Item
1. Financial Statements
Trilogy
Metals Inc.
Interim
Consolidated Balance Sheets
(unaudited)
in thousands of US dollars
|
|
February
29, 2020
$
|
|
|
November
30, 2019
$
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
15,217
|
|
|
|
19,174
|
|
Accounts receivable
(note 3)
|
|
|
418
|
|
|
|
264
|
|
Deposits
and prepaid amounts
|
|
|
300
|
|
|
|
719
|
|
|
|
|
15,935
|
|
|
|
20,157
|
|
Rent deposit
|
|
|
-
|
|
|
|
114
|
|
Equity method
investment (note 4)
|
|
|
175,822
|
|
|
|
-
|
|
Plant and equipment
(note 5)
|
|
|
255
|
|
|
|
715
|
|
Right of use
asset (note 8)
|
|
|
547
|
|
|
|
-
|
|
Mineral
properties and development costs (note 6)
|
|
|
-
|
|
|
|
30,631
|
|
|
|
|
192,559
|
|
|
|
51,617
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued liabilities (note 7)
|
|
|
1,274
|
|
|
|
2,354
|
|
Current
portion of lease liability
|
|
|
137
|
|
|
|
-
|
|
|
|
|
1,411
|
|
|
|
2,354
|
|
Long-term portion
of lease liability (note 8)
|
|
|
510
|
|
|
|
-
|
|
Mineral
properties purchase option
|
|
|
-
|
|
|
|
31,000
|
|
|
|
|
1,921
|
|
|
|
33,354
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Share
capital (note 9) – unlimited common shares authorized, no par value
Issued
-140,659,776 (2019 – 140,427,761)
|
|
|
178,307
|
|
|
|
177,971
|
|
Contributed
surplus
|
|
|
122
|
|
|
|
122
|
|
Contributed
surplus – options (note 9(a))
|
|
|
22,272
|
|
|
|
21,123
|
|
Contributed
surplus – units (note 9(b))
|
|
|
1,470
|
|
|
|
1,759
|
|
Deficit
|
|
|
(11,533
|
)
|
|
|
(182,712
|
)
|
|
|
|
190,638
|
|
|
|
18,263
|
|
|
|
|
192,559
|
|
|
|
51,617
|
|
Commitments (note 11)
(See accompanying notes to the interim consolidated
financial statements)
/s/ James Gowans, Director
|
|
/s/ Kalidas Madhavpeddi, Director
|
|
|
|
Approved on behalf of the Board of Directors
|
|
|
Trilogy
Metals Inc.
Interim
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(unaudited)
in thousands of US dollars, except
share and per share amounts
|
|
For the three months ended
|
|
|
|
February
29, 2020
$
|
|
|
February
28, 2019
$
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
42
|
|
|
|
37
|
|
Foreign exchange loss (gain)
|
|
|
23
|
|
|
|
(34
|
)
|
General and administrative
|
|
|
651
|
|
|
|
492
|
|
Investor relations
|
|
|
126
|
|
|
|
117
|
|
Mineral properties expense (note 6(a))
|
|
|
1,545
|
|
|
|
1,535
|
|
Professional fees
|
|
|
668
|
|
|
|
91
|
|
Salaries
|
|
|
224
|
|
|
|
281
|
|
Salaries – stock-based compensation
|
|
|
1,196
|
|
|
|
1,939
|
|
Total expenses
|
|
|
4,475
|
|
|
|
4,458
|
|
Other items
|
|
|
|
|
|
|
|
|
Gain on derecognition of assets contributed to joint venture (note 4(a))
|
|
|
(175,770
|
)
|
|
|
-
|
|
Share of loss on equity investment (note 4(b))
|
|
|
178
|
|
|
|
-
|
|
Interest and other income
|
|
|
(62
|
)
|
|
|
(122
|
)
|
Comprehensive earnings (loss) for the period
|
|
|
171,179
|
|
|
|
(4,336
|
)
|
Basic earnings (loss) per common share
|
|
$
|
1.22
|
|
|
$
|
(0.03
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
1.16
|
|
|
$
|
(0.03
|
)
|
Basic weighted average number of common shares outstanding
|
|
|
140,616,672
|
|
|
|
131,916,941
|
|
Diluted weighted average number of common shares outstanding
|
|
|
147,649,507
|
|
|
|
131,916,941
|
|
(See accompanying notes to the interim consolidated
financial statements)
Trilogy
Metals Inc.
Interim
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – November 30, 2019
|
|
|
140,427,761
|
|
|
|
177,971
|
|
|
|
-
|
|
|
|
122
|
|
|
|
21,123
|
|
|
|
1,759
|
|
|
|
(182,712
|
)
|
|
|
18,263
|
|
Exercise of options
|
|
|
19,514
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted Share Units
|
|
|
212,501
|
|
|
|
330
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(330
|
)
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,155
|
|
|
|
41
|
|
|
|
-
|
|
|
|
1,196
|
|
Earnings for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
171,179
|
|
|
|
171,179
|
|
Balance – February 29, 2020
|
|
|
140,659,776
|
|
|
|
178,307
|
|
|
|
-
|
|
|
|
122
|
|
|
|
22,272
|
|
|
|
1,470
|
|
|
|
(11,533
|
)
|
|
|
190,638
|
|
(See accompanying notes to the interim consolidated
financial statements)
Trilogy
Metals Inc.
