PolyMet Mining Corp.: Exhibit 99.2 - Filed by newsfilecorp.com
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
General
The following information, prepared as at September 6, 2012
should be read in conjunction with the condensed interim consolidated financial
statements of PolyMet Mining Corp. (the “Company” or “PolyMet”) for the three
and six months ended July 31, 2012 and related notes attached thereto, which are
prepared in accordance with IAS 34, Interim Financial Reporting (“IAS 34”) and
in conjunction with the audited consolidated financial statements for the year
ended January 31, 2012 prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”). All amounts are expressed in United States dollars unless
otherwise indicated.
The Audit Committee of the Board of Directors of the Company,
consisting of four independent directors, has reviewed this document pursuant to
its mandate and charter.
Forward Looking Statements
This Management Discussion and Analysis (“MD&A”) contains
statements that constitute "forward-looking statements" within the meaning of
Section 21E of the United States Securities Exchange Act of 1934, as amended
(the “Exchange Act”). These statements appear in a number of different places in
this MD&A and can frequently, but not always, be identified by words such as
“expects”, “anticipates”, “believes”, “intends”, “estimates”, “potential”,
“possible”, “projects”, “plans” and similar expressions, or statements that
events, conditions or results “will”, “may”, “could” or “should” occur or be
achieved or their negatives or other comparable words. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause PolyMet’s actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements. Forward-looking
statements include statements regarding the outlook for the Company’s future
operations, plans and timing for PolyMet’s exploration and development programs,
statements about future market conditions, supply and demand conditions,
forecasts of future costs and expenditures, the outcome of legal proceedings,
and other expectations, intentions and plans that are not historical fact. The
Company’s actual results may differ materially from those in the forward-looking
statements due to risks facing PolyMet or due to actual facts differing from the
assumptions underlying the Company’s predictions.
The forward-looking statements contained in this MD&A are
based on assumptions which include, but are not limited to:
- Completion of environmental review on the expected timeframe;
- Obtaining permits on a timely basis;
- Execution of prospective business plans;
- Effectively managing currency market fluctuations; and
- Complying with applicable governmental regulations and standards.
Such forward-looking statements are subject to risks,
uncertainties and other factors, including those listed or incorporated by
reference under “Risk Factors” in the Form 20-F. These risks, uncertainties and
other factors include, but are not limited to:
- Risks related to changes in general economic and business conditions,
including changes in interest rates; prices of natural resources, costs
associated with mineral exploration and development, and other economic
conditions;
- Risks related to changes in the resource market including prices of
natural resources, costs associated with mineral exploration and development,
and other economic conditions;
- Natural phenomena;
- Risk related to actions by governments and authorities including changes
in government regulation;
- Uncertainties associated with legal proceedings; and
- Other factors, many of which are beyond our control.
1
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
All forward-looking statements included in this MD&A are
based on information available to us on the date of this MD&A. The Company
expressly disclaims any obligation to update publicly, or otherwise, these
statements, whether as a result of new information, future events or otherwise
except to the extent required by law, rule or regulation. Readers should not
place undue reliance on forward-looking statements. Readers should carefully
review the cautionary statements and risk factors contained in this and all
other documents that the Company files from time to time with regulatory
authorities.
Cautionary note to U.S. investors: the terms “measured and
indicated mineral resource”, “mineral resource”, and “inferred mineral resource”
used in this Management Discussion and Analysis are Canadian geological and
mining terms as defined in accordance with National Instrument 43-101, Standards
of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set out in
the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) Standards
on Mineral Resources and Mineral Reserves. U.S. investors are advised that while
such terms are recognized and required under Canadian regulations, the SEC does
not recognize these terms. Mineral Resources do not have demonstrated economic
viability. It cannot be assumed that all or any part of a Mineral Resource will
be upgraded to Mineral Reserves. Under Canadian rules, estimates of inferred
mineral resources may not form the basis of or be included in feasibility or
other studies. U.S. investors are cautioned not to assume that any part of an
inferred mineral resource exists, or is economically or legally mineable.
2
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Description of Business and Summary of Recent
Events
PolyMet is a Toronto Stock Exchange and NYSE Amex listed Issuer
engaged in the exploration and development, when warranted, of natural resource
properties. The Company’s primary mineral property and principal focus is the
commercial development of its NorthMet Project, a polymetallic project in
northeastern Minnesota, USA which hosts copper, nickel, cobalt and platinum
group metal mineralization.
The NorthMet Project covers a total of approximately 16,700
acres or 25.9 square miles comprising two areas: the NorthMet mine site totaling
approximately 4,300 acres or 6.5 square miles of leased mineral rights and the
Erie Plant site totaling approximately 12,400 acres or 19.4 square miles of
freehold land located approximately six miles west of the mine site. The
property is located in St. Louis County in the Mesabi Range District about 60
miles north of Duluth, Minnesota. The NorthMet Project is easily accessible via
state and county roads. The surfaced County Highway 666 links the plant to the
town of Hoyt Lakes, itself approximately 25 miles east of Virginia, Minnesota
which is located on State Highway 53. The mine site is accessible by an
all-season gravel road from the plant site and a private railroad crosses the
property immediately south of the deposit and runs to the plant site. The plant
site is serviced by commercial railroad which connects into the US national and
Trans-Canadian railroad systems, as well as a private railroad providing access
to port facilities located on Lake Superior. Three high-voltage power lines
owned by Minnesota Power supply the plant site and there is ready access to
industrial electric power at the mine site.
Asset Acquisitions
On November 15, 2005 the Company, through its Minnesota
subsidiary (Poly Met Mining, Inc.), completed the early exercise of PolyMet’s
option with Cliffs Natural Resources, Inc. (NYSE:CLF) (“Cliffs”) to acquire the
Erie Plant, which is located approximately 10 kilometers (6 miles) west of
PolyMet’s NorthMet deposit. The plant was operated by Cliffs for many years and
was acquired by Cliffs in early 2001 from LTV Steel Mining Company after that
company’s bankruptcy at which time the plant was placed on care-and-maintenance
with a view to a potential restart. With minor modification, the crushing and
milling circuits can be used for the NorthMet ore. The plant assets now owned by
PolyMet include crushing and milling equipment, comprehensive spare parts, plant
site buildings, real estate, tailings impoundments and mine workshops, as well
as access to extensive mining infrastructure including roads, rail, water, and
power.
PolyMet plans to refurbish and reactivate the crushing,
concentrating and tailings facilities at the Erie Plant to produce concentrates
containing copper, nickel, cobalt and precious metals. The Company plans to sell
separate copper and nickel concentrates prior to completion of construction and
commissioning of the new hydrometallurgical metal recovery processing
facilities. Once completed, the new hydrometallurgical plant will upgrade the
nickel concentrates to produce a nickel-cobalt hydroxide and a precious metals
precipitate.
On December 20, 2006 the Company acquired from Cliffs, property
and associated rights sufficient to provide it with a railroad connection
linking the mine development site and the Erie Plant. This transaction also
included 120 railcars, locomotive fueling and maintenance facilities, water
rights and pipelines, large administrative offices on site and an additional
6,000 acres of land to the east and west of and contiguous to its existing
tailing facilities.
PolyMet indemnified Cliffs for ongoing reclamation and
remediation associated with the property under both transactions.
In April 2010, Cliffs entered into a consent decree with the
Minnesota Pollution Control Agency (“MPCA”) relating to alleged violations on
the Cliffs Erie Property. This consent decree required submission of Field Study Plan Outlines and Short Term Mitigation Plans, which have
been approved by the MPCA. In April 2012, long-term mitigation plans were
submitted to the MPCA for its review and approval, such approval remains
outstanding to date. As part of its prior transactions with Cliffs, PolyMet has
agreed to indemnify Cliffs for certain on-going site environmental
liabilities.
