Trilogy Metals Inc. — Q3 2018 Form 10-Q
Business context and period: Exploration-stage company focused on the Upper Kobuk Mineral Projects in Alaska, including the Arctic and Bornite projects. This unaudited report covers the three and nine months ended August 31, 2018; amounts are in U.S. dollars unless noted. The company had no producing properties or operating revenue.
Financial results and liquidity
| Metric | Three months ended Aug. 31, 2018 | Three months ended Aug. 31, 2017 | Nine months ended Aug. 31, 2018 | Nine months ended Aug. 31, 2017 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Total expenses | $10.043 million | $8.694 million | $16.487 million | $12.934 million |
| Net loss | $9.920 million | $8.992 million | $16.530 million | $14.378 million |
| Loss per share, basic and diluted | $0.08 | $0.09 | $0.14 | $0.14 |
- Expense mix: Mineral-property expense was $9.051 million for Q3 and $12.657 million for the nine-month period, compared with $8.471 million and $10.407 million in the prior-year periods. There are no meaningful operating margins given the absence of revenue.
- Cash flow, nine months: $14.592 million used in operating activities; $26.945 million provided by financing activities, principally net proceeds from the April share offering; and $12.725 million provided by investing activities, including $10.435 million of South32 project funding and $2.297 million from investment sales. Cash increased by $25.078 million to $30.468 million.
- Balance sheet at Aug. 31, 2018: Cash and equivalents of $30.468 million; current assets of $31.171 million; current liabilities of $3.964 million; working capital of approximately $27.2 million; total assets of $62.121 million; and shareholders’ equity of $37.357 million. No borrowings are reported. The $20.8 million mineral-properties purchase-option balance is deferred consideration, not identified as debt.
- Accounts payable and accrued liabilities were $3.964 million. Contractual obligations totaled $5.092 million, including $3.964 million payable within one year and $1.128 million of office lease commitments.
Material changes versus prior periods
- Q3 net loss increased by $0.928 million year over year, primarily as mineral-property expense rose by $0.580 million amid the field program. Loss per share declined from $0.09 to $0.08, partly reflecting a higher weighted-average share count.
- Nine-month net loss increased by $2.152 million, mainly reflecting higher project activity and $2.250 million more mineral-property expense, including Arctic pre-feasibility-study work. Loss per share remained $0.14 as the higher loss was offset in part by more weighted-average shares.
- Cash rose from $5.391 million at November 30, 2017, driven by the April 2018 bought-deal financing and South32 funding. The offering issued 24.784 million shares at $1.16 each, generating $28.750 million gross and $26.945 million net proceeds. Shares outstanding increased from 105.685 million to 131.534 million.
- The company sold its remaining GoldMining Inc. common shares during the period; its remaining warrants expired unexercised on September 1, 2018.
Outlook, commentary and risks
- Management said available working capital was expected to meet operational requirements for the next three years, while noting the company has no operating cash inflows and continued operations depend on financing or future cash flows.
- The 2018 Bornite program was increased from $10.0 million to $10.8 million, including additional South32 funding. Drilling finished September 19, 2018; additional results were expected in the fall. Initial reported results included 16.4 metres grading 5.34% copper and 0.21% cobalt.
- The Arctic 2018 budget was $6.7 million for feasibility and permitting work. Management was preparing for a mine-permit application in 2019. The Ambler road project had advanced to the Draft Environmental Impact Statement phase; the draft was scheduled for public comment by the end of March 2019.
- The Arctic pre-feasibility study estimated after-tax NPV at 8% of $1.413 billion and after-tax IRR of 33.4% in its base case, with initial capital of $779.6 million. These are project-study estimates, not company earnings or assured outcomes. The company was evaluating ore-sorting costs and benefits.
- South32’s option can lead to a 50/50 joint venture, with a minimum $150 million contribution upon exercise, subject to the agreement’s terms. South32 funds approved annual programs and retains withdrawal and option-election rights. NANA also has rights to an ownership interest or royalty upon mine development.
- Key risks include exploration and resource uncertainty, permitting and environmental requirements, the need for road infrastructure and its approvals, commodity-price and financing risk, and the possibility that projects never reach production. Mineral resources are not mineral reserves and do not establish economic viability. No material current, pending, or threatened litigation was disclosed.
Important facts for investors to verify
- Cash burn, project budgets, and whether management’s three-year liquidity assessment remains valid given the lack of operating revenue.
- South32’s future funding and option decisions, including the conditions and timing for any joint-venture exercise.
- Arctic feasibility-study progress, project cost assumptions, permitting milestones, and the Ambler road’s approval and construction status.
- Bornite drilling results and resource updates, noting that inferred resources have substantial uncertainty and may not be economically mineable.
- Potential dilution: at October 4, 2018, 131.555 million common shares were outstanding, with options, warrants, and share units representing additional potential shares.