PolyMet Mining Corp. - Exhibit 99.2 - Filed by newsfilecorp.com
POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
October 31, 2013
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
General
The following information, prepared as at December 5, 2013
should be read in conjunction with the condensed interim consolidated
financial statements of PolyMet Mining Corp. (“PolyMet” or the “Company”) for
the three and nine months ended October 31, 2013 and related notes attached
thereto, which are prepared in accordance with IAS 34, Interim Financial
Reporting and in conjunction with the audited consolidated financial statements
for the year ended January 31, 2013 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 (“US”)
dollars unless otherwise indicated.
The Audit Committee of the Board of Directors of the Company,
consisting of three 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 |
| For the three and nine months ended October 31, 2013 |
| 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 |
| For the three and nine months ended October 31, 2013 |
| 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 MKT 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 (“NorthMet” or “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 Iron Range mining 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. 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. (“PolyMet US”), completed the early exercise of
PolyMet’s option with Cliffs Natural Resources, Inc. (“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 its
bankruptcy at which time the plant was shut down 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. In October 2012, a response
was received from the MPCA approving plans for pilot tests of various treatment
options to determine the best course of action. Although there is substantial
uncertainty related to applicable water quality standards, engineering scope,
and responsibility for the financial liability, the October 2012 response from the
MPCA provides sufficient guidance to allow the Company to make a reliable
estimate of the liability for the Long Term Mitigation Plan. The Company has
included its best estimate of the liabilities related to this consent decree in
its environmental rehabilitation provision as at October 31, 2013 in the amount
of $30.6 million.
3
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
On May 14, 2013, the Company exercised its Option to Purchase
and Agreement for Development of Wetland Credit Acres with Burns Enterprises,
LLC for lands located in St. Louis County, Minnesota. The transaction closed on
June 19, 2013. The Company is committed to pay $0.570 million prior to February
14, 2014 for the land purchase and $0.342 million over the next several years
for development of wetland credits.
Feasibility Study, Mineral Resources and Mineral
Reserves
With publication of the Definitive Feasibility Study (“DFS”) in
September 2006, summarized in a Technical Report under National Instrument
43-101 (“NI 43-101”), PolyMet established SEC-standard mineral reserves. Proven
and probable mineral reserves were estimated at 181.7 million short tons grading
0.31% copper, 0.09% nickel and 0.01 ounces per ton ("opt") of precious metals.
PolyMet filed an updated Technical Report under NI 43-101 on the NorthMet
Project on January 23, 2013 which summarized the September 2006 DFS, September
2007 expansion of proven and probable mineral reserves, the May 2008 DFS Update,
and February 2011 Project Improvements described below.
In September 2007, PolyMet reported an expansion in these
proven and probable mineral reserves to 274.7 million short tons grading 0.28%
copper, 0.08% nickel and 0.01 opt of precious metals (palladium, platinum and
gold). These mineral reserves lie within measured and indicated mineral
resources of 694 million tons grading 0.3% copper, 0.08% nickel and 0.01 opt of
precious metals. In addition, inferred mineral resources total 230 million tons
grading 0.3% copper, 0.08% nickel and 0.01 opt of precious metals.
The reserves are based on copper at $1.25 per pound, nickel at
$5.60 per pound, and precious metal prices of $210, $800, and $400 per ounce
respectively for palladium, platinum and gold.
DFS Update
On May 20, 2008, PolyMet reported revised
plans and cost estimates for construction and operating costs. The revised plans
include:
- the sale of concentrate during the construction and commissioning of new
metallurgical facilities resulting in a shorter pre-production construction
period (12-15 months) and reduced estimates of capital costs prior to first
revenues ($312 million versus $380 million);
- the new metallurgical facilities to be constructed during initial
production and sales of concentrate. PolyMet anticipates that much of the
additional estimated $290 million of capital costs (for total estimated
project capital of $602 million) will be funded from cash flow from initial
operations;
- mine plans (based on copper at $1.25 per pound) reflect the increase in
reserves and decrease in stripping ratio reported on September 26, 2007, the
use of 240-ton trucks, and owner versus contract mine operations; and
- an estimated $77 million of mining equipment, which was assumed to be
provided by a mining contractor in the DFS, has been incorporated as an
operating lease in updated operating costs.
4
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Project Improvements
On February 2, 2011, the
Company announced that it had simplified the proposed metallurgical process and
now plans to build the Project in two phases:
- Phase I: produce and market concentrates containing copper, nickel, cobalt
and precious metals; and
- Phase II: process the nickel concentrate through a single autoclave,
resulting in production and sale of high grade copper concentrate, value added
nickel-cobalt hydroxide, and precious metals precipitate products.
Previous plans included a second autoclave and a copper solvent
extraction/electro-winning (“SX-EW”) circuit to produce copper metal along with
value added nickel-cobalt hydroxide and precious metals precipitate products.
The changes reflect continued metallurgical process and other project
improvements as well as improved environmental controls that are being
incorporated into the environmental review process. The advantages, compared
with the earlier plan, include a better return on capital investment, reduced
financial risk, lower energy consumption, and reduced waste disposal and
emissions at site. Approximately $127 million of the total $602 million capital
costs estimated in the May 2008 DFS Update will not be incurred in this revised
plan.
Environmental Review and Permitting
To commence commercial production at NorthMet Project, various
regulatory approvals are needed.
