Trilogy Metals Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended August 31, 2017; U.S. dollars unless stated otherwise. Trilogy is an exploration-stage company focused on the Upper Kobuk Mineral Projects in Alaska, including the Arctic and Bornite projects. It reported no operating revenue; none of its mineral properties were producing or under development.
Financial results and position
Amounts below are in millions of U.S. dollars except per-share data.
| Metric | Q3 2017 / Aug. 31, 2017 | Comparable period / prior balance |
|---|---|---|
| Revenue | No operating revenue reported | — |
| Net loss | Q3: $8.992; nine months: $14.378 | Q3 2016: $4.255; nine months 2016: $7.597 |
| Loss per share, basic and diluted | Q3: $0.09; nine months: $0.14 | Q3 2016: $0.04; nine months 2016: $0.07 |
| Cash and cash equivalents | $10.205 | $7.340 at Nov. 30, 2016 |
| Investments | $4.652 | $7.835 at Nov. 30, 2016 |
| Working capital | $11.2 | — |
| Total assets / shareholders’ equity | $47.048 / $32.289 | $46.747 / $46.154 at Nov. 30, 2016 |
| Accounts payable and accrued liabilities | $4.759 | $0.593 at Nov. 30, 2016 |
- Expenses and loss drivers: Mineral-property expense was $8.471 in Q3 and $10.407 for nine months, versus $3.077 and $4.067, respectively, in 2016. The larger 2017 exploration and Arctic pre-feasibility programs were the principal reason losses increased.
- Cash flow: Nine-month operating cash use was $9.067, compared with $6.716 in 2016. Investing activities provided $11.971, including $10.0 of South32 funding and $2.180 from investment sales, partly offset by equipment purchases. Cash increased by $2.814 before a $0.051 foreign-exchange effect.
- Debt and liquidity: No debt balance is reported. The balance sheet includes a $10.0 mineral-properties purchase-option liability/deferred consideration. Contractual obligations totaled $6.108, including $4.759 due within one year and $1.349 in office-lease commitments.
- Margins: Not meaningful for this exploration-stage company with no reported operating revenue.
Material changes versus prior periods
- Q3 net loss rose by $4.737 from Q3 2016, mainly reflecting a $5.394 increase in mineral-property expense as the 2017 field programs were larger and ran later into the season.
- Nine-month net loss increased by $6.781. In addition to higher exploration spending, 2017 included a $1.252 unrealized loss on held-for-trading investments and a $0.230 realized loss on investment sales.
- Foreign-exchange gains were $0.592 in Q3 and $0.542 for nine months, versus small losses in the comparable 2016 periods. Trilogy attributed the gains to Canadian-dollar appreciation and its Canadian-dollar balances.
- 2016 included losses from discontinued Sunward operations; those operations were sold in September 2016. Trilogy recognized no discontinued-operation loss in the 2017 periods.
- Cash rose from Nov. 30, 2016, while investments declined, reflecting investment sales and changes in fair value. Accounts payable and accrued liabilities increased substantially from year-end.
Outlook, commentary and risks
- The 2017 program budget was $17.1 million: $10.0 million for Bornite exploration, funded by South32, and $7.1 million for Arctic pre-feasibility work. Management expected the Arctic pre-feasibility study to be completed in Q1 2018.
- Bornite’s program targeted extensions of known mineralization, with approximately 9,000 meters of drilling planned. Trilogy had completed 6,037 meters by August 31; results were expected through the fall. Initial results were released September 18, 2017, after quarter-end.
- Under the South32 option agreement, South32 is required to fund at least $10 million annually for up to three years to maintain the option, subject to the agreement’s terms. It may withdraw or exercise an option to form a 50/50 joint venture; exercise would require a minimum $150 million contribution, subject to adjustments. Initial funding is treated as deferred consideration and is not recognized as income unless South32 withdraws.
- Management said available working capital was sufficient for operational requirements for the next year and expected to sell GMI shares to help fund operations. Continued operations nevertheless depend on financing, investment sales, option funding, or future cash flows; the company has no operating cash inflows.
- Key risks include exploration and resource uncertainty, permitting and infrastructure needs (including the proposed Ambler access project), commodity-price volatility, cost and financing uncertainty, environmental and regulatory requirements, and the possibility that projects never reach production. A 10% change in the U.S.-Canadian exchange rate would change net loss by approximately $0.647 million; a 1% interest-rate change would change net loss by approximately $0.1 million, all else equal.
- Management reported effective disclosure controls as of August 31, 2017 and no material change in internal control over financial reporting during the quarter. The filing disclosed no material current, pending, or threatened litigation.
Important facts for investors to verify
- South32’s annual funding decisions, the status and terms of its option, and the accounting and availability of the $10.0 million deferred consideration.
- Actual Bornite drilling results and spending, and whether the Arctic pre-feasibility study is completed on the anticipated schedule and budget.
- Cash runway and liquidity assumptions, including the timing and proceeds of planned GMI share sales and any future financing needs.
- Permitting, infrastructure, NANA agreement obligations, and the technical and economic assumptions underlying project development plans and resource estimates.
- Investment valuation and foreign-exchange exposure, which contributed meaningfully to reported results and may fluctuate further.