3
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
There is substantial uncertainty related to applicable water
quality standards, the engineering scope and cost of mitigation required to meet
those standards, and responsibility for the financial liability. As such, the
Company is unable to estimate its potential liability for the Long Term
Mitigation Plan at July 31, 2012. Outcomes that are unfavorable to PolyMet could
result in material additional liability. The Company included its best estimate
of the liabilities related to this consent decree in its environmental
rehabilitation provision for the period ended July 31, 2012.
Environmental Review
In October 2005, the Minnesota Department of Natural Resources
("MDNR") published its Environmental Assessment Worksheet Decision Document
establishing the MDNR as the lead state agency and the US Army Corps of
Engineers (“USACE") as the lead federal agency (together the “Lead Agencies”)
for preparation of an Environmental Impact Statement (“EIS”) for the project. In
2006 these Lead Agencies selected Environmental Resources Management, a leading
global provider of environmental, health and safety, risk, and social consulting
services as independent environmental contractor (“the EIS Contractor”) to
prepare the EIS. The EIS Contractor team included members with expertise and
experience in mining sulfidic ores. Several other government agencies (including
the US Forest Service, the Bois Forte Band of Chippewa and the Fond Du Lac Band
of Lake Superior Chippewa) joined the EIS preparation team as Cooperating
Agencies, which brought their special expertise to the process.
Under state and federal guidelines and regulations, a Draft EIS
identifies the environmental impact of a proposed project as well as evaluating
alternatives and ways to mitigate potential impacts. PolyMet was involved in the
process of alternative/mitigation development and had input into the technical
and economical feasibility of potential alternatives and mitigations. The EIS
Contractor prepared a series of preliminary versions of the Draft EIS that were
reviewed and commented on by the Lead Agencies, other governmental agencies, and
PolyMet.
In November 2009, the Lead Agencies published the PolyMet Draft
EIS with formal notification of publication in the Minnesota Environmental
Quality Board (“EQB”) Monitor and the Federal Register on November 2 and
November 6, 2009, respectively. The formal notification of publication started a
90-day period for public review and comment, which ended on February 3, 2010.
During this period, the lead Agencies held two public meetings – one in the town
of Aurora, MN near the project location and one in Blaine, MN in the
metropolitan Minneapolis-St. Paul area.
The Lead Agencies received more than 3,700 submissions
containing approximately 22,000 separate comments, including an extensive
comment letter from the US Environmental Protection Agency (“EPA”) in its role
as reviewer of projects that could impact the environment.
On June 25, 2010 the Lead Agencies announced that they intend
to complete the EIS process by preparing a Supplemental Draft EIS (“SDEIS”) that
incorporates the proposed US Forest Service ("USFS") land exchange and expands
government agency cooperation. The USFS joined the USACE as a federal co-lead
agency through the completion of the EIS process. In addition, the EPA joined
the effort as a cooperating agency. The MDNR remains the state co-lead
agency.
On October 13, 2010 the USACE and the USFS published a Notice
of Intent to complete the SDEIS, which:
4
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
- Supplements and supersedes the Draft EIS and respond to concerns
identified by the EPA and other comments on the Draft EIS.
- Incorporates potential effects from the proposed land exchange between the
USFS Superior National Forest and PolyMet.
Public review of the scope of the land exchange ended on
November 29, 2010. The Notice of Intent stated that the proposed land exchange
would eliminate conflicts between the United States and private mineral
ownership and consolidate land ownership to improve Superior National Forest
management effectiveness and public access to federal lands. The proposed
exchange is in accordance with Forest Service Strategic Plan Goals to provide
and sustain long-term socioeconomic benefits to the American people, conserve
open space, and sustain and enhance outdoor recreation activities.
The NorthMet mine site encompasses approximately 2,840 of the
6,650 acres of land proposed for exchange to private ownership; the remaining
federal property would improve intermingled and inefficient ownership patterns
and eliminate conflicts if minerals development were to expand in the
future.
The lands that would be received by the Superior National
Forest consist of forest and wetland habitat as well as lake frontage. These
lands would enhance public recreation opportunities and complement existing
federal ownership by eliminating or reducing private holdings surrounded by
Superior National Forest land.
Once the SDEIS is completed, it will be made available for
public review prior to preparation of the final EIS. Completion of the final EIS
and a subsequent Adequacy Decision by the DNR and Record of Decision by the
federal agencies are necessary before the land exchange can occur and various
permits required to construct and operate the project can be issued. The major
permits are:
U.S. Army Corps of Engineers
- Section 404 Individual Permit for Impacted Wetlands
Minnesota Department of Natural Resources
- Permit to Mine
- Water Appropriations Permit
- Dam Safety Permit
- Wetland Replacement Plan
Minnesota Pollution Control Agency
- National Pollutant Discharge Elimination System (NPDES) Permit (storm
water)
- State Disposal System (SDS) Permit
- Air Emissions Permit
Prior to receipt of the permits, the Company intends to secure
construction financing that would be available upon receipt of key permits, with
construction slated to start upon availability of construction finance.
Construction of NorthMet is expected to be made up of four major components:
| 1. |
Implementation of environmental safeguards; |
| 2. |
Construction of the mine and reactivation of some
existing mine infrastructure; |
| 3. |
Refurbishment of the existing Erie Plant facilities and
construction of new flotation facilities, and |
| 4. |
Construction of a new hydrometallurgical
plant. |
5
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Key Recent Developments
On February 1, 2012 PolyMet reported on the status of the
NorthMet environmental review. The EIS Consultant has completed a significant
amount of work on the SDEIS, which will comprise nine chapters. The first four
chapters, comprising over 400 pages and including more than 100 figures were
reviewed by the Lead Agencies.
Other important milestones already achieved include:
- Approval of air emission estimates.
- Approval of cumulative visibility and fiber impact evaluation reports.
- Completion of geotechnical stability modeling with results now under
review.
- Completion of direct wetland impact evaluation and wetland mitigation
plans, which are now under review.
- Completion of hazardous materials assessment; threatened, endangered and
sensitive species analysis; assessments of wildlife and heritage resources;
and wetland/floodplain analysis reports for the lands involved in the land
exchange, which have been delivered to the USFS for review.
- Delivery by PolyMet of updated project documents including the detailed
project description, mine plan, reclamation and waste disposal plans, and
extensive data packages.
Since February 1, 2012 the Lead Agencies have completed their
review of the initial chapters of the SDEIS. Completion of detailed
environmental modeling, including quality assurance plans as well as generation,
verification, review, and documentation of modeling data is underway.
On March 9, 2012 PolyMet entered into an option agreement over
certain land that it plans to have restored to wetlands through an agreement
with AG for Waterfowl, LLP ("AG"). PolyMet paid AG $2.0 million cash and issued
2,788,902 of its common shares and warrants to purchase 1,083,333 of its common
shares at $1.50 per share at any time until December 31, 2015. AG has provided
the Company security over its requirement to perform the wetlands conversion
work in the form of a $5.9 million face value five year zero interest rate
mortgage over land currently in agricultural use that AG will restore to
wetlands in order to earn wetland credits. The mortgage will be proportionately
released as part of the lands are fully restored to approved wetland status, at
which time PolyMet will receive formal wetland credits. Any lands that PolyMet
has not requested be restored to wetland will revert to AG and the remaining
mortgage, if any, will be released on February 28, 2017. PolyMet is committed to
pay AG an additional $0.680 million over seven years as compensation for the
work AG is continuing to undertake.