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 United States Army Corps
of Engineers (“USACE“) as the lead federal agency (together the “Lead Agencies”)
for preparation of an Environmental Impact Statement (“EIS”) for the NorthMet
Project. In 2006, Lead Agencies retained Environmental Resource Management as
the independent contractor (“EIS Contractor”) to prepare the EIS.
In November 2009, the Lead Agencies published the PolyMet draft
EIS, which marked the start of a period for public review and comment that ended
on February 3, 2010. During this period, the Lead Agencies held two public
meetings and received more than 3,700 submissions containing approximately
22,000 separate comments, including an extensive comment letter from the United
States 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
intended to complete the EIS process by preparing a supplemental draft EIS that
incorporates a proposed land exchange with the United States Forest Service
(“USFS”) and expands government agency cooperation. The USFS joined the USACE as
a federal co-lead agency (together, with the MDNR, the “Co-Lead Agencies”)
through the completion of the EIS process. In addition, the EPA has 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 supplemental draft EIS, which will:
- Supplement and supersede the draft EIS and respond to concerns identified
by the EPA and other comments on the draft EIS; and
- Incorporates potential effects from the proposed land exchange between the
USFS and the Company.
5
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
PolyMet has undertaken an extensive review of all aspects of
the NorthMet Project which has resulted in numerous improvements and reduced
environmental impacts.
PolyMet partnered with GE Water & Process Technologies
(“GE”) and Barr Engineering to design and operate a pilot water treatment plant
using reverse osmosis membrane technology developed by GE. The reverse osmosis
pilot plant has successfully treated more than two million gallons of water,
demonstrating the technical and regulatory viability that will enable PolyMet to
meet state and federal water quality standards.
The Company has completed engineering control designs as well
as the design of and inputs to groundwater, surface water and air dispersion
models to assess potential environmental impacts from the NorthMet Project.
Following extensive quality assurance/quality control review by Foth
Infrastructure & Environment and Barr Engineering, PolyMet delivered these
results to the state regulatory agencies and the EIS Contractor for review.
Following review by the Co-Lead Agencies, the preliminary supplemental draft EIS
was released to the EPA and the Bois Forte, Fond du Lac, and Grand Portage
tribal governments.
On August 7, 2013, the EPA issued a letter to the Co-Lead and
Cooperating Agencies providing constructive recommendations for preparing the
draft EIS for additional public feedback. In addition, the letter stated
significant progress has been made in preparing the EIS for project approval
decision-making, including:
| |
- |
“The PSDEIS, along with the additional information
provided to EPA during its review, reflects significant progress in
designing and clearly documenting the project.” |
| |
- |
“EPA appreciates the collaborative and constructive
discussions we have had with the co-lead agencies since receiving the
PSDEIS. In these discussions, we have covered all of the areas where EPA
had questions or comments.” |
On August 23, 2013, the MDNR announced that the 1,800-page
supplement draft EIS, incorporating comments and recommendations from the EPA
and tribal governments, will be available for public review on November 22, 2013
when it will be published in the Federal Register. It will then be published in
the Minnesota Environmental Quality Board Monitor on November 25, 2013.
On November 6, 2013, the MDNR announced that the publication of
a Supplemental Draft Environmental Impact Statement will wait two more weeks as
a result of the three-week federal government shutdown. As a result, the
document will be available for public review on December 6, 2013 when it will be
published in the Federal Register. It will then be published in the Minnesota
Environmental Quality Board Monitor December 9, 2013.
Completion of the final EIS, incorporating appropriate
responses to public comments, and a subsequent adequacy decision by the MDNR 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
NorthMet Project can be issued.
Prior to receipt of the permits, the Company will seek to
secure production debt financing that would be available upon receipt of key
permits, with construction slated to start upon receipt of permits and
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. |
6
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Financing Activities
The universal shelf registration on Form F-3 and short form
base shelf prospectus were renewed in January 2013 for the same offering limit
and covering the same securities. These documents allowed 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 in the United
States and Canada. Unless otherwise specified the net proceeds from the offering
of the securities will be used for construction finance for our copper, nickel,
precious metals development project located in Minnesota and for working
capital. There were no issuances of securities under these registrations during
the nine months ended October 31, 2013 or the year ended January 31, 2013.
Glencore AG (“Glencore”) Financing
Since October 31,
2008 the Company and 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.
As part of the 2013 financing, PolyMet and Glencore entered into a Corporate
Governance Agreement whereby from January 1, 2014 as long as Glencore holds 10%
or more of PolyMet's shares (on a fully diluted basis) Glencore shall have the
right, but not obligation to designate at least one director and not more than
the number of directors proportionate to Glencore's fully diluted ownership of
PolyMet, rounded down to the nearest whole number, such number to not exceed 49%
of the total board. PolyMet previously appointed a senior member of Glencore's
technical team to PolyMet's Technical Steering Committee.