Interim
Consolidated Statements of Cash Flows
(unaudited)
in thousands of US dollars
|
|
For the three months ended
|
|
|
|
February
29, 2020
$
|
|
|
February 28, 2019
$
|
|
Cash flows used in operating activities
|
|
|
|
|
|
|
|
|
Earnings (Loss) for the period
|
|
|
171,179
|
|
|
|
(4,336
|
)
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
42
|
|
|
|
37
|
|
Right of use asset amortization
|
|
|
60
|
|
|
|
-
|
|
Loss on working capital written-off upon joint venture formation
|
|
|
18
|
|
|
|
-
|
|
Gain on derecognition of assets (note 4(a))
|
|
|
(175,770
|
)
|
|
|
-
|
|
Loss on equity investment in Ambler Metals LLC. (note 4(b))
|
|
|
178
|
|
|
|
-
|
|
Unrealized foreign exchange loss (gain)
|
|
|
25
|
|
|
|
5
|
|
Stock-based compensation
|
|
|
1,196
|
|
|
|
1,939
|
|
Operating lease payments
|
|
|
(54
|
)
|
|
|
-
|
|
Net change in non-cash working capital
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(154
|
)
|
|
|
(6
|
)
|
Decrease (increase) in deposits and prepaid amounts
|
|
|
419
|
|
|
|
(280
|
)
|
Decrease in accounts payable and accrued liabilities
|
|
|
(1,080
|
)
|
|
|
(590
|
)
|
|
|
|
(3,941
|
)
|
|
|
(3,231
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Mineral properties funding
|
|
|
-
|
|
|
|
10,200
|
|
|
|
|
-
|
|
|
|
10,200
|
|
Increase in cash and cash equivalents
|
|
|
(3,941
|
)
|
|
|
6,969
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(16
|
)
|
|
|
(5
|
)
|
Cash and cash equivalents – beginning of period
|
|
|
19,174
|
|
|
|
22,991
|
|
Cash and cash equivalents – end of period
|
|
|
15,217
|
|
|
|
29,955
|
|
(See accompanying notes to the interim consolidated
financial statements)
Trilogy
Metals Inc.
Notes
to the Interim 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, through our equity investee (see note 4), 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 interim consolidated financial statements
have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) and include
the accounts of Trilogy and its wholly owned subsidiary, NovaCopper US Inc. (dba “Trilogy Metals US”). All
significant intercompany transactions are eliminated on consolidation. For variable interest entities (“VIEs”) where
Trilogy is not the primary beneficiary, we use the equity method of accounting.
All figures are in United States dollars
unless otherwise noted. References to CAD$ refer to amounts in Canadian dollars.
The unaudited interim consolidated financial
statements include all adjustments necessary for the fair presentation of the Company’s financial position as of February
29, 2020 and our results of operations and cash flows for the three months ended February 29, 2020 and February 28, 2019. The results
of operations for the three months ended February 29, 2020 are not necessarily indicative of the results to be expected for the
fiscal year ending November 30, 2020.
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, 2019, filed with the U.S. Securities and Exchange Commission
(“SEC”) and Canadian securities regulatory authorities on February 13, 2020.
These interim consolidated financial statements
were approved by the Company’s Audit Committee on behalf of the Board of Directors for issue on April 7, 2020.
Accounting standards adopted
In February 2016, the FASB issued new accounting
requirements for accounting for, presentation of, and classification of leases (“ASU 2016-02”) which, together with
subsequent amendments, is included in ASC 842, Leases. ASC 842 became effective for the Company as of December 1, 2019.
The Company adopted ASC 842 using the modified
retrospective transition method by applying the transition provision and recording our cumulative adjustment to opening deficit
at the beginning of the period of adoption on December 1, 2019, rather than at the beginning of the comparative period presented.
Therefore, in the comparative periods, we continue to apply the legacy guidance in ASC 840, including its disclosure requirements.
We elected to apply all of the transition practical expedients available, including:
|
·
|
the package of three practical expedients to (1) not reassess whether any expired or existing contracts
are or contain leases, (2) not reassess the lease classification for any expired or existing leases, and (3) not reassess initial
direct costs for any existing lease;
|
|
·
|
the hindsight practical expedient to use hindsight when determining lease term and assessing impairment
of right-of-use assets, if any; and
|
|
·
|
the easements practical expedient to continue applying our current policy for accounting for any land
easements expired before or existing as of December 1, 2019.
|
In addition, we elected to apply the short-term
lease recognition exemption and elected to apply the practical expedient to not separate lease and non-lease components for all
applicable leases on transition. The adoption of this new standard resulted in the recognition of right of use assets and lease
liabilities of $786,000 as at December 1, 2019.
|
ii
|
Investment in affiliates
|
Investments in unconsolidated ventures
over which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity
method and include the Company’s investment in the Ambler Metals project. We identified Ambler Metals LLC as a Variable Interest
Entity (VIE) as the entity is dependent on funding from its owners. All funding, ownership, voting rights and power to exercise
control is shared equally on a 50/50 basis between the owners of the VIE. Therefore, the Company has determined that it is not
the primary beneficiary of the VIE. The Company’s maximum exposure to loss is its investment in Ambler Metals LLC.
Ambler Metals LLC is a non-publicly traded
equity investee holding exploration and development projects. The Company reviews and evaluates its investment in affiliates for
other than temporary impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
Events that could indicate impairment of an investment in affiliates include a significant decrease in long-term expected commodity
prices, a significant increase in expected operating or capital costs, unfavorable exploration results or technical studies, a
significant decrease in reserves, a loss of significant mineral claims or a change in the development plan or strategy for the
project. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than
the carrying amount of the asset. If the underlying assets are not recoverable, an impairment loss is measured and recorded based
on the difference between the carrying amount of the investee and its estimated fair value which may be determined using a discounted
cash flow model.
in thousands of dollars
|
|
February
29, 2020
$
|
|
|
November 30, 2019
$
|
|
GST input tax credits
|
|
|
37
|
|
|
|
42
|
|
Recoverable payments
|
|
|
22
|
|
|
|
222
|
|
Ambler Metals LLC
|
|
|
359
|
|
|
|
-
|
|
Accounts receivable
|
|
|
418
|
|
|
|
264
|
|
The balance due from Ambler Metals LLC
(“Ambler Metals”) (see note 4 below) consists of $110 thousand for services rendered by Trilogy per a service agreement
(the “Service Agreement”) between Trilogy and Ambler Metals, $120 thousand for additional staking costs and $130 thousand
for invoices paid by Trilogy on behalf of Ambler Metals LLC, per the Service Agreement.
|
4)
|
Equity
method investment
|
|
(a)
|
Formation of Ambler Metals LLC
|
On February 11,
2020, the Company completed the formation of a 50/50 joint venture named Ambler Metals with South32 Limited (“South32”).
As part of the formation of the joint venture, Trilogy contributed all of its assets associated with the Upper Kobuk Mineral Projects
(“UKMP”), including the Arctic and Bornite projects, while South32 contributed US$145 million, resulting in each party’s
subsidiaries directly owning a 50% interest in Ambler Metals.
Ambler Metals is an independently operated
company jointly controlled by Trilogy and South32 through a four-member board, of which two members are currently appointed by
Trilogy based on its 50% equity interest. All significant decisions related to the UKMP require the approval of both companies.
