BUNKER HILL MINING CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), the “Company” refers to Bunker Hill Mining Corp. and its consolidated subsidiaries, except where the context requires otherwise. You should read this discussion in conjunction with the Company’s consolidated financial statements, the related MD&A and the discussion of our Business and Properties in its report on Form 10-KT for the six months ended December 31, 2020, filed with the SEC. The results of operations reported and summarized below are not necessarily indicative of future operating results (refer to “Special Note of Caution Regarding Forward-Looking Statements” above for further discussion).
References to “Notes” are Notes included in the Company’s Notes to Interim Condensed Consolidated Financial Statements (Unaudited).COVID-19 Coronavirus Pandemic Response and ImpactFollowing the outbreak of the COVID-19 coronavirus global pandemic (“COVID-19”) in early 2020, in March 2020 the U.S. Centers for Disease Control issued guidelines to mitigate the spread and health consequences of COVID-19. The Company implemented changes to its operations and business practices to follow the guidelines and minimize physical interaction, including using technology to allow employees to work from home when possible.
As long as they are required, the operational practices implemented could have an adverse impact on our results. The negative impact of COVID-19 remains uncertain, including on overall business and market conditions. There is uncertainty related to the potential additional impacts COVID-19 could have on our operations and financial results for the year.Description of BusinessCorporate InformationThe Company was incorporated under the laws of the State of Nevada, U.S.A on February 20, 2007 under the name Lincoln Mining Corp.
On February 11, 2010, the Company changed its name to Liberty Silver Corp and subsequently, on September 29, 2017, the Company changed its name to Bunker Hill Mining Corp. The Company’s registered office is located at 1802 N. Carson Street, Suite 212, Carson City Nevada 89701, and its head office is located at 82 Richmond Street East, Toronto, Ontario, Canada, M5C 1P1, and its telephone number is 416-477-7771.
The Company’s website is www.bunkerhillmining.com. Information appearing on the website is not incorporated by reference into this report.31Current OperationsOverviewThe Company was incorporated for the purpose of engaging in sustainable mineral exploration, development and mining activities. The Company’s sole focus is the Bunker Hill mine and assets related thereto (the “Mine”), as described below.On August 28, 2017, the Company announced that it signed a definitive agreement with Placer Mining Corporation (“Placer Mining”), the current owner of the Mine, for the lease and option to purchase the Mine in Idaho (the “Lease and Option Agreement”).On November 1, 2019, the Lease and Option Agreement was amended (the “Amended Agreement”).
Under the terms of the Amended Agreement, the Company has an option to purchase the marketable assets of the Mine for a purchase price of £11,000,000 at any time prior to the expiration of the Amended Agreement, payable £6,200,000 in cash, and £4,800,000 in unregistered Common Shares of the Company (calculated using the market price at the time of exercise of the purchase option). Upon signing the Amended Agreement, the Company paid a one-time, non-refundable cash payment of £300,000 to Placer Mining. This payment will be applied to the cash portion of the purchase price upon execution of the purchase option.
In the event the Company elects not to exercise the purchase option, the payment shall be treated as an additional care and maintenance payment. An additional term of the Amended Agreement provides for the elimination of all royalty payments that were to be paid to Placer Mining.Under the terms of the Amended Agreement, during the term of the lease, the Company must make care and maintenance payments in the amount of £60,000 monthly plus other expenses, i.e., taxes, utilities and mine rescue payments.On July 27, 2020, the Company announced that it secured, for a £150,000 cash payment, a further extension to the Lease and Option, Amended and Extension Agreements to purchase the Mine from Placer Mining (the “Second Extension”). The Second Extension is for a further 18 months and is in addition to the 6-month extension.
This Second Extension expires on August 1, 2022.On November 20, 2020, the Company successfully renegotiated the Amended Agreement. Under the new terms, the purchase price has been decreased from £11,000,000 to £7,700,000, with £5,700,000 payable in cash (with an aggregate of £300,000 to be credited toward the purchase price of the Mine as having been previously paid by the Company and an aggregate of £5,400,000 payable in cash outstanding) and £2,000,000 in Common Shares of the Company. The reference price for the payment in Common Shares will be based on the share price of the last equity raise before the option is exercised.
