TRILOGY METALS INC. 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 theU.S. Securities Act of 1933, as amended, Section 21E of theU.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 andAmbler Metals LLC's 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 (as defined below) through feasibility and the permitting of the first mine; impact of COVID-19 on the 2020 field season; market prices for precious and base metals; the timing of the feasibility study onthe Arctic project; timing of the issuance of the Record of Decision by the BLM and the issuance of the Clean Water Act (CWA) Section 404 permit from theUnited States Army Corp. of Engineers, 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 Limited ("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.
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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
will receive the requisite permits and, if it does, whether theAlaska 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
Securities Administrators, the NYSE American, the
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
Company be a passive foreign investment company.
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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.
General
This Management's Discussion and Analysis ("MD&A") of Trilogy Metals Inc.
("Trilogy", "Trilogy Metals", "the Company" or "we") is dated July 7, 2020 and
provides an analysis of our unaudited interim financial results for the quarter
ended May 31, 2020 compared to the quarter ended May 31, 2019 .
The following information should be read in conjunction with our May 31, 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 .
Trilogy's shares are listed on theToronto Stock Exchange ("TSX") and theNYSE American Stock Exchange ("NYSE American") under the symbol "TMQ". Additional information related to Trilogy, including our annual report on Form 10-K, is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. Description of business We are a base metals exploration company focused on the exploration and development of mineral properties, through our equity investee, in the Ambler mining district located inAlaska, 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 namedAmbler Metals LLC ("Ambler Metals") between Trilogy and South32 onFebruary 11, 2020 (see below). The projects contributed to Ambler Metals consist of: i) the Ambler lands which hostthe Arctic copper-zinc-lead-gold-silver project (the "Arctic Project "); and ii) the Bornite lands being explored under a collaborative long-term agreement withNANA Regional Corporation, Inc. ("NANA"), a regionalAlaska Native Corporation , which host the Bornite carbonate-hosted copper project (the "Bornite Project ") and related assets. Project Activities
Deferral of the 2020 Summer Exploration Programs at the UKMP
Through Ambler Metals, we and our joint venture partner, South32 Limited
("South32") have decided not to proceed with the 2020 exploration program after
assessing the current novel coronavirus (COVID-19) environment. Ambler
Metals gave due consideration to the merits of carrying out an abridged work
program at the UKMP. However, given the continued uncertainty resulting from
COVID-19, ongoing safety concerns (despite added safety protocols including
physical distancing, protective equipment and testing)and the fact that, due to
COVID-19, the planned field season had already been delayed to the point at
which any field season would provide limited critical path benefits, the
decision has been made not to proceed with a 2020 field season. The safety of
our employees, contractors and the communities where we work is paramount. We
are disappointed as we know delay affects everyone involved, including our
partner NANA and our NANA shareholder hires.
2020 Operating Budget for the Upper Kobuk Mineral Projects
In a press release datedFebruary 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 theArctic Project , 2,500 meters of drilling within the Ambler Volcanogenic Massive Sulphide ("VMS") Belt and geological mapping and geochemical soil sampling at theBornite Project . However, due to the Coronavirus outbreak, the drilling programs have been deferred, see "Deferral of the 2020 Summer Exploration Programs at the UKMP" above and "Impact of Coronavirus (COVID-19)" below. Project activities during the second quarter consisted of non-drilling, off-site analytical activities focused on updating drilling data, composite sample collection and updates
to
geological models.
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Arctic Project
Activities at the Arctic Project during the second quarter focused mainly on
updating the 2020 Arctic resource and metallurgical drill program for resource
definition and variability testing and planning for the next stages of
engineering studies to advance the project towards permitting and development.
Work on the feasibility study for the Arctic project continued during the second
quarter, with an expected completion date early in the third quarter of 2020.
Bornite Project
The Bornite geological model was updated during the second quarter incorporating
the 2019 drill program results. Additional sample collection from Bornite drill
core was completed during the quarter for age determinations on certain mineral
species. Five additional composite samples from the potential underground
resource area were collected and metallurgical work was started during thequarter.Regional Exploration Project Regional project activities during the second quarter consisted mainly of updating the Sunshine prospect geologic model incorporating the 2019 drill results. In addition, metallurgical work began on five composite samples from the Sunshine prospect. Test work is ongoing and will continue through the third quarter. The Company also continued its review of historical exploration data collected for the Ambler Mining District.
Impact of Coronavirus (COVID-19)
With respect to the outbreak of COVID-19, Trilogy recognizes that the situation is extremely fluid and is monitoring theState of Alaska Health Department andFederal Centers for Disease Control and Prevention ("CDC") recommendations and restrictions on travel. These recommendations and restrictions have significantly impacted our ability to conduct the planned work programs during the fiscal 2020 field season. 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, have determined it prudent to defer the planned exploration drilling activities at the UKMP for this season.
