties, the timing and filing of updated technical reports, the timing
of permitting
,
exploration results and budgets, 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 the Company’s plans and expectations
relating to its Upper Kobuk Mineral Projects, market prices for precious and base metals, 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 a number of material assumptions, including those listed below, which could prove to be significantly incorrect:
|
·
|
assumptions
made in the interpretation of drill results, and of the geology, grade and continuity
of the Company’s mineral deposits;
|
|
·
|
our
ability to achieve production at any of the Company’s mineral exploration and development
properties;
|
|
·
|
our
expected ability to develop adequate infrastructure and that the cost of doing so will
be reasonable;
|
|
·
|
assumptions
that all necessary permits and governmental approvals will be obtained;
|
|
·
|
estimated
capital costs, operating costs, production and economic returns;
|
|
·
|
estimated
metal pricing, metallurgy, mineability, marketability and operating and capital costs,
together with other assumptions underlying the Company’s resource and reserve estimates;
|
|
·
|
continued
good relationships with local communities and other stakeholders;
|
|
·
|
our
expectations regarding demand for equipment, skilled labour and services needed for exploration
and development of mineral properties;
|
|
·
|
assumptions
regarding the merit of litigation; and
|
|
·
|
that
our activities will not be adversely disrupted or impeded by development, operating or
regulatory risks.
|
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;
|
|
·
|
none
of the Company’s mineral properties are in production or are under development;
|
|
·
|
uncertainty
as to whether South32 will exercise its option under the Option Agreement;
|
|
·
|
uncertainties
relating to the assumptions underlying our resource estimates, such as metal pricing,
metallurgy, mineability, marketability and operating and capital costs;
|
|
·
|
risks
related to lack of infrastructure including but not limited to the risk whether or not
the Ambler Mining District Industrial Access Project (“AMDIAP”) will receive
the requisite permits and, if it does, whether Alaska Industrial Development Export Authority
will build the AMDIAP;
|
|
·
|
uncertainty
as to whether there will ever be production at the Company’s mineral exploration
and development properties;
|
|
·
|
uncertainty
as to estimates of capital costs, operating costs, production and economic returns;
|
|
·
|
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 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 market events and general economic conditions;
|
|
·
|
uncertainty
related to inferred mineral resources;
|
|
·
|
uncertainty
related to the economic projections derived from the Pre-Feasibility Study titled “Arctic
Project, Northwest Alaska, USA, NI 43-101 technical report on Pre-Feasibility Study”
dated effective February 20, 2018;
|
|
·
|
risks
related to inclement weather which may delay or hinder exploration activities at its
mineral properties;
|
|
·
|
risks
and uncertainties relating to the interpretation of drill results, the geology, grade
and continuity of our mineral deposits;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
commodity
price fluctuations;
|
|
·
|
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 its control;
|
|
·
|
risks
related to the need for reclamation activities on our properties and uncertainty of cost
estimates related thereto;
|
|
·
|
uncertainty
related to title to our mineral properties;
|
|
·
|
our
history of losses and expectation of future losses;
|
|
·
|
risks
related to increases in demand for equipment, skilled labor and services needed for exploration
and development of mineral properties, and related cost increases;
|
|
·
|
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 the voting power of our major shareholders and the impact that a sale by such
shareholders may have on our share price;
|
|
·
|
risks
related to global climate change;
|
|
·
|
risks
related to adverse publicity from non-governmental organizations;
|
|
·
|
uncertainty
as to the volatility in the price of the Company’s shares;
|
|
·
|
the
Company’s expectation of not paying cash dividends;
|
|
·
|
adverse
federal income tax consequences for U.S. shareholders should the Company be a passive
foreign investment company;
|
|
·
|
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 (the “SEC”), Canadian Securities
Administrators, the NYSE American, the TSX, and the Financial Accounting Standards Boards,
and more specifically, our efforts to comply with the Dodd-Frank Wall Street Reform and
Consumer Protection Act and the newly adopted SEC mining disclosure rules.
|
This list is not exhaustive of the
factors that may affect any of the Company’s forward-looking statements. Forward-looking statements are statements about
the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ
materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors,
including, without limitation, those referred to in Trilogy’s Form 10-K dated February 11, 2019, 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.