On May 23, 2012 PolyMet reported on the status of the NorthMet
environmental review. The Lead Agencies are updating the schedule for completion
of the NorthMet EIS and provisionally expect to publish the SDEIS in the first
quarter of 2013, with a preliminary document available for review by the
Cooperating Agencies two-to-three months before that. The process to complete
the environmental review is:
- Complete rigorous Lead Agency review and quality assurance/quality control
process for the environmental models.
- Incorporate engineering refinements into the models to show that the
project will meet all relevant state and federal standards, including the wild
rice sulfate standards.
- Incorporate comments from the Cooperating Agencies, including the EPA,
into the SDEIS which will be released for public review and comment.
- Prepare and release the final EIS, which must be done before permitting
decisions can be made.
On June 14, 2012 PolyMet reported that the British Columbia
Securities Commission (the “BCSC”) has reviewed select matters related to the
Company’s continuous disclosure record. As a result of that review, the Company
received comments from the BCSC identifying certain technical disclosure issues,
in particular in the Company’s National Instrument 43-101 (“NI 43-101”)
Technical Report on the NorthMet Deposit, Minnesota, USA, dated September 2007. In order to
address these issues, PolyMet plans to file a new Technical Report under the
latest form of NI 43-101, which will fully support the Company’s previous
disclosure of mineral reserves and will be filed on SEDAR upon completion,
scheduled for late-September 2012.
6
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
On June 21, 2012 PolyMet announced that Jon Cherry, a senior
mining executive, would join the company as CEO and President effective July 16,
2012. Mr. Cherry has held increasingly senior positions at operations and
projects for subsidiaries of Rio Tinto plc, one of the world's largest mining
companies. Most recently he was responsible for strategic direction in
environmental permitting and compliance, legal matters, and external relations
related to development of the Resolution copper project in Arizona, a joint
venture between Rio Tinto and BHP Billiton. Previously, he was responsible for
permitting and initial development of the Eagle nickel-copper project in
Michigan's Upper Peninsula. He started his career with Cyprus Thompson Creek in
Idaho before joining Kennecott in Utah. Former CEO and President Joe Scipioni
remains with the Company as Chief Operating Officer.
At its annual shareholders’ meeting on July 10, 2012,
shareholders approved amendment and restatement of the 2007 Omnibus Share
Compensation Plan (the "Plan") and reapproved the Plan and all unallocated
option or awards entitled to be granted thereunder. The amended Plan (a) amended
the number of common shares reserved for issuance, (b) increased the maximum
term of expiry from seven years to ten years; and (c) clarified the definition
of "Market Price". The amended Plan was approved by the TSX on July 19,
2012.
During the six month period ended July 31, 2012, the Company
granted 4,075,000 options to directors and management. This compares with
750,000 options granted during the six month period ended July 31, 2011.
7
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Results of Operations
For the three months ended July 31, 2012 compared to the
three months ended July 31, 2011
a) Loss for the Period:
During the three months ended July 31, 2012, the Company
incurred a loss of $1.982 million ($0.01 loss per share) compared to a loss of
$1.187 million ($0.01 loss per share) during the three months ended July 31,
2011. The increase in the net loss for the period was primarily attributable to
the following:
- an increase in share based compensation in the current year period to
$1,121,000 (prior year period - $32,000) relating to the shareholder approved
option extension impact and option grants to directors and management.
This item was partially offset by the following:
- a decrease in professional fees in the current year period to $79,000
(prior year period - $217,000) primarily due to transition to IFRS in FY2012;
- a decrease in finance income and costs in the current year period to
$25,000 (prior year period - $171,000) primarily due to the reduction in ARO
accretion as a result of the decrease in the discount rate.
b) Cash Flows:
Cash used in operating activities in the three months ended
July 31, 2012 was $1.041 million compared to cash used in the three months ended
July 31, 2011 of $0.819 million. The variance in cash is primarily due to
changes in non-cash working capital balances and the above noted operating
variances.
Cash provided by financing activities for the three months
ended July 31, 2012 was $nil compared to cash provided in the three months ended
July 31, 2011 of $14.245 million. The variance in cash is primarily due to prior
year period Glencore financing, IRRRB loan, and issuance of share capital on
exercise of stock options which was partially offset by the scheduled repayment
of $500,000 debt.
Cash used in investing activities for the three months ended
July 31, 2012 was $4.072 million compared to cash used in the three months ended
July 31, 2011 of with $7.843 million. The decrease was primarily due to prior
year USFS land exchange purchases with funds received from the IRRRB loan.
Total cash for the three months ended July 31, 2012 decreased
by $5.113 million for a balance of $5.821 million compared to the three months
ended July 31, 2011 where cash increased $5.583 million to a balance of $11.492
million.
c) Capital Expenditures:
During the three months ended July 31, 2012 the Company
capitalized $8.209 million (prior year period -$9.855 million) of mineral
property, plant, and equipment costs related to the NorthMet project (draft EIS
and permitting) and other fixed assets.
8
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
For the six months ended July 31, 2012 compared to the three
months ended July 31, 2011
a) Loss for the Period:
During the six months ended July 31, 2012, the Company incurred
a loss of $3.232 million ($0.02 loss per share) compared to a loss of $2.506
million ($0.02 loss per share) during the six months ended July 31, 2011. The
increase in the net loss for the period was primarily attributable to the
following:
- an increase in share based compensation in the current year period to
$1,737,000 (prior year period - $568,000) relating to the shareholder approved
option extension impact and grants to directors and management;
This item was partially offset by the following:
- a decrease in professional fees in the current year period to $161,000
(prior year period - $422,000) primarily due to transition to IFRS in FY2012;
- a decrease in finance income and costs in the current year period to
$34,000 (prior year period - $343,000) primarily due to the reduction in ARO
accretion as a result of the decrease in the discount rate.
b) Cash Flows:
Cash used in operating activities in the six months ended July
31, 2012 was $1.545 million compared to cash used in the six months ended July
31, 2011 of $1.920 million. The variance in cash is primarily due to changes in
non-cash working capital balances and the above noted operating variances.
Cash provided by financing activities for the six months ended
July 31, 2012 was $0.148 million compared to cash provided in the six months
ended July 31, 2011 of $13.812 million. The variance in cash is primarily due to
prior year period Glencore financing, IRRRB loan, and issuance of share capital
on exercise of stock options which was partially offset by the scheduled
repayment of $1.0 million debt.
Cash used in investing activities for the six months ended July
31, 2012 was $10.260 million compared to cash used in the six months ended July
31, 2011 of with $10.761 million. The decrease was primarily due to prior year
USFS land exchange purchases with funds received from the IRRRB loan partially
offset by current year wetland credit option purchases.
Total cash for the six months ended July 31, 2012 decreased by
$11.657 million for a balance of $5.821 million compared to the six months ended
July 31, 2011 where cash increased $1.131 million to a balance of $11.492
million.
c) Capital Expenditures:
During the six months ended July 31, 2012 the Company
capitalized $12.166 million (prior year period -$13.294 million) of mineral
property, plant, and equipment costs related to the NorthMet project (draft EIS
and permitting) and other fixed assets. In addition, the Company capitalized
$5.992 million (prior year period - $nil) of wetland credit intangible costs
related to the wetland credit options and development agreements.
