Trilogy Metals Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2020. Unaudited; amounts are in U.S. dollars unless noted. Trilogy is an exploration-stage company focused on Alaska’s Upper Kobuk Mineral Projects (UKMP), now held through its 50%-owned Ambler Metals joint venture with South32. The company reported no revenue.
Financial performance and position
| Metric | Q2 / May 31, 2020 | Comparable period / prior balance |
|---|---|---|
| Q2 net loss | $3.002 million; $0.02 loss per share, basic and diluted | Q2 2019 loss of $4.509 million; $0.04 per share |
| Six-month net earnings (loss) | $168.177 million; $1.20 basic and $1.13 diluted per share | Six-month 2019 loss of $8.845 million; $0.07 per share |
| Cash and cash equivalents | $12.343 million | $19.174 million at November 30, 2019 |
| Operating cash flow | $(6.816) million for six months | $(7.377) million for six months ended May 31, 2019 |
| Working capital | $12.8 million | — |
| Equity-method investment | $175.261 million in Ambler Metals | No comparable investment at November 30, 2019 |
| Total liabilities | $1.138 million, including $599,000 of lease liabilities | $33.354 million at November 30, 2019 |
The six-month earnings principally reflect a one-time $175.770 million gain recorded when Trilogy contributed UKMP assets to Ambler Metals. The gain is not recurring operating profit. Q2 expenses totaled $2.470 million; margins are not meaningful because the company had no revenue. Cash declined by $6.816 million from operating activities, with a further $15,000 adverse exchange-rate effect. There was no investing cash flow in the six-month period. The filing reports no material off-balance-sheet arrangements.
Material changes and developments
- On February 11, 2020, Trilogy contributed its UKMP assets to the 50/50 Ambler Metals joint venture; South32 contributed $145 million. Trilogy accounts for its interest using the equity method and recognized a $739,000 share of Ambler Metals’ loss through May 31.
- Trilogy’s mineral properties were derecognized following the contribution. Consequently, Trilogy recorded no mineral-property expense in Q2, versus $2.906 million in Q2 2019. It did incur $742,000 of Arctic feasibility-study costs after the joint venture’s formation.
- Ambler Metals loaned $57.5 million back to South32; the loan has a seven-year maturity and is expected to be drawn down through cash calls to fund South32’s share of future programs. Ambler Metals reported $86.490 million in cash, deposits and prepaid expenses at May 31.
- Trilogy adopted ASC 842 leases on December 1, 2019, recognizing right-of-use assets and lease liabilities. Its principal office lease runs through June 2024.
Outlook, commentary and risks
- Ambler Metals and South32 deferred the 2020 UKMP summer exploration program, including planned drilling, because of COVID-19, safety concerns and field-season delays. Off-site analytical, modeling and feasibility-study work continued.
- Management said Trilogy’s $12.3 million cash balance and $12.8 million working capital were sufficient for ongoing corporate operations for at least 12 months. Management did not expect Trilogy to fund its share of UKMP programs until Ambler Metals expends the $145 million subscription price.
- The Arctic feasibility study was expected to be completed early in Q3 2020. The final environmental review for the Ambler Mining District Industrial Access Project had been released; the BLM Record of Decision was expected in July 2020. These are forward-looking expectations, not reported outcomes.
- Management estimated the South32 funding would support UKMP work through feasibility and permitting of the first mine. Once the subscription funding is spent, the partners are expected to fund Ambler Metals pro rata.
- Key risks include permitting and access-road approvals, COVID-19 disruption, exploration and resource uncertainty, metal-price and cost changes, infrastructure and financing needs, and dependence on South32 and other stakeholders. Trilogy has no operating cash inflows and may require future financing. Management reported disclosure controls were effective as of May 31, 2020.
- After quarter-end, incoming CEO Tony Giardini received 1.6 million stock options and an additional 170,000 options in lieu of salary for June–September 2020.
Important facts for investors to verify
- Whether the $145 million joint-venture funding remains adequate for the stated feasibility and permitting objectives, including the terms and repayment mechanics of the South32 loan.
- Subsequent progress and timing for the Arctic feasibility study, BLM decision and other required permits.
- Effects of the canceled 2020 field season on project schedules, costs and future exploration plans.
- Trilogy’s corporate cash burn and funding needs, separately from Ambler Metals’ project funding.
- The nonrecurring nature and accounting basis of the $175.770 million joint-venture gain, and the carrying value and impairment assumptions for the equity investment.