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Talon Metals — Management Reports 2022
Mar 31, 2022
44209_rns_2022-03-30_c3185686-e729-4a68-b25c-4c55ef0b779f.pdf
Management Reports
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MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2021
Dated: March 30, 2022
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
TABLE OF CONTENTS
FORWARD-LOOKING INFORMATION ......................................................................................... 3 GOING CONCERN ......................................................................................................................... 5 COVID-19 ........................................................................................................................................ 5 SUMMARY OF ANNUAL RESULTS .............................................................................................. 6 REVIEW OF ANNUAL RESULTS .................................................................................................. 6 SUMMARY OF QUARTERLY RESULTS ...................................................................................... 9 COMPANY OVERVIEW ................................................................................................................. 9 CAPITAL EXPENDITURES ON EXPLORATION PROJECTS ................................................... 17 FINANCIAL INSTRUMENTS ........................................................................................................ 17 FINANCIAL CONDITION, CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES ................. 20 RISKS AND UNCERTAINTIES .................................................................................................... 25 RELATED PARTY TRANSACTIONS AND BALANCES ............................................................. 33 CRITICAL ACCOUNTING ESTIMATES AND CHANGES IN ACCOUNTING POLICIES .......... 34 INTERNAL CONTROL OVER FINANCIAL REPORTING ........................................................... 36 OUTLOOK ..................................................................................................................................... 36
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
This Management’s Discussion and Analysis (“ MD&A ”) of financial condition and results of operations for the year ended December 31, 2021 should be read in conjunction with the consolidated financial statements of Talon Metals Corp. (“ Talon ” or the “ Company ”) and notes thereto for the year ended December 31, 2021. The MD&A enables readers to assess material changes in financial condition and results of operations in comparison to the corresponding prior– year periods.
Unless otherwise indicated, all monetary statements in this document are in Canadian dollars.
FORWARD-LOOKING INFORMATION
This MD&A contains certain “forward-looking information”. All information, other than information pertaining to historical fact, which addresses activities, events or developments that the Company believes, expects or anticipates will or may occur in the future, including, among other things, the completion and timing of the Company’s objectives, including exploration plans, drilling plans, geophysical work, including using geophysical surveys to identify targets outside of the resource area, mine plans and environmental test work, metallurgical test work, engineering studies, waste characterization studies, the completion of trade-off studies, feasibility studies, and the costs and timing thereof, payments to Kennecott (defined below) pursuant to the 2018 Option Agreement (defined below), the supply of nickel concentrate to Tesla Inc., estimates in respect of mineral resource quantities, mineral resource qualities, the Company’s targets, goals, objectives and plans, the Company’s business plans, priorities and budget, projections in respect of capital expenditures and the Company’s liquidity and capital resources (including, the Company’s expected uses of working capital), is forward-looking information.
Forward-looking information reflects the current expectations or beliefs of the Company based on information currently available to the Company. With respect to forward-looking information contained in this MD&A, the Company has made assumptions regarding, among other things, future currency and interest rates, the regulatory framework (including tax and trade laws and policies) in the countries in which the Company conducts its business, and the Company’s ability to obtain suitably qualified staff and equipment in a timely and cost-efficient manner to meet the Company’s needs.
Forward-looking information is subject to significant risks and uncertainties and other factors that could cause the actual results to differ materially from those discussed in the forward-looking information, and even if such actual results are realized or substantially realized, there can be no assurance that they will have the expected consequences to, or effects on the Company. Factors that could cause actual results or events to differ materially from current expectations include, but are not limited to: the failure of exploration programs to identify mineralization, the failure to establish estimated mineral resources and any reserves; the grade, quality and recovery of mineral resources varying from estimates; risks related to the exploration stage of the Company’s properties; the possibility that future exploration results and metallurgical testing will not be consistent with the Company’s expectations; changes in nickel, copper and/or PGE prices; COVID-19; the war in Ukraine; increased global uncertainty; delays in obtaining or failures to obtain necessary regulatory permits and approvals from government authorities, including approval of applications for licences/permits required to conduct field based programs; uncertainties involved in interpreting drilling results, and the beneficiation process and other geological and product related data; changes in the anticipated demand for nickel, copper, cobalt and/or gold and PGEs; changes in equity and debt markets; inflation; changes in exchange rates; declines in U.S., Canadian and/or global economies; uncertainties relating to the availability and
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
costs of financing needed to complete exploration activities and demonstrate the feasibility of the Company’s projects; exploration costs varying significantly from estimates; delays in the exploration, mineral processing and development of, and/or commercial production from the properties Talon has an interest in; equipment failure; unexpected geological or hydrological conditions; political risks; imprecision in preliminary resource estimates; success of future exploration and development initiatives; the existence of undetected or unregistered interests or claims, whether in contract or in tort, over the property of Talon or the Tamarack Project; changes in government regulations and policies; risks relating to labour; other exploration, development and operating risks; liability and other claims asserted against Talon; volatility in prices of publicly traded securities; and other risks involved in the mineral exploration and development industry and risks specific to the Company, including the risks discussed in this MD&A under “Risks and Uncertainties” .
Forward-looking information speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Company disclaims any intent or obligation to update forward-looking information, whether as a result of new information, future events or results or otherwise. Although the Company believes that the assumptions inherent in the forwardlooking information are reasonable, forward-looking information is not a guarantee of future performance and accordingly undue reliance should not be put on such information due to the inherent uncertainty therein.
The mineral resource figures referred to in this MD&A are estimates, and no assurances can be given that the indicated levels of minerals will be produced. Such estimates are expressions of judgment based on knowledge, mining experience, analysis of drilling results, beneficiation tests and industry practices. Valid estimates made at a given time may significantly change when new information becomes available. While the Company believes that the resource estimates included in this MD&A are well established, by their nature, resource estimates are imprecise and depend, to a certain extent, upon statistical inferences which may ultimately prove unreliable. If such estimates are inaccurate or are reduced in the future, this could have a material adverse impact on the Company.
Mineral resources are not mineral reserves and do not have demonstrated economic viability. Inferred mineral resources are estimated on limited information not sufficient to verify geological and grade continuity or to allow technical and economic parameters to be applied. Inferred mineral resources are too speculative geologically to have economic considerations applied to them to enable them to be categorized as mineral reserves. There is no certainty that mineral resources can be upgraded to mineral reserves through continued exploration.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Additional information relating to the Company, including the Company’s Annual Information Form for the year ended December 31, 2021, is available on SEDAR at www.sedar.com.
GOING CONCERN
The consolidated financial statements of the Company have been prepared on a going concern basis which contemplates that the Company will continue in operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The Company’s ability to continue as a going concern is dependent on its ability to raise financing, as needed, and/or develop the Tamarack Project into a profitable mine. There can be no assurance that the Company will be successful in raising financing, as needed, or developing the Tamarack Project into a profitable mine to meet the Company’s commitments.
The Company has not earned any revenue to date from its operations. The Company, and its joint venture partner, Kennecott Exploration Company (“ Kennecott ”), are in the process of exploring the Tamarack Project (defined below) and the Company has not yet determined whether the Tamarack Project contains ore reserves that are economically recoverable. The recoverability of the Company’s property carrying value and of the related deferred exploration expenditures depends on the Company's ability to maintain an interest in the Tamarack Project, discover economically recoverable reserves and on the Company’s ability to obtain necessary financing to complete the development and to establish profitable production in the future, or the receipt of sufficient proceeds on disposal of its interest in the Tamarack Project.
As at December 31, 2021, the Company had working capital of $23.1 million (December 31, 2020 – $14.1 million) and shareholders’ equity of $122.0 million (December 31, 2020 – $73.1 million). Working capital is defined as current assets less current liabilities.
COVID-19
The COVID-19 pandemic had limited effect on the Tamarack Project during 2021. Procedures and protocols of the Company’s COVID-19 Prevention and Countermeasure Plan continue to be embraced by Tamarack Project personnel and the majority of the Tamarack Project team have been fully vaccinated.
During Q4 2021, the Tamarack Project experienced a number of positive COVID-19 cases among personnel. By effective deployment of the Company’s COVID-19 Prevention and Countermeasure Plan, the positive cases were all contained, large scale outbreaks were avoided and the impact to the Tamarack Project was minimal.
The Company is continuing with social distancing and hygiene protocols and the number of positive COVID-19 cases among Tamarack Project personnel continued to decline in Q1 2022. The Company continues to monitor the latest guidelines and exposure information from the Centers for Disease Control (CDC). The Company’s healthcare provider in Minnesota has laboratory equipment to enable COVID-19 test results within an hour which continues to benefit the Company when potential cases are identified.
Please see “ Financial Condition, Cash Flow, Liquidity and Capital Resources – Liquidity and Capital Resources” and “Financial Instruments – Liquidity Risk” for further important information regarding the potential impact of COVID-19. Please also see “Risks and Uncertainties – COVID19 Coronavirus Outbreak ”.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
SUMMARY OF ANNUAL RESULTS
| Year ended Dec 31, 2021 (audited) |
Year ended Dec 31, 2020 (audited) |
Year ended Dec 31, 2019 (audited) |
|
|---|---|---|---|
| Interest income | $15,342 | $14,589 | $17,976 |
| Net loss | (5,545,812) | (2,732,199) | (3,978,346) |
| Net loss per shares – basic and diluted |
(0.01) | (0.01) | (0.01) |
| Comprehensive loss | (5,553,650) | (4,183,694) | (4,615,921) |
| Total assets | 125,582,336 | 76,271,952 | 59,215,018 |
| Total non-current financial liabilities |
- | 1,093,531 | 971,234 |
| Dividends | - | - | - |
REVIEW OF ANNUAL RESULTS
Certain amounts in the consolidated statements of loss and comprehensive loss have been reclassified to conform to the current year’s presentation and, as such, the discussion that follows below takes into account such reclassification.
Interest income
Interest income is earned on the Company’s cash and cash equivalents balance. Interest income for the year ended December 31, 2021 was $15,342 compared to interest income of $14,589 earned during the same period in the prior year. The relatively stable level of interest income for the current year compared to the prior year was the result of higher cash balances in 2021 offset by lower interest rates primarily as a result of COVID-19.
Expenses
Salaries, benefits, consulting and board fees were $944,274 for the year ended December 31, 2021 compared to $1,316,916 for the year ended December 31, 2020. The decrease was primarily due to the full recognition in 2020 (and partial payment) of consulting fees owed to the Executive Chairman of the Company relating to the five-year period from 2015 to 2020 (see section below entitled “ Related party transactions and balances ” for further information).
Professional fees increased to $898,115 for the year ended December 31, 2021 compared to $448,647 for the year ended December 31, 2020. The increase was primarily the result of legal fees incurred due to the various corporate matters undertaken by the Company over this period, financial advisory fees, auditor fees related to the quarterly review of the Company’s financial statements, and fees associated with the preparation of tax returns and other tax advice. The Company continues to perform legal and tax work in-house whenever possible.