Cautionary note to United States investors
Reserve and resource estimates
This Management’s Discussion
and Analysis has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from
the requirements of U.S. securities laws. Unless otherwise indicated, all resource and reserve estimates included in this Management’s
Discussion and Analysis have been prepared in accordance with National Instrument 43-101 Standards of Disclosure for Mineral
Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy, and Petroleum Definition Standards on Mineral
Resources and Mineral Reserves. NI 43-101 is a rule developed by the Canadian Securities Administrators which establishes standards
for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Canadian standards,
including NI 43-101, differ significantly from the requirements of the SEC, and resource and reserve information contained herein
may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting the generality of
the foregoing, the term “resource” does not equate to the term “reserves”. Under U.S. standards, mineralization
may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically
and legally produced or extracted at the time the reserve determination is made. The SEC’s disclosure standards normally
do not permit the inclusion of information concerning “measured mineral resources”, “indicated mineral resources”
or “inferred mineral resources” or other descriptions of the amount of mineralization in mineral deposits that do
not constitute “reserves” by U.S. standards in documents filed with the SEC. Investors are cautioned not to assume
that any part or all of mineral deposits in these categories will ever be converted into reserves. U.S. investors should also
understand that “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, estimated “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 “contained ounces”
in a resource is permitted disclosure under Canadian regulations; however, the SEC normally 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.
The requirements of NI 43-101 for identification of “reserves” are also not the same as those of the SEC, and reserves
reported by the Company in compliance with NI 43-101 may not qualify as “reserves” under SEC standards. Accordingly,
information concerning mineral deposits set forth herein may not be comparable with information made public by companies that
report in accordance with U.S. standards.
General
This Management’s Discussion and
Analysis (“MD&A”) of Trilogy Metals Inc. (“Trilogy”, “Trilogy Metals”, “the Company”
or “we”) is dated July 8, 2019 and provides an analysis of our unaudited interim financial results for the quarter
ended May 31, 2019 compared to the quarter ended May 31, 2018.
The following information should be read
in conjunction with our May 31, 2019 unaudited 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, 2018.
A summary of the U.S. GAAP accounting policies is outlined in note 2 of the audited consolidated financial statements.
All amounts are in United States dollars unless otherwise stated. References to “Canadian dollars” and “C$”
and “CDN$” are to the currency of Canada and references to “U.S. dollars”, “$” or “US$”
are to the currency of the United States.
Andrew W. West, P.Geo., an employee and
Exploration Manager, 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 exploring and developing our mineral holdings 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”), consist of: i) the 100%
owned 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 host the Bornite carbonate-hosted copper Project (the “Bornite Project”).
Outlook & Project activities
Arctic Project
The $7.0 million engineering and environmental
program, which will be funded entirely by Trilogy, has commenced at Arctic with two rigs from Tuuq Drilling LLC currently in operation
at the site. Work at the Arctic deposit commenced in late June with a view of completing feasibility level geotechnical and hydrology
work. The main goal of this year’s work program is to complete engineering and environmental studies to prepare a National
Instrument 43-101 compliant feasibility study which results are anticipated to be released in the first half of 2020. Work is also
being done to prepare the Arctic Project for permitting, which we expect to commence in 2020. The permitting preparation work being
carried out will support Federal, State and Borough permitting requirements.
Bornite Project
Exploration activities commenced at the beginning of June with more than 2,000 meters of drilling completed
so far at the Bornite Project with three rigs from Major Drilling America, Inc. currently in operation at site. The main goal of
the $9.2 million program will be to drill approximately 8,000 meters within 12 holes and will include both infill and expansion
drilling. Drilling is anticipated to continue throughout the summer and results from the first few holes of this program are expected
to be release in late summer. South32 Limited (“South32”) funded the entire $9.2 million budget in which funds were
fully received during the first quarter maintaining the Option Agreement as defined below in good standing.