The financing agreements comprise $25.0 million initial
principal Series A-D debentures in calendar 2008 drawn in four tranches, $25.0
million placement of PolyMet common shares in calendar 2009 in two tranches,
$30.0 million placement of PolyMet common shares in calendar 2010 in three
tranches, $20.0 million in calendar 2011 in one tranche, and $20.960 million
purchase of PolyMet common shares in the 2013 Rights Offering (the “Rights
Offering”). 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 ownership and ownership rights of PolyMet comprises:
-
78,724,821 shares representing 28.6% of PolyMet's issued shares;
-
$25.0 million initial principal floating rate secured debentures due
September 30, 2014. Including capitalized interest as at October 31, 2013,
these debentures are exchangeable at $1.2920 per share into 24,459,480 common
shares of PolyMet upon PolyMet giving Glencore notice that it has received
permits necessary to start construction of NorthMet and availability of senior
construction finance in a form reasonably acceptable to Glencore or are
repayable on September 30, 2014. The exercise price of the exchange warrants
and the number of warrants are subject to conventional anti-dilution
provisions which were triggered upon close of the Rights Offering; and
-
Glencore holds warrants to purchase 6,458,001 million common shares at
$1.3007 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 NorthMet and availability of senior construction finance, in a
form reasonably acceptable to Glencore. The exercise price of the purchase
warrants and the number of warrants are subject to conventional anti-dilution
provisions which were triggered upon close of the Rights Offering.
7
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
If Glencore were to exercise all of its rights and obligations
under these agreements, it would own 109,642,302 common shares of PolyMet,
representing 35.8% on a partially diluted basis, that is, if no other options or
warrants were exercised or 34.0% on a fully diluted basis.
On April 10, 2013, the Company amended its previous financing
arrangement and issued a new Tranche E debenture (“Debenture”) with the
principal amount of $20.0 million to Glencore and Glencore agreed to a Standby
Purchase Agreement (“Standby”) related to a proposed $60.480 million Rights
Offering by the Company. Under the Standby, Glencore agreed to purchase any
common shares offered under the Rights Offering that were not subscribed for by
holders of the rights, subject to certain conditions and limitations. The $20.0
million Debenture carried a fixed interest rate of 4.721% per annum payable in cash
monthly and matured on the earlier of (i) closing of the Rights Offering by the
Company or (ii) May 1, 2014. The Company provided security by way of a guarantee
and by the assets of the Company and its wholly-owned subsidiary. The sale of
the Debenture was consummated on April 11, 2013. The Company accounted for the
Debenture issued initially at fair value and subsequently at its amortized cost.
Transaction costs of $103,101 relating to the Debenture were capitalized against
the balance. The Debenture was repaid upon the closing of the Rights Offering on
July 5, 2013.
Glencore purchased PolyMet common shares for $20.960 million in
the Rights Offering, which closed on July 5, 2013.
Iron Range Resources & Rehabilitation Board ("IRRRB")
Financing
On June 30, 2011, the Company closed a $4.0 million loan from
the IRRRB, a development agency created by the State of Minnesota to stabilize
and enhance the economy of northeastern Minnesota. At the same time, the Company
exercised its options to acquire two tracts of land 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, and is repayable on
the earlier of June 30, 2016 or the date which the related land is exchanged
with the USFS (not expected to occur within 12 months from October 31, 2013).
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, the date the land is exchanged with the USFS or an alternative
date as determined between the parties as the due date of the loan (“IRRRB
Warrants”). Effective July 5, 2013, the Company increased the number of common
shares issuable to 461,286 and reduced the exercise price to $2.1678, to reflect
the dilutive effect of the 91.6 million common shares that were issued at $0.66
per share in connection with the Rights Offering.
AG for Waterfowl, LLP ("AG") Financing
On March 9,
2012, the Company acquired a secured interest in land (“AG Land”) owned by AG
that is permitted for restoration to wetland. AG was subsequently acquired by
Environmental Investment Partners (“EIP”) and the Company consented to the
assignment of the agreement to EIP on September 7, 2012. EIP will restore the
wetlands and, upon completion, wetland credits are to 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 AG Land, which will be proportionately
released as wetland credits are transferred to the Company. The Company has the
option to exercise five separate phases of wetland credit development. Any
option not exercised by February 28, 2017 will expire and the remaining
mortgage, if any, will be released. As at October 31, 2013, the Company had
exercised the option on phase 1.
8
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
The Company paid initial consideration of $2.0 million cash and
issued 2,788,902 of the Company’s common shares valued at $3.375 million (of
which 371,854 held in escrow pending completion of construction of the first
phase) 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 EIP. The exercise price of the
exchange warrants and the number of warrants are subject to conventional
anti-dilution provisions. Effective July 5, 2013, the Company increased the
number of common shares issuable to 1,249,315 and reduced the exercise price to
$1.3007, to reflect the dilutive effect of the 91.6 million common shares that
were issued at $0.66 per share in connection with the Rights Offering.
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 through 5 will only be incurred if and when the Company
exercises its option on those phases, and will be due over the seven years
following completion of each phase. If wetland credits are issued by the proper
governmental authorities before the seven-year anniversary, any unpaid amounts
are due upon issuance of the wetland credits.
Rights Offering
On May 24, 2013, the Company filed
the final prospectus for an offering of rights ("Rights") to holders of common
shares of the Company to raise up to $60.480 million in gross proceeds (the
"Rights Offering"). Every shareholder received one Right for each common share
owned on June 4, 2013, the Record Date, and two Rights entitled the holder to
acquire one new common share of the Company at $0.66 per share. The Rights
expired on July 3, 2013.
Under the terms of a Standby Purchase Agreement, Glencore
agreed to purchase any common shares not subscribed for by holders of Rights,
subject to certain conditions and limitations guaranteeing a minimum of $53.0
million in gross proceeds. Because the Rights Offering was oversubscribed,
Glencore did not purchase any shares under its standby commitment.