We determined that Ambler Metals is a VIE because it is expected to need additional funding from its owners for its significant
activities. However, we concluded that we are not the primary beneficiary of Ambler Metals as the power to direct its activities,
through its board, is shared under the Ambler Metals limited liability company agreement. As we have significant influence over
Ambler Metals through our representation on its board, we use the equity method of accounting for our investment in Ambler Metals.
Our investment in Ambler Metals was initially measured at its fair value of $176 million upon recognition. Our maximum exposure
to loss in this entity is limited to the carrying amount of our investment in Ambler Metals, which totaled $176 million, as well
as $0.4 million of amounts receivable per the Service Agreement. The following table summarizes the gain on recognition of the
UKMP assets upon transfer to the Ambler Metals joint venture on February 11, 2020.
in thousands
of dollars
|
|
$
|
|
Fair value ascribed to Ambler Metals interest
|
|
|
176,000
|
|
Less: carrying value of contributed /eliminated assets
|
|
|
|
|
Mineral properties
|
|
|
(30,587
|
)
|
Property, plant and equipment
|
|
|
(618
|
)
|
Elimination of Fairbanks warehouse right of use asset
|
|
|
(93
|
)
|
Elimination of prepaid State of Alaska mining claim fees
|
|
|
(303
|
)
|
Add:
|
|
|
|
|
Demobilization costs of drills
|
|
|
278
|
|
Cancellation of Fairbanks warehouse lease liability
|
|
|
93
|
|
Fair value of mineral properties purchase option
|
|
|
31,000
|
|
Gain on derecognition
|
|
|
175,770
|
|
|
(b)
|
Carrying value of equity method investment
|
During the three-month period ended February
29, 2020, Trilogy recognized, based on its 50% ownership interest in Ambler Metals, an equity pick-up equivalent to its pro rata
share of Ambler Metals’ operating loss of $0.4 million for the period between February 11, 2020 (date of joint venture formation)
to February 29, 2020. The carry value of Trilogy’s 50% investment in Ambler Metals as at February 29, 2020 is summarized
on the following table.
in thousands
of dollars
|
|
$
|
|
February 11, 2020, fair value ascribed to Ambler Metals interest
|
|
|
176,000
|
|
Share of loss on equity investment
|
|
|
(178
|
)
|
February 29, 2020, equity method investment
|
|
|
175,822
|
|
|
(c)
|
The following table summarizes Ambler Metals Balance Sheet as at February 29, 2020.
|
in thousands
of dollars
|
|
February
29, 2020
$
|
|
Current assets: Cash, deposits and prepaid expenses
|
|
|
145,049
|
|
Non - current assets: Property, equipment and mineral properties
|
|
|
31,454
|
|
Current liabilities: Accounts payable and accrued liabilities
|
|
|
(517
|
)
|
Non - current liabilities: Lease obligation
|
|
|
(91
|
)
|
Net assets
|
|
|
175,895
|
|
|
(d)
|
The following table summarizes Ambler Metals comprehensive loss from the formation of the joint
venture on February 11, 2020 to the end of the reporting period on February 29, 2020.
|
in thousands
of dollars
|
|
February
11- 29, 2020
$
|
|
Amortization
|
|
|
12
|
|
Mineral properties expense
|
|
|
167
|
|
General and administrative expense
|
|
|
219
|
|
Interest income
|
|
|
(43
|
)
|
Comprehensive loss
|
|
|
355
|
|
in thousands of dollars
|
|
February
29, 2020
|
|
|
|
Cost
$
|
|
|
Accumulated
amortization
$
|
|
|
Assets
derecognized
note
4(a)
$
|
|
|
Net
$
|
|
British Columbia, Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
63
|
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
30
|
|
Leasehold improvements
|
|
|
253
|
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
223
|
|
Computer hardware and software
|
|
|
115
|
|
|
|
(113
|
)
|
|
|
-
|
|
|
|
2
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, and equipment
|
|
|
3,667
|
|
|
|
(3,049
|
)
|
|
|
(618
|
)
|
|
|
-
|
|
Vehicles
|
|
|
348
|
|
|
|
(348
|
)
|
|
|
-
|
|
|
|
-
|
|
Computer hardware and software
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,450
|
|
|
|
(3,577
|
)
|
|
|
(618
|
)
|
|
|
255
|
|
in thousands of dollars
|
|
November 30, 2019
|
|
|
|
Cost
$
|
|
|
Accumulated
amortization
$
|
|
|
Net
$
|
|
British Columbia, Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
63
|
|
|
|
(29
|
)
|
|
|
34
|
|
Leasehold improvements
|
|
|
53
|
|
|
|
(17
|
)
|
|
|
36
|
|
Computer hardware and software
|
|
|
115
|
|
|
|
(112
|
)
|
|
|
3
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, and equipment
|
|
|
3,667
|
|
|
|
(3,026
|
)
|
|
|
641
|
|
Vehicles
|
|
|
348
|
|
|
|
(348
|
)
|
|
|
-
|
|
Computer hardware and software
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
|
4,250
|
|
|
|
(3,535
|
)
|
|
|
715
|
|
|
6)
|
Mineral
properties and development costs
|
in thousands of dollars
|
|
November
30, 2019
$
|
|
|
Acquisition
costs
reimbursable
from Ambler
Metals LLC
|
|
|
Assets
derecognized
note
4(a)
$
|
|
|
February
29, 2020
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambler (a)
|
|
|
26,631
|
|
|
|
(44
|
)
|
|
|
(26,587
|
)
|
|
|
-
|
|
Bornite (b)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
(4,000
|
)
|
|
|
-
|
|
|
|
|
30,631
|
|
|
|
(44
|
)
|
|
|
(30,587
|
)
|
|
|
-
|
|
in thousands of dollars
|
|
November 30, 2018
$
|
|
|
Acquisition costs
$
|
|
|
November 30, 2019
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambler (a)
|
|
|
26,587
|
|
|
|
44
|
|
|
|
26,631
|
|
Bornite (b)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
|
30,587
|
|
|
|
44
|
|
|
|
30,631
|
|
|
(a)
|
Mineral properties expense
|
The following table summarizes mineral
properties expense for the noted periods.
