PolyMet Mining Corp.: Exhibit 99.2 - Filed by newsfilecorp.com
POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
For the three and six months ended July 31, 2015
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
General
The following information, prepared as at September 3, 2015,
should be read in conjunction with the unaudited condensed interim
consolidated financial statements of PolyMet Mining Corp. (“PolyMet” or the
“Company”) as at July 31, 2015 and for the three and six months ended July 31,
2015 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, 2015 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 directors who are all independent, 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:
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Completion of environmental review on the
expected timeframe; |
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Obtaining permits on a timely basis; |
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Raising the funds necessary to develop the
NorthMet Project and continue operations; |
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Execution of prospective business plans; |
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Effectively managing currency market
fluctuations; and |
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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:
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Changes in general economic and business conditions,
including changes in interest rates and exchange rates; |
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Changes in the resource market including prices of
natural resources, costs associated with mineral exploration and
development, and other economic conditions; |
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Natural phenomena; |
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Actions by governments and authorities including changes
in government regulation; |
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Uncertainties associated with legal proceedings; and
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Other factors, many of which are beyond the Company’s
control. |
2
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
All forward-looking statements included in this MD&A are
based on information available to the Company 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 MD&A 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.
Summary of Business
PolyMet is a Toronto Stock Exchange and NYSE MKT listed Issuer
engaged in the exploration and development 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 ore body is at the western end of a series of
known copper-nickel-precious metals deposits in the Duluth Complex. Completion
of the Definitive Feasibility Study (“DFS”) in 2006 established proven and
probable reserves, positioning NorthMet as the most advanced of the four
advanced projects in the Duluth Complex: namely, from west to east NorthMet,
Mesaba, Serpentine, and Nokomis.
PolyMet acquired the Erie Plant through three Contracts for
Deeds with Cliffs Erie LLC, a subsidiary of Cliffs Natural Resources Inc.
(“Cliffs”). The plant is located about six miles west of the NorthMet ore body
and comprises a 100,000 ton-per-day crushing and milling facility, a railroad
and railroad access rights connecting the Erie Plant to the NorthMet ore body,
tailings facilities, 120 railcars, locomotive fueling and maintenance
facilities, water rights and pipelines, and large administrative offices on
site.
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. 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.
3
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
Environmental Review and Permitting
Under the
Minnesota Environmental Policy Act (“MEPA”) and the National Environmental
Policy Act (“NEPA”), state and federal agencies are required to complete an
Environmental Impact Statement (“EIS”) with periods for public review and
comment before permits to construct and operate the Project can be issued.
PolyMet commenced the environmental review and permitting
process in 2004. In October 2005 the scope of the NorthMet EIS was agreed and
the Minnesota Department of Natural Resources (“MDNR”) and U.S. the Army Corps
of Engineers (“USACE”) were established as Co-lead Agencies. Three Minnesota
Chippewa bands joined as Cooperating Agencies. In 2006 the Co-lead Agencies
appointed Environmental Resource Management (“ERM”) as EIS Contractor
responsible for preparing the EIS.
Following publication of the draft EIS, in June 2010 the Co-lead Agencies announced that they intended to complete the EIS process by preparing a supplemental draft EIS (“SDEIS”) incorporating a proposed land exchange with the U.S. Forest Service (“USFS”) and expanded government agency cooperation, with the USFS joining as a federal Co-lead Agency. In June 2011 the U.S. Environmental Protection Agency (“EPA”) joined as a Cooperating Agency.
In December 2013 the Co-lead Agencies published the
supplemental draft EIS (“SDEIS”), which started a new 90-day period for public
review and comment, including three public meetings and resulted in an EC-2
rating from EPA, the highest rating given to a mining project as far as PolyMet is
aware.
On June 22, 2015, the preliminary final EIS (“PFEIS”)
incorporating responses to approximately 58,000 comments on the SDEIS was
circulated to the Co-lead and Cooperating Agencies for review prior to
publication of the final EIS in the Federal Register and the Minnesota
Environmental Quality Board (“EQB”) Monitor, which the MDNR expects to happen in
November 2015.
After publication of the final EIS, the public will have a
minimum of 30 days to comment on the adequacy of the document. Under Minnesota
law, the criteria for determining adequacy are whether the environmental review
addressed the issues identified in the original scoping review, met EIS
procedural requirements, and responded to substantive comments received on the
draft EIS and SDEIS. The MDNR expects to complete its review of comments in
approximately four weeks and issue its Record of Decision on the adequacy of the
EIS in February 2016.