Office and general expenses remained relatively constant for the year ended December 31, 2021 compared to the same period in the prior year with the small decrease of $11,349 due to a reduction in office, I/T and telecommunications expenses.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Insurance remained relatively constant for the year ended December 31, 2021 compared to the same period in the prior year.
Marketing and travel was relatively constant for the year ended December 31, 2021 compared to the same period in the prior year, with the reduction in 2021 compared to 2020 the result of less travel and the reversal of a long-standing travel provision (i.e. an accrual) for $10,000 during 2021.
Listing, filing and shareholder communications expenses increased to $200,485 for the year ended December 31, 2021 compared to $91,538 for the year ended December 31, 2020 primarily due to (i) an increase in annual fees charged by the securities regulatory authorities in Canada and increased TSX annual fees, both due in most part to a higher market capitalization of the Company, (ii) additional costs associated with the Company’s Annual General Meeting due to a larger shareholder base, (iii) costs associated with administering the Company’s stock option plan, and (iv) TSX listing fees associated with the KEX Earn-in Units (defined below).
A recovery of $78,040 was recorded in contingencies for the year ended December 31, 2021 as a result of a reduction in the provision related to a Brazil labour lawsuit from when the Company operated in Brazil in the early 2010’s.
Stock option compensation expense increased to $3,866,345 for the year ended December 31, 2021 compared to $138,888 for the year ended December 31, 2020 as a result of stock options issued in 2020 and 2021 that are being amortized over their vesting periods, most commonly 12 months including a significant option issuance at the end of 2020. In addition, the Company’s stock price was significantly higher in 2021 than 2020 which directly impacts the valuation of stock options issued.
Royalty
On March 7, 2019, Talon Nickel granted a net smelter returns royalty to TF R&S Canada Ltd. (formerly 10782343 Canada Limited) (the “Royalty Holder” ), a subsidiary of Triple Flag Precious Metals Corp, in consideration of the payment of US$5.0 million. The Company, together with its subsidiaries, Cloudmine Holdings Limited and Talon Metals (USA) Inc., agreed to guarantee the payment and performance obligations under the royalty agreement (the “ Royalty Agreement ”). The royalty granted was 3.5% of net smelter returns and will be based on Talon Nickel’s participating interest in the Tamarack Project, except (i) where Talon Nickel’s interest reduces below 51%, in which case it will be paid assuming Talon Nickel’s interest is unchanged at 51%; or (ii) where Talon Nickel has vested at 60% and Talon Nickel’s interest reduces below 60%, in which case it will be paid assuming Talon Nickel’s interest is unchanged at 60%.
The Royalty Agreement contained a one-time put right pursuant to which the Royalty Holder had an option, exercisable within 10 calendar days of March 7, 2022, to cause Talon Nickel to repurchase the entire net smelter returns royalty for a cash payment of US$8.6 million ( “Royalty Put Option” ). In the event the Royalty Holder did not exercise the one-time put right, Talon Nickel had a one-time option to reduce the percentage of the net smelter returns royalty to 1.85% in exchange for cash in the amount of US$4.5 million. On February 15, 2022, Talon Nickel entered into an amending agreement with the Royalty Holder pursuant to which the Royalty Holder waived the put right and completed the early exercise of Talon Nickel’s right to reduce the royalty on Talon Nickel’s interest in the Tamarack Project from 3.5% to 1.85% in exchange for the payment by Talon Nickel of US$4.5 million to the Royalty Holder.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Talon and its related entities have provided security to the Royalty Holder to support the payment and performance obligations related to the royalty and the guarantees. In connection with the royalty agreement, Talon issued the Royalty Holder 5,000,000 warrants ( “Royalty Warrants” ) exercisable to acquire one common share until March 7, 2022 at an exercise price of C$0.0826 per share (which were exercised in December 2021). In connection with the sale of the royalty, the Company paid a 6% commission and issued 4,944,375 warrants to a broker ( “Royalty Broker Warrants” ) with the same terms as the Royalty Warrants.
The Company has designated the Royalty Put Option as a financial instrument at fair value through profit or loss. The Royalty Put Option was initially recorded at fair value and revalued at period end with changes in fair value being recorded through profit and loss. Transaction costs have been expensed.
The Royalty Put Option is being valued using a probability-adjusted discounted cash flow methodology with the following estimates: a risk-free discount rate of 0.05% (December 31, 2020 – 0.11%) and a probability that the option will be exercised of 5% (December 31, 2020 – 10%). The change on the consolidated statement of loss and comprehensive loss reflects the change excluding foreign exchange translation.
The change on the consolidated statement of loss and comprehensive loss reflects the change, excluding foreign exchange translation. The changes in these assumptions resulted in a gain of $543,788 for the year ended December 31, 2021 compared to a loss of $141,441 for the year ended December 31, 2020, reflecting the changes in fair value during the periods.
Foreign Currency Translation
Foreign currency translation resulted in a gain of $81,222 for the year ended December 31, 2021 compared to a loss of $217,764 for the year ended December 31, 2020. This balance is highly variable due to the volatility of exchange rates, translation of the Royalty Put Option and the changing and relatively high level of the Company’s cash balance.
Net Loss
Net loss for the year ended December 31, 2021 was $5.5 million or $0.01 per share (basic and diluted). The net loss was primarily the result of administration expenses[1] and stock option compensation. This compares to a net loss of $2.7 million or $0.01 per share (basic and diluted) for the year ended December 31, 2020, which was primarily the result of administration expenses[1] .
Comprehensive Gain/Loss
During the year ended December 31, 2021, the Company recognized an other comprehensive loss of $7,838. During the year ended December 31, 2020, the Company recognized an other comprehensive loss of $1.5 million. Both losses were related to the foreign exchange conversion from United States dollars to Canadian dollars of the assets and liabilities of Talon Nickel (defined below), a U.S. subsidiary of the Company. The small loss in the current year was due to a relatively steady average exchange rate for 2021 compared to the prior year. This IFRS
1 “administration expenses” include the following expenses: Office and General; Professional Fees; Salaries, Benefits, Consulting and Board Fees; Insurance; Travel; Listing, Filing and Shareholder Communications.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
accounting requirement manifests itself on the balance sheet as a change in the value of Resource properties and deferred expenditures where the Talon Nickel US-denominated balance at the end of the reporting period is converted to Canadian dollars at the foreign exchange rate at the end of the reporting period. The foreign exchange rate can vary significantly from period to period so at times this loss (or gain) may be very volatile.
SUMMARY OF QUARTERLY RESULTS
The following table provides selected quarterly consolidated financial information for the periods ending as indicated. It is derived from the unaudited interim consolidated financial statements and the audited annual consolidated financial statements of the Company. All numbers below are unaudited.
| 2021 | 2020 | |||||||
| Dec 31 | Sept 30 | June 30 | March 31 | Dec 31 | Sept 30 | June 30 | March 31 | |
| Interest income | 6,112 | 4,918 | 3,638 | 674 | 175 | 7 | 874 | 13,533 |
| Net income (loss) | (1,094,946) | (1,479,437) | (2,153,190) | (818,239) | (1,388,911) | (492,611) | (322,670) | (528,007) |
| Basic and diluted net income (loss) per share* |
(0.00) | (0.00) | (0.01) | (0.00) | (0.01) | (0.00) | (0.00) | (0.00) |
| Comprehensive income (loss) |
(1,544,400) | 728,478 | (3,102,115) | (1,635,613) | (4,191,530) | (1,661,133) | (2,685,998) | 4,354,967 |
*Total of quarterly amounts may not reconcile to annual amount due to rounding
Quarterly trends in interest income reflect for the most part interest received on cash balances. Trends in quarterly expenses are driven primarily by administration expenses (defined above) and stock option compensation. Generally, the most variable component of total expenses over the past eight quarters has been fair value adjustments, foreign currency translation and stock option compensation.
COMPANY OVERVIEW
The Company is a mineral exploration company currently focused on the exploration and development of the Tamarack nickel-copper-cobalt project (the “ Tamarack Project ”) in Minnesota, USA (which comprises the “ Tamarack North Project ” and the “ Tamarack South Project ”). As of the date hereof, the only material property of the Company is the Tamarack North Project.
Tamarack Project
Tamarack Earn-in Agreement
On June 25, 2014, Talon’s wholly owned indirect subsidiary, Talon Nickel (USA) LLC (“ Talon Nickel ”), entered into an exploration and option agreement (the “ Tamarack Earn-in Agreement ”) with Kennecott, part of the Rio Tinto Group, pursuant to which Talon Nickel received the right to acquire an interest in the Tamarack Project.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
On January 4, 2016, pursuant to the terms of the Tamarack Earn-in Agreement, as amended, Talon Nickel earned an 18.45% interest in the Tamarack Project by making payments totalling US$25,520,800 broken down as follows:
| Option payments Exploration Land purchases |
1,000,000 $ 21,200,000 3,320,800 |
|---|---|
| 25,520,800 $ |
On December 16, 2016, Talon Nickel entered into an amending agreement with Kennecott (the “ Tamarack Earn-in Third Amending Agreement ”) in respect of the Tamarack Earn-in Agreement (as amended). The Tamarack Earn-in Third Amending Agreement provided, among other things, that Kennecott may elect at any time up to and including September 25, 2017 to grant Talon Nickel the option to purchase the Tamarack Project for a total purchase price of US$114 million (the “ Tamarack Purchase Option ”) or proceed with a joint venture (the “ Tamarack Joint Venture ”) in respect of the Tamarack Project (the “ Kennecott Decision Deadline ”).
On the Kennecott Decision Deadline, Talon Nickel received notification from Kennecott that it had decided to grant Talon Nickel the Tamarack Purchase Option on the terms of the Tamarack Earnin Agreement (as amended).
On November 16, 2017, Talon Nickel elected not to exercise the Tamarack Purchase Option. As such, pursuant to the terms of the Tamarack Earn-in Agreement (as amended), Talon Nickel and Kennecott had 90 days to enter into the Mining Venture Agreement (defined below) governing the terms of the Tamarack Joint Venture.
On January 11, 2018, Talon Nickel and Kennecott entered into a fifth amending agreement (the “ Tamarack Earn-in Fifth Amending Agreement ”) in respect of the Tamarack Earn-in Agreement (as amended), pursuant to which they agreed to (i) enter into the Mining Venture Agreement with immediate effect, and (ii) accelerate the timing of the approval process for the 2018 winter exploration program so that the 2018 winter exploration program was approved with immediate effect.