Regional Exploration
District-wide VTEM and ZTEM helicopter
airborne geophysical surveys were completed this spring along the entire 100-kilometer long belt of the favorable stratigraphy
hosting known polymetallic volcanogenic-massive sulphide (“VMS”) deposits, as well as the areas around the Bornite
deposit and the surrounding Cosmos Hills area. The surveys were flown by Geotech Ltd. and the data is currently being re-processed
by Resource Potential PTY Ltd. The new VTEM and ZTEM surveys will be integrated into our dataset of historical drilling accumulated
over a 40-year period of exploration, all of which has been geo-referenced into an integrated GIS database. This dataset will be
analyzed to determine and prioritize targets for drill testing later in the summer after the Arctic environmental and geotechnical
drill program has been completed. The Company and South32 have agreed to equally fund the Regional Exploration budget. Funds were
received during the first quarter from South32 for their $1.0 million contribution, which is in excess of the original $30 million
in option payments.
Property review
Our principal assets, the UKMP Projects,
are located in the Ambler mining district in Northwest Alaska. Our UKMP Projects comprise approximately 355,323 acres (143,794 hectares)
consisting of the Ambler and Bornite lands.
Arctic Project
The Ambler lands, which host several deposits,
including the high-grade copper-zinc-lead-gold-silver Arctic Project, and other mineralized targets within a 100-kilometer-long
VMS belt, are owned by NovaCopper US. The Ambler lands are in Northwestern Alaska and consist of 114,500 acres (46,337 hectares)
of Federal patented mining claims and State of Alaska mining claims, within which VMS mineralization has been found.
We have recorded the Ambler lands as a
mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.
Bornite Project
On October 19, 2011, Trilogy Metals
US and NANA signed a collaborative agreement to explore and develop the Ambler mining district. Under the Exploration Agreement
and Option to Lease (the “NANA Agreement”), we acquired, in exchange for, among other things, a $4.0 million cash
payment to NANA, the exclusive right to explore the Bornite property and lands deeded to NANA through the Alaska Native Claims
Settlement Act (“ANCSA”), located adjacent to the Arctic Project, and the non-exclusive right to access and entry
onto NANA’s lands. The agreement establishes a framework for any future development of either the Bornite Project or the
Arctic Project. Both projects are included as part of a larger area of interest set forth in the NANA Agreement. The agreement
with NANA created a total land package incorporating our Ambler lands with the adjacent Bornite and ANCSA lands with a total area
of approximately 355,323 acres (143,794 hectares).
Upon the decision to proceed with development
of a mine within the area of interest, NANA maintains the right to purchase an ownership interest in the mine equal to range between
16%-25% or retain a 15% net proceeds royalty which is payable after we have recovered certain historical costs, including capital
and cost of capital. Should NANA elect to purchase an ownership interest in the mine, consideration will be payable based on the
elected percentage purchased and all the costs incurred on the properties less $40.0 million, not to be less than zero. The
parties would form a joint venture and be responsible for all future costs incurred in connection with the mine, including capital
costs of the mine, based on each party’s pro-rata share.
NANA would also be granted a net smelter
return royalty between 1% and 2.5% upon the execution of a mining lease or a surface use agreement, the amount of which is determined
by the particular area of land from which production originates.
We have accounted for the Bornite property
as a mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.
South32 Option Agreement
On April 10, 2017, Trilogy and Trilogy
Metals US entered into an Option Agreement to form a Joint Venture with South32 Group Operations Pty Ltd., a wholly-owned subsidiary
of South32 Limited, which agreement was later assigned by South32 Operations to its affiliate, South32 USA Exploration Inc. on
the UKMP (“Option Agreement”). Under the terms of the Option Agreement, as amended, Trilogy Metals US granted South32
the right to form a 50/50 joint venture to hold all of Trilogy Metals US’ Alaskan assets. Upon exercise of the option, Trilogy
Metals US will transfer its Alaskan assets, including the UKMP, and South32 will contribute a minimum of $150 million, to a newly
formed and jointly held, limited liability company (“LLC”).