The EIS adequacy decision provides the legal and procedural
basis upon which the state can issue a 401 water certification and other
required state permits to construct and operate the NorthMet Project.
The federal Agencies follow different paths after publication
of the final EIS. The USACE can issue its Record of Decision and 404 Wetlands
Permit upon issuance of the 401 certification. The USFS will issue a draft
Record of Decision on the land exchange followed by a 45-day public review
period after which the USFS has up to 75 days to consider comments and issue a
final Record of Decision.
Summary of Recent Events and Outlook
Highlights of Fiscal 2016 to Date
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On June 22, 2015, the PFEIS was circulated to the Co-lead
and Cooperating Agencies for review, which has now been completed.
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PolyMet received the second and third tranches from the
Glencore AG, a wholly owned subsidiary of Glencore plc (together
“Glencore”), $30 million loan facility on April 15, 2015 in the amount of
$8.0 million and on July 1, 2015 in the amount of $8.0 million. The
remaining $6.0 million is scheduled to be drawn on or before October 1,
2015. |
4
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
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On July 30, 2015, PolyMet amended its previous financing arrangement with Glencore by extending the maturity date of the $25 million initial principal convertible debentures to the earlier of the date upon which PolyMet has given Glencore ten days 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 (the “Early Maturity Event”) or March 31, 2016 and the interest rate was increased from 12-month US dollar LIBOR plus 4.0% to 12-month US dollar LIBOR plus 8.0% effective August 1, 2015. The purchase warrant expiration date was extended to the earlier of the Early Maturity Event or December 31, 2016 and the purchase price was reduced from $1.3022 per share to $0.9292 per share. All other terms of both the debentures and the warrants described above are unchanged. |
Net cash used in operating and investing activities during the six months ended July 31, 2015 was $16.108 million, of which approximately $6 million was spent on environmental review and permitting as PolyMet pays its own engineering and legal consultants and also reimburses the state of Minnesota for its internal staff costs and the cost of the EIS Contractor. Other spending relates to maintaining existing infrastructure, engineering, and general corporate purposes.
Goals and Outlook for Remainder of Fiscal 2016
The
environmental review and permitting process is managed by the regulatory
agencies and, therefore, timelines are not under PolyMet’s control.
Understanding that, PolyMet’s objectives include:
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Publication of the final EIS in the state EQB Monitor and the Federal Register (according to the MDNR); |
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Submission of mining, air and water permit applications
as the EIS process concludes; |
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Completion of the Definitive Cost Estimate and Project
Update; and |
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Construction finance plan including commitment of debt
prior to the issuance of permits, subject to typical conditions precedent
such as receipt of permits. |
The MDNR has stated that it expects to issue its Record of Decision on EIS Adequacy in early Fiscal 2017.
PolyMet expects to spend approximately $30 million during the
year ended January 31, 2016. The primary focus remains completion of the
environmental review and permitting process, which is anticipated to cost
approximately $16 million during the year. Other areas of focus include
engineering and completion of the definitive cost estimates, which is
anticipated to cost approximately $3 million during the year.
Prior to receipt of permits, the Company will seek to secure
construction financing that would be available upon receipt of key permits, with
construction and ramp-up to commercial production anticipated to take
approximately two years. The Company is in discussion with commercial banks and
other financial institutions regarding construction finance.
Detailed Description of Business
Asset Acquisitions
In November 2005 the Company, through its Minnesota subsidiary
Poly Met Mining, Inc., acquired the Erie Plant, which is located approximately
six miles west of PolyMet’s NorthMet deposit. The plant was operated by Cliffs
for many years and was acquired by Cliffs from LTV Steel Mining Company after
its bankruptcy, at which time the plant was shut down with a view to a potential
restart. The facility includes 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.
5
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
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 a new hydrometallurgical metal recovery processing facility
which, when completed, will upgrade the nickel concentrates to produce a
nickel-cobalt hydroxide and a precious metals precipitate.
In December 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 6,000 acres of land to the
east and west of and contiguous to its existing tailing facilities.
PolyMet indemnified Cliffs for reclamation and remediation
associated with the property under both transactions. In April 2010 Cliffs
entered into a consent decree with the MPCA relating to alleged violations on
the Cliffs Erie Property. This consent decree required both short-term and
long-term mitigation. Field study activities were completed in 2010 and 2011 and
short-term mitigations were initiated in 2011 as outlined in the plans and
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 and subsequent communication provides clarification to the potential
liability for the long-term mitigation included in the Company’s environmental
rehabilitation provision.
