Trilogy Metals Inc. — Form 10-Q Summary
Business context and reporting period
Trilogy Metals is an exploration-stage company focused on the Upper Kobuk Mineral Projects in northwest Alaska, including the Arctic and Bornite projects. This unaudited 10-Q covers the quarter and nine months ended August 31, 2019; financial amounts are in U.S. dollars unless noted. The company had no producing mines or operating revenue.
Financial results and position
| Metric | Three months ended August 31, 2019 | Nine months ended August 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | No operating revenue reported | No operating revenue reported | No operating revenue reported |
| Total expenses | $12.672 million | $21.789 million | $10.043 million; $16.487 million |
| Net loss | $12.535 million | $21.380 million | $9.920 million; $16.530 million |
| Loss per share, basic and diluted | $0.09 | $0.16 | $0.08; $0.14 |
| Cash used in operating activities | Not stated separately | $15.755 million | $14.592 million for nine months |
At August 31, 2019, cash and cash equivalents were $26.852 million, current assets were $27.731 million, and working capital was $23.2 million. Total assets were $59.252 million and shareholders’ equity was $23.740 million. Accounts payable and accrued liabilities were $4.512 million. The balance sheet lists a $31.0 million mineral-properties purchase-option liability, representing South32 funding treated as deferred consideration, not conventional borrowing. No conventional debt balance is reported.
Cash increased by $3.864 million during the nine months, compared with a $25.078 million increase in the 2018 period. Financing activities provided $9.913 million, principally from warrant exercises; investing activities provided $9.706 million, including $10.2 million of South32 option funding, partly offset by $0.494 million of equipment purchases. The company reported lease commitments of approximately $1.1 million and no material off-balance-sheet arrangements.
Material changes versus prior periods
- Third-quarter loss rose $2.615 million year over year, primarily because mineral-properties expense increased $1.9 million to $10.951 million as the field program expanded. Drilling, project support, engineering, and professional fees also increased.
- Nine-month loss increased $4.850 million year over year. Mineral-properties expense rose $2.735 million to $15.392 million; stock-based compensation increased $1.728 million to $3.005 million.
- All outstanding warrants were exercised during the quarter, raising approximately $9.9 million and issuing 6,521,740 shares. Shares outstanding were 138,905,097 at quarter-end, versus 131,585,612 at November 30, 2018.
- Quarterly spending is seasonal: mineral-property expenses were $10.951 million in Q3, compared with $2.906 million in Q2 2019 as the field program became fully operational.
Outlook, commentary, and risks
- South32 had completed its three-year funding commitments. It could exercise its option to form a 50/50 joint venture and contribute at least $150 million, subject to agreement terms, by the end of January 2020. If it does not exercise, the option lapses; the accounting treatment of prior funding would change.
- The draft environmental impact statement for the Ambler access road was released in August 2019, with public comments accepted through October 29, 2019. Road permitting and construction remain important dependencies for project access and development.
- Management anticipated further 2019 Arctic, Bornite, and regional exploration results in Q4 2019, a feasibility study for Arctic in the first half of 2020, and preparation for permitting, expected to commence in 2020. These are forward-looking expectations, not assured outcomes.
- In September 2019, Rick Van Nieuwenhuyse resigned as CEO, president, and director; director James Gowans was appointed interim president and CEO. Van Nieuwenhuyse remained as a consultant through January 31, 2020.
- The company has no cash inflows from operations and states that continued operations depend on future financing or cash flows. Key risks include access-road approvals, permitting, exploration and resource uncertainty, metal-price volatility, project infrastructure and costs, and South32’s decision.
- Management reported effective disclosure controls as of August 31, 2019, with no material change in internal control over financial reporting during the quarter. The filing disclosed no material current, pending, or threatened litigation.
Important facts for investors to verify
- Whether South32 exercises its option by the end of January 2020, and the final subscription amount and terms.
- Progress on the Ambler access-road environmental review, permits, and any subsequent decision to build the road.
- Upcoming drill results and whether the Arctic feasibility study and permitting timetable remain achievable.
- Cash burn, working capital, and any additional financing needs, given the absence of operating revenue and the higher exploration spending.
- Potential dilution from shares and equity awards; the filing reported 140,003,741 common shares outstanding as of October 8, 2019.