Trilogy Metals Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended February 28, 2021. Financial amounts are in U.S. dollars unless stated otherwise. Trilogy is an exploration-stage company whose Upper Kobuk Mineral Projects (UKMP), including the Arctic and Bornite projects in Alaska, are held through its 50%-owned Ambler Metals LLC joint venture with South32. Trilogy reported no revenue for the quarter.
Financial results and position
- Net loss: $4.516 million, or $0.03 per basic and diluted share, versus net income of $171.179 million, or $1.22 basic and $1.16 diluted per share, in Q1 2020.
- Expenses: Total expenses were $3.423 million, down from $4.475 million. Stock-based compensation rose to $2.148 million from $1.196 million. The quarter included a $1.120 million equity-method loss from Ambler Metals, versus $0.178 million in the prior-year quarter.
- Cash flow: Operating activities used $1.493 million, compared with $3.941 million used in Q1 2020. Cash and cash equivalents declined to $9.631 million from $11.125 million at November 30, 2020.
- Liquidity: Working capital was $9.2 million. Management said cash and working capital were sufficient for at least the next 12 months. Trilogy stated it does not expect to fund its share of UKMP costs until Ambler Metals’ funding is spent.
- Assets and obligations: Trilogy’s equity-method investment in Ambler Metals was $172.025 million, down from $173.145 million. Total liabilities were $1.091 million, including $540,000 of lease liabilities; the filing reports no material off-balance-sheet arrangements. No financial debt balance is reported.
- Margins: Not applicable to the reported period because Trilogy had no revenue.
Material changes versus Q1 2020
The earnings comparison is dominated by a one-time $175.770 million gain recognized in Q1 2020 when Trilogy contributed its Alaska mineral-property assets to Ambler Metals. That quarter also included $1.545 million of mineral-property expenses; Trilogy reported none in Q1 2021 after the properties were contributed. The current-quarter loss therefore does not indicate a comparable deterioration in recurring operating performance. Excluding that unusual prior-period gain, Trilogy’s reported expenses were lower overall, while its equity-method share of Ambler Metals’ loss increased as the prior-year comparison covered only the period after the joint venture’s February 11, 2020 formation.
Outlook, developments, and risks
- Ambler Metals approved an approximately $27 million 2021 UKMP program budget, funded by Ambler Metals. Plans include 7,600 meters of Arctic infill and metallurgical drilling, 7,000 meters of regional exploration drilling, engineering, and work toward submitting a federal Clean Water Act Section 404 permit application in the second half of 2021.
- In January 2021, federal agencies and the Alaska Industrial Development and Export Authority (AIDEA) signed 50-year rights-of-way for the Ambler Road route across federally managed lands; the filing describes these as the final federal permits required for the road project. In February, Ambler Metals approved a development agreement with AIDEA for pre-development feasibility and permitting work. Each party may contribute up to $35 million through December 31, 2024, subject to annually agreed programs and budgets.
- Ambler Metals’ initial $145 million South32 subscription is intended to fund project advancement through feasibility and permitting. Ambler Metals had $79.576 million of cash, deposits and prepaid expenses and a $58.747 million loan receivable from South32 at quarter-end. Trilogy expects to contribute pro rata after the subscription funding is expended.
- Key risks include permitting and construction of the Ambler Road, project approvals and infrastructure, exploration and resource uncertainty, commodity prices, financing needs after the initial funding is exhausted, reliance on South32 and Ambler Metals, and potential impacts from COVID-19, weather, and cost or supply pressures. Trilogy noted that its projects are not producing or under development and that future production is uncertain.
- No material current, pending, or threatened litigation was disclosed. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress and timing of the Arctic Section 404 application, other project approvals, and the Ambler Road’s remaining development steps.
- Ambler Metals’ actual spending, cash runway, South32 loan repayment and funding arrangements, and when future pro rata owner funding may be required.
- Whether the $172.025 million carrying value of Trilogy’s Ambler Metals investment remains recoverable as project, permitting, commodity-price, or funding assumptions change.
- Potential share dilution and expense effects from outstanding options and other equity awards; stock-based compensation was $2.148 million in the quarter.