Feasibility Study, Mineral Resources and Mineral
Reserves
With publication of the DFS in September 2006, summarized in a
NI 43-101 Technical Report, PolyMet established SEC-standard mineral reserves.
Proven and probable mineral reserves were estimated at 181.7 million short tons
grading 0.31% copper, 0.08% nickel and 0.012 ounces per short ton ("opt") of
precious metals (palladium, platinum and gold).
In September 2007 PolyMet reported an expansion in these proven
and probable mineral reserves to an estimated 274.7 million short tons grading
0.28% copper, 0.08% nickel and 0.010 opt of precious metals. These mineral
reserves lie within measured and indicated mineral resources of an estimated
694.2 million short tons grading 0.27% copper, 0.08% nickel and 0.010 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.
In May 2008 PolyMet reported revised plans that included the
sale of concentrate during the construction and commissioning of new
metallurgical facilities resulting in a shorter pre-production construction
period and reduced estimates of capital costs prior to first revenues, with the
new metallurgical facilities to be constructed during initial production and
sales of concentrate and funded from cash flow from initial operations.
In February 2011 PolyMet further simplified the proposed
metallurgical process and planned to build the Project in two phases:
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Phase I: produce and market concentrates containing
copper, nickel, cobalt and precious metals; and |
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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. |
6
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
In February 2013 PolyMet announced further improvements to the
NorthMet Project that it anticipates will reduce the NorthMet Project’s
environmental impacts. The reduced environmental impacts include: reductions in
sulfur dioxide, mercury and greenhouse gas emissions at the plant site, capture
of groundwater and surface seepage with the construction of an in ground
containment system to the north and west of the existing tailings basin, and all
contact water discharged from the NorthMet Project will be treated through
reverse osmosis plants.
An Updated Technical Report under NI 43-101 describing these
changes is filed on EDGAR and SEDAR.
PolyMet plans to complete a Definitive Cost Estimate and
Project Update prior to commencement of construction. The Project Update will
incorporate numerous process and project improvements, environmental controls
described in the final EIS. The Project Update will also include detailed
capital and operating costs reflecting the advanced stage of engineering and
design. As part of this program, PolyMet has entered into a Technical Services
Agreement with Glencore whereby PolyMet reimburses Glencore for costs associated
with providing technical support to PolyMet, primarily in detailed project
design and mineral processing where PolyMet requests assistance under an agreed
scope of work.
Environmental Review and Permitting
PolyMet
commenced the environmental review and permitting process in 2004. In October
2005 the MDNR published its Environmental Assessment Worksheet Decision Document
that set out the scope of the EIS and established the MDNR as the lead state
agency and the USACE as the lead federal agency responsible for the NorthMet
EIS. In 2006 the Co-lead Agencies appointed ERM as EIS Contractor to prepare the
EIS.
In November 2009 the Co-lead Agencies published the NorthMet
draft EIS, which marked the start of a period for public review and comment,
including two public meetings. The EPA issued an extensive comment letter and
rating of the project and the draft EIS in its role as reviewer of projects that
could impact the environment.
In June 2010 the Co-lead Agencies announced that they intended
to complete the EIS process by preparing a supplemental draft EIS incorporating
a proposed land exchange with the USFS and expanding government agency
cooperation. The USFS joined the USACE as a federal Co-lead Agency and in June
2011 the EPA joined as a Cooperating Agency.
In December 2013 the Co-lead Agencies published the SDEIS,
which started a new period for public review and comment, including three public
meetings. The EPA issued comments on the SDEIS, which included an EC-2 rating.
The EC-2 rating is the highest rating for a proposed mining project, so far as
the Company is aware. The highest rating LO (Lack of Objections) is typically
applied to non-industrial projects such as the Upper Mississippi National
Wildlife and Fish Refuge Comprehensive Conservation Plan Implementation. The
EC-2 (Environmental Concerns) rating is the same as received by some other
notable Minnesota projects including the Central Corridor Light Rail Project in
the Twin Cities and the St. Croix River Crossing which have been built or are in
the process of being constructed.
On June 22, 2015 the PFEIS incorporating responses to
approximately 58,000 comments, several thousand of which were substantive, on
the SDEIS was circulated to the Co-lead and Cooperating Agencies for review.
Publication of the final EIS 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. The Company is preparing mining, air
and water permit applications as the EIS process concludes.
