Trilogy Metals Inc. quarterly report, Q1 FY2020

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Trilogy Metals Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended February 29, 2020. All financial amounts below are in U.S. dollars; financial statement figures are generally in thousands. Trilogy is an exploration-stage company focused on Alaska’s Upper Kobuk Mineral Projects (UKMP), now held through its 50/50 joint venture, Ambler Metals LLC.

Financial performance and position

  • Revenue: No operating revenue was reported. The company remains in the exploration and development stage.
  • Earnings: Net earnings were $171.179 million, or $1.22 basic and $1.16 diluted per share, versus a $4.336 million loss, or $0.03 per share, in Q1 2019. The 2020 result was driven primarily by a $175.770 million gain on transferring UKMP assets to Ambler Metals; it does not represent recurring operating earnings.
  • Expenses: Total expenses were $4.475 million, broadly unchanged from $4.458 million a year earlier. Mineral property expense was $1.545 million; professional fees rose to $668,000 from $91,000, largely due to joint-venture and accounting-related work. Stock-based compensation was $1.196 million, down from $1.939 million.
  • Cash flow: Operating activities used $3.941 million, compared with $3.231 million used in Q1 2019. Investing cash flow was zero, versus $10.2 million of mineral-property funding in the prior-year quarter. Cash declined from $19.174 million at November 30, 2019 to $15.217 million at February 29, 2020.
  • Liquidity: Working capital was $14.5 million. Management said cash and working capital were sufficient for at least the next 12 months. Trilogy stated it did not expect to fund its share of UKMP programs until Ambler Metals spends the approximately $145 million subscription proceeds.
  • Assets and liabilities: The balance sheet included a $175.822 million equity-method investment in Ambler Metals. Accounts payable and accrued liabilities were $1.274 million. Lease liabilities totaled $647,000 ($137,000 current and $510,000 long term). The filing reports no material borrowing debt. No meaningful operating margin is available because the company reported no revenue.

Material changes and transaction

  • On February 11, 2020, Trilogy and South32 completed the 50/50 formation of Ambler Metals. Trilogy contributed its UKMP assets, including the Arctic and Bornite projects; South32 contributed $145 million. Trilogy accounts for its interest using the equity method and recognized its initial investment at a fair value of $176 million.
  • The asset contribution produced the $175.770 million gain. Trilogy also recorded $178,000 as its share of Ambler Metals’ loss from formation through February 29.
  • After quarter-end, Ambler Metals loaned $57.5 million to South32 and retained $87.5 million. The loan has a seven-year maturity, can be called earlier in installments for project needs, and is secured by South32’s LLC interest and a South32 affiliate guarantee.
  • Trilogy adopted ASC 842 lease accounting on December 1, 2019, recognizing $786,000 of right-of-use assets and lease liabilities at transition. It also derecognized the relevant assets and lease obligation transferred or reassigned in the joint-venture transaction.

Outlook, risks, and contingencies

  • Ambler Metals approved a 2020 budget of $22.8 million, funded by the joint venture. Planned work included 10,000 meters of Arctic drilling, 2,500 meters of regional Ambler VMS-belt drilling, and Bornite mapping and soil sampling. The Arctic work was intended to support feasibility studies, metallurgical testing, resource conversion, and infrastructure planning.
  • The planned field programs could be delayed, reduced, or cancelled because of COVID-19 travel restrictions and health-related concerns. The filing gives no quantified estimate of the pandemic’s financial impact.
  • Management estimated that the subscription funding, including amounts due under the South32 loan, would fund UKMP work through feasibility and permitting of the first mine. Once those funds are spent, the parties are expected to contribute further funding pro rata; future development therefore depends on additional capital and approvals.
  • Key risks include permitting and infrastructure development (including the Ambler access project), exploration and resource uncertainty, commodity-price volatility, financing needs, weather, and the ability to maintain relationships with South32 and local stakeholders. Trilogy has no cash inflows from operations and expects future losses; it does not expect to pay cash dividends.
  • The company reported no material current, pending, or threatened litigation and no material off-balance-sheet arrangements. Management said disclosure controls were effective as of February 29, 2020.

Important facts for investors to verify

  1. How the $145 million joint-venture funding is being used, including the terms, repayment capacity, and security of the $57.5 million South32 loan.
  2. Whether COVID-19 or permitting and access constraints changed the announced $22.8 million program, planned drilling, or project schedule.
  3. What feasibility, permitting, and capital milestones remain before development, and when Trilogy may need to fund its 50% share.
  4. The sustainability of Trilogy’s standalone cash position given ongoing operating cash use and the absence of operating revenue.
  5. Potential dilution: as of April 7, 2020, Trilogy reported 140,665,733 common shares outstanding and securities convertible or exercisable into an aggregate of 12,168,312 additional shares.