Following the Tamarack Earn-in Fifth Amending Agreement, Talon Nickel elected to not financially participate in any further funding made in respect of the Tamarack Project while Kennecott was the operator/manager of the Tamarack Project. This resulted in dilution of its interest from 18.45% to 17.56% (which was later increased to 51% and may increase further to 60%). Going forward, Talon Nickel is required to fund the Tamarack Project in accordance with the 2018 Option Agreement (defined below).
Tamarack Joint Venture
On January 11, 2018, Talon Nickel and Kennecott entered into the mining venture agreement in respect of the Tamarack Project (the “ Mining Venture Agreement ”).
During the term of the 2018 Option Agreement (defined below), the Mining Venture Agreement is in abeyance and the terms of the 2018 Option Agreement govern the relationship between Talon Nickel and Kennecott in respect of the Tamarack Project.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
2018 Option Agreement
On November 7, 2018, Talon Nickel entered into an exploration and option agreement (the “ 2018 Option Agreement ”) with Kennecott which provides Talon Nickel with the right to acquire up to a 60% interest in the Tamarack Project. The 2018 Option Agreement has an effective date of March 13, 2019.
Pursuant to the terms of the 2018 Option Agreement, Talon Nickel has taken over operatorship of the Tamarack Project and Talon had the right to acquire a 51% interest in the Tamarack Project upon:
-
(1) the payment of US$6 million in cash to Kennecott (the “ Initial Cash Payment ”);
-
(2) the issuance of US$1.5 million worth of common shares of Talon to Kennecott (the “ Share Payment ”);
-
(3) within 3 years of the effective date of the 2018 Option Agreement (March 13, 2022), Talon Nickel either spending US$10 million or completing a pre-feasibility study on the Tamarack Project; and
-
(4) within 3 years of the effective date of the 2018 Option Agreement (March 13, 2022), Talon Nickel paying Kennecott an additional US$5 million in cash.
In late September 2021, approximately 6 months ahead of schedule, Talon completed all of the requirements and earned a 51% interest in the Tamarack Project. Rather than receiving US$5 million in cash, Kennecott agreed to accept 10,543,333 units of Talon (each a “ KEX Earn-in Unit ”) at a deemed issuance price of C$0.60 per KEX Earn-in Unit in full satisfaction of the US$5 million cash obligation. Each KEX Earn-in Unit was comprised of one common share of Talon and onehalf of one purchase warrant. Each whole warrant is exercisable to acquire a Talon common share until September 29, 2022 at an exercise price of $0.80 per share.
Talon Nickel has the right to increase its interest in the Tamarack Project by 9% to a total of 60% by:
-
(1) completing a feasibility study on the Tamarack Project within 7 years of the effective date of the 2018 Option Agreement (March 13, 2026); and
-
(2) paying Kennecott US$10 million in cash on or before the seventh anniversary of the effective date of the 2018 Option Agreement (March 13, 2026).
Upon Talon Nickel vesting with its applicable joint venture interest in the Tamarack Project, the parties have agreed to enter into a new joint venture agreement, pursuant to which, so long as Talon Nickel has a majority interest, Talon Nickel will continue to act as operator of the Tamarack Project. In the event Talon Nickel has delivered a feasibility study on the Tamarack Project, upon the completion thereof, the parties have agreed to fund the Tamarack Project in accordance with their respective ownership interests, or be subject to dilution.
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Tamarack North Project
The Tamarack North Project is located adjacent to the town of Tamarack in north-central Minnesota approximately 100 km west of Duluth and 200 km north of Minneapolis, in Aitkin County.
The Tamarack Igneous Complex (“ TIC ”), which sits within the Tamarack North Project boundaries, is an ultramafic intrusion that is associated with the early evolution of the failed, Midcontinental Rift (dated at 1105ma +/- 1.2). This age is significantly older than the Duluth Complex Intrusions which consistently date at 1099ma and is consistent with other earlier intrusions of the Midcontinental Rift that are often characterised by more primitive melts.
The TIC has intruded into Thomson Formation siltstones and sandstones of the Animikie Group and is preserved beneath shallow Quaternary glacial sediments.
To date, exploration by Kennecott and Talon has included diamond drilling and sampling, as well as a range of geophysical surveys, including, airborne magnetic and electromagnetic (EM, MegaTEM and AreoTEM), ground magnetic and EM, magnetotelluric (MT), gravity, seismic, resistivity/induced polarization and downhole EM.
On February 4, 2021, Talon released an updated preliminary economic assessment as part of an updated independent technical report prepared in accordance with National Instrument 43-101 – Standards of Disclosure for Minerals Projects (“ NI 43-101 ”) in respect of the Tamarack North Project (the “ Updated PEA ”). The Updated PEA is entitled “NI 43-101 Technical Report Updated Preliminary Economic Assessment (PEA) #3 of the Tamarack North Project – Tamarack, Minnesota” with an effective date of January 8, 2021.
Included in the Updated PEA is an updated independent mineral resource estimate prepared in accordance with NI 43-101 (the “ Resource Estimate ”). The Resource Estimate has an effective date of January 8, 2021, was prepared by independent “Qualified Person” (as that term is defined in NI 43-101) Mr. Brian Thomas of Golder Associates Ltd. (“ Golder ”) and is summarized below.
| Domain | Classification | %Ni Cut-Off |
Tonnes (000) |
Ni (%) |
Cu (%) |
Co (%) |
Pt (g/t) |
Pd (g/t) |
Au (g/t) |
NiEq (%) |
|---|---|---|---|---|---|---|---|---|---|---|
| USMSU | Indicated Resource | 0.5 | 1,462 | 1.32 | 0.78 | 0.04 | 0.17 | 0.11 | 0.11 | 1.81 |
| LSMSU | Indicated Resource | 0.5 | 2,340 | 2.08 | 1.10 | 0.05 | 0.55 | 0.34 | 0.25 | 2.87 |
| MSU | Indicated Resource | 0.5 | 124 | 5.72 | 2.36 | 0.12 | 0.60 | 0.46 | 0.23 | 7.23 |
| Total | Indicated Resource | 0.5 | 3,926 | 1.91 | 1.02 | 0.05 | 0.41 | 0.26 | 0.20 | 2.62 |
| USMSU | Inferred Resource | 0.5 | 2,652 | 0.76 | 0.47 | 0.02 | 0.25 | 0.14 | 0.12 | 1.10 |
| LSMSU | Inferred Resource | 0.5 | 115 | 0.86 | 0.51 | 0.02 | 0.57 | 0.36 | 0.24 | 1.34 |
| MSU | Inferred Resource | 0.5 | 443 | 5.93 | 2.52 | 0.12 | 0.70 | 0.52 | 0.26 | 7.53 |
| 138 | Inferred Resource | 0.5 | 3,953 | 0.82 | 0.63 | 0.02 | 0.21 | 0.12 | 0.14 | 1.21 |
| Total | Inferred Resource | 0.5 | 7,163 | 1.11 | 0.68 | 0.03 | 0.26 | 0.16 | 0.14 | 1.57 |
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TALON METALS CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
All resources reported at a 0.5% Ni cut-off. No modifying factors have been applied to the estimates. Tonnage estimates are rounded to the nearest 1,000 tonnes. Metallurgical recovery factored into the reporting cut-off.
NiEq grade based on base case metal prices of $8.00/lb Ni, $3.00/lb Cu, $25.00/lb Co, $1,000/oz Pt, $1,000/oz Pd and $1,300/oz Au using the following formula: NiEq% = Ni%+ Cu% x $3.00/$8.00 + Co% x $25.00/$8.00 + Pt [g/t]/31.103 x $1,000/$8.00/22.04 + Pd [g/t]/31.103 x $1,000/$8.00/22.04 + Au [g/t]/31.103 x $1,300/$8.00/22.04. No adjustments were made for recovery or payability.
The Updated PEA was prepared by independent “Qualified Persons” (as that term is defined in NI 43-101) Leslie Correia (Pr. Eng) of Paterson & Cooke Canada Inc, Andre-Francois Gravel (P. Eng.) of DRA Americas Inc. (“ DRA ”), Tim Fletcher (P. Eng.) of DRA, Daniel Gagnon (P. Eng.) of DRA, Volodymyr Liskovych (P. Eng.) of DRA, David Ritchie (P. Eng.) of SLR Consulting (Canada) Ltd., Oliver Peters (P. Eng.) of Metpro Management Inc., Andrea Martin (P.E.) of Foth Infrastructure & Environment, LLC and Brian Thomas (P. Geo.) of Golder.
Please refer to the Updated PEA for further information, including the QA/QC, analytical and testing procedures employed at the Tamarack North Project. The Updated PEA is available under Talon’s SEDAR profile at www.sedar.com and on the Company’s website at www.talonmetals.com.
Work Completed/Expenditures – Tamarack North Project and Tamarack South Project
During the year ended December 31, 2021, the Company incurred $38.0 million of expenditures, substantially all on the Tamarack North Project, as detailed in the following table:
| Category | Year Ended Dec 31, 2021 |
|---|---|
| Exploration, drilling and assays | $19,251,561 |
| Geophysics | 2,066,364 |
| Mining and geotechnical studies | 915,809 |
| Metallurgical testing | 1,136,464 |
| Environmental, permitting, community and government relations | 4,017,211 |
| Economic studies | 770,091 |
| Mineral leases, property tax and land purchases | 1,133,635 |
| Professional fees | 114,920 |
| Site costs, travel and general | 991,725 |
| Site remediation | 508,897 |
| Utilities and fuel | 299,526 |
| Payment to Kennecott through issuance of KEX Earn-in Units | 6,763,176 |
| Total* | $37,969,379 |
*May not total due to rounding
The above spending was in the connection with the following: (i) continuous drilling to expand and infill the current resource, with a focus on expansion to potentially deliver an updated resource estimate; (ii) geophysical work to identify new prospective drilling targets at the Tamarack Project; (iii) work towards feasibility studies; (iv) additional metallurgical test work and downstream processing options; (v) the commencement of an exploration program (as further discussed in the section entitled “Upcoming Work – Tamarack North Project”); and (vi) the issuance of the KEX
13
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Earn-in Units in order to satisfy the US$5 million payable to Kennecott as part of the 2018 Option Agreement earn-in conditions to vest at a 51% interest in the Tamarack Nickel Project.
In July 2020, the Company entered into a cost-effective lease-to-own agreement in respect of a drill rig. Following this, the Company hired a full-time dedicated team of drillers, some with specific drilling experience at the Tamarack Project, with the primary objective of materially increasing the number of meters drilled at the Tamarack Project at a substantially reduced cost while maintaining first-in-class health and safety standards. Given the Company’s positive experience with running its own drill rig and a full-time dedicated drill team, in October 2020, the Company entered into a second cost-effective lease-to-own agreement in respect of a second drill rig, which arrived at the Tamarack Project site in November 2020. The Company has also retained a full-time dedicated team of drillers to run this second drill rig. In February 2021, the Company purchased outright the two drill rigs.