7
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
The environmental review and permitting process is managed by
the regulatory agencies and therefore, timelines are not under PolyMet’s
control.
The major permits are:
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U.S. Army Corps of Engineers |
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Section 404 Individual Permit for Impacted
Wetlands |
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Minnesota Department of Natural
Resources |
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Permit to Mine |
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Water Appropriations Permit |
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Dam Safety Permit |
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Wetland Replacement Plan |
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Minnesota Pollution Control
Agency |
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National Pollutant Discharge Elimination System
(NPDES) Permit (storm water) |
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State Disposal System (SDS) Permit |
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Air Emissions Permit |
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. The universal shelf registration on Form F-3
allows PolyMet 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 for 36 months. The Company is currently
evaluating the renewal of the universal shelf registration in Canada, which
expired 25 months after its last renewal in January 2013. Unless otherwise
specified, the net proceeds from the offering of the securities will be used for
construction finance for the Company’s copper, nickel, precious metals
development project located in Minnesota and for working capital. There were no
issuances of securities under these registrations during the six months ended
July 31, 2015 or the year ended January 31, 2015.
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 agreement, 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 has 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.
8
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
The financing agreements comprise $25.0 million initial principal secured convertible debentures in calendar 2008 drawn in four tranches (Tranches A through D, together the “2008 Debentures”), $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 placement of PolyMet common shares in calendar 2011 in one tranche, $20.960 million purchase of PolyMet common shares in the Rights Offering, and $30.0 million initial principal secured debentures in calendar 2015 drawn and to be drawn in four tranches (the “2015 Debentures”). 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:
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78,724,821 shares representing 28.5% of PolyMet's issued
shares; |
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The 2008 Debentures are due March 31, 2016. Including capitalized and accrued interest as at July 31, 2015, these debentures are exchangeable through the exercise of an Exchange Warrant at $1.2920 per share into 26,501,973 common shares of PolyMet upon the Early Maturity Event or are repayable on March 31, 2016. The interest rate was 12-month US dollar LIBOR plus 4.0% per annum through July 31, 2015 when it was reset to LIBOR plus 8.0%. The exercise price of the exchange warrant and the number of shares issuable upon exercise are subject to conventional anti-dilution provisions; and |
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Glencore holds warrants to purchase 6,458,001 million
common shares at $0.9292 per share at any time until December 31, 2016,
subject to mandatory exercise if the 20-day volume weighted average price
(“VWAP”) of PolyMet common shares is equal to or greater than 150% of the
exercise price and occurrence of the Early Maturity Event. The exercise
price of the purchase warrants and the number of warrants are subject to
conventional anti-dilution provisions. |
If Glencore were to exercise all of its rights and obligations
under these agreements, it would own 111,684,795 common shares of PolyMet,
representing 36.1% on a partially diluted basis, that is, if no other options or
warrants were exercised or 33.5% on a fully diluted basis, if all other options
and warrants were exercised, whether they are in-the-money or not.
The first three tranches of the 2015 Debentures have been issued. Tranche F in the amount of $8.0 million was issued on January 30, 2015. Tranche G in the amount of $8.0 million was issued on April 15, 2015. Tranche H in the amount of $8.0 million was issued on July 1, 2015. Tranche I in the amount of $6.0 million is to be issued on or before October 1, 2015. The 2015 Debentures bear interest at 12-month US dollar LIBOR plus 8.0% per annum payable in cash upon maturity and mature on the earlier of (i) the availability of at least $100 million of finance provided the Company demonstrates repayment is prudent or (ii) March 31, 2016. The Company provided security by way of a guarantee and a pledge of the assets of the Company and its wholly-owned subsidiary, Poly Met Mining, Inc. The Company recognized the 2015 Debentures initially at fair value and subsequently accounted for the debentures at amortized cost.
On July 30, 2015, the Company amended its previous financing arrangement with Glencore. The maturity date of the 2008 Debentures and associated Exchange Warrant was extended to the earlier of the Early Maturity Event or March 31, 2016 and the interest rate was increased from 12-month US dollar LIBOR plus 4.0% to 12-month US dollar LIBOR plus 8.0% effective August 1, 2015. The purchase warrant expiration date was extended to the earlier of the Early Maturity Event or December 31, 2016 and the purchase price was reduced from $1.3022 per share to $0.9292 per share. All other terms of both the debentures and the warrants described above are unchanged. The transaction has been accounted for as a modification of the existing convertible debt with the $1.241 million difference in the fair value of the purchase warrants as a result of the extension in term and price reduction being recorded within equity.