In thousands of dollars
|
|
Three
months ended
February
29, 2020
$
|
|
|
Three
months ended
February
28, 2019
$
|
|
Alaska, USA
|
|
|
|
|
|
|
|
|
Community
|
|
|
137
|
|
|
|
118
|
|
Drilling
|
|
|
-
|
|
|
|
-
|
|
Engineering
|
|
|
723
|
|
|
|
357
|
|
Environmental
|
|
|
99
|
|
|
|
165
|
|
Geochemistry and geophysics
|
|
|
12
|
|
|
|
165
|
|
Land and permitting
|
|
|
134
|
|
|
|
120
|
|
Project support
|
|
|
249
|
|
|
|
226
|
|
Other income
|
|
|
-
|
|
|
|
(1
|
)
|
Wages and benefits
|
|
|
191
|
|
|
|
385
|
|
|
|
|
1,545
|
|
|
|
1,535
|
|
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. Expenses during the first
quarter ended February 29, 2020 consisted mainly of engineering studies in preparation of the Arctic feasibility study and care
and maintenance of the camp during the winter season. Cumulative mineral properties expense in Alaska from the initial earn-in
agreement on the property in 2004 to February 29, 2020 is $115.3 million and cumulative acquisition costs were $30.6 million.
Cumulative spend to date totaled $145.9 million through to February 29, 2020. On February 11, 2020, upon the formation of the joint
venture with South 32, the acquisition costs of $30.6 million were derecognized upon the contribution of the mineral properties
to Ambler Metals.
As
part of the formation of the joint venture with South32 on February 11, 2020, Trilogy contributed all of its assets associated
with the UKMP, including the Arctic and Bornite projects. As a result, $0.62 million of machinery and equipment as well as $30.6
million of mineral properties related to the UKMP were derecognized in Trilogy on February 11, 2020.
|
7)
|
Accounts
payable and accrued liabilities
|
in thousands of dollars
|
|
February
29, 2020
$
|
|
|
November 30, 2019
$
|
|
Trade accounts payable
|
|
|
528
|
|
|
|
902
|
|
Accrued liabilities
|
|
|
646
|
|
|
|
721
|
|
Accrued salaries and vacation
|
|
|
100
|
|
|
|
731
|
|
Accounts payable and accrued liabilities
|
|
|
1,274
|
|
|
|
2,354
|
|
in thousands
of dollars
|
|
$
|
|
ASC 842 transition as at December 1, 2019
|
|
|
681
|
|
Amortization
|
|
|
(60
|
)
|
Lease accretion
|
|
|
19
|
|
Derecognition of Fairbanks warehouse lease
|
|
|
(93
|
)
|
|
|
|
547
|
|
The
Company’s lease arrangements primarily consist of an operating lease for our office space ending in June 2024. There are
no extension options.
Total
lease expense recorded within general and administrative expenses was comprised of the following components:
in thousands
of dollars
|
|
Three
months ended
February
29, 2020
$
|
|
Operating lease costs
|
|
|
50
|
|
Variable lease costs
|
|
|
34
|
|
Total lease expense
|
|
|
84
|
|
Variable
lease costs consist primarily of the Company’s portion of operating costs associated with the office space lease as the Company
elected to apply the practical expedient not to separate lease and non-lease components.
As
of February 29, 2020, the weighted-average remaining lease term was 4.3 years and the weighted-average discount rate is 8%. Significant
judgment was used in the determination of the incremental borrowing rate which included estimating the Company’s credit rating.
Supplemental
cash and non-cash information relating to our leases during the three months ended February 29, 2020 are as follows:
|
•
|
Cash paid for amounts included in the measurement of lease
liabilities was $54,134.
|
|
•
|
No cash was paid upon termination of a lease for office and
warehouse space and reassignment to Ambler Metals that resulted in the derecognition of the right-of-use asset of $92,974 and the
operating lease liability of $93,006.
|
Future
minimum payments relating to the lease recognized in our balance sheet as of February 29, 2020 are as follows:
in thousands
of dollars
Fiscal year
|
|
February
29, 2020
$
|
|
2020
|
|
|
136
|
|
2021
|
|
|
189
|
|
2022
|
|
|
195
|
|
2023
|
|
|
200
|
|
2024
|
|
|
119
|
|
Total undiscounted lease payments
|
|
|
839
|
|
Effect of discounting
|
|
|
(192
|
)
|
Present value of lease payments recognized as lease liability
|
|
|
647
|
|
Authorized:
unlimited common shares, no par
value
in thousands of dollars,
except share amounts
|
|
Number
of shares
|
|
|
Ascribed
value
$
|
|
November 30, 2018
|
|
|
131,585,612
|
|
|
|
164,069
|
|
Exercise of options
|
|
|
1,725,776
|
|
|
|
1,123
|
|
Restricted Share Units
|
|
|
412,501
|
|
|
|
424
|
|
Deferred Share Units
|
|
|
182,132
|
|
|
|
189
|
|
Exercise of warrants
|
|
|
6,521,740
|
|
|
|
12,166
|
|
November 30, 2019
|
|
|
140,427,761
|
|
|
|
177,971
|
|
Exercise of options
|
|
|
19,514
|
|
|
|
6
|
|
Restricted Share Units
|
|
|
212,501
|
|
|
|
330
|
|
February 29, 2020, issued and outstanding
|
|
|
140,659,776
|
|
|
|
178,307
|
|
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 February 29,
2020, 11,927 NovaGold DSUs remained outstanding representing a right to receive 1,988 common shares in Trilogy, which will settle
upon certain directors retiring from NovaGold’s board.
During the period ended February 29, 2020,
the Company granted 2,050,000 options (2019 – 2,430,000 options) at a weighted-average exercise price of CAD$3.02 (2019 –
CAD$2.94) 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 $0.99 (2019
- $1.08).
For the period ended February 29, 2020,
Trilogy recognized a stock-based compensation charge of $1.16 million (2019 – $1.59 million) for options granted
to directors, employees and service providers, net of estimated forfeitures.
The fair value of the stock options recognized
in the period has been estimated using the Black-Scholes option pricing model.