Upcoming Work – Tamarack North Project
The Company is focused on the advancement of the Tamarack North Project. As of March 30, 2022, the Company had working capital excluding the Royalty Put Option of approximately $42 million.
The Company intends to further advance the Company’s objective of completing a series of tradeoff studies and mine planning, metallurgy, and engineering studies on the Tamarack North Project during 2022 and early-to-mid 2023.
During 2021, the Company successfully drilled two areas with mixed massive sulphide mineralization below a thicker zone of disseminated sulphide mineralization. These areas are referred to as CGO East and CGO West. These areas are shallower than the present Tamarack North Project mineral resource and, as such, could potentially reduce the timeline to production. The Company has been focused on expanding and infill drilling of these areas and plans to continue expansion and infilling of these areas during 2022.
During 2021, the Company also conducted infill drilling of the massive sulphide unit that forms part of the present Tamarack North Project mineral resource. Drilling of the massive sulphide unit will continue throughout 2022.
During 2021, the Company designed and successfully deployed a suite of geophysical survey methods over the present Tamarack North Project mineral resource. The Company also completed a detailed magneto-telluric survey over the northern half of the Tamarack Intrusive Complex, which is currently being interpreted. In 2022, the Company plans to also deploy its geophysical methods to help guide the drilling of priority targets that lie outside of the present Tamarack North Project mineral resource area. The ultimate objective is to discover and delineate high-grade nickel deposits that can be accessed underground from the present Tamarack North Project mineral resource area. If successful, this would constitute a continuation of underground mining to extend the mine life, with potentially no impact to surface infrastructure.
During 2021, the Company expanded its environmental baseline work, and such work will continue throughout 2022. The Company has commenced waste characterization studies, which will also continue throughout 2022.
In January 2022, Talon Nickel entered into an agreement with Tesla Inc. (“ Tesla ”) for the supply
14
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
and purchase of 75,000 metric tonnes (165 million lbs) of nickel in concentrate. Talon Nickel has agreed to use commercially reasonable efforts to achieve commercial production on or before January 1, 2026, which may be extended by the parties for up to 12 months following which Tesla has the right to terminate the agreement and Talon Nickel may elect to sell to other parties. Given the agreement with Tesla, during 2022, the Company intends to focus its metallurgical testing with the objective of producing a nickel concentrate for Tesla and a copper concentrate for selling to one or more smelters.
There is no assurance that the various drill, test and study programs will be completed in this timeline (or at all). The exploration, development and construction of mineral projects are subject to a number of risks and uncertainties. See section below entitled “Risks and Uncertainties” .
March 2021 Prospectus Offering
On March 18, 2021, the Company closed an offering of 57,500,000 units (the “ March 2021 Prospectus Offering ”) at a price of $0.60 per unit for aggregate gross proceeds of $34,500,000 pursuant to a short form prospectus. Each unit consisted of one common share and one-half of a share purchase warrant of the Company. Each whole warrant entitles the holder to acquire one common share at a price of $0.80 for a period of 12 months following closing of the offering.
The Company intended to use the net proceeds of the March 2021 Prospectus Offering as disclosed in the section titled “Use of Net Proceeds” in the Company’s Short Form Prospectus dated March 11, 2021 (“ March 2021 Prospectus ”) that has been filed on SEDAR. The below table is a comparison of the disclosed use of proceeds with the amount spent to the end of the third quarter of 2021. The budget was for the period commencing February 1, 2021.
| Category | Budget or “Use of Net Proceeds” from March 2021 Prospectus |
Approximate Expenditures as at Dec 31, 2021 |
Approximate Expenditures Remaining as at Dec 31, 2021 |
|---|---|---|---|
| Exploration | $17,300,000 | $15,939,537 | $1,360,463 |
| Mine planning, metallurgy and engineering | 5,300,000 | 2,748,381 | 2,551,619 |
| Environmental baseline, permitting and community | 2,000,000 | 1,675,384 | 324,616 |
| Mineral leases and land | 2,000,000 | 1,142,193 | 857,807 |
| Marketing, finance, legal and admin | 1,000,000 | 972,302 | 27,698 |
| Public company costs | 500,000 | 1,023,819 | (523,819) |
| Payments and/or incur expenditures in accordance with the 2018 Option Agreement |
6,300,000 | -* | -* |
| General corporate and working capital | 8,175,000 | - | 8,175,000 |
| Total | $42,575,000 | $23,501,616 | $12,773,384 |
*On September 29, 2021, the Company issued the KEX Earn-in Units to satisfy the US$5.0 million payment to Kennecott pursuant to the 2018 Option Agreement and thus did not use proceeds from the March 2021 Prospectus to make the budgeted payment of C$6.3 million.
To December 31, 2021, $23.5 million of the budgeted $42.6 million “Use of Net Proceeds” has been expended. Of the $23.5 million expended, $15.9 million has been incurred on exploration which includes exploration drilling, geophysics, infill drilling and local site costs that support exploration and data management. The focus on exploration is necessary to determine the size or bounds of the mineralization prior to completing certain detailed work associated with feasibility studies and because exploration provides potentially the greatest return on investment. The
15
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
remaining funds expended largely related to studies and testing to support feasibility studies.
Capitalized expenditures during the year ended December 31, 2021 on the Tamarack Project outlined above in the section titled “Work Completed/Expenditures – Tamarack North Project and Tamarack South Project” of $38.0 million exceeds the $23.5 million “Approximate Expenditures as at December 31, 2021” from the March 2021 Prospectus reconciliation primarily due to (i) noncash items included in the $38.0 million amount and not in the $15.9 million amount such as the payment to Kennecott through issuance of KEX Earn-in Units of $6.8 million and capitalized stock options cost of $8.3 million related to the portion of stock option cost directly attributable to work on the Tamarack Project and (ii) other items such as the time period the amounts relates to, the acquisition of fixed assets and inclusion/exclusion of expenditures that are not related to the Tamarack Project.
Overall, spending is on track and working capital of $23.1 million as of December 31, 2021 was sufficient to cover the approximate expenditures remaining of $12.8 million as at December 31, 2021.
January 2022 Prospectus Offering and January 2022 Concurrent Private Placement
Notwithstanding the above, on January 31, 2022, the Company completed the January 2022 Prospectus Offering (defined below) and Concurrent Private Placement (defined below). The Corporation intends to use the majority of the net proceeds from the January 2022 Prospectus Offering and January 2022 Concurrent Private Placement for advancing work related to its planned exploration and development program at the Tamarack North Project and for general corporate and working capital purposes during 2022 and early-to-mid 2023. The Company intends to use the net proceeds from the January 2022 Prospectus Offering and January 2022 Concurrent Private Placement, together with available funds (including remaining net proceeds from the March 2021 Prospectus Offering), approximately as follows:
| Source of Funds Existing estimated adjusted working capital (excluding legal contingencies) as of December 31, 2021 (estimated in January 2022) Net proceeds from the January 2022 Prospectus Offering Net proceeds from the January 2022 Concurrent Private Placement Total Expenditures Exploration Mine planning, metallurgy and engineering Environmental baseline, assessment and engineering Mineral leases and land Marketing, finance, legal and admin Payment to Triple Flag Public company costs General corporate and working capital Total |
Estimated Amount |
|---|---|
| $23,800,000 $25,543,760 $6,252,784 |
|
| $55,596,544 $24,200,000 $11,100,000 $8,800,000 $1,500,000 $2,300,000 $5,600,000 $1,100,000 $996,544 |
|
| $55,596,544 |
16
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Qualified Persons
Etienne Dinel, Vice President, Geology of Talon is a Qualified Person within the meaning of NI 43-101. Dr. Dinel has reviewed, approved and verified the technical information disclosed in this MD&A (other than the Resource Estimate), including sampling, analytical and test data underlying the technical information.
The Qualified Person who is responsible for the Resource Estimate in this MD&A is Mr. Brian Thomas, senior resource geologist at Golder and independent of Talon. Mr. Thomas has reviewed, approved and verified the data disclosed in this MD&A relating to the Resource Estimate including, sampling, analytical and test data underlying the Resource Estimate and has visited the site and reviewed and verified the QA/QC procedures used at the Tamarack North Project and found them to be consistent with industry standards.
CAPITAL EXPENDITURES ON EXPLORATION PROJECTS
Deferred exploration and development expenditures of the Company are comprised as follows:
| Dec 31, 2020 2021 Additions Foreign Exchange Dec 31, 2021 |
Dec 31, 2020 2021 Additions Foreign Exchange Dec 31, 2021 |
Dec 31, 2020 2021 Additions Foreign Exchange Dec 31, 2021 |
Dec 31, 2020 2021 Additions Foreign Exchange Dec 31, 2021 |
|
|---|---|---|---|---|
| Mineral properties- Resource Tamarack Project |
properties and deferred expenditures (presented in Canadian dollars) | |||
| $60,799,398 | $37,969,379 | $(14,845) | $98,753,932 |
Amounts incurred on the exploration of mineral properties for the year ended December 31, 2021 amounted to $38.0 million and are the result of amounts incurred by Talon in respect of the Tamarack Project in accordance with the 2018 Option Agreement as detailed in the table above under “ Tamarack Project - Work Completed/Expenditures – Tamarack North Project and Tamarack South Project ”.
The foreign exchange loss of $14,845 is a non-cash item that is the result of fluctuations in the Canadian dollar denominated carrying value of the project which has been converted from United States dollars, as a result of the change in the Canadian dollar/United States dollar exchange rate from 1.2732 at December 31, 2020 to 1.2678 at December 31, 2021. IFRS requires that the yearend or period-end United States dollar balance of Resource properties and deferred expenditures be converted to Canadian dollars at the year-end or period-end exchange rate.
Amounts incurred on the exploration of mineral properties for the year ended December 31, 2020 amounted to $10.4 million and was the result of amounts incurred by Talon in respect of the Tamarack Project in accordance with the 2018 Option Agreement, primarily for exploration, drilling and geophysics.
FINANCIAL INSTRUMENTS
| Dec 31, 2021 | Dec 31, 2020 | |
|---|---|---|
| Held for trading, measured at fair value: Cash and cash equivalents |
$25,065,775 | $15,355,958 |
| Royalty Put Option | $545,105 | $1,093,531 |
17
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Talon is exposed to various risks related to its financial assets and liabilities. The most significant of these risks are discussed below and are managed on an ongoing basis.
Credit Risk Management
Certain of the Company’s financial assets are exposed to a degree of credit risk. The Company endeavors to mitigate credit risk by holding its cash and cash equivalents as cash deposits, shortterm government treasury bills, money market funds and guaranteed investment certificates (“ GICs ”) with major commercial banks.
Credit risk relating to accounts receivable arises from the possibility that any counterparty to an instrument fails to perform. The Company does not feel there is significant counterparty risk that could have an impact on the fair value of cash and cash equivalents and receivables.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due or at reasonable cost. The Company has in place a planning and budgeting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis and its capital, development and exploration expenditures.