Upon the closing of the Rights Offering on July 5, 2013, the
Company issued a total of 91,636,202 common shares for gross proceeds of $60.480
million. Expenses and fees relating to the Rights Offering were $2.108 million,
including the $1.061 million standby commitment fee paid to Glencore, and
reduced the gross proceeds recorded as share capital. The closing of the Rights
Offering triggered customary anti-dilution provisions for outstanding warrants,
share options, and unissued RSUs.
The key business objectives that the Company expects to
accomplish with the proceeds of the Rights Offering are: (a) repayment of the
Bridge Loan upon closing of the Rights Offering at a cost of $20.0 million (b)
completion of the environmental review that is necessary for the issuance of
permits required to construct and operate the NorthMet Project at a cost of
approximately $17.0 million, (c) maintaining existing infrastructure at a cost
of approximately $5.0 million, (d) completion of engineering needed to commence
construction shortly after receipt of permits at a cost of approximately $10.0
million, and (e) initial procurement of long lead time equipment at a cost of
approximately $10.0 million.
9
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
As at October 31, 2013, approximate proceeds usage from the
Rights Offering was as follows:
| Purpose |
Planned |
Actual To Date |
Variance |
|
| Cash on hand prior to closing |
$ 15,000 |
12,986 |
(2,014) |
(1) |
| Rights Offering Proceeds |
60,480 |
60,480 |
-0- |
|
| Rights Offering Expenses |
(1,630) |
(2,108) |
(478) |
(2) |
| Repayment of Bridge Loan (principal) |
(20,000) |
(20,000) |
-0- |
|
| Environmental Review & Permitting |
(17,000) |
(6,153) |
10,847 |
(3) |
| Maintaining Existing Infrastructure |
(5,000) |
(1,740) |
3,260 |
(3) |
| Engineering |
(10,000) |
(488) |
9,512 |
(3) |
| Procurement of Long Lead Equipment |
(10,000) |
-0- |
10,000 |
(3) |
| General Corporate Purposes |
(11,850) |
(2,469) |
9,381 |
(3) |
| Cash as at October 31,
2013 |
|
40,508 |
|
|
Note:
| |
(1) |
Closing on land purchase option occurred sooner than
planned. |
| |
(2) |
Additional expenses incurred assisting shareholders
exercise their rights including clarifying eligibility to
participate. |
| |
(3) |
Future spending to occur in accordance with key business
objectives. |
Other Financings
During the nine months ended
October 31, 2013, the Company issued no shares (prior year period – 185,000)
upon exercise of options for proceeds of $nil (prior year period -
$148,000).
During the nine months ended October 31, 2013, the Company also
issued 108,123 shares (prior year period – 60,000) as partial payment for
options to purchase land.
10
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Discussion of Operations
For the three months ended October 31, 2013 compared to
three months ended October 31, 2012
a) Loss for the Period:
During the three months ended October 31, 2013, the Company
incurred a loss of $1.753 million ($0.01 loss per share) compared to a loss of
$1.253 million ($0.01 loss per share) during the three months ended October 31,
2012. The increase in the net loss for the period was primarily attributable to
the following:
- an increase in shareholder, investor, and public relations in the current
year period to $0.645 million (prior year period - $0.132 million) relating to
public relations campaigns in advance of SDEIS public comment period; and
- an increase in finance costs in the current year period to $0.345 million
(prior year period - $0.002 million) relating to an increase in the accretion
of the environmental rehabilitation provision as a result of the increased
liability.
These items were partially offset by the following:
- a decrease in salaries and benefits in the current year period to $0.271
million (prior year period - $0.589 million) relating to prior year board and
other management changes; and
- a decrease in share-based compensation in the current year period to
$0.084 million (prior year period - $0.214 million) relating to prior year
board and other management changes.
b) Cash Flows for the Period:
Cash used in operating activities in the three months ended
October 31, 2013 was $1.955 million compared to cash used in the three months
ended October 31, 2012 of $0.948 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 October 31, 2013 was $nil compared to cash provided in the three months
ended October 31, 2012 of $9.982 million. The prior year period includes funding
from share issuances to Glencore.
Cash used in investing activities for the three months ended
October 31, 2013 was $6.315 million compared to cash used in the three months
ended October 31, 2012 of $3.797 million. The increase was primarily due to
increased spending on permitting as the supplement draft EIS nears publication
in the Federal Register and the Minnesota Environmental Quality Board Monitor in
early December 2013.
Total cash for the three months ended October 31, 2013
decreased by $8.270 million for a balance of $40.508 million compared to the
three months ended October 31, 2012 where cash increased $5.237 million to a
balance of $11.058 million.
c) Capital Expenditures for the Period:
During the three months ended October 31, 2013 the Company
capitalized $6.650 million (prior year period - $38.913 million) of mineral
property, plant, and equipment costs related to the NorthMet Project (draft EIS
and permitting) and other fixed assets. The prior year period includes an
increase of $35.503 million to the environmental rehabilitation asset related to
the Cliffs Purchase Agreements. See further discussion in the Asset Acquisitions
section above.