9
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Summary of Quarterly Results
(All figures
in Thousands of U.S. dollars except Loss per share)
Three Months
Ended
|
July 31
2012
$
|
Apr. 30
2012
$
|
Jan. 31
2012
$
|
Oct. 31
2011
$
|
July 31
2011
$
|
Apr 30
2011
$
|
Jan. 31
2011
$
|
Oct. 31
2010
$
|
| Total Revenues |
- |
- |
- |
- |
- |
- |
- |
- |
General and
Administrative
|
(1,958) |
(1,283) |
(704) |
(520) |
(962) |
(1,183) |
(746) |
(281) |
Other Income
(Expenses) |
(24) |
33 |
211 |
474 |
(225) |
(136) |
(2,277) |
48 |
| Net Loss |
(1,982) |
(1,250) |
(493) |
(46) |
(1,187) |
(1,319) |
(3,023) |
(233) |
| Loss per share |
(0.01) |
(0.01) |
(0.00) |
(0.00) |
(0.01) |
(0.01) |
(0.02) |
(0.00) |
Significant items to report for the quarterly results are as
follows:
The Company recorded deferred income tax recoveries as the
expiration of warrants triggered a capital gain for tax purposes which was
offset by the application of tax losses carried forward resulting in a credit of
$657,000, $1,219,000 and $171,000 in the quarters ended October 31, 2011,
January 31, 2011, and October 31, 2010, respectively. There were no similar tax
recoveries recorded in the other quarters.
A non-cash loss of $2.931 million on refinancing of convertible
debt in the quarter ended January 31, 2011. There were no similar losses
recorded in other quarters.
A loss on asset held for sale of $520,000 was recorded in the
quarter ended January 31, 2011.
A recovery of previously expensed share-based compensation
costs of $212,000 due to the forfeiture of unvested share options was recorded
in the quarter ended October 31, 2010. There were no similar share-based
compensation recoveries recorded in the other quarters.
The net loss included share-based compensation expense
(recovery) for the quarters ended:
| |
1. |
July 31, 2012 - $1,121,000 |
| |
2. |
April 30, 2012 - $616,000 |
| |
3. |
January 31, 2012 - $28,000 |
| |
4. |
October 31, 2011 - $29,000 |
| |
5. |
July 31, 2011 - $32,000 |
| |
6. |
April 30, 2011 - $536,000 |
| |
7. |
January 31, 2011 - $50,000 |
| |
8. |
October 31, 2010 - $(203,000) |
10
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Financing Activities
On August 27, 2009 the Company announced that it had filed a
universal shelf registration on Form F-3 with the U.S. Securities and Exchange
Commission (“SEC”). This universal shelf registration allows PolyMet to have the
option to offer and sell, from time to time in one or more offerings, up to $500
million of its debt securities, common shares, warrants and units.
Since October 31, 2008 the Company and Glencore AG (“Glencore”)
have entered into a series of financing agreements and a marketing agreement
whereby Glencore committed to purchase all of the Company’s production of
concentrates, metal, or intermediate products on market terms at the time of
delivery, for at least the first five years of production. PolyMet agreed to
propose to shareholders the election of Stephen Rowland, a senior executive of
Glencore, as a director and also appointed a senior member of Glencore's
technical team to PolyMet's Technical Steering Committee. As a result of the
series of financing transactions and the purchase by Glencore of PolyMet common
shares previously owned by Cliffs, Glencore's current and potential ownership of
PolyMet comprises:
-
41,967,842 shares representing 23.6% of PolyMet's issued shares
-
$25.0 million initial principal floating rate secured debentures due
September 30, 2014. Including capitalized interest as at July 31, 2012, these
debentures are exchangeable at $1.50 per share into 19,839,877 common shares
of PolyMet upon PolyMet giving Glencore notice that it has received permits
necessary to start construction of the NorthMet project and availability of
senior construction finance in a form reasonably acceptable to Glencore.
-
Glencore has subscribed to 5.0 million common shares at $2.00 per share to
be issued no later than October 15, 2012.
-
Glencore holds warrants to purchase 5.6 million common shares at $1.50 per
share at any time until December 31, 2015, subject to mandatory exercise if
the 20-day Value Weighted Average Price (“VWAP”) of PolyMet common shares is
equal to or greater than 150% the exercise price and PolyMet provides notice
to Glencore that it has received permits necessary to start construction of
the North Met Project and availability of senior construction finance, in a
form reasonably acceptable to Glencore.
If Glencore were to exercise all of its rights and obligations
under these agreements, it would own 72,408,916 common shares of PolyMet,
representing 34.8% on a partially diluted basis, that is, if no other options or
warrants were exercised.
Proceeds from private placement financings with Glencore were
used for Mineral PP&E investments, loan repayments, and general corporate
expenditures. As at July 31, 2012, approximate proceed usage was as follows:
11
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
| Financing |
|
Gross |
|
|
|
|
|
Expenses |
|
|
Mineral |
|
|
Loan |
|
|
General |
|
|
Cash at |
|
| |
|
Amount |
|
|
|
|
|
|
|
|
PP&E |
|
|
Repayment |
|
|
Corporate |
|
|
July 31, |
|
| |
|
|
|
|
|
|
|
|
|
|
(5) |
|
|
(4) |
|
|
(5) |
|
|
2012 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2009 common share private placement |
$ |
25.0 |
|
|
(1 |
) |
$ |
0.3 |
|
$ |
19.7 |
|
$ |
2.0 |
|
$ |
3.0 |
|
|
n/a |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2010 common share private placement |
$ |
20.0 |
|
|
(2 |
) |
$ |
0.2 |
|
$ |
14.8 |
|
$ |
2.0 |
|
$ |
3.0 |
|
|
n/a |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 common share private placement |
$ |
20.0 |
|
|
(3 |
) |
$ |
0.2 |
|
$ |
5.5 |
|
$ |
7.0 |
|
$ |
1.5 |
|
$ |
5.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
$ |
65.0 |
|
|
|
|
$ |
0.7 |
|
$ |
40.0 |
|
$ |
11.0 |
|
$ |
7.5 |
|
$ |
5.8 |
|
| Note: |
|
| (1) |
9,433,962 common shares of the company issued on November
17, 2009 at $2.65 per share for gross proceeds of $25.0 million.
|
| |
|
| (2) |
5,000,000 common shares of the company issued on January
17, 2011 at $2.00 per share for gross proceeds of $10.0 million; 5,000,000
common shares of the company issued on July 15, 2011 at $2.00 per share
for gross proceeds of $10.0 million; additional $10.0 million to be funded
by October 15, 2012. |
| |
|
| (3) |
13,333,333 common shares of the company issued on
November 30, 2011 at $1.50 per share for gross proceeds of $20.0 million.
|
| |
|
| (4) |
Repayment of long-term loan to Cliffs |
| |
|
| (5) |
Capitalized PP&E amounts vary by year in relation to
mineral property acquisitions, mine development plans, environmental, and
permit work. Appx $3.0 million per year is expensed as general corporate.
|
On June 30, 2011 PolyMet closed a $4.000 million loan from the
IRRRB. At the same time, the Company exercised its options to acquire two tracts
of land totaling approximately 5,300 acres of forests, wetlands, and lakes with
high recreational value that are included as part of the proposed land exchange
with the USFS. The loan is secured by the land acquired, carries a fixed
interest rate of 5% per annum, compounded annually if not paid, and is repayable
on the earlier of June 30, 2016 or the date which the related land is exchanged
with the USFS. PolyMet has issued warrants giving the IRRRB the right to
purchase 400,000 shares of its common shares at $2.50 per share at any time
until the earlier of June 30, 2016 or one year after permits are received.
On March 9, 2012 the Company acquired a secured interest in
land owned by AG for Waterfowl, LLP ("AG") that is permitted for restoration to
wetland. AG will restore the wetlands and, upon completion, wetland credits will
be issued by the proper governmental authorities. The Company plans to use the
wetland credits to offset wetlands disturbed during construction and operation
of the NorthMet Project. The Company holds a first mortgage on the land, which
will be proportionately released as wetland credits are transferred to the
Company. The Company has the option to exercised individually five separate
phases of wetland credit development. Any options not exercised by February 28,
2017 will expire and the remaining mortgage, if any, will be released. As at
July 31, 2012, the Company had exercised the option on Phase 1.