To maintain the option in good standing,
South32 is required to fund a minimum of $10 million per year for up to a three-year period, which funds will be used to execute
a mutually agreed upon program at the UKMP. The funds provided by South32 may only be expended in accordance with an approved
program by a technical committee with equal representation from Trilogy and South32. South32 may exercise its option at any time
over the three-year period to enter into the 50/50 joint venture. To subscribe for 50% of the JV, South32 must contribute a minimum
of $150 million, plus (i) any amounts Trilogy spends on matched parallel funding to a maximum of $16 million over the three year
period and (ii) $5 million if the option is exercised between April 1, 2018 and March 31, 2019 or $10 million if the option is
exercised between April 1, 2019 and the expiration date of the option, less the amount of the initial funding contributed by South32
(the “Subscription Price”). South32 has now funded the full three-year option period. South32 has until the end of
January 2020 to exercise the option to form the JV LLC and make the subscription payment.
Option Funding Phase
Provided that all the exploration data
and information has been made available to South32 by no later than December 31 of each year, South32 must decide by the end of
January of the following year whether; (i) to fund a further tranche of a minimum of $10 million, or (ii) to withdraw and not
provide any further annual funding. In years 1 and 2, if the election to fund a further tranche is not made in January, South32
has until the end of March to exercise the option to form the LLC and make the subscription payment. If South32 elects to exercise
the option, the Subscription Price shall be paid in one tranche within 45 business days. Should South32 not make its annual minimum
payment or elect to withdraw, the option will lapse and South32 will have no claim to ownership or the funds it had already spent.
The option payment for the first year was paid by South32 in April 2017 and expended on the Year 1 exploration program at the
Bornite Project. Early in December 2017, South32 committed to fund the $10 million 2018 program for the Bornite Project. The funds,
which represent the second tranche, maintain the Option Agreement in good standing, and were fully received on January 24, 2018.
An additional $0.80 million was received during the year ended November 30, 2018 from South32 as an advance on the year three
funding.
On January 31, 2019, we announced the
2019 program and budgets with South32 committing to fund the $9.2 million budget for the Bornite Project. The funds, which represent
the third and final tranche, maintain the Option Agreement in good standing, and were fully received during the quarter ended
February 28, 2019.
Subscription Funding Phase
At any time during the option funding
phase of the agreement, South32 may elect to subscribe for a 50% interest in a newly formed LLC which will take transfer of, and
hold, Trilogy Metals US’ Alaskan Assets. As part of the Subscription Price, South32 will match any spending expended by
us at the Arctic Project over 3 years (2017, 2018 and 2019), to a cumulative maximum of $16 million. Depending on when the option
is exercised, certain amounts of the Initial Funding will be deducted from the Subscription Price.
Trilogy currently estimates that the Subscription
Price would fund the UKMP through feasibility and the permitting of the first mine to be developed in the Ambler mining district.
Once the full amount of the subscription payment of approximately $150 million is expended, the parties will contribute funding
pro rata, as contemplated by the operating agreement which will govern the LLC (the “LLC Agreement”). The LLC Agreement
anticipates a General Manager, Chief Financial Officer and Chief Operating and Technical Officer to be appointed by the LLC’s
Board, which will have equal representation from Trilogy and South32.
As the initial option payments are credited
against the future subscription price upon exercise, we have accounted for the payment received as deferred consideration. At
such time as the option is exercised, the initial payments received to that date will be recognized as part of the consideration
received for our contribution of the Alaska assets, including the UKMP, into the joint venture. If South 32 withdraws from the
Option Agreement, the consideration will be recognized in the statement of loss at that time.
