Trilogy Metals Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended November 30, 2020; the filing also reports fourth-quarter results. Unless noted, amounts are U.S. dollars. Trilogy is an exploration and development company with a 50% interest in Ambler Metals LLC, its equally owned joint venture with South32, which holds the Upper Kobuk Mineral Projects in Alaska. Neither project is producing, and Trilogy has no mining operating revenue.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net earnings (loss) | $161.8 million | ($27.9 million) |
| Basic earnings (loss) per share | $1.14 | ($0.21) |
| Operating cash flow | ($8.3 million) | ($23.5 million) |
| Cash and cash equivalents at year-end | $11.1 million | $19.2 million |
| Working capital at year-end | $10.4 million | $17.8 million |
| Total assets | $185.3 million | $51.6 million |
| Total liabilities | $1.5 million | $33.4 million |
| Shareholders’ equity | $183.8 million | $18.3 million |
FY2020 earnings chiefly reflect a $175.8 million gain recognized when Trilogy contributed its Alaska assets to Ambler Metals and received a 50% interest. This non-operating gain more than offset $12.2 million of reported expenses and Trilogy’s $2.9 million share of Ambler Metals’ post-formation loss. The filing does not report mining revenue or operating margins. Trilogy had no conventional funded debt reported; its balance sheet included $566,000 of lease liabilities. Operating cash outflow declined from 2019, mainly because the joint venture assumed project funding after its February 2020 formation. No investing cash flows were reported for FY2020.
Fourth-quarter 2020 net loss was $3.2 million, compared with $6.5 million in fourth-quarter 2019. The filing attributes the improvement mainly to lower mineral-property expenses, partly offset by the equity-method loss and management salaries.
Business developments and project economics
- South32 contributed $145 million to establish Ambler Metals in exchange for a 50% interest; Trilogy contributed the UKMP assets. Trilogy accounts for its interest using the equity method and reported a $173.1 million carrying value at year-end.
- Ambler Metals had $81.7 million of cash and an additional $58.5 million loan receivable from South32 at November 30, 2020. The loan has a seven-year maturity, is secured by South32’s Ambler Metals membership interest and guaranteed by a South32 affiliate. The filing says Ambler Metals expected to begin drawing cash calls for South32’s share of the 2021 budget before year-end 2021.
- The 2020 Arctic feasibility study describes a proposed 10,000-tonne-per-day open-pit mine with a 12-year mine life. On a 100% project basis, it estimates 43.443 million tonnes of Probable Mineral Reserves. Trilogy’s joint-venture share is 50%. These are Canadian NI 43-101 estimates; the filing states Trilogy has no reserves under SEC Industry Guide 7.
- The Arctic study estimates post-tax NPV of $1.135 billion at an 8% discount rate, a 27.1% post-tax IRR and a 2.6-year payback, on a 100% project basis. These are feasibility-study projections, not realized results, and exclude the possible effect of NANA’s right to take a 16%–25% project interest or a 15% net-proceeds royalty.
- The Ambler Road project received a federal Record of Decision approving a 211-mile northern route and a Clean Water Act permit in 2020. Environmental groups subsequently sued over the approvals. The filing reports that federal right-of-way agreements were signed in January 2021; the road still requires development and construction.
Outlook, risks and contingencies
Ambler Metals cancelled its planned 2020 field season because of COVID-19-related safety concerns and delays. Its approximately $27 million 2021 program and budget is funded by Ambler Metals and includes Arctic drilling and metallurgical work, regional exploration drilling, engineering and permitting activities. Trilogy separately budgeted approximately $5.3 million for corporate activities. Management stated that Trilogy’s working capital was sufficient for its operational requirements for the next two years.
In February 2021, after the fiscal year-end, Ambler Metals agreed to fund 50% of certain AIDEA pre-construction activities for the Ambler Access Project over three to four years, up to $35 million. Key uncertainties include securing project permits, road construction and toll costs, remote-site infrastructure, metal prices, resource and feasibility assumptions, environmental and closure obligations, COVID-19 disruptions, and dependence on South32 and NANA. The Arctic study estimates initial capital of $905.6 million in narrative text, while its capital-cost table shows a project total of $906.7 million; the filing also presents differing closure-cost estimates in different sections.
The company reported no material pending or threatened litigation known to it, apart from routine matters; the Ambler Road lawsuit is described in the MD&A. Management concluded disclosure controls and internal control over financial reporting were effective as of November 30, 2020. The independent auditor gave an unqualified opinion on the financial statements, but did not attest to internal control effectiveness.
Important facts for investors to verify
- Reconcile the Arctic study’s stated initial capital cost ($905.6 million versus $906.7 million in the cost table) and its differing closure-cost disclosures.
- Track Ambler Metals’ cash use, the terms and repayment of its $57.5 million loan to South32, and the timing and amount of future owner funding.
- Confirm progress, litigation outcomes, permitting status, construction financing and final toll terms for the Ambler Road; the feasibility economics depend materially on access.
- Assess how NANA’s back-in or royalty election would affect project ownership and the published Arctic economics, which exclude those alternatives.
- Distinguish Canadian mineral resource and reserve categories and feasibility projections from SEC-standard reserves and actual project performance; Trilogy reports no SEC Industry Guide 7 reserves.