9
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
Iron Range Resources & Rehabilitation Board ("IRRRB")
Financing
On June 30, 2011, the Company closed a $4.0 million loan from
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. The loan is classified as current as the land exchange is
expected to occur within 12 months from July 31, 2015. The Company has issued
warrants giving the IRRRB the right to purchase 461,286 shares of its common
shares at $2.1678 per share at any time until June 30, 2016.
AG for Waterfowl, LLP ("AG") Financing
In March 2012
the Company acquired a secured interest in land owned by AG that is permitted
for wetland restoration. AG subsequently assigned the agreement to EIP
Minnesota, LLC (“EIP”) in September 2012. EIP will restore the wetlands and,
upon completion, wetland credits are to be issued by the proper governmental
authorities.
As part of the initial consideration, AG holds warrants to
purchase 1,249,315 common shares at $1.3007 per share at any time until December
31, 2015, subject to mandatory exercise if the 20-day VWAP of PolyMet shares is
equal to or greater than $3.00 and PolyMet provides notice to AG that it has
received permits necessary to start construction of the NorthMet Project. The
exercise price of the purchase warrants and the number of warrants are subject
to conventional anti-dilution provisions.
In April 2015 the Company entered into a revised agreement with
EIP whereby EIP will seek to sell credits that PolyMet does not need to third
parties and, over time, reimburse PolyMet for its costs. The financial asset has
been designated as available for sale. Upon closing of the transaction, the
Company recognized the receivable at fair value calculated using a 9.25%
discount rate and 12 year term resulting in a receivable of $2.552 million and a
non-cash loss of $1.852 million. The Company accounted for subsequent fair value
changes through other comprehensive income or loss. Under the agreement, PolyMet
retains the right to purchase up to 300 credits until February 28, 2017 with
additional payments due only if PolyMet exercises that right in part or in
full.
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 (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.
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 restricted share units.
The key business objectives that the Company expected to
accomplish with the proceeds of the Rights Offering were: (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.
10
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
As at July 31, 2015, approximate proceeds usage from the Rights
Offering was as follows:
| Purpose |
|
Planned |
|
|
Actual To Date |
|
|
Variance |
|
|
Note |
|
| 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) |
|
| Repay Bridge Loan (principal) |
|
(20,000 |
) |
|
(20,000 |
) |
|
-0- |
|
|
|
|
| Environmental Review & Permitting |
|
(17,000 |
) |
|
(29,488 |
) |
|
(12,488 |
) |
|
(3) |
|
| Maintain Existing Infrastructure |
|
(5,000 |
) |
|
(6,363 |
) |
|
(1,363 |
) |
|
(4) |
|
| Engineering |
|
(10,000 |
) |
|
(3,481 |
) |
|
6,519 |
|
|
(4) |
|
| Procure Long Lead Equipment |
|
(10,000 |
) |
|
-0- |
|
|
10,000 |
|
|
(4) |
|
| General Corporate Purposes |
$ |
(11,850 |
) |
$ |
(12,026 |
) |
$ |
(176 |
) |
|
|
|
|
Remaining Rights Offering Cash |
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
|
|
| Note: |
| (1) |
Land purchase closed before rights offering
rather than after as planned. |
| (2) |
Additional costs to clarify rights offering
eligibility and assist eligible shareholders. |
| (3) |
Additional costs to complete SDEIS, respond to
public comments, and prepare FEIS. |
| (4) |
Spending on engineering and long lead equipment
was deferred where appropriate to focus on |
| |
receipt of permits and to maintain existing
infrastructure. |
Other Financings
During the six months ended July 31, 2015 the Company issued
25,000 shares (prior year period – 75,000) pursuant to the exercise of share
options for proceeds of $0.025 million (prior year period - $0.081 million).
During the six months ended July 31, 2015, the Company issued
87,826 shares (prior year period – 53,419) as partial payment for options to
purchase land.
11
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
Discussion of Results
The financial results for all periods presented below have been
prepared in accordance with IFRS as issued by IASB.