In a press release datedMarch 27, 2020 , the Company announced the release of the final Environmental Impact Statement (EIS) by theUnited States Bureau of Land Management (BLM). The final step in the permitting process for the AMDIAP is the issuance of the Record of Decision by the BLM, which is expected to
be issued inJuly 2020 . Corporate developments Annual General Meeting
The Annual General Meeting of shareholders was held on
Appointment of New President and CEO
Tony Giardini was appointed as President and CEO of the Company effectiveJune 1, 2020 .Mr. Giardini has been a director of the Company since 2012 and will continue to be an executive director.Mr. Giardini has extensive experience as an executive officer and key leadership team member with his previous roles as President of Ivanhoe Mines Ltd. ("Ivanhoe"), a base metals development and exploration company, and as Chief Financial Officer at Kinross Gold Corporation, a senior gold producer.Mr. Giardini has extensive experience with joint ventures and large capital projects, including Ivanhoe's three large development assets, Platreef, Kipushi and Kamoa-Kakula. 20 Joint Venture Option agreement OnApril 10, 2017 , Trilogy and Trilogy Metals US entered into an Option Agreement to form a Joint Venture withSouth32 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. South32 exercised its option
onDecember 19, 2019 . Formation of joint venture OnFebruary 11, 2020 , Trilogy completed the formation of the 50/50 joint venture with South32. Trilogy contributed all its assets associated with the 172,675-hectare UKMP, includingthe Arctic and Bornite Projects, while South32 contributed a subscription price ofUS$145 million (the "Subscription Price"), resulting in each party owning a 50% interest in Ambler Metals. The Subscription Price will be used to advancethe 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. To assist Ambler Metals during the initial set up phase, Trilogy is paying all of Ambler Metals' invoices and being reimbursed pursuant to a services agreement (the "Services Agreement") until the back office is fully transitioned to a new team employed by Ambler Metals, which will be no longer than the end of the year. 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$175 million as well as$0.7 million of amounts receivable per a Service Agreement between Trilogy and Ambler Metals. The amounts receivable as atMay 31, 2020 has been subsequently collected. During the three-month period endedMay 31, 2020 , Ambler Metals loaned$57.5 million back to South32 and retained$87.5 million . The loan has a 7-year maturity date, but Ambler Metals will begin to draw down on the loan with cash calls to South32 to fund its 50% share of the 2021 budget to advance development studies, resource drilling and regional exploration programs. The loan is secured by South32's membership interest in Ambler Metals and guaranteed bySouth32 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. 21 Summary of results in thousands of dollars, except for per share amounts Three months ended Six months ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019
Selected expenses $ $ $ $ General and administrative 433 436 1,084 928 Mineral properties expense - 2,906
1,545 4,441
Feasibility study 742 - 742 -
Professional fees 198 153 866 244
Salaries 226 282 450 563Salaries - stock-based compensation 770 664 1,966 2,603 Investor relations 101 175 227 292 Gain on derecognition of assets contributed to joint venture - - (175,770 ) - Equity in investee 561 - 739 - Comprehensive earnings (loss) for the period (3,002 ) (4,509 ) 168,177 (8,845 ) Basic earnings (loss) per common share ($ 0.02 ) ($ 0.04 ) $ 1.20 ($ 0.07 ) Diluted earnings (loss) per common share ($ 0.02 ) ($ 0.04 ) $ 1.13 ($ 0.07 ) For the three months endedMay 31, 2020 , Trilogy reported loss of$3.0 million (or$0.02 basic and diluted loss per common share). For the comparable period in 2019, we reported a net loss of$4.5 million (or$0.04 basic and diluted loss per common share). The decrease in comprehensive loss is primarily due to the elimination of mineral properties expense as these expenditures became the responsibility of Ambler Metals subsequent to the formation of the joint venture with South32 onFebruary 11, 2020 . For the three-month period endedMay 31, 2019 , Trilogy spent$2.9 million in mineral properties expense, mostly consisting of internal engineering studies for the Bornite and Arctic Projects, meteorological and air quality studies for theArctic Project and costs associated with preparing
the camp for the field season.
