Trilogy Metals Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2018. All financial amounts below are in U.S. dollars; statement amounts are in thousands unless stated otherwise.
Business context
Trilogy is an exploration-stage base-metals company focused on the Upper Kobuk Mineral Projects in Northwest Alaska, including the Arctic and Bornite projects. Neither project is producing, and the company reported no operating revenue.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Total expenses | $3,616 | $2,469 | $6,444 | $4,249 |
| Net loss | $3,664 | $2,390 | $6,610 | $5,387 |
| Loss per share, basic and diluted | $0.03 | $0.02 | $0.06 | $0.05 |
- Mineral-property expense was $2.475 million for the quarter and $3.606 million for the six months, versus $1.297 million and $1.936 million, respectively, in the comparable 2017 periods. The company attributed the increase mainly to project work and preparation of the Arctic pre-feasibility study (PFS).
- At May 31, cash and cash equivalents were $37.469 million, current assets were $38.631 million, and working capital was approximately $36.1 million. Total assets were $69.626 million and shareholders’ equity was $47.059 million.
- The balance sheet reports no debt. Liabilities included $2.567 million of accounts payable and accrued liabilities and a $20.0 million mineral-properties purchase-option balance.
- Six-month operating cash use was $6.566 million; financing provided $26.931 million net of issuance costs, and investing activities provided $11.702 million. Cash increased by $32.067 million, plus an $11,000 exchange-rate effect.
- The April bought-deal financing issued 24.784 million shares at $1.16 per share for $28.75 million gross proceeds and $26.931 million net proceeds. Shares outstanding at May 31 were 131.348 million.
- Investment-related items affected reported earnings: the six-month statement included a $1.276 million realized loss on investment sales and a $1.016 million unrealized gain on held-for-trading investments.
Changes versus prior periods
Net losses increased year over year in both the quarter and six-month period, primarily as higher exploration and project-development spending more than offset income and investment gains. The company also cited increased general and administrative and investor-relations activity. Stock-based compensation expense for the six months rose to $1.073 million from $0.499 million.
Liquidity improved substantially following the $26.9 million net equity financing and receipt of South32’s second $10 million program funding tranche. Trilogy sold GoldMining Inc. shares during the period for approximately $2.1 million; it reported selling its remaining 280,000 shares in June 2018.
Outlook, commentary and risks
- Management said available working capital was expected to fund operational requirements for the next three years. The company remains dependent on financing or future cash flows, as it has no operating cash inflows.
- The 2018 Bornite program budget was $10 million, including planned drilling of approximately 8,000 meters. The Arctic program budget was $6.7 million, focused on feasibility-level engineering, geotechnical and hydrological work, environmental baseline studies, and permitting preparation.
- The Arctic PFS reported estimated after-tax NPV at 8% of $1.413 billion, after-tax IRR of 33.4%, initial capital of $779.6 million, and an estimated 12-year mine life. These are project-study estimates, not operating results or a production forecast; development would require significant capital, permits, and infrastructure.
- The Ambler road access project had entered the Draft Environmental Impact Statement phase; the Draft EIS was scheduled for March 2019. The filing highlights uncertainty over permitting and whether the road will be built.
- South32’s option agreement provides for at least $10 million of annual program funding for up to three years and a potential 50/50 joint venture, subject to the agreement’s terms and South32’s elections. The $20 million purchase-option liability reflects deferred consideration accounting; the filing states the option’s fair value was nil at May 31.
- After quarter-end, Trilogy announced an inferred cobalt resource at Bornite totaling 77 million pounds of contained cobalt. The filing cautions that inferred resources are uncertain and are not mineral reserves or evidence of economic viability.
- Principal risks include exploration and resource uncertainty, commodity-price volatility, financing needs, permitting and infrastructure, environmental requirements, title, weather, and possible dilution from future equity issuance. The company reported no material current, pending, or threatened litigation; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether planned Arctic feasibility and permitting work and the Bornite drilling program progress on schedule and within budget.
- South32’s future funding and option-exercise decisions, and the accounting and balance-sheet treatment of the related deferred consideration.
- The status, timing, permitting and financing of the Ambler road access project, a key infrastructure dependency.
- Updated technical reports and the assumptions underlying Arctic PFS economics and Bornite resource estimates, including the distinction between inferred resources and reserves.
- Cash burn, remaining liquidity runway, and potential dilution from outstanding options, warrants, RSUs and DSUs; the filing reports 17.150 million potential shares from convertible securities at July 16, 2018.