As of December 31, 2021, the Company had a cash and cash equivalents balance of $25.1 million, (December 31, 2020 – $15.4 million) to settle current liabilities of $2.4 million (December 31, 2020 – $1.4 million).
In order to meet future working capital requirements, the Company will need to raise financing as needed and/or develop the Tamarack Project into a profitable mine. There can be no assurance that the Company will be successful in raising financing as needed or developing the Tamarack Project into a profitable mine to meet the Company’s future working capital requirements.
On March 18, 2021, the Company closed the March 2021 Prospectus Offering.
On January 31, 2022, the Company closed the January 2022 Prospectus Offering and January 2022 Concurrent Private Placement (defined below).
The outbreak of the novel strain of coronavirus, specifically identified as COVID-19 has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to business globally . Global equity markets have experienced significant volatility and periods of weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The ultimate duration and impact of COVID-19 is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company and its subsidiaries in future periods.
COVID-19 may have a significant negative impact on the Company’s ability to raise capital and on operations. Other world events including the war in Ukraine have resulted in increased volatility and may also have a significant negative impact on the Company’s ability to raise capital and on operations.
18
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
See “ Financial Condition, Cash Flow, Liquidity and Capital Resources – Liquidity and Capital Resources”, “Risks and Uncertainties” and “Outlook” for further important information.
Market Risk
Market risk is the risk that changes in market prices, including foreign exchange rates and interest rates will affect the Company’s income or the value of its financial instruments.
The Company records its investments using the closing price at the end of the reporting period. Changes in the closing price will affect the fair value of these investments.
As at December 31, 2021 and December 31, 2020, the Company held no investments other than cash and cash equivalents which management considers to not be materially susceptible to market risks.
Foreign Exchange Risk
The Company is exposed to movements in the United States dollar. Payments made to Kennecott and substantially all of the costs associated with the operatorship of the Tamarack Project are denominated in United States dollars. Talon’s head-office salaries, administrative costs and fees to Canadian-based consultants are denominated in Canadian dollars. Talon’s financing activities have been primarily in Canadian dollars.
Given the above, the Company maintains funds in both Canadian and U.S. dollars taking into account cash needs over the medium term.
As of December 31, 2021, Talon was exposed to movements in the United States dollar as a result of cash on hand, the Royalty Put Option, certain accounts payable and the majority of costs associated with the development of the Tamarack Project.
As of December 31, 2021, the Company had net monetary assets in United States dollars of $18.2 million (Canadian dollar equivalent). If foreign exchange rates had changed by 5% on the last day of the period with all other facts/assumptions held constant, there would be a change in the net income or loss of the Company for the year ended December 31, 2021 of approximately $0.9 million.
COVID-19 and other world events including the war in Ukraine have resulted in increased volatility of the Canadian/U.S. dollar exchange rate which, may increase the Canadian dollar denominated cost of the Company’s operations since a majority of costs associated with the development of the Tamarack Project are denominated in United States dollars.
Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk to the extent of its interest income on holding of government treasury bills, money market funds and GICs (collectively, “ Short Term Investments ”).
19
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
The Short Term Investments typically have a term of less than 6 months. It is management’s opinion that the Company is not exposed to significant interest or credit risks arising from the Short Term Investments. The Company mitigates its risk by holding Short Term Investments low in risk and with highly rated reputable financial institutions.
The carrying values of the Company’s financial instruments approximate their fair values unless otherwise noted.
The Company’s financial instruments are classified as current assets or liabilities on the statement of financial position of the Company. For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value.
Fair Value Hierarchy
The fair value hierarchy establishes three levels to classify inputs to the valuation techniques used to measure fair value. Level 1 inputs are quoted market prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly, such as prices, or indirectly (derived from prices). Level 3 inputs are unobservable (supported by little or no market activity), such as non-corroborative indicative prices for a particular instrument provided by a third party.
The Company has classified its financial assets and liabilities as follows at December 31, 2021:
Level 1 Cash and cash equivalents $25,065,775 Level 3 Royalty Put Option $545,105
FINANCIAL CONDITION, CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Highlights
| Year ended Dec 31, 2021 |
Year ended Dec 31, 2020 |
|
|---|---|---|
| Operating activities | $(2,474,591) | $(2,879,312) |
| Investing activities | (23,303,967) | (9,794,447) |
| Financing activities | 35,500,605 | 20,766,964 |
| Increase (decrease) in cash & cash equivalents | 9,722,047 | 8,093,205 |
| Effect of foreign exchange on consolidation | (12,230) | (7,958) |
| Beginning cash & cash equivalents | 15,355,958 | 7,270,711 |
| Endingcash & cash equivalents | $25,065,775 | $15,355,958 |
Operating Activities
Operating activities for the year ended December 31, 2021 consumed $2.5 million of cash primarily due to net operating expenses and a reduction in working capital. This compares to $2.9 million consumed during the year ended December 31, 2020. The decrease was primarily due to a reduction in consulting fees paid to the executive chairman in 2021 compared to 2020 as
20
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
discussed in the section below entitled “Related party transactions and balances”. See “Review of Annual Results ” for a discussion of operating expenses.
Investing Activities
Investing activities for the year ended December 31, 2021 consumed $23.3 million compared to $9.8 million in the same period in the prior year. In both cases, it was primarily due to capitalized exploration costs. For details on the spending during the year ended December 31, 2021, see the section titled “Work Completed/Expenditures – Tamarack North Project and Tamarack South Project” , with the difference due to non-cash expenditures, accounts payable and accruals, and the purchase of fixed assets that are being depreciated to Resource properties and deferred expenditures.
Financing Activities
On March 26, 2020, the Company filed a final short form base shelf prospectus (the “ 2020 Base Shelf Prospectus ”) with the securities regulatory authorities in each of the provinces of Canada, other than the province of Québec. Pursuant to the 2020 Base Shelf Prospectus, Talon was able to issue common shares, debt securities, subscription receipts or warrants or any combination of such securities as units, in amounts, at prices, and on terms to be determined based on market conditions at the time of sale and set forth in an accompanying prospectus supplement, for an aggregate offering amount of up to $40 million during the 25-month period that the 2020 Base Shelf Prospectus remained effective. The 2020 Base Shelf Prospectus was revoked once the 2021 Base Shelf Prospectus (defined below) became effective.
On December 7, 2021, the Company filed a new final short form base shelf prospectus (the “2021 Base Shelf Prospectus ”) with the securities regulatory authorities in each of the provinces of Canada, other than the province of Québec. Pursuant to the 2021 Base Shelf Prospectus, Talon may issue common shares, debt securities, subscription receipts or warrants or any combination of such securities as units, in amounts, at prices, and on terms to be determined based on market conditions at the time of sale and set forth in an accompanying prospectus supplement, for an aggregate offering amount of up to $90 million during the 25-month period that the Base Shelf Prospectus remains effective. Talon filed the Base Shelf Prospectus to give it flexibility to take advantage of financing opportunities as they may arise and as the Company deems appropriate, subject to market conditions and other relevant factors.
On March 18, 2021, the Company completed the March 2021 Prospectus Offering pursuant to a short form prospectus.
On January 31, 2022, the Company closed a bought deal public offering of common shares of the Company pursuant to a prospectus supplement to the 2021 Base Shelf Prospectus (the “ January 2022 Prospectus Offering” ). Pursuant to the January 2022 Prospectus Offering, Talon issued 38,200,000 common shares at a price of $0.72 per common share for aggregate gross proceeds of $27,504,000. Concurrently with the closing of the January 2022 Prospectus Offering, the Company closed a non-brokered private placement of 8,953,013 common shares at a price of $0.72 per common share for aggregate gross proceeds of $6,446,169.36 ( “January 2022 Concurrent Private Placement” ).
The Company evaluates possible financing activities on an ongoing basis, the Company’s short and long-term budgets in respect of its projects and working capital requirements, as well as the
21
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
availability and costs associated with raising additional capital.
Liquidity and Capital Resources
As of December 31, 2021, the Company had a cash and cash equivalents balance of $25.1 million (December 31, 2020 – $15.4 million) to settle current liabilities of $2.4 million (December 31, 2020 – $1.4 million).
Working capital, which was augmented in March 2021 and January 2022 by the funds raised from the March 2021 Prospectus Offering and the January 2022 Prospectus Offering, is expected to be sufficient to meet the planned spending discussed in the section above “Upcoming Work – Tamarack North Project”.
In order to meet future working capital requirements, the Company will need to raise financing as needed and/or develop the Tamarack Project into a profitable mine. There can be no assurance that the Company will be successful in raising financing as needed or developing the Tamarack Project into a profitable mine to meet the Company’s future working capital requirements.
The Company’s monthly cash outflows are dependent on whether and to what extent the Company is pursuing an active exploration program. The Company’s monthly cash outflows are also dependent on the outlook for raising additional capital and the current amount of working capital. As such, the Company can reduce operating and investing spending to adjust for periods when access to financing is constrained.
Pursuant to an investment agreement dated November 7, 2018 between the Company and Resource Capital Fund VI L.P. (“ RCF ”), for as long as RCF and its affiliates, on a partially diluted basis, hold common shares of the Company equal to or exceeding 10% of all common shares issued and outstanding, RCF has the right to participate in any equity financings of the Company (other than certain exempt issuances) at the same price and on the same terms, on a pro rata basis, such that RCF is entitled to maintain its percentage interest in common shares of the Company on a partially diluted basis.
Effective July 25, 2019, the Company and RCF entered into a qualification rights agreement (the “ Qualification Rights Agreement ”) pursuant to which, under certain circumstances and limitations, RCF has the right to require the Company to qualify shares of the Company held by RCF under a prospectus by way of secondary offering. These qualification rights expire July 25, 2022. Pursuant to the Qualification Rights Agreement, RCF can qualify certain of its shares in the capital of the Company under a prospectus offering initiated by the Company and, subject to certain limitations, can also require the Company to file a prospectus to complete a secondary offering on a maximum of two occasions during the term of the Qualification Rights Agreement. The Company is entitled to postpone any such request by RCF for a period of up to 90 days in certain circumstances, including in the event that the Company is actively employing its best efforts to complete an equity offering, and also in the event that the request is made 60 days after the filing of a final prospectus by the Company.
See “ Financial Instruments – Liquidity Risk” (including in respect of the potential impact of the COVID-19) and “Risks and Uncertainties” for further important information.
22
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
A summary of Contributed Surplus for the period from January 1, 2020 to December 31, 2021 is as follows:
| Balance | December 31, 2019 | $20,051,418 |
|---|---|---|
| Stock options | Stock option compensation | 715,818 |
| Stock options | Stock options exercised | (2,433,134) |
| Balance | December 31, 2020 | $18,334,102 |
| Stock options | Stock option compensation | 12,160,792 |
| Stock options | Stock options exercised | (186,446) |
| Balance | December 31, 2021 | $30,308,448 |
DISCLOSURE OF OUTSTANDING SHARE DATA
As of March 30, 2022, the Company had 757,080,776 common shares issued and outstanding.