The Company will continue to make a monthly care and maintenance payment of £60,000 to the Lessor in return for on-going technical support to the Company. Under this amendment to the Amended Agreement, the Company’s contingent obligation to settle £1,787,300 of accrued payments due to the Lessor has been waived. Further, under the amendment to the Amended Agreement, the Company is to make an advance payment of £2,000,000 to Placer Mining, which shall be credited toward the purchase price of the Mine when the Company elects to exercise its purchase right.
In the event that the Company irrevocably elects not to exercise its purchase right, the advance payment of £2,000,000 will be repaid to the Company within twelve months from the date of such election. The Company made this advance payment, which had the effect of decreasing the remaining amount payable to purchase the Mine to an aggregate of £3,400,000 payable in cash and £2,000,000 in Common Shares of the Company.As a part of the purchase price, the Amended Agreement also requires payments pursuant to an agreement with the U.S. Environmental Protection Agency (“EPA”) whereby for so long as the Company leases, owns and/or occupies the Mine, the Company will make payments to the EPA on behalf of Placer Mining in satisfaction of the EPA’s claim for cost recovery.
These payments, if all are made, will total £20,000,000. The agreement calls for payments starting with £1,000,000 30 days after a fully ratified agreement was signed (which payment was made) followed by £2,000,000 on November 1, 2018 and £3,000,000 on each of the next 5 anniversaries with a final £2,000,000 payment on November 1, 2024. In addition to these payments, the Company is to make semi-annual payments of £480,000 on June 1 and December 1 of each year, to cover the EPA’s estimated costs of maintaining and treating water at the water treatment facility with a true-up to be paid by the Company once the actual costs are determined.
The November 1, 2018, December 1, 2018, June 1, 2019, November 1, 2019 and November 1, 2020 payments, totaling £8,960,000, were not made, and concurrent with discussions concerning the long-term water management solutions the Company is having discussions with the EPA in an effort to reschedule these payments in ways that enable the sustainable operation of the Mine as a viable long-term business.32The Mine remains the largest single producing mine by tonnage in the Coeur d’Alene lead, zinc and silver mining district in Northern Idaho. Historically and according to the Bunker Hill Mines Annual Report 1980, the Mine produced over 35,000,000 tonnes of ore grading on average 8.76% lead, 3.67% zinc, and 155 g/t silver. The Mine is the Company’s only focus, with a view to raising capital to rehabilitate the mine and put it back into production.The Company believes that there are numerous exploration targets of opportunity left in the Mine from surface, in parallel to known and mined mineralization and at depth, below existing workings.
In addition to the zinc-rich zones, these also include high-grade lead-silver veins which are currently the primary focus of the Company’s exploration programs.ProductsThe Mine is a lead-silver-zinc Mine. When back in production, the Company intends to mill mineralized material on-site or at a local third-party mill to produce both lead-silver and zinc concentrates which will then be shipped to third party smelters for processing.The Company will continue to explore the property with a view to proving additional resources.InfrastructureThe acquisition of the Mine includes all mining rights and claims, surface rights, fee parcels, mineral interests, easements, existing infrastructure at Milo Gulch, and the majority of machinery and buildings at the Kellogg Tunnel portal level, as well as all equipment and infrastructure anywhere underground at the Bunker Hill Mine Complex. The acquisition also includes all current and historic data relating to the Bunker Hill Mine Complex, such as drill logs, reports, maps, and similar information located at the Mine site or any other location.Government Regulation and ApprovalThe current exploration activities and any future mining operations are subject to extensive laws and regulations governing the protection of the environment, waste disposal, worker safety, mine construction, and protection of endangered and protected species.
The Company has made, and expects to make in the future, significant expenditures to comply with such laws and regulations. Future changes in applicable laws, regulations and permits or changes in their enforcement or regulatory interpretation could have an adverse impact on the Company’s financial condition or results of operations.It is anticipated that it may be necessary to obtain the following environmental permits or approved plans: ? Reclamation and Closure Plan ?
Water Discharge Permit ? Air Quality Operating Permit ? Obtaining Water Rights for OperationsProperty DescriptionThe Amended Agreement includes mineral rights to approximately 440 patented mining claims covering over 5700 acres.
