Trilogy Metals Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended February 28, 2018. Amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted. Trilogy is an exploration-stage company focused on the Upper Kobuk Mineral Projects in Alaska, including the Arctic and Bornite projects. It had no operating revenue or production.
Financial position and results
- Revenue and earnings: No revenue was reported. Net loss was $2.946 million, or $0.03 per share, compared with a $2.996 million loss, or $0.03 per share, in Q1 2017. Profit margins are not applicable.
- Expenses: Total expenses were $2.828 million versus $1.771 million. Mineral property expense rose to $1.131 million from $0.639 million, largely reflecting engineering, environmental and consulting work for the Arctic preliminary feasibility study (PFS). Stock-based compensation increased to $0.922 million from $0.395 million.
- Investments: The company recorded a $0.639 million unrealized gain on its GoldMining Inc. holdings, offset in part by a $0.774 million realized loss on sales. In Q1 2017, it recorded a $1.239 million unrealized loss and a small realized gain.
- Cash flow: Operating activities used $4.331 million, compared with $1.442 million in Q1 2017. Investing activities provided $11.061 million, including $9.635 million of South32 funding and $1.432 million of net investment-sale proceeds. Cash increased by $6.730 million to $12.146 million.
- Liquidity: Working capital was approximately $12.6 million. Current assets were $14.071 million and current liabilities were $1.460 million. Management said additional funding will be needed to support future operations and administration.
- Debt and other obligations: No borrowings are reported. Liabilities include $1.460 million of accounts payable and accrued liabilities and a $20.0 million mineral-property purchase-option balance, representing deferred South32 consideration. Office lease commitments totaled $1.237 million.
- Assets and equity: Mineral properties and development costs were $30.587 million; total assets were $45.101 million and shareholders’ equity was $23.641 million. Shares outstanding were 106,535,276 at February 28, 2018.
Material developments and outlook
- The Arctic PFS announced during the quarter reported a base-case after-tax NPV at 8% of $1.413 billion and after-tax IRR of 33.4%; estimated initial capital was $779.6 million, with a 12-year mine life. These are project-study estimates, not company earnings or guidance, and are subject to the assumptions and limitations described in the filing.
- South32 funded the second $10 million tranche under the UKMP option agreement during the quarter. The funds are for an approved program. South32’s option could lead to a 50/50 joint venture, with South32 required to contribute at least $150 million upon exercise, subject to the agreement’s terms.
- The 2018 Bornite program and budget was approved at $10 million, including infill and step-out drilling; field work was anticipated to begin in May 2018. The company planned further Arctic ore-sorting work and to assess next steps toward feasibility work and permitting.
- Management planned to work with AIDEA on permitting for the Ambler Mining District Industrial Access Project. The filing cited a draft environmental impact statement targeted for March 2019 and a final statement for December 2019; road access and permitting remain significant uncertainties.
Risks, contingencies and other disclosures
- The company has no operating cash inflows and depends on financing, investment sales and South32 funding. Continued operations depend on obtaining additional financing or generating future cash flows.
- Key risks include project infrastructure and access, permits and environmental approvals, commodity-price volatility, resource and project-economic uncertainty, exploration and development costs, and the possibility that the projects will never enter production.
- South32 funding is restricted to the approved program in practice under the agreement, although it is not classified as restricted cash. If South32 withdraws, deferred consideration may be recognized in earnings.
- The company reported no material current, pending or threatened litigation and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Review the Arctic PFS technical report, assumptions, capital estimates and project economics; distinguish Canadian resource classifications from SEC reserve standards.
- Confirm South32’s subsequent funding and option elections, and the treatment and availability of the deferred $20.0 million consideration.
- Track the AMDIAP access-road permitting schedule, environmental review and the availability of a viable route to project development.
- Assess the company’s cash runway, future financing needs, investment-sale proceeds and potential dilution from outstanding options, warrants and share units.
- Reconcile investment-sale gains and losses and their impact on reported quarterly net loss and cash flow.