Trilogy Metals Inc. current report, 12 April 2018

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Business Context and Reporting Period

Company: Trilogy Metals Inc.
Filing Type: Form 8-K (Current Report)
Date: April 12, 2018
Subject: Release of the Pre-Feasibility Study (PFS) and Technical Report for the Arctic Project in Northwest Alaska, USA. The report was prepared in accordance with National Instrument 43-101 (NI 43-101) standards.

Key Financial Metrics and Project Economics

Capital Costs:

  • Initial Capital Cost: $779.6 million (Direct: $543.8M; Indirect: $235.8M).
  • Sustaining Capital (12-year Life of Mine): $65.9 million.
  • Closure Costs: $65.3 million (undiscounted).
Operating Costs:
  • Average Life-of-Mine (LOM) Operating Cost: $46.81 per tonne milled.
  • Breakdown: Mining ($20.47/t), Processing ($15.09/t), G&A ($5.60/t), Road Toll ($4.70/t).
Production and Reserves:
  • Mineral Reserves: 43.0 million tonnes (Probable only; no Proven reserves).
  • Average Grades: 2.32% Cu, 3.24% Zn, 0.57% Pb, 0.49 g/t Au, 36.0 g/t Ag.
  • Mine Life: 12 years of production following a 3-year pre-production/construction period.
  • Processing Capacity: 10,000 tonnes per day.
Economic Analysis (Base Case):
  • Pre-Tax: 38.0% IRR; $1,935.2 million NPV (8% discount rate); 1.9-year payback.
  • Post-Tax: 33.4% IRR; $1,412.7 million NPV (8% discount rate); 2.0-year payback.
Assumed Metal Prices:
  • Copper: $3.00/lb; Zinc: $1.10/lb; Lead: $1.00/lb.
  • Gold: $1,300/oz; Silver: $18.00/oz.

Material Changes and Project Status

This filing represents a significant advancement from exploration to pre-feasibility. Key developments include:

  • Resource Definition: Establishment of Probable Mineral Reserves of 43 million tonnes, inclusive of Indicated and Inferred resources.
  • Infrastructure Requirements: The project is a greenfields site requiring significant infrastructure, including a 30.7 km access road connecting to the proposed Ambler Mining District Industrial Access Project (AMDIAP) road, LNG power generation, and self-contained camps.
  • Joint Venture Options:
    • NANA Regional Corporation: Holds a back-in-right to acquire 16-25% of the project or receive a 15% net proceeds royalty upon construction decision.
    • South32 Limited: Holds an option to form a 50/50 Joint Venture by contributing a minimum of $150 million.
  • Royalties: A 1% net smelter return (NSR) royalty is payable to Kennecott (purchasable for $10 million) and NANA (1% NSR on production).

Outlook, Risks, and Contingencies

Permitting and Timeline:
The project requires extensive permitting, including a Plan of Operation Approval from the State of Alaska and a Section 404 permit from the US Army Corps of Engineers (USACE). The NEPA process (Environmental Impact Statement) is estimated to take 1.5 to 3 years. Construction is projected to take 3 years prior to first production.

Key Risks:

  • Infrastructure Dependency: Economic viability relies heavily on the construction of the AMDIAP road. Delays or cost overruns in this toll road could materially impact the project.
  • Regulatory Standards: The filing includes a cautionary note that NI 43-101 resource/reserve estimates differ from SEC standards and may not be comparable to U.S. company disclosures.
  • Commodity Prices: The project's NPV and IRR are most sensitive to copper prices, followed by zinc prices and capital costs.
  • Environmental: The site involves potentially acid-generating (PAG) waste rock and requires complex water management and tailings storage facilities in a remote, sensitive environment.

Management Commentary:
Management concludes the project shows positive economics under current assumptions. A single-phase work program budgeted at $3.3 million is recommended to optimize plant design, evaluate power supply, and advance permitting.

Investor Verification Checklist

  • Infrastructure Status: Verify the current permitting and construction status of the Ambler Mining District Industrial Access Project (AMDIAP) road, as the project is inaccessible without it.
  • Joint Venture Exercise: Monitor whether South32 exercises its option to form a 50/50 JV and whether NANA elects a back-in-right or royalty upon a construction decision.
  • Permitting Timeline: Track the progress of the USACE Section 404 permit and the Environmental Impact Statement (EIS), which are critical path items.
  • Capital Cost Accuracy: Review the $779.6 million initial capital estimate against actual bids, given the remote location and high contingency requirements.
  • Resource Conversion: Note that "Inferred" resources (3.5 Mt) have high uncertainty and cannot be relied upon for feasibility studies under Canadian rules without further exploration.