The Company paid AG initial consideration of $2.0 million cash
and issued 2,788,902 of the Company’s common shares (of which 371,854 held in
escrow pending Phase 1 completion) and a warrant to purchase 1,083,333 of the
Company’s common shares at $1.50 per share at any time until December 31, 2015
as consideration for a $5.9 million mortgage to secure performance by AG. In
addition to the initial consideration, performance commitments for Phase 1
totaling $0.68 million will be due over the seven years following wetland construction completion for ongoing
maintenance by AG. Performance payments totaling $1.063 million per phase for
completion and maintenance of Phase 2 to 5 will only be incurred if and when the
Company initiates development of those phases, and will be due over seven years
from the completion of each phase. If wetland credits are issued before the
seven-year anniversary, any unpaid amounts are due upon issuance of the wetland
credits.
12
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
The transaction was negotiated between unrelated parties and
therefore the Company has concluded the fair value of the services should be
allocated between the $2.0 million cash payment, the $3.9 million equity
instruments, and $4.933 million in future performance payments. Since the
Company expects to exercise each of the remaining options prior to expiration,
the Company determined that the total consideration price of approximately
$10.833 million should be allocated equally amongst the total credits. Since
there is a market for wetland credits, the Company could sell some or all to
third parties. To date the company has recorded the shares, warrants and cash
paid, including transaction costs, as a charge of $5,992,173 to Wetland Credit
Intangibles, which will be tested for impairment indicators at each reporting
date and amortized on a systematic basis over their useful lives, once they are
completed and available for use.
During the six months ended July 31, 2012 the Company issued
185,000 shares (prior year period –1,110,000) upon exercise of options for
proceeds of $148,000 (prior year period - $834,000). During the six months ended
July 31, 2012, PolyMet also issued 40,000 shares (prior year period – 95,000) as
partial payment for options to purchase land.
13
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Liquidity and Capital Resources
As at July 31, 2012 the Company had working capital of $4.257
million compared with working capital of $16.375 million at January 31, 2012
consisting primarily of cash of $5.821 million (January 31, 2012 -$17.478
million), trade and other receivables of $0.665 million (January 31, 2012 -
$0.440 million), prepaid expenses of $0.539 million (January 31, 2012 - $0.934
million), trade payables and accrued liabilities of $1.914 million (January 31,
2012 - $1.679 million), and the current portion of environmental rehabilitation
provision of $0.869 million (January 31, 2012 - $0.828 million).
The Company expects to pay the $4.0 million IRRRB loan plus
capitalized interest and convertible debt principal balance of $25.0 million
plus capitalized interest from working capital, additional financing and funds
from operations once commercial production has commenced. The Company’s cash is
primarily held in deposits and bearer deposits of a major Canadian bank and does
not include any exposure to asset-backed commercial paper.
As at July 31, 2012 the Company, has obligations to issue
3,640,000 shares under the Company’s Bonus Share Plan. The Company has received
shareholder approval for the Bonus Shares of Milestones 1 – 4 and regulatory
approval for Milestones 1, 2 and 3. Milestone 4 is subject to regulatory
approval. To July 31, 2012, 5,240,000 shares have been issued for the
achievement of Milestones 1, 2 and 3. The bonus shares allocated for Milestones
1 through 3 are valued using the Company’s closing trading price on May 28, 2004
of CDN$0.75 per share, the date of the approval of the bonus plan by the
disinterested shareholders. The bonus shares allocated for Milestone 4 are
valued using the Company’s closing trading price on June 17, 2008 of US$3.80 per
share, the date of the approval of the bonus plan by the disinterested
shareholders.
As at September 4, 2012, the Company has outstanding
commitments related to the environmental review process, wetland credit
intangibles, rent, and consultants of approximately $3.8 million with
approximately half due over the next year and the remainder due over seven
years
While these condensed interim consolidated financial statements
have been prepared on the basis that PolyMet Mining Corp. will continue as a
going concern, which assumes that the Company will be able to meet its
commitments, continue operations, realize its assets and discharge its
liabilities in the normal course of business for the foreseeable future, there
are conditions that cast significant doubt on the validity of that assumption.
The Company has incurred losses since inception and has an accumulated deficit
of $85.0 million at July 31, 2012.
PolyMet Mining Corp. will need to raise sufficient funds to
meet its current obligations as well as fund ongoing development, capital
expenditures and administration expenses, in accordance with the Company’s
spending plans for the next year. While in the past the Company has been
successful in closing financing agreements with Glencore and other parties,
there can be no assurance it will be able to do so again in the future.
On November 12, 2010, PolyMet Mining Corp. entered into a
definitive agreement with Glencore AG (“Glencore”) to sell in a private
placement 15.0 million common shares at $2.00 per share for gross proceeds of
$30.0 million, before deducting estimated offering expenses. Completion of the
sale of these shares and funding are to occur in three tranches of 5 million
shares each, subject in each case to certain closing conditions. The first
tranche closed on January 17, 2011 and the second tranche closed on July 15,
2011. The third tranche is scheduled to close on October 15, 2012.
In order to meet all of its obligations for the period to July
31, 2013, PolyMet Mining Corp. will have to receive the remaining equity tranche
and obtain additional financing.
14
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Management believes that, based upon the underlying value of
the NorthMet Project, it will be able to obtain the necessary financing to meet PolyMet Mining Corp.’s
requirements on an ongoing basis; however, there can be no assurance that the
necessary financing will be obtained. Factors that could affect the availability
of financing include the state of international debt and equity markets,
investor perceptions and expectations and the global metals markets.
These condensed interim consolidated financial statements do
not reflect any adjustments to the carrying values of assets and liabilities,
reported expenses, and balance sheet classifications that would be necessary
should the Company be unable to continue as a going concern, and these
adjustments could be material.
15
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Financial Instruments and Risk Management
The carrying values of the Company’s financial instruments are
classified into the following categories:
| |
|
July 31, |
|
|
January 31, |
|
| |
|
2012
|
|
|
2012
|
|
| Loans and Receivables (1) |
$ |
5,821 |
|
|
17,478 |
|
| Available-for-sale |
|
15 |
|
|
30 |
|
| Other loans and receivables |
|
665 |
|
|
440 |
|
| Other financial
liabilities (2) |
|
35,500 |
|
|
34,369 |
|
| (1) |
Includes cash and equivalents. |
| (2) |
Includes trade payables and accrued liabilities,
convertible debt and long term debt. |
The Company has determined the estimated fair values of its
financial instruments based on appropriate valuation methodologies.
Risks Arising from Financial Instruments and Risk
Management
The Company’s activities expose it to a variety of financial
risks: market risk (including currency), credit risk, liquidity risk, interest
rate risk and investment risk. Reflecting the current stage of development of
the Company’s NorthMet Project, PolyMet’s overall risk management program
focuses on facilitating the Company’s ability to continue as a going concern and
seeks to minimize potential adverse effects on PolyMet’s ability to execute its
business plan.
Risk management is the responsibility of executive management.
Material risks are identified and monitored and are discussed with the audit
committee and the board of directors.
Currency Risk
The Company incurs expenditures in Canada and in the United
States. The functional and reporting currency of the Company and its subsidiary
is the United States dollar. Foreign exchange risk arises because the amount of
Canadian dollar cash and equivalents, trade and other receivables, investment or
trade payables and accrued liabilities will vary in United States dollar terms
due to changes in exchange rates.