Of these claims, 35 include surface ownership of approximately 259 acres. The transaction also includes certain parcels of fee property which includes mineral and surface rights but not patented mining claims. Mining claims and fee properties are located in Townships 47, 48 North, Range 2 East, Townships 47, 48 North, Range 3 East, Boise Meridian, Shoshone County, Idaho.The Amended Agreement specifically excludes the following: the Machine Shop Building and Parcel number 21 including all fixed equipment located inside the building and personal property located upon this parcel; unmilled ore located at the Mine yard; and residual lead/zinc ore mined and broken, but not removed from the Mine.Surface rights were originally owned by various previous owners of the claims until the acquisition of the properties by Bunker Limited Partners (“BLP”).
BLP sold off surface rights to various parties over the years while maintaining access to conduct mining operations and exploration activities as well as easements to a cross over and access other of its properties containing mineral rights. Said rights were reserved to its assigns and successors in continuous perpetuity. Idaho Law also allows mineral right holders access to mine and explore for minerals on properties to which they hold minerals rights.Title to all patented mining claims included in the transaction was transferred from Bunker Hill Mining Co. (U.S.) Inc. by Warranty Deed in 1992.
The sale of the property was approved of by the U.S. Trustee and U.S. Bankruptcy Court.Over 90% of surface ownership of patented mining claims not owned by Placer Mining is owned by different landowners.
These include: Stimpson Lumber Co.; Riley Creek Lumber Co.; Powder LLC.; Golf LLC.; C & E Tree Farms; and Northern Lands LLC.Patented mining claims in the State of Idaho do not require permits for underground mining activities to commence on private lands. Other permits associated with underground mining may be required, such as water discharge and site disturbance permits. The water discharge is being handled by the EPA at the existing CTP.
The Company expects to take on the water treatment responsibility in the future and obtain an appropriate discharge permit.33CompetitionThe Company competes with other mining and exploration companies in connection with the acquisition of mining claims and leases on zinc and other base and precious metals prospects as well as in connection with the recruitment and retention of qualified employees. Many of these companies are much larger than the Company, have greater financial resources and have been in the mining business for much longer than it has. As such, these competitors may be in a better position through size, finances and experience to acquire suitable exploration and development properties.
The Company may not be able to compete against these companies in acquiring new properties and/or qualified people to work on its current project, or any other properties that may be acquired in the future.Given the size of the world market for base precious metals such as silver, lead and zinc, relative to the number of individual producers and consumers, it is believed that no single company has sufficient market influence to significantly affect the price or supply of these metals in the world market.EmployeesThe Company has two employees in executive positions. The balance of the Company’s operations is contracted for as consultants.Completed Work and Future Plan of OperationsOfficer AppointmentEffective as of January 12, 2021, the Board appointed Mr. David Wiens to the role of Chief Financial Officer and Corporate Secretary of the Company, replacing Mr.
Wayne Parsons, who continues to serve on the Board.Financing TransactionOn February 24, 2021, the Company closed a non-brokered private placement of 19,994,080 Units of the Company at C£0.40 per Unit for gross proceeds of £6,618,069 (C£7,830,544). Each Unit consists of one Common Share of the Company and one Common Share purchase warrant. Each whole warrant entitles the holder to acquire one Common Share of the Company at a price of C£0.60 per Common Share for a period of five years.
Pursuant to the offering, certain directors and officers of the Company acquired 626,580 Units. This issuance of such Units in connection with the offering was considered a “related party transaction” as such term is defined under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”).Mineral ResourcesConcurrent with the digitization work, and since March 2020, the Company has been working systematically to bring a number of mineralized zones into accordance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) through drilling and channel sampling of the open stopes. This work focused upon the mineralization that is closest to the existing infrastructure and above the current water-level.On March 19, 2021, the Company announced an updated mineral resources estimate consisting of a total of 4.4 million tons in the Indicated category, containing 3.0 million ounces of silver, 487 million pounds of zinc, and 176 million pounds of lead; and a total of 5.6 million tons in the Inferred category, containing 8.3 million ounces of silver, 548 million pounds of zinc, and 312 million pounds of lead.On May 3, 2021, the Company filed a technical report entitled “Technical Report for the Bunker Hill Mine, Coeur d’Alene Mining District, Shoshone County, Idaho, USA” with an effective date of March 22, 2021 prepared in accordance with NI 43-101 in support of such mineral resources estimate.