The following table details the convertible securities of the Company which are outstanding as at March 30, 2022:
| Expiry Date Exercise Price |
Total |
|---|---|
| Common Shares Stock Options Mar 22, 2024 $0.095 Stock Options Jun 6, 2024 $0.18 Stock Options Oct 2, 2024 $0.18 Stock Options Oct 28, 2024 $0.165 Stock Options Dec 12, 2024 $0.145 Stock Options Mar 13, 2025 $0.10 Stock Options July 22, 2025 $0.145 Stock Options July 23, 2025 $0.145 Stock Options Aug 7, 2025 $0.28 Stock Options Aug 14, 2025 $0.26 Stock Options Aug 15, 2025 $0.25 Stock Options Oct 28, 2025 $0.30 Stock Options Nov 8, 2025 $0.31 Stock Options Dec 28, 2025 $0.51 Stock Options Mar 19, 2026 $0.70 Stock Options May 28, 2026 $0.59 Stock Options June 25, 2026 $0.52 Stock Options Oct 22, 2026 $0.65 Stock Options Jan 13, 2027 $0.72 Stock Options Feb 3, 2027 $0.66 Stock Options Feb 18, 2027 $0.67 Warrants Aug 13, 2022 $0.26 Warrants Dec 11, 2022 $0.30 Warrants Sept 29, 2022 $0.80 |
757,080,776 30,645,116 4,962,735 1,000,000 6,000,000 1,500,000 5,380,000 350,000 500,000 350,000 1,400,000 200,000 200,000 200,000 19,205,000 5,307,736 5,000,000 12,300,000 1,800,000 1,600,000 6,400,000 1,900,000 670,366 1,234,526 5,271,666 |
| Total number of shares issuable on exercise: | 870,457,921 |
As Talon Nickel expands its team given that it is now the operator of the Tamarack Project, stock options were issued by the Company during 2020 and 2021 primarily to new employees and consultants.
23
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
The following details the change in stock options outstanding of the Company during the year ended December 31, 2021:
| Options | Weighted Average Exercise Price |
|
|---|---|---|
| Outstanding – beginning of year Granted Granted Granted Granted Exercised Exercised Exercised Exercised Exercised Cancelled Cancelled Cancelled Cancelled Cancelled |
76,964,838 5,307,736 5,400,000 12,600,000 1,900,000 (150,000) (20,000) (50,000) (325,000) (850,000) (400,000) (150,000) (312,500) (200,000) (200,000) |
$0.226 0.70 0.59 0.52 0.65 0.095 0.28 0.30 0.51 0.145 0.10 0.30 0.51 0.52 0.59 |
| Outstanding–end of year | 99,515,074 | $0.315 |
All of the stock options outstanding have been issued pursuant to the Company’s stock option plan.
Estimated fair value of stock options
The Company determined the fair value of the stock options issued during the year ended December 31, 2021 and 2020 using the Black-Scholes option pricing model using the following assumptions:
| Year ended December 31, | Year ended December 31, | |
|---|---|---|
| 2021 | 2020 | |
| Share price | Closing price on the day prior to | |
| the date of grant | ||
| Risk-free interest rate | 0.92% - 1.38% | 0.74% |
| Expected life | 5 years | 5 years |
| Expected volatility | 70% | 75% |
| Dividend yield | 0% | 0% |
| Forfeiture rate | 0% | 0% |
Stock option compensation expense for the years ended December 31, 2021 and 2020, presented in the table below, was recognized in the consolidated statements of loss and comprehensive loss. In addition, amounts related to stock option compensation attributable to work carried out on the Tamarack Project were capitalized to Resource properties and deferred expenditures for the years ended December 31, 2021 and 2020, also presented in the table below.
24
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
| METALS CORP. EMENT’S DISCUSSION AND ANALYSIS year ended December 31, 2021 |
|
|---|---|
| Stock option compensation - expensed Stock option compensation - capitalized Stock option compensation - total |
Year ended Year ended ended ended December 31, 2021 December 31, 2020 |
| 3,866,345 $ 138,888 $ 8,294,447 576,930 |
|
| 12,160,792 $ 715,818 $ |
RISKS AND UNCERTAINTIES
Talon is subject to a number of risk factors due to the nature of the mineral business in which it is engaged, the limited extent of its assets and its stage of development.
The exploration operations of the Company are speculative due to the high-risk nature of its business which is primarily focused on the acquisition, exploration and development of mineral projects. The Company’s activities in pursuit of its objectives are subject to a number of risks and uncertainties.
The following is a summary of the most significant of those risks and uncertainties affecting or that could affect the financial condition or results of operations of the Company. For a further discussion of the risks and uncertainties facing the Company, please refer to the Company’s Annual Information Form for the year ended December 31, 2021 under the heading “Risk Factors” available on SEDAR at www.sedar.com. These risk factors could materially affect the Company’s future operating results and could cause actual events to differ materially from those described in forward-looking statements relating to the Company. The Company may face additional risks and uncertainties, including, risks and uncertainties that are unknown to the Company or risks and uncertainties that the Company now believes to be unimportant, which could have a material adverse effect on the business of the Company. If any of the risks actually occur, the business, financial condition or results of operations of the Company could be negatively affected.
2018 Option Agreement
Pursuant to the terms of the 2018 Option Agreement, Talon Nickel has the further right to acquire a 60% interest in the Tamarack Project, subject to the completion of certain conditions. In the event that Talon Nickel fails to meet the requirements to earn such interest in the Tamarack Project, in certain limited circumstances, Talon Nickel may revert to a minority interest in the Tamarack Project, and cease to be the operator of the Tamarack Project. In such case, all future funding requirements for the Tamarack Project would be determined by Kennecott (in its capacity as operator), and any failure by Talon Nickel to fund its proportional share of such funding would result in dilution of its interest in the Tamarack Project.
In order for Talon Nickel to earn a 60% interest in accordance with the 2018 Option Agreement, the Company will be required to raise additional capital and there can be no assurance that the Company will be successful in raising such capital. If the Company is successful in raising capital, it could result in substantial dilution to existing shareholders of the Company.
25
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Governmental Regulation; Environmental Risks and Hazards
The mineral exploration activities of the Company and Kennecott (in respect of the Tamarack Project) are subject to various laws governing prospecting, development, production, taxes, labour standards and occupational health, mine safety, toxic substances and other matters. Mining, beneficiation and exploration activities are also subject to various laws and regulations relating to the protection of the environment. Although the Company believes that its and Kennecott’s (in respect of the Tamarack Project) exploration activities are currently carried out in accordance with all applicable rules and regulations, no assurance can be given that new rules and regulations will not be enacted, including any limitation, or prohibition, on sulphide mining, or that existing rules and regulations will not be applied in a manner that could limit or curtail production or development of the Company’s properties. Amendments to current laws and regulations governing the operations and activities of the Company or more stringent implementation thereof could have a material adverse effect on the Company’s business, financial condition and results of operations and cause increases in exploration expenses, capital expenditures or production costs, reduction in levels of production at producing properties, or abandonment or delays in development of the Company’s existing and/or new properties.
All phases of the Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates, including, as it relates to the Tamarack Project, the regulations applicable in Minnesota, USA. Environmental legislation is evolving in a manner that will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that existing or future environmental regulation will not materially adversely affect the Company’s business, financial condition and results of operations. Environmental hazards may exist on the properties on which the Company holds interests that are unknown to the Company at present and that have been caused by previous or existing owners or operators of the properties.
In particular, existing and possible future environmental and social impact legislation, regulations and actions, including the regulation of air and water quality (including, changes to the regulations in Minnesota surrounding the protection of waters in which wild rice inhabits), mining reclamation, solid and hazardous waste handling and disposal, the promotion of occupational health and safety, the protection of wildlife and ecological systems and the protection of the societies and communities of indigenous peoples, could cause significant expense, capital expenditures, restrictions and delays in the Company’s activities, the extent of which cannot be predicted and which may well be beyond its capacity to fund. Environmental and social impact studies may be required for some operations, and significant fines and clean-up responsibilities may be imposed for companies causing damage to the environment in the course of their activities.
In addition, the Company could incur substantial losses as a result of loss of life, severe damage to and destruction of property, natural resources and equipment, pollution and other environmental damage, clean-up responsibilities, regulatory investigation and penalties, suspension of operations and repairs to resume operations.
Government approvals and permits are currently, or may in the future be, required in connection with the Company’s operations, including approvals that may be required for the Company to act as operator in respect of the Tamarack Project while the Tamarack Project exploration leases are in the name of Kennecott. To the extent such approvals are required and not obtained (or
26
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
delayed), the Company may be curtailed or prohibited from proceeding with planned exploration or development of its properties, including the Tamarack Project.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining and beneficiation operations, including the Company, may be required to compensate those suffering loss or damage by reason of such activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations, which may adversely affect the Company.
Exploration, Development and Operating Risks
The exploration for and development of mineral deposits involves significant risks which even a combination of careful evaluation, experience and knowledge may not eliminate. While the discovery of an ore body may result in substantial rewards, few properties that are explored are ultimately developed into producing mines. Major expenses may be required to locate and establish mineral reserves, to develop metallurgical processes and to construct mining and processing facilities at a particular site. Actual exploration, development and/or other costs and economic returns may differ significantly from those the Company has anticipated. It is impossible to ensure that the exploration programs planned by Talon or Kennecott will result in a profitable commercial mining operation. Talon cannot give any assurance that its and Kennecott’s (in respect of the Tamarack Project) current and future exploration activities and/or metallurgical testing will be consistent with the Company’s expectations or result in any additional mineralization and/or a mineral deposit containing mineral reserves. Whether a mineral deposit will be commercially viable depends on a number of factors, some of which are: the particular attributes of the deposit, such as size, grade and proximity to infrastructure; commodity prices that are highly cyclical; and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in Talon not receiving an adequate return on invested capital.
Although Talon’s present activities are directed towards the financing, exploration and development of mineral projects, its activities may also ultimately include mining operations. Mining and exploration operations generally involve a high degree of risk. Talon’s operations (and Kennecott’s as they may relate to the Tamarack Project) are subject to all the hazards and risks normally encountered in the exploration, development, production and beneficiation of nickel, copper and platinum, including unusual and unexpected geologic formations, seismic activity, cave-ins, flooding and other conditions involved in the drilling and removal of material, any of which could result in damage to, or destruction of, mines and other producing facilities, damage to life or property, environmental damage and possible legal liability. Although adequate precautions to minimize risk will be taken, mining and exploration operations are subject to hazards such as equipment failure or failure of retaining dams around tailings disposal areas which may result in environmental pollution and consequential liability.
