Trilogy Metals Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended May 31, 2019; filing/MD&A dated July 8–9, 2019. All amounts are in U.S. dollars unless noted. Trilogy is an exploration-stage company focused on the Upper Kobuk Mineral Projects in Alaska, including the Arctic and Bornite projects. It has no producing properties and reported no revenue.
Financial results and liquidity
| Metric | Q2 2019 / May 31, 2019 | Comparable period / prior balance |
|---|---|---|
| Net loss | $4.509 million; $0.04 per share | Q2 2018: $3.664 million; $0.03 per share |
| Six-month net loss | $8.845 million; $0.07 per share | Six months 2018: $6.610 million; $0.06 per share |
| Cash and cash equivalents | $25.806 million | November 30, 2018: $22.991 million |
| Working capital | $26.0 million | Filing does not provide a directly comparable prior working-capital figure |
| Total assets | $58.441 million | November 30, 2018: $54.659 million |
| Total liabilities | $32.481 million, including $31.0 million deferred South32 option consideration | November 30, 2018: $22.457 million |
| Debt | No debt balance reported | — |
| Operating cash flow | Six-month use: $7.377 million | Six months 2018: $6.566 million used |
Q2 expenses were $4.659 million, including $2.906 million of mineral-property expense and $664,000 of stock-based compensation. Six-month expenses were $9.117 million, including $4.441 million of mineral-property expense and $2.603 million of stock-based compensation. No operating margins are meaningful because the company had no revenue.
Cash increased by $2.823 million during the six months, before an $8,000 adverse foreign-exchange effect. Investing cash inflows included $10.2 million of South32 option-program funding; there were no financing proceeds in the period. Accounts payable and accrued liabilities were $1.481 million, all due within one year. Separate office and warehouse lease commitments totaled approximately $1.1 million.
Changes versus prior comparable period
- Q2 net loss increased by $845,000 year over year; six-month net loss increased by $2.235 million.
- Mineral-property expense rose $431,000 in Q2 and $835,000 for the six-month period, reflecting increased engineering, environmental, geophysical, project-support and field-preparation work.
- Stock-based compensation increased $513,000 in Q2 and $1.530 million for the six months. Management attributed the increase primarily to higher share prices and fair-value expense for awards.
- Investor-relations costs increased year over year, which management attributed to greater marketing activity and investor meetings. The prior-year periods also included losses on disposed Gold Mining Inc. investments; no such investment remained in 2019.
- Cash was higher than at November 30, 2018, supported by South32 funding. After quarter-end, warrant exercises generated approximately $9.9 million and increased shares outstanding.
Outlook, commentary and risks
- Arctic: Trilogy began a company-funded $7.0 million engineering and environmental program, including geotechnical and hydrology work intended to support a feasibility study targeted for the first half of 2020. The company expected permitting preparation to support permitting expected to begin in 2020.
- Bornite: The planned $9.2 million program called for approximately 8,000 meters of drilling in 12 holes. South32 funded the full program; drilling had commenced by early June, with initial results expected in late summer.
- Regional exploration: Airborne surveys were completed, with data being reprocessed and analyzed to prioritize later drill targets. Trilogy and South32 agreed to share the regional exploration budget; South32 contributed $1.0 million.
- South32 option: South32 had funded the full three-year option period and could exercise until the end of January 2020 to form a 50/50 joint venture, subject to the agreement’s terms, including a minimum $150 million contribution plus specified adjustments. Exercise is uncertain; if it does not proceed, the accounting and funding implications differ.
- Management said future operations depend on additional financing or future cash flows. The company has no operating cash inflows and may seek equity, debt, convertible debt or other funding.
- Key risks include permitting and infrastructure development (including the Ambler access project), mineral-resource and project-economics uncertainty, metal-price volatility, exploration and development costs, and the possibility that South32 will not exercise its option. Trilogy cautioned that Canadian mineral-resource disclosure standards differ from SEC standards and that resources are not necessarily reserves or economically mineable.
- After May 31, all 6,521,740 outstanding warrants were exercised ahead of expiry, yielding approximately $9.9 million. As of July 8, 2019, 138,905,097 common shares were outstanding.
Important facts for investors to verify
- Whether South32 exercises its option by the end of January 2020, and the resulting joint-venture funding and ownership terms.
- Progress, costs and results of the Arctic feasibility work, Bornite drilling and regional target evaluation, including timing of the anticipated study and results.
- Cash burn and future financing needs, including the use of South32 program funds and post-quarter warrant proceeds.
- The status and timing of required permits and the Ambler access infrastructure project.
- Share dilution from warrant exercises and outstanding options, RSUs and DSUs; confirm the current share count and potential issuance.
- Basis and assumptions underlying project economics, mineral estimates, capital and operating costs, and any future impairment assessments.