Further details regarding the Company’s mineral resources estimate, including estimation methodologies, can be found in the technical report filed on EDGAR and SEDAR .It should be noted that mineral resources as stated above, including those delineated in the Inferred, Measured and Indicated categories, are not mineral reserves as defined by SEC guidelines, and do now show demonstrated economic viability. Due to the uncertainty that may be attached to Inferred mineral resources, it cannot be assumed that all or any part of an Inferred mineral resource will be upgraded to an Indicated or Measured mineral resource as a result of continued exploration.34ExplorationWith the completion of exploration drilling related to the updated mineral resources estimate as announced on March 19, 2021 (as described above), the Company’s exploration strategy has been focused on high-grade silver targets within the upper areas of the Mine that have been identified by the data review and digitization process. The aim of this program is to identify, develop and add high-grade silver resources in ways that materially increase the quantity of silver resources relative to lead and zinc.Consistent with that strategy and concurrent with the announcement of the updated mineral resources estimate, the Company announced the identification of a new silver exploration opportunity in the hanging wall of the Cate Fault which it intends to include in its ongoing drilling campaign.
In conjunction with this drilling campaign, continued digitization, geologic modeling and interpretation will continue to focus on identifying additional high grade silver exploration targets.On March 29, 2021, the Company announced multiple high-grade silver mineralization results through chip-channel sampling of newly accessible areas of the Mine identified through the Company’s proprietary 3D digitization program, and as part of its ongoing silver-focused drilling program. An area was identified on the 9-level that resulted in ten separate chip samples greater than 900 g/t AgEq(1), each with minimum 0.6m length. Mineralization remains open up dip, down dip and along strike from the sampling location.
The Company also reported drill results including a 3.8m intercept with a grade of 996.6 g/t AgEq(1), intersected at the down-dip extension of the UTZ zone at the 5-level. The Company will continue to report mineralized drill intercepts concurrent with the receipt of data from its exploration program.On September 23, 2021, the Company announced that it has completed an extensive ground geophysical survey spanning approximately 1,200 acres of previously un-explored ground immediately to the south and south-west of historic underground workings, conducted as a high-resolution 3D IP (DCIP) survey method. The coverage area will extend to a depth of approximately 1,300 feet, with the objective of identifying near-surface drilling targets that are directly accessible from existing workings.
The program was completed during the third quarter of 2021 and finalized data from the geophysics is expected in November 2021.(1) Prices used to calculate Ag Eq are as follows: Zn=£1.16/lb; Pb=£0.92/lb; and Ag=£20/oz.Water Management OptimizationThe EPA currently provides mine water treatment services for the Mine to ensure compliance with existing discharge standards. This is done via its management of the EPA’s Central Treatment Plant (“CTP”), located adjacent and downstream to the Mine. Although it also treats other contaminated water collected from other sources in the vicinity, with respect to its service to the Mine, this facility treats all the water that exits the Kellogg Tunnel before it is discharged into the South Fork of the Coeur d’Alene River.In September 2020, the Company began its water management program with the goal of improving the understanding of the Mine’s water system and enacting immediate improvement in the water quality of effluent leaving the mine for treatment at the CTP.
Informed by historical research provided by the EPA, the Company initiated a study of the water system of the mine to: i) identify of the areas where sulphuric acid (Acid Mine Drainage, or “AMD”) is generated in the greatest and most concentrated quantities, and ii) understand the general flow paths of AMD on its way through and out of the mine as it travels to the CTP.Leveraging its improved understanding through this study, on February 11, 2021, the Company announced the successful commissioning of a water pre-treatment plant located within the Mine, designed to significantly improve the quality of Mine water discharge, which in turn would support a rapid restart of the Mine. Specifically, the water pre-treatment plant achieves this goal by reducing significantly the amount of treatment required at the CTP, and the associated costs, before the Mine water is discharged into the south fork of the Coeur d’Alene River, removing over 70% of the metals from water before it leaves the Mine, with the potential for further improvements.In an effort to improve transparency to all stakeholders with regard to the results of this system, the Company launched a water quality tracking platform on its website on March 15, 2021, which uploads real-time data every five minutes and provides an interactive database to allow detailed historical analysis.35Infrastructure ReviewThe Mine main level is termed the nine level and is the largest level in the Mine. It is connected to the surface by the approximately 12,000 foot-long Kellogg Tunnel.
