Trilogy Metals Inc. annual report, FY2022

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Trilogy Metals Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended November 30, 2022; filed February 14, 2023. Amounts are in U.S. dollars unless stated otherwise. Trilogy is a pre-revenue mineral exploration and development company with a 50% interest in Ambler Metals LLC, its joint venture with South32.

Business context and projects

The joint venture holds the Upper Kobuk Mineral Projects in remote northwest Alaska: the Arctic copper-zinc-lead-gold-silver project, which has a feasibility study and probable reserves, and the Bornite copper-cobalt project, which remains at the exploration stage. Neither project is producing or under construction. Trilogy’s results include its equity-method share of Ambler Metals’ losses.

Financial and operating performance

  • Revenue and profitability: Trilogy reported no mining revenue and a comprehensive loss of $24.3 million, or $0.17 per share, versus a $21.7 million loss, or $0.15 per share, in FY2021. The $2.6 million increase in loss primarily reflected a $4.3 million increase in Trilogy’s share of Ambler Metals’ losses, partly offset by lower corporate expenses.
  • Fourth quarter: FY2022 Q4 loss was $5.2 million, compared with $6.1 million in Q4 FY2021. Trilogy attributed the improvement mainly to lower salaries and other corporate costs.
  • Cash flow and liquidity: Operating cash outflow was $3.9 million, down from $5.1 million in FY2021. At year-end, Trilogy had $2.6 million of cash and $2.4 million of working capital, versus $6.3 million and $5.6 million, respectively, a year earlier.
  • Assets and obligations: Total assets were $146.0 million, including a $142.8 million investment in Ambler Metals. Total liabilities were $0.6 million; the filing reports lease liabilities, but no material interest-bearing debt for Trilogy. Ambler Metals held $80.8 million of cash and $77.7 million of working capital.
  • Going concern: Trilogy has an accumulated deficit of $66.9 million, no recurring operating cash inflows, and expects to need additional financing. Management and the auditor state that these conditions raise substantial doubt about Trilogy’s ability to continue as a going concern. The audited statements are prepared on a going-concern basis.

Project metrics and changes

  • Arctic: Trilogy’s 50% attributable probable mineral reserves were 23.35 million tonnes. The reserve estimate increased 7.4% in tonnage from 2021. The project-level feasibility case assumes a 10,000-tonne-per-day operation, 13 production years, and a 7.3:1 waste-to-ore strip ratio.
  • Arctic feasibility economics: On a 100% project basis, estimated initial capital is $1.177 billion; total capital including sustaining and closure costs is approximately $1.719 billion. The study estimates pre-tax NPV of $1.500 billion and IRR of 25.8%, and post-tax NPV of $1.108 billion and IRR of 22.8%, each at an 8% discount rate. These are study estimates, not Trilogy’s realized results, and depend on assumptions including prices, costs, permits, financing and road access.
  • Bornite: Trilogy’s 50% attributable inferred resource is 101.3 million tonnes at 1.46% copper, containing 3.257 billion pounds of copper; no mineral reserves have been estimated. The resource update increased total inferred tonnage to 202.7 million tonnes on a 100% basis. The filing’s comparison table appears to contain an inconsistent percentage-change figure for in-pit tonnage; verify against the technical report.
  • Exploration: Ambler Metals spent approximately $28.5 million in FY2022, including drilling, engineering and project support. The summer program completed 10,738 metres of drilling across the projects, plus mapping, sampling and trenching.

Outlook, risks and unusual items

  • The FY2023 Ambler Metals budget is $9.2 million for the UKMP and $1.0 million for the Ambler Access Project, funded from joint-venture cash. The stated corporate budget for Trilogy is approximately $4.0 million. Management says Trilogy does not expect to fund Ambler Metals until its existing cash is expended.
  • The proposed 211-mile Ambler Access Project remains a major development dependency. In 2022, the Department of the Interior sought remand of the environmental review and suspension of right-of-way permits; the Bureau of Land Management began a supplemental environmental impact statement process. BLM anticipated a draft statement in Q2 2023 and a final statement and decision in Q4 2023; these are agency expectations, not guarantees.
  • Key risks include financing needs, lack of road and power infrastructure, permitting and litigation uncertainty, commodity-price volatility, remote-site logistics and weather, reliance on South32, and uncertainty in resource estimates and project economics. NANA’s agreements may provide development interests or royalties if a mine proceeds.
  • Management reported effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements while highlighting substantial doubt about going concern. The auditor identified assessment of impairment indicators for the Ambler investment as a critical audit matter; no impairment was recorded in the presented statements.
  • Trilogy believes it was a passive foreign investment company (PFIC) for U.S. tax purposes in FY2022, which may have adverse tax consequences for U.S. shareholders.

Important facts for investors to verify

  • Trilogy’s standalone cash runway, financing alternatives and dilution exposure, given $2.6 million of year-end cash and the going-concern warning.
  • Ambler Metals’ spending, remaining cash and the assumptions behind the FY2023 budgets.
  • The status and timing of the Ambler Access Project supplemental environmental review, permits, litigation and potential road financing and tolls.
  • Arctic feasibility assumptions, including capital and closure costs, metal prices, recoveries, schedule and access-road costs; distinguish 100% project economics from Trilogy’s 50% interest.
  • Bornite resource comparison figures and the scope for converting inferred resources or defining recoverable cobalt; no Bornite reserves are reported.
  • PFIC status and applicable U.S. shareholder tax elections, with individual tax advice.