Summary of Quarterly Results
(All figures
in thousands of U.S. dollars, except loss per share)
| Three Months Ended |
Jul 31
2015 |
Apr 30
2015 |
Jan 31
2015 |
Oct 31
2014 |
Jul 31
2014 |
Apr 30
2014 |
Jan 31
2014 |
Oct 31
2013 |
| Revenues |
- |
- |
- |
- |
- |
- |
- |
- |
| General and Administrative |
(1,168) |
(1,343) |
(1,796) |
(1,131) |
(1,171) |
(1,391) |
(2,602) |
(1,373) |
| Other Income (Expenses) |
(530) |
(2,215) |
(467) |
(488) |
(439) |
(393) |
(355) |
(380) |
| Loss for the Period |
(1,698) |
(3,558) |
(2,263) |
(1,619) |
(1,610) |
(1,784) |
(2,957) |
(1,753) |
| Loss per Share (1) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
(0.01) |
| |
|
|
|
|
|
|
|
|
Cash used in operating
activities |
(712) |
(1,512) |
(1,186) |
(861) |
(1,077) |
(1,072) |
(1,493) |
(1,955) |
Cash provided by (used) by
financing activities |
8,025 |
7,954 |
7,896 |
- |
- |
81 |
- |
- |
Cash used in investing
activities |
(8,078) |
(5,806) |
(6,258) |
(6,552) |
(6,227) |
(8,216) |
(6,215) |
(6,315) |
| (1) |
Loss per share amounts may not reconcile due to rounding
differences. |
The loss for the period includes share-based compensation
expense for the three months ended:
| July 31, 2015 - $0.127 million |
July 31, 2014 - $0.216 million |
| April 30, 2015 - $0.126 million |
April 30, 2014 - $0.149 million |
| January 31, 2015 - $0.622 million |
January 31, 2014 - $1.340 million |
| October 31, 2014 - $0.134 million |
October 31, 2012 - $0.084 million
|
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 sections above and below.
Three months ended July 31, 2015 compared to three months
ended July 31, 2014
The Company’s focus during the three months ended
July 31, 2015 was to provide the Lead Agencies with input into the FEIS and
permit work at the NorthMet Project and to obtain additional financing.
a) Loss for the Period:
During the three months ended July 31, 2015, the Company
incurred a loss of $1.698 million ($0.01 loss per share) compared to a loss of
$1.610 million ($0.01 loss per share) during the three months ended July 31,
2014. The increase in the loss for the period was primarily attributable to
financing costs as the Company evaluates financing alternatives.
12
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
b) Cash Flows for the Period:
Cash used in operating activities in the three months ended
July 31, 2015 was $0.712 million compared to cash used in the three months ended
July 31, 2014 of $1.077 million. The variance in cash is primarily due to
changes in non-cash working capital balances.
Cash provided by financing activities for the three months
ended July 31, 2015 was $8.025 million compared to cash provided in the three
months ended July 31, 2014 of $nil. The increase was primarily due to funding
from a non-convertible loan.
Cash used in investing activities for the three months ended
July 31, 2015 was $8.078 million compared to cash used in the three months ended
July 31, 2014 of $6.227 million. The increase was primarily due to efforts in
the current year period surrounding the PFEIS completion.
Including the effect of foreign exchange, total cash for the
three months ended July 31, 2015 decreased by $0.765 million for a balance of
$9.168 million compared to the three months ended July 31, 2014 where cash
decreased $7.304 million to a balance of $16.283 million.
c) Capital Expenditures for the Period:
During the three months ended July 31, 2015 the Company
capitalized $7.680 million of mineral property, plant, and equipment costs
related to the NorthMet Project and other fixed assets as compared to $7.533
million during the three months ended July 31, 2014.
Six months ended July 31, 2015 compared to six months ended
July 31, 2014
The Company’s focus during the six months ended July 31,
2015 was to provide the Lead Agencies with input into the FEIS and permit work
at the NorthMet Project and to obtain additional financing.
a) Loss for the Period:
During the six months ended July 31, 2015, the Company incurred
a loss of $5.256 million ($0.02 loss per share) compared to a loss of $3.394
million ($0.01 loss per share) during the six months ended July 31, 2014. The
increase in the loss for the period was primarily attributable to a non-cash
loss on disposal of Wetland Credit Intangible as the proceeds will be received
over many years.
b) Cash Flows for the Period:
Cash used in operating activities in the six months ended July
31, 2015 was $2.224 million compared to cash used in the six months ended July
31, 2014 of $2.149 million. The variance in cash is primarily due to changes in
non-cash working capital balances.
Cash provided by financing activities for the six months ended
July 31, 2015 was $15.979 million compared to cash provided in the six months
ended July 31, 2014 of $0.081 million. The increase was primarily due to funding
from a non-convertible loan.