Three major inclined shafts with associated hoists and hoistrooms are located on the nine level. These are the No.
1 shaft, which is used for primary muck hoisting in the main part of the Mine; the No.
2 shaft, which is a primary shaft for men and materials in the main part of the Mine; and the No.
3 Shaft, which is used for personnel, materials and muck hoisting for development in the northwest part of the Mine.The top stations of these shafts and the associated hoistrooms and equipment have all been examined by Company personnel and are in moderately good condition. The Company believes that all three shafts remain in a condition that they are repairable and can be bought back into good working order over the next few years.The water level in the Mine is held at approximately the ten level of the Mine, roughly 200 feet below the nine level.
The Mine was historically developed to the 27 level, although the 25 level was the last major level that underwent significant development and past mining. Each level is approximately 200 feet vertically apart.The southeastern part of the Mine was historically serviced by the Cherry Raise, which consisted of a two-compartment shaft with double drum hoisting capability that ran at an incline up from the nine level to the four level. The central part of the Mine was serviced upward by the Last Chance Shaft from the nine level to the historic three or four level.
Neither the Cherry Raise or the Last Chance shaft are serviceable at this time. However, the upper part of the Mine from eight level up to the four level has been developed by past operators by a thorough-going rubber tire ramp system, which is judged to be about 65% complete.The Company has repaired the first several thousand feet of the Russell Tunnel, which is a large rubber-tire capable tunnel with an entry point at the head of Milo Gulch. This tunnel will provide early access to the UTZ Zone, and Quill and Newgard Zones, following ramp and access development.
The Company has made development plans to provide interconnectivity of the ramp system from the Russell Tunnel at the four level down to the eight level, with further plans to extend the ramp down to the nine level. Thus rubber-tired equipment will be used for mining and haulage throughout the upper Mine mineral zones, which have already been identified, and for newly found zones.The Kellogg Tunnel will be used as a tracked rail haulage tunnel for supply of personnel and materials into the Mine and for haulage of mined material out of the Mine. Historically, the Kellogg Tunnel was used in this manner when the Mine was producing upwards of 3,000 tons per day of mined material.
The Company has inspected the Kellogg Tunnel for its entire length and has determined that significant timbered sections of the tunnel will need extensive repairs. These are areas that intersect various faults passing through the Kellogg Tunnel at normal to oblique angles and create unstable ground.The Company has determined that all of the track, as well as spikes, plates and ties holding the track will need to be replaced, and has started that process in support of the on-going exploration program. Additionally, the water ditch that runs parallel to the track will need to be thoroughly cleaned out and new timber supports and boards that keep the water contained in its path will need to be installed.
All new water lines, compressed air lines and electric power feeds will also need to be installed. The total cost estimate for this Kellogg Tunnel work is still in process as of the date hereof, but the time estimate for these repairs is approximately twelve months.Bunker Hill Mine Restart Developments and Preliminary Economic AssessmentIn November 2020, the Company launched a Preliminary Economic Assessment (“PEA”) to assess the potential for a rapid restart of the Mine for minimal capital by focusing on the de-watered upper areas of the Mine, utilizing existing infrastructure, and based on truck haulage and toll milling methods.To support the Company’s strategy of targeting a rapid production restart as outlined above, development drilling subsequent to November 2020 focused on targets in the upper levels of the Mine located in close proximity to existing infrastructure, aimed at expanding the resource base for the PEA.In January 2021, the Company reported continued progress towards completing a PEA and further detailed the potential parameters of the restart, including: i) low up-front capital costs through utilization of existing infrastructure, potentially enabling a rapid production restart; ii) a staged approach to mining, potentially supporting a long-life operation; iii) underground processing and tailings deposition with potential for high recovery rates; iv) development of a sustainable operation with minimal environmental footprint; and v) potential increase in the existing resource base.36On April 20, 2021, the Company reported the results of its PEA for the Mine. The PEA contemplates a £42 million initial capital cost (including 20% contingency) to rapidly restart the Mine, generating approximately £20 million of annual average free cash flow over a 10-year mine life, and producing over 550 million pounds of zinc, 290 million pounds of lead, and 7 million ounces of silver at all-in sustaining costs of £0.65 per payable pound of zinc (net of by-products).