Summary of results
in thousands of dollars, except for
per share amounts
|
|
Three months ended
|
|
|
Six months ended
|
|
Selected expenses
|
|
May 31, 2019
$
|
|
|
May 31, 2018
$
|
|
|
May 31, 2019
$
|
|
|
May 31, 2018
$
|
|
General and administrative
|
|
|
436
|
|
|
|
454
|
|
|
|
928
|
|
|
|
799
|
|
Mineral properties expense
|
|
|
2,906
|
|
|
|
2,475
|
|
|
|
4,441
|
|
|
|
3,606
|
|
Professional fees
|
|
|
153
|
|
|
|
114
|
|
|
|
244
|
|
|
|
273
|
|
Salaries
|
|
|
282
|
|
|
|
223
|
|
|
|
563
|
|
|
|
452
|
|
Salaries – stock-based compensation
|
|
|
664
|
|
|
|
151
|
|
|
|
2,603
|
|
|
|
1,073
|
|
Investor relations
|
|
|
175
|
|
|
|
138
|
|
|
|
292
|
|
|
|
202
|
|
Loss and comprehensive loss for the period
|
|
|
4,509
|
|
|
|
3,664
|
|
|
|
8,845
|
|
|
|
6,610
|
|
Basic and diluted loss per common share
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
For the three month period ended May 31,
2019, Trilogy reported a net loss of $4.5 million (or $0.04 basic and diluted loss per common share) which was higher than the
net loss of $3.7 million for the comparative period in 2018 (or $0.03 basic and diluted loss per common share).
The differences in relation to the comparative
three month period ended May 31, 2018 are primarily due to: i) an increase of $0.4 million in mineral properties expense mostly
consisting of engineering work related to the scoping study for Bornite and Arctic projects, environmental work related to meteorological
and air quality study for the Arctic project during the second quarter of 2019, personnel costs and project support costs including
camp facilities repair and maintenance, fixed wing costs and set-up costs incurred for the new office and warehouse in Fairbanks;
and ii) an increase of $0.5 million in stock-based compensation due to a higher share price contributing to a higher fair value
vesting for stock options, RSUs and DSUs granted during the six month period ended May 31, 2019.
Other differences noted for the comparable
periods were: i) an increase in salaries as the current period includes compensation for a new hire during the third quarter of
2018 for which there is no comparative for the second quarter of 2018; ii) an increase in professional fees due to an increase
in accounting and audit fees; iii) an increase in investor relations expenses due to the Company’s increased level of marketing
activity including attendance at more investor conferences and meetings in the current period; and iv) a slight decrease in general
and administrative expenses in the current period.
The comparative period also included a
$0.1 million loss on held for trading investments resulting from the disposition of 725,000 common shares of Gold Mining Inc. (“GMI”)
for which there are no comparative figures for the three month period ended May 31, 2019 as the remaining investment in GMI was
fully disposed during fiscal 2018.
For the six month period ended May 31,
2019, Trilogy reported a net loss of $8.8 million (or $0.07 basic and diluted loss per common share) compared to a net loss of
$6.6 million for the corresponding period in 2018 (or $0.06 basic and diluted loss per common share).
The differences in relation to the comparative
six month period ended May 31, 2018 are primarily due to: i) an increase of $0.8 million in mineral properties expense mostly consisting
of Geophysics work including core scan work for the Arctic project, aerial electromagnetic survey for Bornite and the region, engineering
work related to additional metallurgical and scoping studies, environmental work related to meteorological and air quality study,
personnel costs and project support costs including camp facilities repair and maintenance, and fixed wing costs and set-up costs
incurred for the new office and warehouse in Fairbanks; ii) an increase of $1.5 million in stock-based compensation due to a higher
share price contributing to a greater fair value amortization of stock options, RSUs and DSUs granted during the six month period
ended May 31, 2019; iii) an increase of $0.1 million in general and administration costs; iv) an increase of $0.9 million in investor
relations expenses due to the Company’s increased level of marketing activity including attendance at more investor conferences
and meetings during the six month period ended May 31, 2019 and v) an increase of $0.1 million in salaries due to a new hire during
the third quarter of 2018 for which there is no comparative for the six month period ended May 31, 2018.
During the six month period ended May
31, 2018, the Company recorded a loss on held for trading investments of $0.3 million upon disposition of 2,085,000 common shares
of GMI for which there are no comparative figures for the six month period ended May 31, 2019 as the remaining investment in GMI
was fully disposed during fiscal 2018.