As the majority of the Company’s expenditures are in United
States dollars, the Company has kept a significant portion of its cash and
equivalents in United States dollars. The Company has not hedged its exposure to
currency fluctuations.
The Company was exposed to currency risk through the following
assets and liabilities denominated in Canadian dollars:
| |
|
July 31, |
|
|
January 31, |
|
| |
|
2012
|
|
|
2012
|
|
| Loans and receivables (1) |
$ |
149 |
|
$ |
305 |
|
| Available-for-sale |
|
15 |
|
|
30 |
|
| Other loans and receivables |
|
153 |
|
|
95 |
|
| Other financial liabilities (2) |
|
(78 |
) |
|
(239 |
) |
| |
$ |
239 |
|
$ |
191 |
|
| (1) |
Includes cash and equivalents. |
| (2) |
Includes trade payables and accrued
liabilities. |
Based on the above net exposures, as at July 31, 2012, a 10%
change in the Canadian / United States exchange rate would have impacted the
Company’s loss by $24,000.
16
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Credit Risk
Credit risk arises on cash and equivalents held with banks and
financial institutions, as well as credit exposure on outstanding trade and
other receivables. The maximum exposure to credit risk is equal to the carrying
value of the financial assets of $6,486,000.
The Company’s cash and equivalents are held through a large
Canadian financial institution.
Liquidity Risk
Liquidity risk arises through the excess of financial
obligations over available financial assets due at any point in time. The
Company’s objective in managing liquidity risk is to maintain sufficient readily
available reserves in order to meet its liquidity requirements at any point in
time. The Company achieves this by maintaining sufficient cash and equivalents.
See additional discussion in the “Liquidity and Capital Resources” section.
Interest Rate Risk
Interest rate risk arises on cash and equivalents and long term
debt and fluctuations in the related interest rates. The Company has not hedged
any of its interest rate risk.
The Company was exposed to interest rate risk through the
following assets and liabilities:
| |
|
July 31, |
|
|
January 31, |
|
| |
|
2012
|
|
|
2012
|
|
| Loans and receivables (1) |
$ |
5,821 |
|
$ |
17,478 |
|
| Other financial
liabilities (2) |
$ |
33,586 |
|
$ |
32,690 |
|
| (1) |
Includes cash and equivalents. |
| (2) |
Represents long term debt and convertible
debt. |
Investment Risk
The Company’s investment in the common shares of a publicly
traded Canadian mining company bears investment risk. The maximum exposure to
investment risk is equal to the carrying value of the investment.
The Company's investment in the NorthMet Project is also at
risk since the NorthMet Project is pledged in part as security to Cliffs and
otherwise is pledged wholly as security to Glencore.
The Company was exposed to investment risk through the
following assets:
| |
|
July 31, |
|
|
January 31, |
|
| |
|
2012
|
|
|
2012
|
|
| Available-for-sale (1) |
$ |
15 |
|
$ |
30 |
|
17
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Fair Value Measurements
PolyMet’s financial assets and liabilities are measured or
disclosed at fair value on a recurring basis and classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement. There are three levels of fair value hierarchy that prioritize the
inputs to valuation techniques used to measure fair value, with level 1 inputs
having the highest priority. The levels and the valuation techniques used to
value the Company’s financial assets and liabilities are described below:
| Level 1 – |
Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities. |
| |
|
|
Investments in marketable securities are valued using
quoted market prices in active markets, obtained from securities
exchanges. Accordingly, these items are included in Level 1 of the fair
value hierarchy. |
| |
|
| Level 2 – |
Quoted prices in markets that are not active, quoted
prices for similar assets or liabilities in active markets, or inputs that
are observable, either directly or indirectly, for substantially the full
term of the asset or liability. |
| |
|
| Level 3 – |
Unobservable (supported by little or no market activity)
prices. |
Loans and receivables are recorded at face value. Trade and
other receivables are short-term in nature and represent the initial price of
the good or service. Long term and convertible debt have been fair valued using
assumptions with respect to interest rates relevant to similar debt taking into
account the collateral involved.
The fair values of the Company's financial assets, loans and
receivables and trade and other receivables approximate their carrying amounts.
The Company’s investment is valued using quoted market prices in active markets,
obtained from securities exchanges and accordingly is Level 1 in the fair value
hierarchy.
The fair value of the Company's trade payables and accrued
liabilities, long term debt and convertible debt approximate their carrying
amounts.
Capital Management
Similar to other companies in the development stage, the
Company is in discussions with certain parties to provide funding which will
enable the Company to execute its business plan. With the completion of the DFS
and taking into account the current permitting process the Company is in,
PolyMet will require additional funds through Project construction. Funding for
the Project could come from a number of sources and include internal cash flows
(for the second stage of the construction), bank project financing and capital
market financing. During the upcoming fiscal year, the Company’s objective is to
identify the source or sources from which it will obtain the capital required to
complete the Project.
The Company has no externally imposed capital requirements. In
the management of capital, the Company includes the components of shareholders’
equity, convertible debt and long-term debt. The Company manages the capital
structure and makes adjustments to it depending on economic conditions and the
rate of anticipated expenditures. To maintain or adjust the capital structure,
the Company may attempt to issue new shares, issue new debt, acquire or dispose
of assets.
In order to assist in management of its capital requirements,
the Company prepares expenditure budgets that are updated as necessary depending
on various factors. The budgets are approved by the Company’s Board of
Directors.
PolyMet Mining Corp. will need to raise sufficient funds to
meet its current obligations as well as fund ongoing development, capital
expenditures and administration expenses, in accordance with the Company’s
spending plans for the next year. While in the past the Company has been
successful in closing financing agreements with Glencore and other parties,
there can be no assurance it will be able to do so again in the future. See
additional discussion in the Liquidity and Capital Resources section above.
18
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Critical Accounting Estimates
The preparation of the consolidated financial statements in
conformity with IFRS requires the use of certain critical accounting estimates.
These critical accounting estimates require management to make assumptions and
estimates that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as at the date of the financial
statements.
Significant estimates used in the preparation of these
consolidated financial statements include, amongst other things, expected
economic lives of plant and equipment, anticipated costs of environmental
rehabilitations including the reclamation of mine site, valuation of options,
convertible debt and share purchase warrants, and the assessment of impairment
in value of long lived assets. Actual results could differ from these estimates.
The following discusses some of the most significant accounting estimates and
judgements that the Company has made in the preparation of these consolidated
financial statements:
(i) Determination of mineral reserves
Reserves are estimates of the amount of product that can be
economically and legally extracted from the Company’s property. In order to
estimate reserves, estimates are required about a range of geological, technical
and economic factors, including quantities, production techniques, production
costs, capital costs, transport costs, demand, prices and exchange rates.
Estimating the quantity of reserves requires the size, shape and depth of
deposits to be determined by analyzing geological data. This process may require
complex and difficult geological judgments to interpret the data. As a result,
management will form a view of forecast sales prices, based on current and
long-term historical average price trends. Changes in the proven and probable
reserves estimates may impact the carrying value of property, plant and
equipment, restoration provisions, recognition of deferred tax amounts and
depreciation, depletion and amortization.
(ii) Asset values and impairment charges
If the recoverable amount of an asset or cash-generating unit
is estimated to be less than its carrying amount, the carrying amount of the
asset or cash-generating unit is reduced to its recoverable amount. An
impairment loss is recognized immediately in the statement of loss and
comprehensive loss. Management’s determination of recoverable amounts include
estimates of sales volumes and prices, costs to sell, recoverable reserves,
operating costs and capital costs, which are subject to certain risks and
uncertainties that may affect the recoverability of an asset’s costs. Although
management has made its best estimate of these factors, it is possible that
changes could occur that could adversely affect management’s estimate of the net
cash flow to be generated from its assets or cash-generating unit.