The economic viability of mineral projects, including projects such as the Tamarack Project, may be affected, in part, by the ability of the operator to mine, beneficiate and, to the extent the Company has not already done so, enter into off-take agreements with potential end users. No assurance can be made that Talon (or, if applicable, Kennecott as it relates to the Tamarack
27
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Project) will be successful in entering into off-take agreements in respect of local and/or export sales or, if necessary, in accessing local smelting facilities.
Increased Availability of Alternative Nickel Sources or Substitution of Nickel from End Use Applications
Demand for primary nickel may be negatively affected by the direct substitution of primary nickel with other materials in current and future applications. In response to high nickel prices or other factors, producers of batteries may shift from batteries with high nickel content to batteries with either lower nickel content or no nickel content. In addition, in response to high nickel prices or other factors, producers and consumers of stainless steel may partially shift from stainless steel with high nickel content to stainless steels with either lower nickel content or no nickel content. One or both of these shifts may adversely affect demand for nickel.
Changes in the Price of Nickel
The ability to develop the Tamarack Project is directly related to the market price of nickel. Nickel is sold in an active global market and traded on commodity exchanges, such as the LME and the New York Mercantile Exchange. Nickel prices are subject to significant fluctuations (as was seen in March 2022 when the price of nickel spiked and the LME ceased trading of Nickel for a period of time as a consequence of the war in Ukraine) and are affected by many factors, including actual and expected macroeconomic and political conditions, levels of supply and demand, the availability and costs of substitutes, input costs, foreign exchange rates, inventory levels, investments by commodity funds and other actions of participants in the commodity markets. Nickel prices have fluctuated widely, particularly in recent years. Consequently, the economic viability of the Tamarack Project cannot be accurately predicted and may be adversely affected by fluctuations in nickel prices.
COVID-19 Coronavirus Outbreak
The current and ongoing global uncertainty with respect to the spread of COVID-19, the rapidly evolving nature of the pandemic and local and international developments related thereto and its effect on the broader global economy and capital markets may have a negative effect on the Company and the advancement of the Tamarack Project. While the precise impact of the COVID19 outbreak on the Company remains unknown, rapid spread of COVID-19 and declaration of the outbreak as a global pandemic has resulted in and may in the future result in travel advisories and restrictions, certain restrictions on business operations, social distancing precautions and restrictions on group gatherings which are having and may have direct impacts on businesses in the United States, Canada and around the world and could result in travel bans, closure of assay labs or delays in obtaining results from assay labs, work delays, restrictions on or shutting down of drilling operations, difficulties for contractors and employees getting to site, restrictions related to other mining related business and operations and the diversion of management attention all of which in turn could have a negative impact on development of the Tamarack Project and the Company generally. The spread of COVID-19 may also have a material adverse effect on global economic activity and could result in volatility and disruption to global supply chains and the financial and capital markets, which could affect the business, financial condition, results of operations, prospects and other factors relevant to the Company, including its ability to raise additional financing. There can be no assurance that COVID-19 or any other public health crises will not have a material adverse effect on the Company and its business and operations.
28
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
War in Ukraine
The military conflict in Ukraine could lead to heightened volatility in the global markets, increased inflation, and turbulence in commodities markets, including nickel. More recently, in response to Russian military actions in Ukraine, several countries (including Canada, the United States and certain allies) have imposed economic sanctions and export control measures, and may impose additional sanctions or export control measures in the future, which have and could in the future result in, among other things, severe or complete restrictions on exports and other commerce and business dealings involving Russia, certain regions of Ukraine, and/or particular entities and individuals. While the Company does not have any direct exposure or connection to Russia or Ukraine, as the military conflict is a rapidly developing situation, it is uncertain as to how such events and any related economic sanctions could impact the global economy and commodities markets. Any negative developments in respect thereof could have a material adverse effect on the Company’s business, operations or financial condition.
Working Capital Requirements
In order to meet future working capital requirements, the Company may need to raise additional capital. If the Company seeks to raise additional capital, it may not be available when needed, or if available, the terms of such capital might not be favourable to the Company. Global securities markets continue to experience volatility (and extreme volatility since the outbreak of COVID-19 and other world events, including the war in Ukraine), which may result in difficulty raising equity capital and market forces may render it difficult or impossible for the Company to secure placees to purchase any new share issuances at prices which will not lead to severe dilution to existing shareholders, or at all. There can be no assurance that the Company will be successful in raising additional capital, when needed, to meet the Company’s future working capital requirements. If the Company is not successful in doing so (or in doing so sufficiently), it may have a material adverse effect on the Company’s business, financial condition and results of operations (including, in certain circumstances, the ability of the Company to continue to operate as a going concern).
Ability to Continue as a Going Concern
The Company believes that it has or will have sufficient funds to meet its obligations and planned expenditures for the ensuing twelve months as they fall due. In assessing whether the going concern assumption contained in the Company’s financial statements for the year ended December 31, 2021 is appropriate, the Company takes into account all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period. The Company’s ability to continue future operations beyond December 31, 2022 may be dependent on the Company’s ability to secure additional financing.
Litigation
The outcome of outstanding, pending or future proceedings cannot be predicted with certainty and may be determined adversely against the Company or may delay the Company from proceeding with the Tamarack Project in a timely manner. Specifically, current litigation proceedings in Brazil, even in cases which the Company’s legal counsel believes have a possible chance of success by the counterparty, may be determined, in whole or in part, against the Company. One or more of such determinations against the Company may adversely affect the
29
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Company’s financial condition and may have a material adverse impact on the ability of the Company to carry on operations.
Uncertainty Relating to Inferred and Indicated Mineral Resources
There is a risk that the inferred and indicated mineral resources currently reported for the Tamarack Project cannot be converted into mineral reserves as the ability to assess geological continuity is not sufficient to demonstrate economic viability. Due to the uncertainty that may attach to inferred and indicated mineral resources, there is no assurance that inferred and indicated mineral resources will be upgraded to resources with sufficient geological continuity to constitute proven and probable mineral reserves as a result of continued exploration.
Key Executives and Consultants
The Company is dependent on the services of key executives, including the directors of the Company and a small number of highly skilled and experienced employees and consultants. Due to the relatively small size of the Company, the loss of these persons or the Company’s inability to attract and retain additional highly skilled employees or consultants may adversely affect its business and future operations.
Market Price of Common Shares; Impact of Volatility; Litigation resulting from Volatility
Securities of small-cap companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments in North America and globally and market perceptions of the attractiveness of particular industries. In the past several years and more recently with the outbreak of COVID-19 and the war in Ukraine, worldwide securities markets have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly those considered exploration or development stage companies, have experienced declines in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies.
The price of Talon’s common shares may also be affected by short-term changes in nickel or other relevant mineral prices or in its financial condition or results of operations. Other factors unrelated to the Company’s performance that may have an effect on the price of Talon’s common shares include the following: COVID-19, the war in Ukraine, the fact that RCF and Pallinghurst Nickel International Ltd. own or may sell a large number of common shares of the Company; the extent of analytical coverage available to investors concerning the Company’s business may be limited if investment banks with research capabilities do not follow the Company’s securities; lessening in trading volume and general market interest in the Company’s securities may affect an investor’s ability to trade significant numbers of Talon’s common shares; the size of the Company’s public float may limit the ability of some institutions to invest in the Company’s securities; and a substantial decline in the price of Talon’s common shares that persists for a significant period of time could cause the Company’s securities to be delisted, further reducing market liquidity.
As a result of any of these factors, the market price of Talon’s common shares at any given point in time may not accurately reflect the Company’s long-term value. Securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. The Company may in the future be the target of similar litigation. Securities
30
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
litigation could result in substantial costs and damages and divert management’s attention and resources.
Exchange Rate Fluctuations
Certain of the Company’s financing activities are completed in Canadian dollars while the majority of the Company’s non-working capital costs are in United States dollars and any payments made under the 2018 Option Agreement and the Royalty Agreement will be made in United States dollars. As such, the Company is exposed to movements in the United States dollar.
A depreciation of the Canadian dollar against the United States dollar may negatively affect the Company’s current or future cash balance and may require the Company to raise additional capital to offset additional costs caused by exchange rate fluctuations. In addition, a depreciation of the Canadian dollar against the United States dollar may require the Company to raise more money than it otherwise would have been required to do. The Company may not be able to complete such a larger financing which may result in the Company not being able to meet its obligations in respect of the Tamarack Project. Such a failure may have a material adverse impact on the Company, including potential dilution of its interest in the Tamarack Project and its ability to continue operating.
Land Title
With respect to the Tamarack Project, the mineral and surface interests are held in Kennecott’s name through various Minnesota state leases, private agreements and fee ownership. Maintenance of all of such rights are subject to ongoing compliance with the terms of such licenses, agreements and contracts. While the Company intends to take all reasonable steps to maintain title to its mineral properties, there can be no assurance that it will be successful in extending or renewing mineral rights on or prior to the expiration of their term. The acquisition of title to mineral properties is a very detailed and time-consuming process. Title to, and the area of, mineral concessions may be disputed. Although the Company believes it has taken reasonable measures to ensure proper title to its properties (including, the Tamarack Project), there is no guarantee that title to any of its properties will not be challenged or impaired. Third parties may have valid claims underlying portions of the Company’s interests, including prior unregistered liens, agreements, transfers or claims (including, native land claims) and title may be affected by, among other things, undetected defects. In addition, the Company may be unable to operate its properties as permitted or to enforce its rights with respect to its properties.
Insurance and Uninsured Risks
Talon’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods and earthquakes. Such occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental damage to the Company’s properties (including, the Tamarack Project) or the properties of others, delays in mining, monetary losses and possible legal liability.
Although Talon maintains insurance to protect against certain risks in such amounts as it considers reasonable, its insurance will not cover all the potential risks associated with the Company’s operations. Talon may also be unable to obtain or maintain insurance to cover risks
31
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards as a result of exploration and production is not generally available to Talon or to other companies in the mining industry on acceptable terms. Talon might also become subject to liability for pollution or other hazards that may not be insured against or that Talon may elect not to insure against because of premium costs or other reasons. Losses from these events may cause Talon to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.
Political, Judicial, Administrative, Taxation or Other Regulatory Factors
Talon may be adversely affected by changes in political, judicial, administrative, taxation or other regulatory factors in the areas in which Talon operates and/or holds interests. Such changes could have a material adverse effect on the Company’s business, financial condition and results of operations and cause increases in exploration expenses, capital expenditures or production costs, or abandonment or delays in development of the Company’s existing and/or new properties, including impacting decisions to continue with the funding of the Tamarack Project.