Selected financial data
Quarterly information
In thousands of dollars,
except per share amounts
|
|
Q2 2019
|
|
|
Q1 2019
|
|
|
Q4 2018
|
|
|
Q3 2018
|
|
|
Q2 2018
|
|
|
Q1 2018
|
|
|
Q4 2017
|
|
|
Q3 2017
|
|
|
|
05/31/19
|
|
|
02/28/19
|
|
|
11/30/18
|
|
|
08/31/18
|
|
|
05/31/18
|
|
|
02/28/17
|
|
|
11/30/17
|
|
|
08/31/17
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Interest
and other income
|
|
|
150
|
|
|
|
122
|
|
|
|
117
|
|
|
|
135
|
|
|
|
77
|
|
|
|
17
|
|
|
|
13
|
|
|
|
23
|
|
Mineral
property expenses
|
|
|
2,906
|
|
|
|
1,535
|
|
|
|
3,833
|
|
|
|
9,051
|
|
|
|
2,475
|
|
|
|
1,131
|
|
|
|
4,693
|
|
|
|
8,471
|
|
Earnings
(loss) for the period
|
|
|
(4,509
|
)
|
|
|
(4,336
|
)
|
|
|
(5,319
|
)
|
|
|
(9,920
|
)
|
|
|
(3,664
|
)
|
|
|
(2,946
|
)
|
|
|
(6,726
|
)
|
|
|
(8,992
|
)
|
Earnings
(loss) per common share – basic and diluted
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.08
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
|
|
(0.09
|
)
|
Factors that can cause fluctuations in
our quarterly results include the length of the exploration field season at the properties, the type of program conducted, stock
option vesting, and issuance of shares. Other factors that have caused fluctuations in the quarterly results that would not be
expected to re-occur include the acquisition and disposition of GMI shares and financing activities.
During the quarter ended May 31, 2019,
mineral property expense increased by $1.4 million when compared to the prior quarter as the Company prepared for the commencement
of the 2019 drill program and field season. Our loss of $4.5 million for the quarter ended May 31, 2019 is consistent with the
prior quarter as the increase in the second quarter mineral property expenses were offset by higher first quarter stock-based compensation
due to the fair value amortization of new option grants during the first quarter. The current period loss is $0.9 million higher
when compared to the loss for the second quarter ended May 31, 2018 of $3.7 million due mostly to an increase in mineral properties
expense and stock-based compensation.
Our loss for the first quarter ended February
28, 2019 of $4.3 million was lower when compared to the two prior quarterly periods and reflects the seasonality of the mineral
property expenses which are mostly incurred during the summer and fall season.
During the fourth quarter of 2018, we had
a loss of $5.3 million compared to a loss of $6.7 million in the fourth quarter of 2017. The primary drivers for the difference
were $0.9 million lower mineral properties expenses, loss on disposition of investments of $0.8 million in the fourth quarter of
2017 for which the comparative is nil in the fourth quarter 2018, all offset by $0.5 million in increased salaries benefits in
the fourth quarter 2018. We incurred $3.8 million of mineral property expenses in the fourth quarter of 2018 compared to $4.7 million
of mineral property expenses in the fourth quarter of 2017 as the camp closed earlier in the 2018 program (October 13, 2018) versus
the 2017 program (October 31, 2017).
Similarly, our loss for the third quarter
ended August 31, 2018 of $9.9 million is slightly higher than the comparable loss of $9.0 million in the third quarter ended August
31, 2017 due to the size of the 2018 field program which added an additional $0.6 million in mineral property expenses. The remaining
$0.3 million difference is mostly due to increased general and administrative expenses, salaries and stock-based compensation.
Liquidity and capital resources
At May 31, 2019, we had $25.8 million
in cash and cash equivalents and working capital of $26.0 million. The increase in cash was a result of fully receiving the $9.2
million Year 3 funding from South32 as well as an additional $1.0 million for the regional exploration program. The increase in
working capital for the period was a result of higher accounts receivable and prepaids balances as well as a lower accounts payable
balance as at May 31, 2019. Subsequent to the end of the second quarter, the Company received additional proceeds of approximately
$9.9 million as a result of an exercise of 6,521,740 warrants.