Other variances in relation to the comparative three-month period endedMay 31, 2020 consists of the following: i) feasibility study expenses of$0.7 million were related to theArctic Project , and include costs incurred subsequent to the formation of Ambler Metals onFebruary 11, 2020 , for which there are no prior year comparatives; ii) share of loss in equity investment in Ambler Metals of$0.6 million , amounts for which do not exist in the comparable second quarter of 2019; iii) an increase of$0.1 million in stock-based compensation primarily due to option and restricted share unit ("RSU") awards that were granted and fully vested during the quarter; and iv) a decrease of$0.07 million in investor relations as marketing events scheduled during the quarter were postponed due to the impact of COVID-19. For the six- month period endedMay 31, 2020 , Trilogy reported comprehensive earnings of$168 million (or$1.20 basic and$1.13 diluted earnings per common share). For the comparable period in 2019, we reported a comprehensive loss of$8.8 million (or$0.07 basic and diluted loss per common share). The differences for the six-month period endedMay 31, 2020 , when compared to the same period in 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 Ambler Metals onFebruary 11, 2020 . This gain was offset by a$0.7 million loss reflecting the Company's 50% equity share of Ambler Metals operating loss for the six-month period endedMay 31, 2020 . There is no comparable amount in the second quarter of 2019. Other variances noted for the comparative six-month period endedMay 31, 2020 consist of the following: i) an increase in general and administrative expenses of$0.2 million , primarily due to executive recruiting fees; ii) an elimination of$2.9 million in mineral properties expense as all mineral property assets were contributed to Ambler Metals upon formation of the joint venture onFebruary 11, 2020 ; iii) an increase of$0.6 million in professional fees primarily attributed to the implementation of new lease accounting standards, legal fees related to the formation of the joint venture and consulting fees for the former CEORick Van Nieuwenhuyse who remained as a consultant to Trilogy through toFebruary 29, 2020 ; iv) the inclusion of$0.1 million in salaries in stock based compensation for the interim CEO; and iv) a decrease of$0.6 million in stock-based compensation driven primarily by a combination of a 200,000 unit reduction in the number of stock options granted as well as a lower share price contributing to a lower fair value for stock options, RSUs and deferred share units ("DSU") granted during the six-month period endedMay 31, 2020 . 22 Selected financial data Quarterly information in thousands of dollars, except per share amounts Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019 Q4 2018 Q3 2018 05/31/20 02/28/20 11/30/19 08/31/19 05/31/19 02/28/19 11/30/18 08/31/18 $ $ $ $ $ $ $ $ Interest and other income 29 62 91 137 150 122 117 135 Mineral property expenses - 1,545 3,819 10,951 2,906 1,535 3,833 9,051 Share of loss on equity investment 561 178 - - - - - - Earnings (loss) for the period (3,002 ) 171,179 (6,525 ) (12,535 ) (4,509 ) (4,336 ) (5,319 ) (9,920 ) Earnings (loss) per common share - basic (0.02 ) 1.22 (0.05 ) (0.09 ) (0.04 ) (0.03 ) (0.04 ) (0.08 ) Earnings (loss) per common share - diluted (0.02 ) 1.16 (0.05 ) (0.09 ) (0.04 ) (0.03 ) (0.04 ) (0.08 ) 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 three-month period endedMay 31, 2020 , we reported a comprehensive loss of$3.0 million , which consists of$2.4 million in operating expenses and$0.6 million for Trilogy's 50% share of Ambler Metals' operating loss, from the formation of the joint venture onFebruary 11, 2020 , toMay 31, 2020 . There is no prior period comparative for the pro rata share of Ambler Metals operating loss as the joint venture formation was completed during fiscal 2020. When compared to the three-month period endedMay 31, 2019 , the current period operating expenses was$2.1 million lower. The decrease is primarily due to the elimination of$2.9 million of mineral properties expense for which there are no comparable expenses in the current period, offset by$0.7 million in feasibility study costs in the current period. 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 Ambler Metals' operating loss for the period fromFebruary 11, 2020 toFebruary 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 Ambler Metals' operating loss. The expense of$4.4 million incurred for the first quarter of 2020 was slightly higher than the loss of$4.3 million for the first quarter of 2019 primarily due to higher professional fees, general and administrative expense, share of loss on equity investment offset by a lower stock-based compensation cost.
The loss of$6.5 million for the fourth quarter endedNovember 30, 2019 is higher when compared to the net loss of$5.3 million incurred in the fourth quarter endedNovember 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 endedAugust 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.
Liquidity and capital resources
AtMay 31, 2020 , we had$12.3 million in cash and cash equivalents and working capital of$12.8 million , which is sufficient to fund our ongoing operations for at least the next 12 months. The projects are fully funded by Ambler Metals and we do not anticipate needing to fund our 50% share of future expenditures to advance the projects until Ambler Metals'$145 million is spent. 23 Contractual obligations Contractual obligated undiscounted cash flow requirements as atMay 31, 2020 are as follows. In thousands of dollars Total <1 Year 1-2 Years 2-5 Years Thereafter $ $ $ $ $ Accounts payable and accrued liabilities 539 539 - - - Office lease 774 181 379 214 - 1,313 720 379 214 -
Off-balance sheet arrangements
We have no material off-balance sheet arrangements.
Outstanding share data AtJuly 7, 2020 , we had 140,965,583 common shares issued and outstanding. AtJuly 7, 2020 , we had outstanding, 12,848,538 stock options with a weighted-average exercise price of$1.37 as well as 1,204,170 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 an aggregate
of 14,054,695 common shares. New accounting pronouncements
Certain recent accounting pronouncements have been included under note 2 in our
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.
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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 Ambler Metals. We
identified Ambler Metals 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.
Ambler Metals 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 copper 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.
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