The PEA contemplates a low environmental footprint, long-term water management solution, and significant positive economic impact for the Shoshone County, Idaho community. The PEA is based on the mineral resources estimate described above and published on March 22, 2021, following the drilling program conducted in 2020 and early 2021 to validate the historical reserves. The PEA includes a mining inventory of 5.5Mt, which represents a portion of the 4.4Mt Indicated mineral resource and 5.6Mt Inferred mineral resource.
Further details regarding the PEA can be found in the news release dated April 20, 2021 on EDGAR, SEDAR and the Company’s website www.bunkerhillmining.com. In addition, on June 4, 2021, the Company filed the Preliminary Economic Assessment report, entitled “NI 43-101 Technical Report and Preliminary Economic Assessment of the Bunker Hill Mine” on SEDAR. There were no material differences between the key results, assumptions and estimates contained in the report filed on June 4, 2021 and the news release dated April 20, 2021.The PEA is preliminary in nature and includes Inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves.
There is no certainty that the project described in the PEA will be realized. Mineral resources that are not mineral reserves do not have demonstrated economic viability.On April 27, 2021, the Company announced that it had engaged Cutfield Freeman & Co. to provide independent advice on all aspects of restart mining finance related to the Mine.It should be noted that mineral resources as stated above, including those delineated in the Inferred, Measured and Indicated categories, are not mineral reserves as defined by SEC guidelines, and do now show demonstrated economic viability. Due to the uncertainty that may be attached to Inferred mineral resources, it cannot be assumed that all or any part of an Inferred mineral resource will be upgraded to an Indicated or Measured mineral resource as a result of continued exploration.On September 20, 2021, the Company reported the results of its new PEA for the Mine.
The PEA contemplates a £44 million initial capital cost (including 20% contingency) to rapidly restart the Mine, generating approximately £25 million of annual average free cash flow over a 11-year mine life, and producing over 591 million pounds of zinc, 323 million pounds of lead, and 8 million ounces of silver at all-in sustaining costs of £0.47 per payable pound of zinc (net of by-products). The PEA contemplates a low environmental footprint, long-term water management solution, and significant positive economic impact for the Shoshone County, Idaho community. The PEA is based on the mineral resources estimate described above and published on March 22, 2021, following the drilling program conducted in 2020 and early 2021 to validate the historical reserves.
The PEA includes a mining inventory of 6.4Mt, which represents a portion of the 4.4Mt Indicated mineral resource and 5.6Mt Inferred mineral resource. Further details regarding the PEA can be found in the news release dated September 20, 2021 on EDGAR, SEDAR and the Company’s website www.bunkerhillmining.com. There were no material differences between the key results, assumptions and estimates contained in the report filed on June 4, 2021 and the news release dated April 20, 2021.London Mining District Joint VentureOn October 4, 2021, the Company announced its intention to enter into a joint venture with MineWater Finance LLC to explore the mineral potential of the London gold mine, and the surrounding district, in Colorado, USA.
London Mining District produced gold and silver from 1875 to 1942, including over 650,000 gold ounces from the London Mine.Results of OperationsThe following discussion and analysis provides information that the Company believes is relevant to an assessment and understanding of its results of operation and financial condition for the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020. Unless otherwise stated, all figures herein are expressed in U.S. dollars, which is the functional currency of the Company.Comparison of the Three and Nine Months Ended September 30, 2021 and September 30, 2020RevenueDuring the three and nine months ended September 30, 2021 and September 30, 2020, the Company generated no revenue.Operating ExpensesDuring the three months ended September 30, 2021, the Company reported total operating expenses of £2,464,945 as compared to £6,105,916 during the three months ended September 30, 2020, a decrease of £3,640,971 or approximately 60%.The decrease in total operating expenses during the three months ended September 30, 2021 was primarily due to a decrease in exploration expense of £3,745,464 (£1,465,157 in the three months ended September 30, 2021 compared to £5,210,621 in the three months ended September 30, 2020) due to lower drilling activity and related expenses. The decrease in operation and administration expenses (£221,451 in the three months ended September 30, 2021 compared to £552,789 in the three months ended September 30, 2020) was mostly due to lower stock-based compensation expensed during the three months ended September 30, 2021.