We expended $7.4 million on operating
activities during the six months ended May 31, 2019 compared with $6.6 million for operating activities for the same period in
2018. Most cash spent on operating activities during all periods was expended on mineral property expenses, general and administrative,
salaries and professional fees.
The Company continues to fund its cash
expenditures through its working capital. As the Company is not currently in production, the Company will need to raise additional
funds to support its operations and administration expenses in the future. Future sources of liquidity may include debt financing,
equity 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.
All cash generated from investing activities
during the six months ended May 31, 2019 were from the South 32 Option Agreement funding of $10.2 million (2018 - $9.6 million)
and there were no proceeds from the sale of investments (2018 - $2.1 million) as all GMI shares were full disposed during fiscal
2018. During the six months ended May 31, 2019, no cash was generated from financing activities (2018 - $26.9 million).
Contractual obligations
Contractual obligated undiscounted cash
flow requirements as at May 31, 2019 are as follows.
In thousands of dollars
|
|
Total
|
|
|
< 1 Year
|
|
|
1–2 Years
|
|
|
2–5 Years
|
|
|
Thereafter
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Accounts payable and accrued liabilities
|
|
|
1,481
|
|
|
|
1,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Office lease
|
|
|
963
|
|
|
|
174
|
|
|
|
375
|
|
|
|
414
|
|
|
|
-
|
|
Office and warehouse lease
|
|
|
139
|
|
|
|
57
|
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2,583
|
|
|
|
1,712
|
|
|
|
457
|
|
|
|
414
|
|
|
|
-
|
|
Off-balance sheet arrangements
We have no material off-balance sheet
arrangements. The Company has lease commitments for office and warehouse spaces with a remaining total commitment of $1.1 million.
Outstanding share data
At July 8, 2019, we had 138,905,097 common
shares issued and outstanding. At July 8, 2019, we had outstanding 11,042,502 stock options with a weighted-average exercise price
of $0.98. We also had, 1,286,595 deferred share units (“DSUs”), 11,927 NovaGold deferred share units entitling the
holder to receive one common share for every six NovaGold shares received, and 212,501 RSUs. Upon exercise of all the foregoing
convertible securities, the Company would be required to issue aggregate of 12,543,586 common shares.
New accounting pronouncements
Certain recent accounting pronouncements
have been included under note 2 in our May 31, 2019 unaudited interim consolidated financial statements
Critical accounting estimates
The most critical accounting estimates upon which our financial status depends are those requiring estimates
of the recoverability of our capitalized mineral properties, impairment of long-lived assets, income taxes and valuation of stock-based
compensation.
Mineral properties and development
costs
All direct costs related to the acquisition
of mineral property interests are capitalized. The acquisition of title to mineral properties is a complicated and uncertain process.
The Company has taken steps, in accordance with industry standards, to verify the title to mineral properties in which it has
an interest. Although the Company has made efforts to ensure that legal title to its mining assets is properly recorded, there
can be no assurance that such title will be secured indefinitely.
Impairment of long-lived assets
Management assesses the possibility of
impairment in the carrying value of its long-lived assets whenever events or circumstances indicate that the carrying amounts
of the asset or asset group may not be recoverable. Significant judgments are made in assessing the possibility of impairment.
Management considers several factors in considering if an indicator of impairment has occurred, including but not limited to,
indications of value from external sources, significant changes in the legal, business or regulatory environment, and adverse
changes in the use of physical condition of the asset. These factors are subjective and require consideration at each period end.
If an indicator of impairment is determined to exist, management calculates the estimated undiscounted future net cash flows relating
to the asset or asset group using estimated future prices, 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 and operating capital and reclamation costs are subject to risk and uncertainties that
may affect the determination of the recoverability of the long-lived asset.
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.
South32 Option Agreement
The option to form the JV LLC is recognized
as a financial instrument at inception of the arrangement with an initial fair value of $nil. This option is required to be re-measured
at fair value at each reporting date with any changes in fair value recorded in loss for the period.