Trilogy Metals Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended August 31, 2021. Amounts are in U.S. dollars unless stated otherwise. Trilogy is an exploration and development company with its Upper Kobuk Mineral Projects (UKMP) held through its 50%-owned, jointly controlled Ambler Metals LLC. Trilogy reported no operating revenue.
Financial position and performance
- Quarter: Net loss was $7.664 million, or $0.05 per basic and diluted share, versus a $3.184 million loss, or $0.02 per share, in Q3 2020. Expenses were $1.596 million; the largest item was Trilogy’s $6.072 million share of Ambler Metals’ loss.
- Nine months: Net loss was $15.593 million, or $0.11 per basic and diluted share, versus net earnings of $164.993 million in 2020. The prior-year result included a one-time $175.770 million gain on contributing UKMP assets to Ambler Metals.
- Cash and liquidity: Cash was $6.831 million at August 31, 2021, down from $11.125 million at November 30, 2020. Current assets were $7.328 million and current liabilities $0.561 million, yielding working capital of approximately $6.8 million. Management said cash and working capital were sufficient for at least the next 12 months.
- Cash flow: Operating activities used $4.283 million over nine months; $0.119 million was invested in mineral claims. Cash declined by approximately $4.294 million, including the effect of exchange rates.
- Assets and investment: The Ambler Metals equity-method investment was $164.253 million, down from $173.145 million at fiscal year-end, reflecting Trilogy’s $8.892 million share of the investee’s nine-month loss. Total assets were $172.255 million.
- Debt and obligations: The filing reports no material borrowing debt. Lease liabilities totaled $0.462 million; undiscounted office lease payments were $0.507 million. Total liabilities were $0.847 million.
- Margins: Not meaningful because Trilogy has no operating revenue. Its results primarily reflect corporate expenses and its share of Ambler Metals’ exploration and development costs.
Material changes and operating developments
- Q3 loss increased by $4.480 million year over year, mainly because Trilogy’s share of Ambler Metals’ loss rose by about $5.0 million as the joint venture incurred 2021 field-program drilling costs. The 2020 field season had been cancelled because of COVID-19.
- Ambler Metals reported a nine-month comprehensive loss of $17.783 million, compared with $3.666 million in 2020. Its mineral properties expense increased to $15.109 million from $2.409 million.
- The 2021 UKMP exploration budget was $27 million. Drilling fell behind schedule due to adverse weather and contractor staffing challenges; 7,325 meters were completed. At Arctic, 18 holes totaling 4,131 meters were drilled, and regional work completed eight holes totaling 3,194 meters. Results were expected later in 2021.
- Trilogy’s corporate stock-based compensation was $3.081 million for the nine months, broadly similar to $3.030 million in 2020. Common shares outstanding were 144,451,485 at August 31, 2021.
Outlook, risks and contingencies
- Management said the UKMP is funded through Ambler Metals and Trilogy did not expect to fund its 50% share of future UKMP expenditures until South32’s $145 million contribution to the joint venture is spent. The filing does not specify when that funding threshold may be reached.
- Ambler Metals was preparing an Arctic Project Notice of Intent, with filing expected before year-end 2021. Management anticipated a 24-to-30-month permitting process.
- The Ambler Access Project, a proposed 211-mile industrial road, is critical to UKMP development. Environmental groups’ lawsuits challenge federal project approvals. On September 28, 2021, the Department of Justice requested 60-day stays in both cases. The company cautioned that litigation, further permitting and financing needs could delay or prevent construction.
- Management identified risks including exploration and permitting uncertainty, project infrastructure and road access, reliance on South32 and other third parties, commodity prices, financing, weather, COVID-19, and potential impairment of the Ambler Metals investment. Trilogy stated that it had no material changes to its previously disclosed risk factors except the heightened Ambler Access Project risk.
- No production or project revenue guidance was provided. Management said corporate cash costs were primarily tracking to budget. There were no material off-balance-sheet arrangements; management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether the Ambler Access Project lawsuits, federal review and additional permitting affect the road’s approval, financing, timing or construction.
- Whether Ambler Metals’ remaining funds are sufficient for planned UKMP work, and when Trilogy may need to contribute additional funding.
- Results from the 2021 Arctic and regional drilling, and progress on Arctic permitting and the expected Notice of Intent.
- The carrying value and recoverability of Trilogy’s $164.253 million Ambler Metals investment, including the effect of continued joint-venture losses.
- Trilogy’s cash use and liquidity relative to management’s stated minimum 12-month runway, given the absence of operating cash inflows.