11
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
For the nine months ended October 31, 2013 compared to nine
months ended October 31, 2012
a) Loss for the Period:
During the nine months ended October 31, 2013, the Company
incurred a loss of $5.175 million ($0.02 loss per share) compared to a loss of
$4.485 million ($0.03 loss per share) during the nine months ended October 31,
2012. The increase in the net loss for the period was primarily attributable to
the following:
- an increase in shareholder, investor, and public relations in the current
year period to $1.720 million (prior year period - $0.431 million) relating to
public relations campaigns in advance of SDEIS public comment period and
investor relations campaigns in advance of the Rights Offering; and
- an increase in finance costs in the current year period to $1.096 million
(prior year period - $0.036 million) relating to an increase in the accretion
of the environmental rehabilitation provision as a result of the increased
liability.
These items were partially offset by the following:
- a decrease in share-based compensation in the current year period to
$0.357 million (prior year period - $1.951 million) relating to prior year
board and other management changes.
b) Cash Flows for the Period:
Cash used in operating activities in the nine months ended
October 31, 2013 was $6.541 million compared to cash used in the nine months
ended October 31, 2012 of $2.493 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 nine months ended
October 31, 2013 was $58.372 million compared to cash provided in the nine
months ended October 31, 2012 of $10.131 million. The current year period
includes funding from the Rights Offering. The prior year period includes
exercise of share options and funding from share issuances to Glencore.
Cash used in investing activities for the nine months ended
October 31, 2013 was $19.411 million compared to cash used in the nine months
ended October 31, 2012 of $14.058 million. The increase was primarily due to
increased spending on permitting as the supplement draft EIS nears publication
in the Federal Register and the Minnesota Environmental Quality Board Monitor in
early December 2013.
Total cash for the nine months ended October 31, 2013 increased
by $32.420 million for a balance of $40.508 million compared to the nine months
ended October 31, 2012 where cash decreased $6.420 million to a balance of
$11.058 million.
c) Capital Expenditures for the Period:
During the nine months ended October 31, 2013 the Company
capitalized $15.726 million (prior year period - $51.079 million) of mineral
property, plant, and equipment costs related to the NorthMet Project (draft EIS
and permitting) and other fixed assets. The prior year period includes an
increase of $35.503 million to the environmental rehabilitation asset related to
the Cliffs Purchase Agreements. See further discussion in the Asset Acquisitions
section above. In addition, the Company capitalized $nil million (prior year
period - $5.992 million) of wetland credit intangible costs related to wetland
credit options and development agreements.
12
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| 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
|
Oct 31
2013 |
July 31
2013 |
Apr 30
2013 |
Jan 31
2013 |
Oct 31
2012 |
July 31
2012 |
Apr 30
2012 |
Jan 31
2012 |
| Total Revenues |
- |
- |
- |
- |
- |
- |
- |
- |
| General and Administrative |
(1,373) |
(1,372) |
(1,307) |
(1,406) |
(1,261) |
(1,958) |
(1,283) |
(704) |
| Other Income (Expenses) |
(380) |
(390) |
(353) |
(735) |
8 |
(24) |
33 |
211 |
| Net Loss |
(1,753) |
(1,762) |
(1,660) |
(2,141) |
(1,253) |
(1,982) |
(1,250) |
(493) |
| Loss per share |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.00) |
| |
|
|
|
|
|
|
|
|
| Cash provided by (used in)
operating activities |
(1,955) |
(519) |
(4,067) |
1,377 |
(948) |
(1,041) |
(504) |
(751) |
| Cash provided by financing
activities |
- |
38,429 |
19,943 |
- |
9,982 |
- |
148 |
12,829 |
| Cash used in investing
activities |
(6,315) |
(8,241) |
(4,855) |
(4,347) |
(3,797) |
(4,072) |
(6,188) |
(1,753) |
Financial information for all periods has been reported in
accordance with IFRS as issued by the IASB.
Results fluctuate from quarter to quarter based on activity in
the Company including NorthMet development and corporate activities. See
additional discussion of significant items in the “Discussion of Operations”
section above and as follows:
The net loss included share-based compensation expense for the
quarters ended:
| October 31, 2013 - $84,000 |
October 31, 2012 - $214,000
|
| July 31, 2013 - $89,000 |
July 31, 2012 - $1,121,000 |
| April 30, 2013 - $184,000 |
April 30, 2012 - $616,000
|
| January 31, 2013 - $304,000 |
January 31, 2012 - $28,000
|
13
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Liquidity and Capital Resources
Substantially all cash and cash equivalents are held in United
States currency. 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 October 31, 2013, the Company had working capital of
$6.934 million compared with working capital of $2.629 million as at January 31,
2013 consisting primarily of cash and cash equivalents of $40.508 million
(January 31, 2013 - $8.088 million), trade and other receivables of $1.370
million (January 31, 2013 - $0.830 million), prepaid expenses of $0.970 million
(January 31, 2013 - $0.771 million), trade payables and accrued liabilities of
$3.196 million (January 31, 2013 - $5.269 million), convertible debt of $31.603
million (January 31, 2013 - $nil) and the current portion of environmental
rehabilitation provision of $1.115 million (January 31, 2013 - $1.808
million).
As at October 31, 2013, the Company has firm commitments
related to the environmental review process, land options, wetland credit
intangibles, consultants, and rent of approximately $4.9 million with the
majority due over the next year and the remainder due over seven years.
As at October 31, 2013, the Company had non-binding commitments
to maintain its mineral lease rights of $180,000 with all due in the next year.
