Trilogy Metals Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended August 31, 2016; unaudited. Amounts are in U.S. dollars unless noted. The company changed its name from NovaCopper Inc. to Trilogy Metals Inc. on September 1, 2016.
Business context
Trilogy is a pre-revenue mineral exploration and development company focused on the Upper Kobuk Mineral Projects in Alaska, including the Arctic and Bornite projects. It sold its Colombian Titiribi project through the sale of Sunward Investments, which closed after quarter-end on September 1, 2016. The company reported the Colombian operations as discontinued operations.
Key financial metrics
| Metric | Q3 2016 / August 31, 2016 | Comparable period / prior balance |
|---|---|---|
| Revenue | No operating revenue reported | Not applicable |
| Net loss | $4.255 million for Q3; $7.597 million for nine months | $4.162 million and $7.442 million, respectively, in 2015 |
| Continuing-operations loss | $3.902 million for Q3; $6.885 million for nine months | $3.964 million and $7.244 million, respectively, in 2015 |
| Discontinued-operations loss | $0.353 million for Q3; $0.712 million for nine months | $0.198 million for both comparative periods |
| Loss per share | $0.04 for Q3; $0.07 for nine months | $0.04 and $0.10, respectively, in 2015 |
| Cash and cash equivalents | $9.227 million | $16.064 million at November 30, 2015 |
| Operating cash used | $6.716 million for nine months | $6.098 million in 2015 |
| Current assets / current liabilities | $13.381 million / $0.854 million | $16.885 million / $0.751 million at November 30, 2015 |
| Total shareholders’ equity | $43.348 million | $50.430 million at November 30, 2015 |
Mineral-property expense was $3.077 million in Q3 and $4.067 million for the nine-month period. No debt is reported in the presented balance sheet; the filing does not provide a separate debt balance. Profit margins are not meaningful because the company reported no operating revenue.
Changes versus prior periods
- Q3 net loss increased by about $0.1 million year over year; the nine-month net loss increased by about $0.2 million. Continuing-operations losses were lower in both comparisons, while discontinued-operations losses were higher.
- Q3 mineral-property expense rose to $3.1 million from $2.8 million, reflecting higher claim maintenance, environmental field work, and temporary geology consultants. For nine months, expense increased to $4.1 million from $3.4 million, including additional environmental, geotechnical, and personnel costs.
- Professional fees declined compared with 2015, which included Sunward acquisition costs. The 2016 discontinued-operations loss included professional fees related to the Sunward Investments sale.
- Cash fell by $6.837 million from November 30, 2015. The company reported no cash from financing activities during the nine months.
Outlook, commentary, and risks
- The 2016 Alaska program had a budget of $5.5 million. The company completed 3,058 metres of drilling at Arctic, along with geotechnical, hydrological, metallurgical, environmental baseline, and other field work to support future studies and a pre-feasibility study. Assay results were expected in fall 2016.
- Management said available working capital was sufficient for operational requirements over the next 12 months, while noting that future exploration and development depend on additional financing. Financing may not be available on favorable terms, or at all.
- The September 1 sale consideration was 5 million Brazil Resources shares and 1 million two-year warrants exercisable at Cdn$3.50, valued at approximately $8.1 million. Management expected to recognize an approximately $4.4 million gain in Q4 2016 and believed tax pools would offset taxes on that gain. These were estimates following a post-quarter-end transaction.
- The company has no production or operating cash inflows. Key risks include financing needs, commodity-price volatility, permitting and environmental requirements, lack of road access to the Alaska projects, exploration uncertainty, and potential dilution from equity issuance and convertible securities.
- The Bornite/NANA agreement includes potential NANA rights to a 16%–25% mine interest or a 15% net-proceeds royalty, as well as additional royalty provisions. The filing also describes a 1% net smelter return royalty on the Ambler lands, which Trilogy may purchase for $10 million.
- A Colombian environmental-related lawsuit and permit matter were disclosed; the company said it was no longer subject to these contingencies after the Sunward Investments sale. Management considered the lawsuit without merit, but said its outcome had been too early to predict.
- Management concluded disclosure controls were effective as of August 31, 2016 and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify the final fair value and accounting treatment of the Brazil Resources shares and warrants, and the Q4 gain actually recognized.
- Monitor cash burn, the timing and cost of the Arctic pre-feasibility work, and whether additional financing is needed.
- Review drilling results and technical disclosures, noting the filing’s warning that Canadian mineral-resource disclosures may not be comparable to U.S. reserve disclosures.
- Assess the potential economic effects of NANA’s project rights and the Ambler royalty.
- Check the fully diluted share count and potential dilution from outstanding options, warrants, RSUs, and DSUs; the filing stated that exercise or settlement of listed convertible securities could require approximately 14.36 million additional shares.