Cash used in investing activities for the six months ended July
31, 2015 was $13.884 million compared to cash used in the six months ended July
31, 2014 of $14.443 million. The decrease was primarily due to efforts in the
prior year period surrounding the SDEIS public comment period and review of
comments received.
13
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
Including the effect of foreign exchange, total cash for the
six months ended July 31, 2015 decreased by $0.129 million for a balance of
$9.168 million compared to the six months ended July 31, 2014 where cash
decreased $16.511 million to a balance of $16.283 million.
c) Capital Expenditures for the Period:
During the six months ended July 31, 2015 the Company
capitalized $10.749 million of mineral property, plant, and equipment costs
related to the NorthMet Project and other fixed assets as compared to $16.346
million during the six months ended July 31, 2014. The decrease is primarily due
to the environmental rehabilitation provision, which decreased during the
current year period by $5.542 million compared with an increase during the prior
year period by $1.555 million as a result of changes in the risk-free interest
rate. In addition, the Company capitalized $0.100 million (prior year period
$0.100 million) of wetland credit intangible costs related to wetland credit
options and development agreements.
Liquidity and Capital Resources
As at July 31, 2015, the Company had a working capital
deficiency of $59.093 million compared with a working capital deficiency of
$31.672 million as at January 31, 2015. The large increase is the result of the
non-convertible debt to Glencore being reclassified as a current liability
during the period. Working capital consists primarily of cash of $9.168 million
(January 31, 2015 - $9.301 million), current amounts receivable of $0.370
million (January 31, 2015 - $0.381 million), prepaid expenses of $1.114 million
(January 31, 2015 - $1.108 million), accounts payable and accrued liabilities of
$3.235 million (January 31, 2015 - $2.673 million), convertible debt of $34.240
million (January 31, 2015 - $33.451 million), non-convertible debt of $29.319
million (January 31, 2015 - $4.614 million) and the current portion of
environmental rehabilitation provision of $2.951 million (January 31, 2015 -
$1.724 million).
As at July 31, 2015, the Company has firm commitments related
to the environmental review process, land options, consultants, and rent of
approximately $2.5 million with the majority due over the next year and the
remainder due over three years.
As at July 31, 2015, the Company had non-binding commitments to
maintain its mineral lease rights of $0.180 million with all due in the next
year.
As at July 31, 2015, the Company has obligations to issue 3,640,000 shares under Milestone 4 of the Company’s Bonus Share Plan. Milestone 4 represents commencement of commercial production at NorthMet at a time when the Company has not less than 50% ownership interest. At the Company’s Annual General Meeting of shareholders held on June 17, 2008, the disinterested shareholders approved the bonus shares for Milestone 4. Regulatory approval is required prior to issuance of these shares.
While these condensed interim 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,
there are conditions that cast substantial doubt on that assumption.
As at July 31, 2015, PolyMet had cash of $9.168 million and a working capital deficiency of $59.093 million primarily due to the $34.240 million secured convertible debt and $24.533 million secured non-convertible debt due to Glencore being classified as current liabilities. If Glencore does not exchange the convertible debt for common shares upon maturity, PolyMet will need to renegotiate the agreement or raise sufficient funds to repay this debt along with the non-convertible debt.
14
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
Management believes, based upon the underlying value of the NorthMet Project, the advanced stage of permitting, the ongoing financing arrangements with Glencore and the ongoing discussions with numerous investment banks and investors regarding potential financing, that financing will continue to be available allowing the Company 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 twelve months. While in the past the Company has been successful in renegotiating debt and closing financing agreements, there can be no assurance it will be able to do so again. Factors that could affect the availability of financing include the state of debt and equity markets, investor perceptions and expectations and the 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.
See additional discussion in the “Summary of Recent Events and
Outlook” section above and “Financial Instruments and Risk Management” section
below.
Financial Instruments and Risk Management
The Company's financial instruments are classified as loans and
receivables and other financial liabilities.