As at October 31, 2013, 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 October 31, 2013, 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.
The consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of operations.
Liquidity risk is the risk the Company will not be able to meet
its financial obligations as they become due. As at October 31, 2013, PolyMet
had cash of $40.508 million and working capital of $6.934 million. The
significant reduction in working capital during the period is a result of the
$31.603 million convertible debenture due to Glencore becoming a current
liability on the basis it matures on September 30, 2014.
PolyMet will need to renegotiate the convertible debenture or
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 renegotiating the convertible debenture with
Glencore and closing financing agreements, there can be no assurance it will be
able to do so again.
Management believes that, based upon the underlying value of
the NorthMet Project, it will be able to extend the term of the convertible
debenture or obtain the necessary financing to meet the Company’s minimum
obligations for at least the next 12 months. However, there are no assurances
that these initiatives will be successful or sufficient to meet the Company’s
liquidity requirements.
14
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| 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:
| |
|
October 31, |
|
|
January 31, |
|
| |
|
2013 |
|
|
2013
|
|
| Loans and Receivables (1) |
$ |
40,508 |
|
$ |
8,088 |
|
| Available-for-sale |
|
- |
|
|
17 |
|
| Other loans and receivables |
|
1,370 |
|
|
830 |
|
| Other financial
liabilities (2) |
$ |
38,993 |
|
$ |
39,727 |
|
| (1) |
Includes cash and cash 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 cash equivalents, investment, trade and other
receivables, 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 cash
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:
| |
|
October 31, |
|
|
January 31, |
|
| |
|
2013 |
|
|
2013 |
|
| Loans and receivables (1) |
$ |
101 |
|
$ |
71 |
|
| Available-for-sale |
|
- |
|
|
17 |
|
| Other loans and receivables |
|
10 |
|
|
57 |
|
| Other financial liabilities (2) |
|
(66 |
) |
|
(268 |
) |
| |
$ |
45 |
|
$ |
(123 |
) |
| (1) |
Includes cash and cash equivalents. |
| (2) |
Includes trade payables and accrued
liabilities. |
Based on the above net exposures, as at October 31, 2013, a 10%
change in the Canadian / United States exchange rate would have impacted the
Company’s loss by approximately $5,000.
15
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Credit Risk
Credit risk arises on cash and cash 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 $41,878,000.
The Company’s cash and cash equivalents are primarily 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 cash
equivalents. See additional discussion in the “Liquidity and Capital Resources”
section.
Interest Rate Risk
Interest rate risk arises on cash and cash equivalents, long
term debt, and convertible 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:
| |
|
October 31, |
|
|
January 31, |
|
| |
|
2013 |
|
|
2013 |
|
| Loans and receivables (1) |
$ |
40,508 |
|
$ |
8,088 |
|
| Other financial
liabilities (2) |
$ |
35,797 |
|
$ |
34,458 |
|
| (1) |
Includes cash and cash equivalents. |
| |
|
| (2) |
Represents long term debt and convertible
debt. |
Fair Value Measurements
The Company’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 input
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. |
The fair values of the Company's cash and cash equivalents, and
other loans and receivables approximate their carrying amounts. The Company’s
available-for-sale investment is valued using quoted market prices in active
markets, obtained from securities exchanges and accordingly is Level 1 in the
fair value hierarchy.
16
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
The fair value of the Company's trade payables and accrued
liabilities and convertible debt approximate their carrying amounts. The
Company’s long term debt is recognized initially at fair value, net of any
transaction costs incurred, and subsequently at amortized cost using the
effective interest method. The carrying amount of long term debt exceeds the
face value by approximately $194,000.
Capital Management
The Company is in discussions with certain parties to provide
funding which will enable the Company to execute its business plan. The Company
expects to have sufficient funds to complete the environmental review and
permitting process, and pre-construction engineering but will require additional
funding for construction of the NorthMet Project. 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.
Related Party Transactions
The Company conducted transactions with senior management,
directors and persons or companies related to these individuals, and paid or
accrued amounts as follows:
| |
|
Nine months ended October 31, |
|
| |
|
2013 |
(1) |
|
2012 |
(2) |
| Salaries and other short-term benefits |
$ |
1,121 |
|
$ |
1,081 |
|
| Other long-term benefits |
|
45 |
|
|
38 |
|
| Termination benefits |
|
- |
|
|
279 |
|
| Share-based payment (3) |
|
- |
|
|
1,886 |
|
| |
|
|
|
|
|
|
| Total |
$ |
1,166 |
|
$ |
3,284 |
|
| |
(1) |
Nine months ended October 31, 2013 includes Directors
(Jonathan Cherry, David Dreisinger, W. Ian L. Forrest, Alan Hodnik,
William Murray, Stephen Rowland, Michael Sill, and Frank Sims) and senior
management (Jonathan Cherry, Douglas Newby, Joseph Scipioni, Bradley
Moore, Ryan Vogt, and Stephanie Hunter). |
| |
(2) |
Nine months ended October 31, 2012 includes Directors
(David Dreisinger, W. Ian L. Forrest, Alan Hodnik, William Murray, Stephen
Rowland, Joseph Scipioni, Michael Sill, and Frank Sims) and senior
management (Joseph Scipioni, Douglas Newby, Bradley Moore, and Niall
Moore). |
| |
(3) |
Share-based payment represents the fair value determined
at grant date to be expensed over the vesting
period. |
17
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
There are agreements with key employees (Jonathan Cherry,
Douglas Newby, Joseph Scipioni, and Brad Moore) that contain severance
provisions for termination without cause or in the event of a take-over bid.