Assumptions used in the pricing model for
the period are as provided below.
|
|
February
29, 2020
|
|
Risk-free interest rates
|
|
|
1.64
|
%
|
Exercise price
|
|
|
CAD$3.10
|
|
Expected life
|
|
|
3.0 years
|
|
Expected volatility
|
|
|
63.1
|
%
|
Expected dividends
|
|
|
Nil
|
|
As of February 29, 2020, there were 1,453,338
non-vested options outstanding with a weighted average exercise price of $2.21; the non-vested stock option expense not yet recognized
was $0.95 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 February 29, 2020 is as follows:
|
|
February
29, 2020
|
|
|
|
Number
of options
|
|
|
Weighted
average exercise price
$
|
|
Balance – beginning of the period
|
|
|
9,205,600
|
|
|
|
1.08
|
|
Granted
|
|
|
2,050,000
|
|
|
|
2.25
|
|
Exercised
|
|
|
(26,667
|
)
|
|
|
0.54
|
|
Forfeited
|
|
|
(230,000
|
)
|
|
|
2.19
|
|
Balance – end of period
|
|
|
10,998,933
|
|
|
|
1.27
|
|
The following table summarizes information
about the stock options outstanding at February 29, 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
|
|
|
|
2,676,433
|
|
|
|
0.73
|
|
|
|
0.36
|
|
|
|
2,676,433
|
|
|
|
0.73
|
|
|
|
-
|
|
|
$0.51 to $1.00
|
|
|
|
3,195,000
|
|
|
|
2.35
|
|
|
|
0.66
|
|
|
|
3,195,000
|
|
|
|
2.35
|
|
|
|
-
|
|
|
$1.01 to $1.50
|
|
|
|
225,000
|
|
|
|
3.12
|
|
|
|
1.32
|
|
|
|
175,000
|
|
|
|
3.08
|
|
|
|
50,000
|
|
|
$1.51 to $2.00
|
|
|
|
640,000
|
|
|
|
4.46
|
|
|
|
1.81
|
|
|
|
623,333
|
|
|
|
4.49
|
|
|
|
16,667
|
|
|
$2.01 to $2.54
|
|
|
|
4,262,500
|
|
|
|
4.28
|
|
|
|
2.23
|
|
|
|
2,875,829
|
|
|
|
4.17
|
|
|
|
1,386,671
|
|
|
|
|
|
|
10,998,933
|
|
|
|
2.84
|
|
|
|
1.27
|
|
|
|
9,545,595
|
|
|
|
2.60
|
|
|
|
1,453,338
|
|
The aggregate intrinsic value of vested
share options (the market value less the exercise price) at February 29, 2020 was $5.9 million (2019 - $13 million) and the aggregate
intrinsic value of exercised options for the three months ended February 29, 2020 was $0.04 million (2019 - $0.08 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 February 29, 2020 is as follows:
|
|
Number
of RSUs
|
|
|
Number
of DSUs
|
|
Balance – beginning of the period
|
|
|
212,501
|
|
|
|
1,137,488
|
|
Granted
|
|
|
-
|
|
|
|
21,927
|
|
Vested/paid
|
|
|
(212,501
|
)
|
|
|
-
|
|
Balance – end of period
|
|
|
-
|
|
|
|
1,159,415
|
|
For the period ended February 29, 2020,
Trilogy recognized a stock-based compensation charge of $0.04 million (2019- $0.35 million), net of estimated forfeitures.
No RSUs were granted as part of the annual
incentive payout for the 2019 fiscal year to officers. The 225,000 RSUs granted for the annual incentive payout for the 2018 fiscal
year vested half on the grant date and half on the first anniversary of the grant date. RSUs vesting in December 2019 were settled
on December 17, 2019 through the issuance of 212,501 common shares.
|
10)
|
Financial
instruments
|
The Company is exposed to a variety of
risks arising from financial instruments. These risks and management’s objectives, policies and procedures for managing these
risks are disclosed as follows.
The Company’s financial
instruments consist of cash 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.
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 February 29, 2020 is limited to the Canadian dollar consisting
of cash of CDN$540,000, accounts receivable of CDN$49,000 and accounts payable of CDN$865,000. 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 $21,000.
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 February 29, 2020 are as follows:
in thousands of dollars
|
|
Total
$
|
|
|
<1
Year
$
|
|
|
1–2
Years
$
|
|
|
2–5
Years
$
|
|
|
Thereafter
$
|
|
Accounts payable and accrued liabilities
|
|
|
1,274
|
|
|
|
1,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,274
|
|
|
|
1,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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 February
29, 2020, a 1% change in interest rates would result in a change in net loss of $0.1 million, assuming all other variables remain
constant.
The Company has commitments with respect
to an office lease requiring future minimum lease payments as summarized in note 8(b) above.
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 the Company’s work programs and budgets; perceived merit of properties, exploration results and budgets, the Company
and Ambler Metals’ funding requirements, mineral reserves and resource estimates, work programs, capital expenditures, operating
costs, cash flow estimates, production estimates and similar statements relating to the economic viability of a project, timelines,
strategic plans, statements regarding Ambler Metals’ plans and expectations relating to its Upper Kobuk Mineral Projects,
sufficiency of the $145 million subscription price to fund the UKMP through feasibility and the permitting of the first mine; impact
of COVID-19 on the upcoming field season; 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 the beliefs, expectations and opinions of management on the date the statements are made, as well as on a number of material
assumptions, which could prove to be significantly incorrect, including about:
|
·
|
our ability to achieve production at the Upper Kobuk Mineral Projects;
|
|
·
|
the accuracy of our mineral resource and reserve estimates;
|
|
·
|
the results, costs and timing of future exploration drilling and engineering;
|
|
·
|
timing and receipt of approvals, consents and permits under applicable legislation;
|
|
·
|
the adequacy of our financial resources;
|
|
·
|
the receipt of third party contractual, regulatory and governmental approvals for the exploration,
development, construction and production of our properties;
|
|
·
|
our expected ability to develop adequate infrastructure and that the cost of doing so will be reasonable;
|
|
·
|
continued good relationships with South32, our joint venture partner, as well as local communities
and other stakeholders;
|
|
·
|
there being no significant disruptions affecting operations, whether relating to labor, supply,
power damage to equipment or other matter;
|
|
·
|
expected trends and specific assumptions regarding metal prices and currency exchange rates;
|
|
·
|
the potential impact of the novel coronavirus (COVID-19); and
|
|
·
|
prices for and availability of fuel, electricity, parts and equipment and other key supplies remaining
consistent with current levels.
|
We have also assumed that no significant
events will occur outside of our normal course of business. Although we have attempted to identify important factors that could
cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other
factors that cause actions, events or results not to be as anticipated, estimated or intended. We believe that the assumptions
inherent in the forward-looking statements are reasonable as of the date of this MD&A. However, forward-looking statements
are not guarantees of future performance and, accordingly, undue reliance should not be put on such statements due to the inherent
uncertainty therein.