The increase in legal and accounting, and consulting in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was due to increased corporate activity, and legal, professional and consulting expenses related to completion of the updated PEA.37During the nine months ended September 30, 2021, the Company reported total operating expenses of £12,384,474 as compared to £11,058,237 during the nine months ended September 30, 2020, an increase of £1,326,237 or approximately 12%.The increase was due to significant additional accrual for water treatment charges from the EPA and additional exploration expenses resulting from the Company’s drilling activities in the first half of 2021, and additional legal and consulting expenses related to the completion of the updated PEA.For financial accounting purposes, the Company reports all direct exploration expenses under the exploration expense line item of the Condensed Interim Consolidated Statements of Income and Comprehensive Income. Certain indirect expenses may be reported as operation and administration expense or consulting expense on the statement of operations.Net Income and Comprehensive IncomeThe Company reported net income and comprehensive income of £3,960,630 for the three months ended September 30, 2021, compared to net loss and comprehensive loss of £267,859 for the three months ended September 30, 2020, an increase of £4,228,489. The Company also reported net income and comprehensive income of £9,843,495 for the nine months ended September 30, 2021, compared to net loss and comprehensive loss of £13,848,837 for the nine months ended September 30, 2020.
The increase in net income and comprehensive income was primarily due to a gain related to the change in derivative liability of £6,460,513 for the three months ended September 30, 2021, and £22,172,681 for the nine months ended September 30, 2021, as compared to a gain of £9,311,304 for the three months ended September 30, 2020, and a gain of £1,096,476 for the nine months ended September 30, 2020. The gain in the three and nine months ended September 30, 2021 related mostly to the fair value decrease of the Company’s outstanding warrants due to a decrease in the Company’s share price.ANALYSIS OF FINANCIAL CONDITIONLiquidity and Capital ResourcesThe Company does not have sufficient working capital needed to meet its current fiscal obligations and commitments, including commitments associated with the acquisition of the Mine. In order to continue to meet its fiscal obligations in the current fiscal year and beyond, the Company must seek additional financing.
This raises substantial doubt about the Company’s ability to continue as a going concern. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management is considering various financing alternatives including, but not limited to, raising capital through the capital markets and debt financing.As noted previously, the Company has engaged Cutfield Freeman & Co. to provide independent advice on all aspects of restart mining financing related to the Mine, including the acquisition of the Mine.
Management is considering various financing alternatives including, but not limited to, raising capital through the capital markets, debt financing and royalty/streaming arrangements.The Company is also working to secure adequate capital to continue making lease payments, payments to the EPA, conduct exploration activities on site and cover general and administrative expenses associated with managing a public company.In February 2021, the Company closed a non-brokered private placement of 19,994,080 units of the Company at C£0.40 per unit for gross cash proceeds of £6,168,069 (C£7,830,544). Each unit consists of one Common Share of the Company and one Common Share purchase warrant, which entitles the holder to acquire one Common Share at a price of C£0.60 per Common Share for a period of five years. In connection with the financing, the Company paid a cash commission of C£140,400 and issued 351,000 finder options, which are exercisable into units at an exercise price of C£0.40 for a period of three years.
Pursuant to the offering, certain directors and officers of the Company acquired 626,580 Units. This issuance of such Units in connection with the offering was considered a “related party transaction” as such term is defined under MI 61-101.38The Company has accounted for the warrants issued through units issuance in accordance with ASC Topic 815. These warrants issued through units issuance are considered derivative instruments as they were issued in a currency other than the Company’s functional currency of the U.S. dollar.