None of PolyMet’s other directors has a service contract with the Company
providing for benefits upon termination of his employment.
As a result of Glencore’s ownership of 28.6% of the Company it
is also a related party. See additional discussion in the “Financing Activities”
section above.
Shareholder Rights Plan
The Shareholder Rights Plan (“Rights Plan”) was approved in May
2004 and modified and reapproved by the Company's shareholders in July 2013.
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 Rights Plan
expires on the earlier of the date of termination if not confirmed at the
upcoming meeting, or the date of termination if not re-confirmed at subsequent
meetings. 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.
Proposed Transactions
There are no proposed transactions that will materially affect
the performance of the Company.
18
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements in
conformity with IFRS as issued by IASB requires the use of certain critical
accounting estimates. These critical accounting estimates require management to
make judgments 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.
Critical accounting estimates and judgments used in the
preparation of these consolidated financial statements are as follows:
(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. In addition,
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) Impairment of non-financial assets
The carrying amounts of the Company’s non-financial assets,
including mineral property, plant and equipment, and wetland credit intangible
are reviewed at each reporting date to determine whether there is any indication
of impairment. If any such indication exists, the asset’s recoverable amount is
estimated at the greater of its value in use and its fair value less costs to
sell. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset. An impairment loss is recognized if the carrying amount of an asset
exceeds its estimated recoverable amount. An impairment loss previously recorded
is reversed if there has been a change in the estimates used to determine the
recoverable amount.
For its mineral 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. No
indicators of impairment for its mining property were identified for the nine
months ended October 31, 2013 or the year ended January 31, 2013.
(iii) Provision for Environmental Rehabilitation Costs
Provisions for environmental rehabilitation costs associated
with mineral property, plant and equipment, are recognized when the Company has
a present legal or constructive obligation that can be estimated reliably, and
it is probable an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability.
19
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
Upon initial recognition of provisions for environmental
rehabilitation costs, a corresponding increase to the carrying amount of the
related asset is recorded and amortized over the life of the asset. The
estimates are based principally on legal and regulatory requirements. Following
initial recognition of the environmental rehabilitation provision, the carrying
amount of the liability is accreted to its future value over the life of the
asset, reduced for actual reclamation payments incurred, adjusted for changes to
the current market-based discount rate, and adjusted for changes in the amount
and timing of the underlying cash flows needed to settle the obligation.
It is possible that the Company’s estimates of its ultimate
environmental rehabilitation liabilities could change as a result of changes in
regulations, changes in the extent of environmental rehabilitation required,
changes in the means of rehabilitation, changes in the extent of responsibility
for the financial liability or changes in cost estimates. The operations of the
Company may in the future be affected from time to time in varying degrees by
changes in environmental regulations, including those for future removal and
site restoration costs. Both the likelihood of new regulations and their overall
effect upon the Company may vary greatly and are not predictable.
The Company’s provision for environmental rehabilitation cost
obligations represents management’s best estimate of the present value of the
future cash outflows required to settle the liability.
Adoption of New or Amended IFRS
On February 1, 2013, the Company adopted the following new or
amended accounting standards that were previously issued by the IASB, which did
not have a significant impact on the Company’s consolidated financial
statements.
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 10 is effective for annual periods beginning on or after
January 1, 2013.
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. IFRS
11 is effective for annual periods beginning on or after January 1, 2013.
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 12 is effective for annual periods beginning
on or after January 1, 2013, with early adoption permitted.
20
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
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. IFRS 13 is effective for annual periods beginning on or
after January 1, 2013.
IFRIC 20 – Stripping Costs in the Production Phase of a
Surface Mine
On October 20, 2011, the IASB issued a new
interpretation, IFRIC 20, to address accounting issues regarding waste removal
costs incurred in surface mining activities during the production phase of a
mine, referred to as production stripping costs. The new interpretation
addresses the classification and measurement of production stripping costs as
either inventory or as a tangible or intangible non-current ‘stripping activity
asset’. The standard also provides guidance for the depreciation or amortization
and impairment of such assets. IFRIC 20 is effective for reporting years
beginning on or after January 1, 2013, although earlier application is
permitted.
IAS 1 – Presentation of Items of Other Comprehensive
Income
The amendments of IAS 1 change the grouping of items
presented in other comprehensive income. Items that could be reclassified (or
‘recycled’) to net earnings at a future point in time would be presented
separately from items that will never be reclassified. The amendment becomes
effective for annual periods beginning on or after July 1, 2012.
Future Accounting Changes
The Company anticipates that all of the relevant pronouncements
will be adopted in the Company’s accounting policy for the first period
beginning after the effective date of the pronouncement. Information on new
standards, amendments and interpretations that are expected to be relevant to
the Company’s financial statements is provided below. Certain other new
standards and interpretations have been issued but are not expected to have a
material impact on the Company’s financial statements and are therefore not
discussed below:
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 9 is
effective for annual periods beginning on or after January 1, 2015. The Company
is currently assessing the impact of adopting IFRS 9 on its consolidated
financial statements, including the applicability of early adoption.
21
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| 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: 274,961,074 common shares as at
December 2, 2013.