Forward-looking statements are subject
to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from
those reflected in the forward-looking statements, including, without limitation:
|
·
|
risks related to inability to define proven and probable reserves;
|
|
·
|
risks related to our ability to finance the development of our mineral properties through external
financing, strategic alliances, the sale of property interests or otherwise;
|
|
·
|
uncertainty as to whether there will ever be production at the Company’s mineral exploration
and development properties;
|
|
·
|
risks related to our ability to commence
production and generate material revenues or obtain adequate financing for our planned exploration and development activities;
|
|
·
|
risks related to lack of infrastructure including but not limited to the risk whether or not
the Ambler Mining District Industrial Access Project, or AMDIAP, will receive the requisite permits and, if it does, whether the
Alaska Industrial Development and Export Authority will build the AMDIAP;
|
|
·
|
risks related to inclement weather which may delay or hinder exploration activities at our mineral
properties;
|
|
·
|
risks related to our dependence on a third party for the development of our projects;
|
|
·
|
commodity price fluctuations;
|
|
·
|
our history of losses and expectation of future losses;
|
|
·
|
uncertainties relating to the assumptions underlying our resource estimates, such as metal pricing,
metallurgy, mineability, marketability and operating and capital costs;
|
|
·
|
uncertainty related to inferred mineral resources;
|
|
·
|
mining and development risks, including risks related to infrastructure, accidents, equipment
breakdowns, labor disputes or other unanticipated difficulties with or interruptions in development, construction or production;
|
|
·
|
risks related to market events and general economic conditions;
|
|
·
|
risks related to the outbreak of the coronavirus (COVID-19);
|
|
·
|
risks and uncertainties relating to the interpretation of drill results, the geology, grade
and continuity of our mineral deposits;
|
|
·
|
risks related to governmental regulation and permits, including environmental regulation, including
the risk that more stringent requirements or standards may be adopted or applied due to circumstances unrelated to the Company
and outside of our control;
|
|
·
|
the risk that permits and governmental approvals necessary to develop and operate mines at our
mineral properties will not be available on a timely basis or at all;
|
|
·
|
risks related to the need for reclamation activities on our properties and uncertainty of cost
estimates related thereto;
|
|
·
|
uncertainty related to title to our mineral properties;
|
|
·
|
risks related to the acquisition and integration of operations or projects;
|
|
·
|
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 our ability to maintain the adequacy of internal control over financial reporting
as per the requirements of Section 404 of the Sarbanes-Oxley Act;
|
|
·
|
increased regulatory compliance costs, associated with rules and regulations promulgated by
the United States Securities and Exchange Commission, Canadian Securities Administrators, the NYSE American, the Toronto Stock
Exchange, and the Financial Accounting Standards Boards, and more specifically, our efforts to comply with the Dodd-Frank Wall
Street Reform and Consumer Protection Act;
|
|
·
|
uncertainty as to the volatility in the price of the Company’s common shares;
|
|
·
|
the Company’s expectation of not paying cash dividends; and
|
|
·
|
adverse federal income tax consequences for U.S. shareholders should the Company be a passive
foreign investment company.
|
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 13, 2020, 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 April 7, 2020 and provides an analysis of our unaudited interim financial results for the quarter
ended February 29, 2020 compared to the quarter ended February 28, 2019.
The following information should be read
in conjunction with our February 29, 2020 unaudited interim condensed consolidated financial statements and related notes which
were prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The MD&A
should also be read in conjunction with our audited consolidated financial statements and related notes for the year ended November 30, 2019.
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”) were contributed into a 50/50
joint venture named Ambler Metals LLC (‘Ambler Metals”) between Trilogy and South32 Limited (‘South32”)
on February 11, 2020 (see below). The projects contributed to the joint venture consist of: i) the Ambler lands which host the
Arctic copper-zinc-lead-gold-silver project (the “Arctic Project”); and ii) the Bornite lands being explored under
a collaborative long-term agreement with NANA Regional Corporation, Inc. (“NANA”), a regional Alaska Native Corporation,
which host the Bornite carbonate-hosted copper project (the “Bornite Project”) and related assets.
Corporate
developments
Long-term incentives
On December
19, 2019, the Board of Directors approved the granting of 2,050,000 stock options to employees and directors with various vesting
terms.
Project
Activities
2020 Operating Budget for the Upper
Kobuk Mineral Projects
In a press
release dated February 26, 2020, the Company announced that Ambler Metals had approved a 2020 program budget of $22.8 million for
the advancement of the UKMP. The budget is 100% funded by Ambler Metals. The 2020 program budget includes 10,000 meters of drilling
at the Arctic Project, 2,500 meters of drilling within the Ambler Volcanogenic massive Sulphide (“VMS”) Belt and geological
mapping and geochemical soil sampling at the Bornite Project. However, the timing of these programs may be delayed, see
“Impact of Coronavirus (COVID-19)” below.
Arctic Project
Activities
at the Arctic Project will continue to focus on advancing studies and preparing for permit applications. Ambler Metals plans to
conduct a 10,000-meter drilling program at the Arctic Project during the summer field season to gather additional drill data for
the conversion of resources to the measured category, the next phase of metallurgical studies, including pilot plant testing, and
geotechnical drilling for infrastructure placement. The drill program is expected to commence in mid-June and finish at the end
of August. Studies are expected to continue throughout the year.
Bornite Project
The
2020 field program at the Bornite Project will consist of geological mapping and geochemical soil sampling over the northern Cosmos
Hills and review of drill core and surface exposures to determine controls on high grade zones of copper mineralization. Although
there is no planned drilling at the Bornite Project in 2020, the Bornite geological database will be updated and the team will
identify priority drill targets for the 2021 field season.
Regional Exploration Project
Following
up from the 2019 work performed by Trilogy along the 70-mile (100 kilometer) Ambler VMS belt, Ambler Metals will continue exploration
efforts within the Ambler VMS belt to discover and define potential deposits that can provide additional feed to a future Arctic
mill. Ambler Metals plans to conduct a 2,500-meter drill campaign in the VMS belt, following up from last year’s drilling
at the Sunshine prospect and at other identified targets. The drill program is expected to commence in mid-July and finish at the
end of August. The drilling will be preceded by detailed geologic mapping, geochemical soil sampling, and ground geophysics.