For its mining property interest the Company considers both
external and internal sources of information in assessing whether there are any
indications of impairment. External sources of information the Company considers
include changes in the market, economic and legal environment in which the
Company operates that are not within its control and affect the recoverable
amount of mining property interests. Internal sources of information the Company
considers include indications of economic performance of the asset. In
determining the recoverable amounts of the Company’s mining property interest,
the Company’s management makes estimates of the discounted future after-tax cash
flows expected to be derived from the Company’s property, costs to sell the
mining property and the appropriate discount rate. Reductions in price
forecasts, increases in estimated future costs of production, increases in
estimated future non-expansionary capital expenditures, reductions in the amount
of recoverable reserves and resources, and/or adverse current economics can
result in a write-down of the carrying amounts of the Company’s mining interest.
19
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
(iii) Estimated Reclamation and Closure Costs
The Company’s provision for reclamation and closure cost
obligations represents management’s best estimate of the present value of the
future cash outflows required to settle the liability which reflects estimates
of future costs, inflation, and assumptions of risks associated with the future
cash outflows, and the applicable risk-free interest rates for discounting the
future cash outflows. Changes in the above factors can result in a change to the
provision recognized by the Company. Changes to reclamation and closure cost
obligations are recorded with a corresponding change to the carrying amounts of
the related mining property. Adjustments to the carrying amounts of the related
mining property can result in a change to future depletion expense.
Recent Accounting Pronouncements
The IASB issued the following standards which have not yet been
adopted by the Company: IFRS 9,
Financial instruments - Classification and Measurement,
IFRS 10, Consolidated Financial Statements, IFRS 11, Joint
Arrangements IFRS 12, Disclosure of Interests in Other Entities, and
IFRS 13, Fair Value Measurement. Each of the new standards is effective
for annual periods beginning on or after January 1, 2013, except for IFRS 9
which is effective for annual periods beginning on or after January 1, 2015,
with early adoption permitted. The Company has not yet begun the process of
assessing the impact that the new and amended standards will have on its
consolidated financial statements or whether to early adopt any of the new
requirements.
The following is a brief summary of these new standards:
IFRS 9 – Financial instruments - classification and
measurement
This is the first part of a new standard on classification
and measurement of financial assets that will replace IAS 39, Financial
Instruments: Recognition and Measurement. IFRS 9 has two measurement
categories: amortized cost and fair value. All equity instruments are measured
at fair value. A debt instrument is at amortized cost only if the entity is
holding it to collect contractual cash flows and the cash flows represent
principal and interest. Otherwise it is at fair value through profit or loss.
Requirements for financial liabilities were added to IFRS 9 in October 2010.
Most of the requirements for financial liabilities were carried forward
unchanged from IAS 39. However, some changes were made to the fair value option
for financial liabilities to address the issue of own credit risk.
IFRS 10 – Consolidation
IFRS 10 requires an entity to
consolidate an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those
returns through its power over the investee. Under existing IFRS, consolidation
is required when an entity has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. IFRS 10
replaces SIC-12 Consolidation—Special Purpose Entities and parts of IAS
27 Consolidated and Separate Financial Statements.
IFRS 11 - Joint Arrangements
IFRS 11 requires a
venturer to classify its interest in a joint arrangement as a joint venture or
joint operation. Joint ventures will be accounted for using the equity method of
accounting whereas for a joint operation the venturer will recognize its share
of the assets, liabilities, revenue and expenses of the joint operation. Under
existing IFRS, entities have the choice to proportionately consolidate or equity
account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests
in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary
Contributions by Venturers.
20
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
IFRS 12 – Disclosure of Interests in Other
Entities
IFRS 12 establishes disclosure requirements for interests in
other entities, such as joint arrangements, associates, special purpose vehicles
and off balance sheet vehicles. The standard carries forward existing
disclosures and also introduces significant additional disclosure requirements
that address the nature of, and risks associated with, an entity’s interests in
other entities.
IFRS 13 - Fair Value Measurement
IFRS 13 is a
comprehensive standard for fair value measurement and disclosure requirements
for use across all IFRS standards. The new standard clarifies that fair value is
the price that would be received to sell an asset, or paid to transfer a
liability in an orderly transaction between market participants, at the
measurement date. It also establishes disclosures about fair value measurement.
Under existing IFRS, guidance on measuring and disclosing fair value is
dispersed among the specific standards requiring fair value measurements and in
many cases does not reflect a clear measurement basis or consistent
disclosures.
Shareholder Rights Plan
Effective May 25, 2007, the Company adopted an updated
Shareholder Rights Plan (“Rights Plan”), which was approved by the Company’s
shareholders on June 27, 2007, and modified by the Company’s shareholders on
June 17, 2008, and reapproved by the Company's shareholders on July 13, 2011 and
July 10, 2012. Under the Rights Plan, the Company has issued one right for no
consideration in respect of each outstanding common share of the Company to all
holders of record of common shares on December 4, 2003. All common shares
subsequently issued by the Company during the term of the Rights Plan will have
one right represented for each common share held by the shareholder of the
Company. The term of the Rights Plan is 10 years, unless the rights are earlier
redeemed or exchanged. The Rights issued under the Rights Plan become
exercisable only if a party acquires 20% or more of the Company's common shares
without complying with the Rights Plan or without the approval of the Board of
Directors of the Company.
Each Right entitles the registered holder thereof to purchase
from the Company on the occurrence of certain events, one common share of the
Company at the price of CDN$50.00 per share, subject to adjustment (the
“Exercise Price”). However, if a Flip-in Event (as defined in the Rights Plan)
occurs, each Right would then entitle the registered holder to receive, upon
payment of the Exercise Price, that number of common shares that have a market
value at the date of that occurrence equal to twice the Exercise Price. The
Rights are not exercisable until the Separation Time as defined in the Rights
Plan.
Off Balance-Sheet Arrangements
The Company does not utilize off-balance sheet
arrangements.
21
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Related Party Transactions
The Company conducted transactions with key management
personnel, comprising of certain members of senior management, officers,
directors and persons or companies related to these individuals, and paid or
accrued amounts during the six months ended July 31, 2012 and 2011, as
follows:
| |
|
July
31, 2012 |
|
|
July
31, 2011 |
|
| Wages and other short-term benefits |
$ |
562 |
|
$ |
472 |
|
| Termination benefits |
|
- |
|
|
- |
|
| Other long-term benefits |
|
18 |
|
|
18 |
|
| Share-based compensation |
|
1,809
|
|
|
738
|
|
| |
|
|
|
|
|
|
| Total |
$ |
2,389 |
|
$ |
1,228 |
|
The amounts charged to the Company for the services provided
have been determined by negotiation among the parties.
As a result of Glencore’s ownership of 23.6% of the Company it
is also a related party.
Proposed Transactions
There are no proposed transactions that will materially affect
the performance of the Company.
Subsequent Events
There are no subsequent events that will materially affect the
performance of the Company.
22
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Other MD&A Requirements
Outstanding Share Data
Authorized Capital: Unlimited common shares without par
value.
Issued and outstanding: 177,752,026 common shares as at
September 4, 2012.