Outstanding options, warrants and convertible securities as
at December 2, 2013:
Type of Security
|
Number **
|
Exercise Price
(US$) ** |
Expiry Date
|
| Share options |
1,190,000 |
1.1115* |
September 19, 2015 |
| Share options |
200,000 |
0.9807* |
October 24, 2015 |
| Share options |
125,000 |
0.9399* |
December 5, 2015 |
| Common share warrants |
6,458,001 |
(Note 1) 1.3007 |
December 31, 2015 |
| Common share warrants |
1,249,315 |
(Note 2) 1.3007 |
December 31, 2015 |
| Share options |
1,950,000 |
2.2556* |
March 20, 2016 |
| Share options |
250,000 |
1.0232 |
April 1, 2016 |
| Share options |
325,000 |
2.4272* |
June 19, 2016 |
| Common share warrants |
461,286 |
(Note 3) 2.1678 |
June 20, 2016 |
| Share options |
300,000 |
3.1219* |
September 1, 2016 |
| Share options |
750,000 |
1.0000 |
September 24, 2016 |
| Share options |
525,000 |
2.6969* |
January 5, 2017 |
| Share options |
1,250,000 |
2.5926 |
February 13, 2017 |
| Share options |
250,000 |
2.5319 |
March 12, 2017 |
| Share options |
50,000 |
2.5059 |
March 23, 2017 |
| Share options |
360,000 |
2.6013 |
September 4, 2017 |
| Share options |
205,000 |
2.6447 |
December 12, 2017 |
| Share options |
70,000 |
2.6273 |
January 11, 2018 |
| Share options |
100,000 |
2.4886 |
January 31, 2018 |
| Share options |
500,000 |
2.3585 |
February 15, 2018 |
| Share options |
100,000 |
3.3990 |
June 2, 2018 |
| Share options |
175,000 |
2.7921 |
July 30, 2018 |
| Share options |
585,000 |
0.7110 |
January 30, 2019 |
| Share options |
910,000 |
0.7110 |
February 17, 2019 |
| Share options |
115,000 |
2.3152 |
October 15, 2019 |
| Share options |
60,000 |
3.0695 |
January 8, 2020 |
| Share options |
300,000 |
1.8816 |
January 25, 2021 |
| Share options |
750,000 |
1.7689 |
March 10, 2021 |
| Share options |
1,150,000 |
1.0318 |
March 8, 2022 |
| Share options |
100,000 |
1.0058 |
April 2, 2022 |
| Share options |
2,500,000 |
0.7613 |
June 21, 2022 |
| Share options |
125,000 |
0.7240 |
July 9, 2022 |
| Share options |
150,000 |
0.8237 |
July 11, 2022 |
| Share options |
50,000 |
0.8671 |
July 25, 2022 |
| Share options |
300,000 |
0.7977 |
January 7, 2023 |
| Share options |
100,000 |
0.9972 |
April 3, 2023 |
| Share options |
100,000 |
0.8200 |
October 2, 2023 |
* For information purposes, those share options granted with an
exercise price in Canadian dollars (“CDN”) have been translated to the Company’s
reporting currency using the exchange rate as at December 2, 2013 of 1.00
US$ = 1.0610 CDN$.
22
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
** Effective July 5, 2013, the Company increased the number of
common shares issuable and reduced the exercise price of all warrants that were
outstanding prior to the Rights Offering and reduced the exercise price of all
options that were outstanding prior to the Rights Offering, to reflect the
dilutive effect of the 91.6 million common shares that were issued at $0.66 per
share in connection with the Rights Offering.
| Note 1: |
Each warrant entitles the holder to purchase one common
share of PolyMet at $1.3007 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 the holder 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 the
holder. Following satisfaction of the conditions for mandatory exercise,
if the holder does not elect to exercise these warrants, the warrants will
expire. |
| |
|
| Note 2: |
Each warrant entitles the holder to purchase one common
share of PolyMet at $1.3007 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 NorthMet 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 $2.1678 and expires on the earlier of June 20, 2016
and one year after the Company receives its permits for the NorthMet
Project. |
The Omnibus Share Compensation Plan (“Omnibus Plan”) was
created to align the interests of the Company’s employees, directors, officers
and consultants with those of shareholders. Effective May 25, 2007, the Company
adopted the Omnibus Plan, which was approved by the Company’s shareholders’ on
June 27, 2007, modified and further ratified and reconfirmed by the Company’s
shareholders most recently on July 10, 2012. The Omnibus Plan restricts the
award of share options, restricted shares, and bonus shares to 10% of the common
shares issued and outstanding on the grant date, excluding 2,500,000 common
shares pursuant to an exemption approved by the Toronto Stock Exchange.
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, 2013
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, 2013 occur, the
Company’s business, operating results and financial condition could be seriously
harmed and investors could lose all of their investment.
23
| PolyMet Mining Corp. |
| (a development stage company) |
| Management Discussion and Analysis |
| For the three and nine months ended October 31, 2013 |
| Tabular amounts
in thousands of U.S. Dollars except for price per share, shares and
options |
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, 2013. Based on this evaluation, the CEO and CFO have concluded that
the Company’s disclosure controls and procedures were effective at January 31,
2013.
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 month period ended October 31, 2013
that have materially affected, or are reasonably likely to material affect, its
internal control over financial reporting.
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.
24