Impact of Coronavirus (COVID-19)
With respect to the outbreak of the novel
coronavirus (COVID-19), Trilogy recognizes that the situation is extremely fluid and is monitoring the State of Alaska Health Department
recommendations and restrictions on travel. These recommendations and restrictions may significantly impact our ability to conduct
the planned work programs during the upcoming field season. So, although the work programs discussed above are still currently
scheduled to commence as originally planned, our highest priority is the health, safety and welfare of our employees, contractors
and community members. As a result, we and our joint venture partner, through Ambler Metals, will make the necessary adjustments
to the work programs, including extending the timeline or scope for the remainder of the programs, or even cancelling the planned
exploration activities at the UKMP for this season, if it is determined to be necessary or prudent to do so.
Joint
Venture
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, 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 which South32 exercised on December 19, 2019.
Formation of joint venture
On February 11, 2020, Trilogy completed
the 50/50 joint venture with South32. Trilogy contributed all of its assets associated with the 172,675-hectare UKMP, including
the Arctic and Bornite projects, while South32 contributed a subscription price of US$145 million (the “Subscription Price”),
resulting in each party owning a 50% interest in Ambler Metals. The Subscription Price will be used to advance the Arctic and Bornite
Projects, along with exploration in the Ambler mining district. With Ambler Metals being well funded, with access to $145 million,
Trilogy does not expect to fund programs and budgets to advance the UKMP until the Subscription Price is spent by Ambler Metals.
Ambler Metals is an independently operated
company controlled by Trilogy and South32 through a four-member board of which two members are currently appointed by Trilogy based
on its 50% equity interest. All significant decisions related to the UKMP require the approval of both companies. We determined
that Ambler Metals is a variable interest entity, or VIE, because it is expected to need additional funding from its owners for
its significant activities. However, we concluded that we are not the primary beneficiary of Ambler Metals as the power to direct
its activities, through its board, is shared under the limited liability company agreement. As we have significant influence over
Ambler Metals through our representation on its board, we use the equity method of accounting for our investment in Ambler Metals.
Our investment in Ambler Metals was initially measured at its fair value of $176 million upon recognition. Our maximum exposure
to loss in this entity is limited to the carrying amount of our investment in Ambler Metals, which totaled $176 million as well
as $0.4 million of amounts receivable per a Service Agreement between Trilogy and Ambler Metals.
Subsequent to the end of the first quarter,
Ambler Metals loaned US$57.5 million back to South32 and retained $87.5 million. The loan has a 7-year maturity date, but Ambler
Metals can demand earlier repayment in installments as required to advance development studies, resource drilling and regional
exploration programs. The loan is secured by South32’s membership interest in the LLC and guaranteed by South32 International
Investment Holdings Pty Ltd. Trilogy currently estimates that the Subscription Price, which includes the funds to be repaid under
the loan, will 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 Price payment of $145 million is expended, the parties will contribute funding pro rata,
as contemplated by the operating agreement which governs Ambler Metals.
Summary
of results
in
thousands of dollars,
except for per share amounts
|
|
Three months ended
|
|
Selected
expenses
|
|
February
29, 2020
$
|
|
|
February
28, 2019
$
|
|
General and administrative
|
|
|
651
|
|
|
|
492
|
|
Mineral properties expense
|
|
|
1,545
|
|
|
|
1,535
|
|
Professional fees
|
|
|
668
|
|
|
|
91
|
|
Salaries
|
|
|
224
|
|
|
|
281
|
|
Salaries – stock-based compensation
|
|
|
1,196
|
|
|
|
1,939
|
|
Total expenses
|
|
|
4,475
|
|
|
|
4,458
|
|
Gain on derecognition of assets contributed to joint venture
|
|
|
(175,770
|
)
|
|
|
-
|
|
Equity in investee
|
|
|
178
|
|
|
|
-
|
|
Comprehensive earnings (loss) for the period
|
|
|
171,179
|
|
|
|
(4,336
|
)
|
Basic earnings (loss) per common share
|
|
$
|
1.22
|
|
|
$
|
(0.03
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
1.16
|
|
|
$
|
(0.03
|
)
|
For the three months ended February 29,
2020, Trilogy reported net earnings of $171 million (or $1.22 basic and $1.16 diluted earnings per common share). For the comparable
period in 2019, we reported a net loss of $4.3 million (or $0.03 basic and diluted loss per common share). The first quarter 2020
differences, when compared to the first quarter 2019, are primarily due to the gain of $176 million recognized from the contribution
of mineral property assets to the joint venture with South32 upon formation of the joint venture on February 11, 2020. This gain
was slightly offset by $0.18 million in loss from equity investee, consisting of Trilogy’s 50% share of Ambler Metals’
operating loss for the first quarter of 2020, for which there is no comparable amount in the first quarter of 2019.
Other variances noted for the comparable
period were i) an increase in general and administrative expenses of $0.16 million primarily due to an additional $0.07 million
in regulatory fees due mostly to the filing of the base shelf prospectus and $0.1 million in executive recruiting fees; ii) an
increase in professional fees of $0.58 million mainly consisting of $0.12 million for consulting fees for the research and implementation
of new accounting standards, legal fees of $0.25 million related to the formation of the joint venture, valuation and loan capacity
analysis fees of $0.07 million related to the formation of the joint venture, and consulting fees of $0.1 million for Rick Van
Nieuwenhuyse who remained as a consultant to Trilogy through to February 29, 2020; iii) a decrease of $0.06 million in salaries
due to reductions in head office staffing levels; and iv) a decrease in stock-based compensation driven primarily by a 0.38 million
reduction in the number of stock options granted during the first quarter versus the comparative period as well as no vesting of
RSUs during the period, resulting in stock based compensation savings of approximately $0.74 million and $0.33 million, respectively.
Mineral property expenses for the three
months ended February 29, 2020 were consistent with the comparative period and mainly include engineering costs related to the
Company’s Arctic feasibility study.