Possible Conflicts of Interest
Certain of the directors and officers of the Company also serve as directors and/or officers of other companies involved in natural resource exploration and development and consequently there exists the possibility for such directors and officers to be in a position of conflict. The Company expects that any decision made by any of such directors and officers involving the Company will be made in accordance with their duties and obligations to deal fairly and in good faith with a view to the best interests of the Company and its shareholders, but there can be no assurance in this regard.
Triple Flag Royalty Financing
Pursuant to the Royalty Agreement, Talon and its related entities have provided security to the Royalty Holder to support the payment and performance obligations related to the royalty and the guarantees. In the event Talon Nickel fails to meet such obligations, the Royalty Holder has the right to exercise its security and may, among other things, acquire Talon Nickel’s entire interest in the Tamarack Project.
The Royalty Agreement contains restrictive covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, the ability of the Company to amend the 2018 Option Agreement, cease to be the operator of the Tamarack Project, sell or dispose of Talon Nickel’s interest in the Tamarack Project, incur additional indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets and merge or consolidate with another entity. A failure to comply with these obligations could result in an event of default (as defined under the Royalty Agreement) which, if not waived, could permit the Royalty Holder to exercise its security and, among other things, acquire Talon Nickel’s entire interest in the Tamarack Project.
Pursuant to the Royalty Agreement, Talon Nickel is required to make payment to the Royalty Holder based on an assumed ownership percentage in the Tamarack Project of 51% or 60%, depending on the particular circumstances. In the event that Talon Nickel dilutes below the assumed ownership percentage, it will nevertheless still be required to make payment to the
32
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
Royalty Holder at the assumed ownership percentage. Given this unique payment structure under the Royalty Agreement, there is a risk that the Company may not have enough money to make the required payments to the Royalty Holder. In such circumstance, the failure by Talon Nickel to make adequate payment to the Royalty Holder would constitute an event of default under the Royalty Agreement, thereby entitling the Royalty Holder to exercise its security and, among other things, acquire Talon Nickel’s entire interest in the Tamarack Project.
RELATED PARTY TRANSACTIONS AND BALANCES
Related parties include directors and officers of the Company, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions.
The spouse of the CEO provided recruiting services relating to new hires during the year ended December 31, 2021 for fees of $25,672 (year ended December 31, 2020 – $23,941).
The remuneration, including benefits, of directors and officers of the Company for the years ended December 31, 2021 and 2020 was as follows:
| Year ended December 31, | ||
|---|---|---|
| 2021 2020 |
||
| Cash compensation | $ | 2,489,442 $ 1,329,855 |
| Board fees | 65,459 516,023 | |
| Stock option compensation | 6,243,576 134,784 | |
| Total Aggregate Compensation | $ | 8,798,477$1,980,662 |
| Capitalized portion included in Total Aggregate Compensation (capitalized to | ||
| Resource properties and deferred expenditures): | ||
| Cash compensation | $ | 1,647,308 $ 718,145 |
| Stock option compensation | 2,499,265 104,112 | |
| Total | $ | 4,146,573$822,257 |
As a result of COVID-19, the CEO, President and CFO of the Company agreed to defer a portion of their April and May 2020 salaries totalling $74,167 which was subsequently paid by the Company as of December 31, 2020.
Cash compensation and stock option compensation is recorded on the consolidated statements of loss and comprehensive loss in “Salaries, benefits, consulting and board fees” and on the consolidated statements of financial position in “Resource properties and deferred expenditures”.
During Q4 2020, the Corporate Governance and Compensation Committee approved the payment of certain deferred consulting fees to the Company’s Executive Chairman. These deferred consulting fees amounted to the sum of $483,000 and related to the years 2015 to 2020. Pursuant to a consulting agreement dated December 1, 2015 between the Company and the Executive Chairman, such consulting fees were initially to be paid out to the Executive Chairman upon the earlier of a termination of the Executive Chairman’s consulting agreement or a change of control. As of December 31, 2021, $115,829 of consulting fees remained outstanding. In March 2022, the Corporate Governance and Compensation Committee approved an amendment to the Executive Chairman’s consulting agreement which provided that all outstanding consulting fees be paid immediately and going forward his consulting fees would no longer be deferred but rather paid in the normal course.
33
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
In Q2 2021, $150,000 in deferred salaries relating to the years 2016 to 2018 ($50,000 per year) were paid to each of the CEO and President of the Company. The CEO and President deferred their salaries during those years in order to preserve cash for the Company.
As of December 31, 2021, $115,829 (December 31, 2020 - $283,529) remained payable to the Executive Chairman which was subsequently paid in Q1 2021.
In March 2020, 3,000,000 options were issued to an officer of the Company with a term of 5 years, an exercise price of $0.10 and vesting over 2.5 years.
In December 2020, 10,115,000 options were issued to officers and the board of directors of the Company with a term of 5 years, an exercise price of $0.51 and vesting over 1 year.
In March 2021, 607,736 options were issued to an officer with a term of 5 years, an exercise price of $0.70 and vesting over 1 year.
In May 2021, 4,000,000 options were issued to officers and the board of directors of the Company with a term of 5 years, an exercise price of $0.59 and vesting over 1 year.
In June 2021, 7,000,000 options were issued an officer of the Company with a term of 5 years and an exercise price of $0.52 that vest 2,000,000 on September 2, 2021 and 5,000,000 over 2 years.
CRITICAL ACCOUNTING ESTIMATES AND CHANGES IN ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. The consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the consolidated financial statements and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and also in future periods when the revision affects both current and future periods.
Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of each reporting period and for the periods then ended, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the valuation of resource properties, the estimation of contingencies, the valuation of the asset retirement obligation and the valuation of the Royalty Put Option.
The uncertainty regarding the valuation of resource properties arises as a result of estimates and judgments such as forecasts of metal prices, operating costs, capital costs and income taxes among numerous other valuation inputs, discount rates, comparability of the Company’s properties to those of other market participants and the selection of market-participant assumptions used to determine recoverable value.
34
TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
The uncertainty regarding the estimation of contingencies arises as result of the uncertainty as to legal proceedings that are before the courts, as well the amount and probability of a future payment or award.
The uncertainty regarding the valuation of the asset retirement obligation arises as result of certain key inputs such as future estimated costs, future inflation, the possibility of changing laws and requirements, including changes in constructive obligations and the discount rate used to present value the future estimated costs.
The uncertainty regarding the valuation of the Royalty Put Option arises as result of certain key inputs such as the probability that the Royalty Put Option will be exercised which is determined by management based on a quantitative assessment of the value of the Royalty Put Option presently and at the exercise date along with qualitative assessments regarding permitting and other qualitative aspects of the Tamarack Project such as exploration potential and the quality of the project, among other items.
Talon considers the following accounting policies to be critical in the preparation of its financial statements:
Resource properties and deferred exploration and evaluation costs
Interests in mineral exploration properties are recorded at cost. Exploration expenditures relating to mineral properties in which an interest is retained are deferred and carried as an asset until the results of the projects are known. If the project is unsuccessful or if exploration has ceased because continuation is not economically feasible, the cost of the property and the related deferred exploration expenditures are written off.
The cost of mineral properties includes the cash consideration paid and the negotiated value of shares issued on the acquisition of properties. Properties acquired under option agreements, whereby option payments are made at the discretion of the company, are recorded in the financial statements at the time payments are made. The proceeds from options granted or royalties sold on properties are credited to the cost of the related property.
Deferred exploration costs are amortized over the estimated useful life of the related mineral property as commercial production commences. If the net carrying amount of the deferred exploration expenses is not recoverable, these costs are written down to net recoverable amount of the deferred exploration expense.
The amounts shown for mineral properties and deferred exploration costs represents cost to date, and do not necessarily represent present or future values as they are entirely dependent upon the economic recovery of future reserves.
The Company does not accrue the estimated future costs of maintaining its mineral properties in good standing.
Asset retirement obligations
A provision is recognized on the consolidated statement of financial position when the Company has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined
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TALON METALS CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2021
by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The Company’s asset retirement obligations arise from its obligations to undertake site reclamation and remediation in connection with its resource properties. The estimated costs of reclamation are based on current regulatory requirements and the present value of estimated reclamation costs at the future date of purchase. Future changes to those regulations and standards, as well as changes resulting from operations may result in actual reclamation costs differing from the estimate.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The CEO and the CFO, with the assistance of management, have conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as at December 31, 2021. Based on the evaluation, the CEO and the CFO have concluded that as at December 31, 2021, the Company’s internal control over financial reporting is effective, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework.
No changes were made to the Company’s internal control over financial reporting during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OUTLOOK
The Company is focused on the advancement of the Tamarack North Project. As of March 30, 2022, the Company had working capital excluding the Royalty Put Option of approximately $42 million.
The Company intends to further advance the Company’s objective of completing a series of tradeoff studies and mine planning, metallurgy, and engineering studies on the Tamarack North Project during 2022 and early-to-mid 2023.
During 2021, the Company successfully drilled two areas with mixed massive sulphide mineralization below a thicker zone of disseminated sulphide mineralization. These areas are referred to as CGO East and CGO West. These areas are shallower than the present Tamarack North Project mineral resource and, as such, could potentially reduce the timeline to production. The Company has been focused on expanding and infill drilling of these areas and plans to continue expansion and infilling of these areas during 2022.
During 2021, the Company also conducted infill drilling of the massive sulphide unit that forms part of the present Tamarack North Project mineral resource. Drilling of the massive sulphide unit will continue throughout 2022.
During 2021, the Company designed and successfully deployed a suite of geophysical survey methods over the present Tamarack North Project mineral resource. The Company also completed a detailed magneto-telluric survey over the northern half of the Tamarack Intrusive Complex, which is currently being interpreted. In 2022, the Company plans to also deploy its geophysical methods to help guide the drilling of priority targets that lie outside of the present Tamarack North Project mineral resource area. The ultimate objective is to discover and delineate high-grade nickel deposits that can be accessed underground from the present Tamarack North
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TALON METALS CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2021
Project mineral resource area. If successful, this would constitute a continuation of underground mining to extend the mine life, with potentially no impact to surface infrastructure.
During 2021, the Company expanded its environmental baseline work, and such work will continue throughout 2022. The Company has commenced waste characterization studies, which will also continue throughout 2022.
In January 2022, Talon Nickel entered into an agreement with Tesla Inc. (“ Tesla ”) for the supply and purchase of 75,000 metric tonnes (165 million lbs) of nickel in concentrate. Talon Nickel has agreed to use commercially reasonable efforts to achieve commercial production on or before January 1, 2026, which may be extended by the parties for up to 12 months following which Tesla has the right to terminate the agreement and Talon Nickel may elect to sell to other parties. Given the agreement with Tesla, during 2022, the Company intends to focus its metallurgical testing with the objective of producing a nickel concentrate for Tesla and a copper concentrate for selling to one or more smelters.
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