Outstanding options, warrants and convertible securities as at
September 4, 2012:
Type of Security
|
Number
|
Exercise Price
(US$) |
Expiry Date
|
| Share options |
1,190,000 |
1.38* |
September 19, 2015 |
| Share options |
200,000 |
1.22* |
October 24, 2015 |
| Share options |
125,000 |
1.17* |
December 5, 2015 |
| Share options |
2,100,000 |
2.80* |
March 20, 2016 |
| Share options |
325,000 |
3.01* |
June 19, 2016 |
| Share options |
300,000 |
3.87* |
September 1, 2016 |
| Share options |
525,000 |
3.35* |
January 5, 2017 |
| Share options |
1,250,000 |
2.99 |
February 13, 2017 |
| Share options |
250,000 |
2.92 |
March 12, 2017 |
| Share options |
50,000 |
2.89 |
March 23, 2017 |
| Share options |
360,000 |
3.00 |
September 4, 2017 |
| Share options |
205,000 |
3.05 |
December 12, 2017 |
| Share options |
70,000 |
3.03 |
January 11, 2018 |
| Share options |
100,000 |
2.87 |
January 31, 2018 |
| Share options |
500,000 |
2.72 |
February 15, 2018 |
| Share options |
100,000 |
3.92 |
June 2, 2018 |
| Share options |
175,000 |
3.22 |
July 30, 2018 |
| Common share warrants |
5,600,000 |
(Note 1) 1.50 |
December 31, 2018 |
| Common share warrants |
1,083,333 |
(Note 2) 1.50 |
December 31, 2018 |
| Share options |
585,000 |
0.82 |
January 30, 2019 |
| Common share warrants |
400,000 |
(Note 3) 2.50 |
June 20, 2019 |
| Share options |
910,000 |
0.82 |
February 17, 2019 |
| Share options |
115,000 |
2.67 |
October 15, 2019 |
| Share options |
60,000 |
3.54 |
January 8, 2020 |
| Share options |
300,000 |
2.17 |
January 25, 2021 |
| Share options |
750,000 |
2.04 |
March 10, 2021 |
| Share options |
1,150,000 |
1.19 |
March 8, 2022 |
| Share options |
100,000 |
1.16 |
April 2, 2022 |
| Share options |
2,500,000 |
0.88 |
June 21, 2022 |
| Share options |
125,000 |
0.84 |
July 9, 2022 |
| Share options |
150,000 |
0.95 |
July 11, 2022 |
| Share options |
50,000 |
1.00 |
July 25, 2022 |
| Total Share Options Outstanding |
14,620,000 |
|
|
* For information purposes, those options granted with an
exercise price in Canadian dollars have been translated to the Company’s
reporting currency using the exchange rate as at September 4, 2012 of 1.00 CDN$
= 1.0139 US$.
|
Note 1: |
Each warrant entitles the holder to purchase one common
share of PolyMet at $1.50 and expires on December 31, 2015, subject to
mandatory exercise if the 20-day volume weighted average price ("VWAP") of
PolyMet shares is equal to or greater than 150% the exercise price and
PolyMet provides notice to Glencore that it has received permits necessary
to start construction of the North Met Project and availability of senior
construction finance, in a form reasonably acceptable to Glencore.
Following satisfaction of the conditions for mandatory exercise, if
Glencore does not elect to exercise these warrants, the warrants will
expire. |
23
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
| Note 2: |
Each warrant entitles the holder to purchase one common
share of PolyMet at $1.50 and expires on December 31, 2015, subject to
mandatory exercise if the 20-day volume weighted average price ("VWAP") of
PolyMet shares is equal to or greater than $3.00 and PolyMet provides
notice to the holder that it has received permits necessary to start
construction of the North Met Project. Following satisfaction of the
conditions for mandatory exercise, if the holder does not elect to
exercise these warrants, the warrants will expire. |
| |
|
| Note 3: |
Each warrant entitles the holder to purchase one common
share of PolyMet at $2.50 and expires on the earlier of June 20, 2016 and
one year after the Company receives its permits for the NorthMet Project. |
At the Annual and Special Meeting of the shareholders of
PolyMet on June 24, 2009, the disinterested shareholders of the Company approved
an extension of the expiry date by two years of all share options outstanding as
at June 24, 2009.
Effective May 25, 2007, the Company adopted an Omnibus Share
Compensation Plan (“Omnibus Plan”), which was approved by the Company’s
shareholders’ on June 27, 2007, modified by the Company’s shareholders on June
17, 2008, ratified and reconfirmed by the Company’s shareholders on July 7,
2010, and modified, ratified and reconfirmed by the Company’s shareholders on
July 10, 2012. The Omnibus Plan covers the Company’s employees, directors,
officers and consultants. The awards are granted for varying terms ranging from
two to ten years.
20,455,908 common shares, comprising 17,773,202 common shares
representing 10% of the common shares issued and outstanding on June 1, 2012
(the record date for the July 10, 2012 shareholders' meeting) plus 2,682,706
common shares pursuant to an exemption under Section 613(c) of the Toronto Stock
Exchange Company Manual have been reserved for issuance pursuant to the Omnibus
Plan and approved by the Toronto Stock Exchange. 3,640,000 of these common
shares have been reserved for issuance of Bonus Shares.
At the Annual and Special Meeting of the shareholders of the
Company on July 10, 2012, the disinterested shareholders approved an extension
of the expiry date by three years of all share options outstanding as at July
10, 2012.
24
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Risks and Uncertainties
An investment in the Company’s common shares is highly
speculative and subject to a number of risks and uncertainties. Only those
persons who can bear the risk of the entire loss of their investment should
participate. An investor should carefully consider the risks described in
PolyMet’s Form 20-F/Annual Information Form for the year ended January 31, 2012
on file with the SEC and Canadian securities regulators and other information
filed with the Canadian and United States securities regulators before investing
in the Company’s common shares. The risks described in PolyMet’s Form
20-F/Annual Information Form are not the only ones faced. Additional risks that
the Company currently believes are immaterial may become important factors that
affect the Company’s business. If any of the risks described in PolyMet’s Form
20-F/Annual Information Form for the year ended January 31, 2012 occur, the
Company’s business, operating results and financial condition could be seriously
harmed and investors could lose all of their investment.
Disclosure controls and procedures
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports filed or submitted by the
Company under U.S. and Canadian securities legislation is recorded, processed,
summarized and reported within the time periods specified in those rules,
including providing reasonable assurance that material information is gathered
and reported to senior management, including the Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate, to permit timely decisions
regarding public disclosure. Management, including the CEO and CFO, has
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in Rule 13a-15(e) and15d-15(e) of
the US Exchange Act and the rules of Canadian Securities Administration, as at
January 31, 2012. Based on this evaluation, the CEO and CFO have concluded that
the Company’s disclosure controls and procedures were effective at January 31,
2012.
Management’s Responsibility for Financial
Statements
The information provided in this report including the financial
statements, is the responsibility of management. In the preparation of these
statements, estimates are sometimes necessary to make a determination of future
values for certain assets or liabilities. Management believes such estimates
have been based on careful judgments and have been properly reflected in the
accompanying financial statements.
Management maintains a system of internal controls to provide
reasonable assurances that the Company’s assets are safeguarded and to
facilitate the preparation of relevant and timely information.
Management’s report on internal control over financial
reporting
The Company’s management is responsible for establishing and
maintaining adequate internal controls over financial reporting. Any system of
internal control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
There have been no changes in the Company’s internal control
over financial reporting during the three or six month period ended July 31,
2012 that have materially affected, or are reasonably likely to material affect,
its internal control over financial reporting.
25
| POLYMET MINING CORP. |
| (a development stage company) |
| MANAGEMENT DISCUSSION AND ANALYSIS |
| FORM 51-102F1 |
| For the second quarter ended July 31, 2012 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Additional Information
Additional information related to the Company is available
for view on SEDAR and EDGAR, respectively, at www.sedar.com and at www.sec.gov, and at the Company’s
website www.polymetmining.com.
26