Selected
financial data
Quarterly information
in thousands of dollars,
except per share amounts
|
|
Q1
2020
|
|
|
Q4
2019
|
|
|
Q3
2019
|
|
|
Q2
2019
|
|
|
Q1
2019
|
|
|
Q4
2018
|
|
|
Q3
2018
|
|
|
Q2
2018
|
|
|
|
02/28/19
$
|
|
|
11/30/19
$
|
|
|
08/31/19
$
|
|
|
05/31/19
$
|
|
|
02/28/19
$
|
|
|
11/30/18
$
|
|
|
08/31/18
$
|
|
|
05/31/18
$
|
|
Interest and other income
|
|
|
62
|
|
|
|
91
|
|
|
|
137
|
|
|
|
150
|
|
|
|
122
|
|
|
|
117
|
|
|
|
135
|
|
|
|
77
|
|
Mineral property expenses
|
|
|
1,545
|
|
|
|
3,819
|
|
|
|
10,951
|
|
|
|
2,906
|
|
|
|
1,535
|
|
|
|
3,833
|
|
|
|
9,051
|
|
|
|
2,475
|
|
Earnings (loss) for the period
|
|
|
171,179
|
|
|
|
(6,525
|
)
|
|
|
(12,535
|
)
|
|
|
(4,509
|
)
|
|
|
(4,336
|
)
|
|
|
(5,319
|
)
|
|
|
(9,920
|
)
|
|
|
(3,664
|
)
|
Earnings (loss) per common share – basic
|
|
|
1.22
|
|
|
|
(0.05
|
)
|
|
|
(0.09
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.08
|
)
|
|
|
(0.03
|
)
|
Earnings (loss) per common share – diluted
|
|
|
1.16
|
|
|
|
(0.05
|
)
|
|
|
(0.09
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.08
|
)
|
|
|
(0.03
|
)
|
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 assets and financing activities.
For the first quarter of 2020, we reported
comprehensive earnings of $171 million which consisted of a gain of $176 million arising from the derecognition of our Alaskan
mineral properties upon contribution to the joint venture with South32, offset by Trilogy’s 50% share of the joint venture’s
operating loss for the period from February 11, 2020 to February 29, 2020 and total expenses of $4.5 million for the period. There
are no prior period comparatives for the gain on contribution of Alaskan assets or the pro rata share of the joint venture’s
operating loss. The remaining difference between the expense of $4.4 million incurred for the current quarter and the loss of $6.5
million for the fourth quarter of 2019 was primarily due to a $2.3 million reduction in mineral property expenses and reflects
the seasonal nature of this cost.
The loss of $6.5 million for the fourth
quarter ended November 30, 2019 is higher when compared to the net loss of $5.3 million incurred in the fourth quarter ended November
30, 2018. The primary drivers for the difference were $0.7 million higher stock-based compensation, $0.6 million higher professional
fees and $0.1 million increase in general and administrative expenses, all offset by $0.2 million in decreased salaries and benefits
in the fourth quarter 2019.
Our net loss for the third quarter ended
August 31, 2019 of $12.5 million was significantly higher versus the comparative loss of $9.9 million for the same quarter in the
prior year. The $2.6 million increase is primarily due to an increase in mineral properties expenditures due to the size of the
2019 field program which included the new regional exploration program which did not exist in the comparative period.
Our net loss for the second quarter ended
May 31, 2019 of $4.5 million is $0.9 million higher when compared to the comparative second quarter ended May 31, 2018. The difference
is primarily due to an increase in mineral properties expenses related to the new regional exploration program commencing in the
period with district-wide airborne geophysical surveys completed in the quarter and an increase in stock-based compensation.
Liquidity
and capital resources
At February
29, 2020, we had $15.2 million in cash and cash equivalents and working capital of $14.5 million, which is sufficient to
fund our ongoing operations for at least the next 12 months. The projects will be funded by Ambler Metals and we do not anticipate
needing to fund our 50% share of future expenditures to advance the projects until the approximately $145 million is spent.
Contractual
obligations
Contractual obligated undiscounted cash
flow requirements as at February 29, 2020 are as follows.
In thousands of dollars
|
|
Total
$
|
|
|
<1 Year
$
|
|
|
1–2 Years
$
|
|
|
2–5 Years
$
|
|
|
Thereafter
$
|
|
Accounts payable and accrued liabilities
|
|
|
1,274
|
|
|
|
1,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Office lease
|
|
|
839
|
|
|
|
136
|
|
|
|
384
|
|
|
|
319
|
|
|
|
-
|
|
|
|
|
2,113
|
|
|
|
1,410
|
|
|
|
384
|
|
|
|
319
|
|
|
|
-
|
|
Off-balance
sheet arrangements
We have no
material off-balance sheet arrangements.
Outstanding
share data
At April 7, 2020, we had 140,665,733 common
shares issued and outstanding. At April 7, 2020, we had outstanding, 10,983,933 stock options with a weighted-average exercise
price of $1.21 as well as 1,182,391 deferred share units (“DSUs”) and 11,927 NovaGold DSUs for which the holder is
entitled to receive one common share for every six NovaGold shares received. Upon exercise of all the foregoing convertible securities,
the Company would be required to issue aggregate of 12,168,312 common shares.
New
accounting pronouncements
Certain recent
accounting pronouncements have been included under note 2 in our February 29, 2020 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, equity method investment, 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.
Investment in affiliates
Investments in unconsolidated ventures
over which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity
method and include the Company’s investment in the Ambler Metals project. We identified Ambler Metals LLC as a Variable Interest
Entity (VIE) as the entity is dependent on funding from its owners. All funding, ownership, voting rights and power to exercise
control is shared equally on a 50/50 basis between the owners of the VIE. Therefore, the Company has determined that it is not
the primary beneficiary of the VIE. The Company’s maximum exposure to loss is its investment in Ambler Metals LLC.
Ambler Metals LLC is a non-publicly traded
equity investee holding exploration and development projects. The Company reviews and evaluates its investment in affiliates for
other than temporary impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
Events that could indicate impairment of an investment in affiliates include a significant decrease in long-term expected gold
price, a significant increase in expected operating or capital costs, unfavorable exploration results or technical studies, a significant
decrease in reserves, a loss of significant mineral claims or a change in the development plan or strategy for the project. Asset
impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying
amount of the asset. If the underlying assets are not recoverable, an impairment loss is measured and recorded based on the difference
between the carrying amount of the investee and its estimated fair value which may be determined using a discounted cash flow model.
Additional
information
Additional
information regarding the Company, including our annual report on Form 10-K, is available on SEDAR at www.sedar.com and
EDGAR at www.sec.gov and on our website at www.trilogymetals.com. Information contained on our website is not incorporated
by reference.