The estimated fair value of warrants accounted for as liabilities was determined on the date of issue and marks to market at each financial reporting period. The change in fair value of the warrant liability is recorded in the interim condensed consolidated statements of income and comprehensive income as a gain or loss and is estimated using the Binomial model.The Company’s operations could be significantly adversely affected by the effects of a widespread global outbreak of a contagious disease, including the current outbreak of respiratory illness caused by COVID-19. The Company cannot accurately predict the impact COVID-19 will have on its operations and the ability of others to meet their obligations with the Company, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the length of travel and quarantine restrictions imposed by governments of affected countries.
In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could further affect the Company’s operations and ability to finance its operations.Current Assets and Total AssetsAs of September 30, 2021, the Company’s balance sheet reflects that the Company had: i) total current assets of £2,930,905 compared to total current assets of £4,045,618 at December 31, 2020, a decrease of £1,114,713 or approximately 28%; and ii) total assets of £5,510,252, compared to total assets of £6,709,016 at December 31, 2020, a decrease of £1,198,764 or approximately 18%. The decrease in current assets was mostly impacted by the decrease in cash and cash equivalents, primarily due to the Company’s spending related to exploration partially offset by proceeds of £6,008,672 from the non-brokered private placement closed on February 24, 2021, and £2,500,000 of proceeds from the Company’s promissory note issued on September 22, 2021.Current Liabilities and Total LiabilitiesAs of September 30, 2021, the Company’s balance sheet reflects that the Company had total current liabilities of £17,949,659 and total liabilities of £23,596,319, compared to total current liabilities of £14,178,553 and total liabilities of £38,246,613 as of December 31, 2020. The increase in current liabilities is impacted by the new promissory note issued in September and accruals related to water treatment charges from the EPA.
The decrease in non-current and total liabilities is primarily due to a decrease in derivative warrant liability as a result of a decrease in the Company’s share price over the nine months ended September 30, 2021.Working CapitalAs of September 30, 2021, the Company had negative working capital of £15,018,754 compared to negative working capital of £10,132,935 as of December 31, 2020. The increase in negative working capital was due to the decrease in cash and cash equivalents primarily related to exploration activity, and additional liability accrued in relation to water treatment charges from the EPA.Cash FlowDuring the nine months ended September 30, 2021, cash was primarily used to fund activities at the Mine operations including exploration and property payments. The Company reported a net decrease in cash of £1,055,412 during the nine months ended September 30, 2021 compared to a net increase of £8,555,910 during the nine months ended September 30, 2020.
The decrease in cash during the nine months ended September 30, 2021 is a result of £9,372,253 of net cash used in operating activities, £94,693 used in investing activities, and £8,411,534 of net cash provided by financing activities including the non-brokered private placement closed on February 24, 2021 and proceeds from the promissory note issued on September 22, 2021.Going ConcernThese unaudited interim condensed consolidated financial statement filings have been prepared on the going concern basis, which assumes that adequate sources of financing will be obtained as required and that the Company’s assets will be realized, and liabilities settled in due course of business. Accordingly, the interim condensed consolidated unaudited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company not be able to continue as a going concern. The going concern assumption is discussed in the financial statements Note 1 – Nature and Continuance of Operations and Going Concern.39CRITICAL ACCOUNTING ESTIMATESThe preparation of the interim condensed consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes can differ from these estimates.
The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the financial statements are:Share-based paymentsManagement determines costs for share-based payments using market-based valuation techniques. The fair value of the share awards and warrant liabilities are determined at the date of grant using generally accepted valuation techniques and for warrant liabilities at each balance sheet date thereafter. Assumptions are made and judgment used in applying valuation techniques.
These assumptions and judgments include estimating the future volatility of the stock price and expected dividend yield. Such judgments and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates.Warrants and accrued liabilitiesEstimating the fair value of derivative warrant liability requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the issuance.
This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the warrants and conversion feature derivative liability, volatility and dividend yield and making assumptions about them.The Company has to make estimates to accrue for certain expenditures due to delay in receipt of third party vendor invoices.
These accruals are made based on trends, history and knowledge of activities.
Actual results may be different.Off-Balance Sheet ArrangementsThe Company has no off-balance sheet arrangements.(C) Edgar Online, source Glimpses
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