The carrying values of each classification of financial
instrument at July 31, 2015 are:
| |
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
Loans and |
|
|
Available |
|
|
financial |
|
|
Total carrying |
|
| |
|
receivables |
|
|
for sale |
|
|
liabilities |
|
|
value |
|
| Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
$ |
9,168 |
|
$ |
- |
|
$ |
- |
|
$ |
9,168 |
|
|
Amounts receivable |
|
78
|
|
|
2,627
|
|
|
- |
|
|
2,705
|
|
| Total financial assets |
$ |
9,246 |
|
$ |
2,627 |
|
$ |
- |
|
$ |
11,873 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts payable and accrued liabilities |
$ |
- |
|
$ |
- |
|
$ |
3,235 |
|
$ |
3,235 |
|
| Convertible debt |
|
- |
|
|
- |
|
|
34,240 |
|
|
34,240 |
|
|
Non-convertible debt |
|
- |
|
|
- |
|
|
29,319 |
|
|
29,319 |
|
| Total financial liabilities |
$ |
- |
|
$ |
- |
|
$ |
66,794 |
|
$ |
66,794 |
|
15
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
The carrying values of each classification of financial
instrument at January 31, 2015 are:
| |
|
|
|
|
Other |
|
|
Total |
|
| |
|
Loans and |
|
|
financial |
|
|
carrying |
|
| |
|
receivables |
|
|
liabilities |
|
|
value |
|
| Financial assets |
|
|
|
|
|
|
|
|
|
| Cash |
$ |
9,301 |
|
$ |
- |
|
$ |
9,301 |
|
|
Amounts receivable |
|
381
|
|
|
- |
|
|
381
|
|
| Total financial assets |
$ |
9,682 |
|
$ |
- |
|
$ |
9,682 |
|
| |
|
|
|
|
|
|
|
|
|
| Financial liabilities |
|
|
|
|
|
|
|
|
|
| Accounts payable and accrued liabilities |
$ |
- |
|
$ |
2,673 |
|
$ |
2,673 |
|
| Convertible debt |
|
- |
|
|
33,451 |
|
|
33,451 |
|
|
Non-convertible debt |
|
- |
|
|
12,469 |
|
|
12,469 |
|
| Total financial liabilities |
$ |
- |
|
$ |
48,593 |
|
$ |
48,593 |
|
Fair Value Measurements
The fair value hierarchy prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy are
described below:
Level 1 – Quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2 – Inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or indirectly.
Level 3 – Inputs for the asset or liability that are not based
on observable market data.
The fair values of cash, current amounts receivable, and
accounts payable and accrued liabilities approximate their carrying amounts due
to their short-term nature. The fair value of available for sale amounts
receivable are based on cash flows discounted using a rate based on the market
interest rate and the risk premium specific to the asset. The fair value of
convertible debt and non-convertible debt approximates the carrying amount at
amortized cost using the effective interest method.
Liquidity Risk
Liquidity risk is the risk the Company will not be able to meet
its financial obligations as they become due and 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 and is achieved by maintaining sufficient cash. See additional
discussion in the “Liquidity and Capital Resources” section above.
16
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
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:
| |
|
Six months ended July 31,
|
|
| |
|
2015 (1) |
|
|
2014 (2) |
|
| Salaries and other short-term benefits |
$ |
545 |
|
$ |
766 |
|
| Other long-term benefits |
|
20 |
|
|
31 |
|
| Share-based payment (3)
|
|
- |
|
|
84 |
|
|
Total |
$ |
565 |
|
$ |
881 |
|
| (1) |
Six months ended July 31, 2015 includes Directors
(Jonathan Cherry, Matthew Daley, David Dreisinger, W. Ian L. Forrest, Alan
Hodnik, William Murray, Stephen Rowland, and Michael Sill) and senior
management (Jonathan Cherry, Douglas Newby, and Bradley Moore). |
| (2) |
Six months ended July 31, 2014 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, and Bradley
Moore). |
| (3) |
Share-based payment represents the fair value determined
at grant date to be expensed over the vesting
period. |
There are agreements with key employees (Jonathan Cherry,
Douglas J. Newby and Bradley Moore) that contain severance provisions for
termination without cause or in the event of a take-over bid. Other than the
President and Chief Executive officer, none of PolyMet’s other directors has a
service contract with the Company providing for benefits upon termination of
their employment.
As a result of Glencore’s ownership of 28.5% of the Company it
is also a related party. PolyMet has entered into a Technical Services Agreement
with Glencore whereby PolyMet reimburses Glencore for costs associated with
providing technical support to PolyMet, primarily in detailed project design and
mineral processing where PolyMet requests assistance under an agreed scope of
work. During the six months ended July 31, 2015, the Company paid $0.950 million
(July 31, 2014 - $nil) for services under this agreement. See discussion of
additional transactions in the “Financing Activities” section above.
Shareholder Rights Plan
The Shareholder Rights Plan is designed to ensure that all
shareholders receive equal treatment and to maximize shareholder values in the
event of a take-over bid or other acquisition that could lead to a change in
control of the Company. It is not intended to deter take-over bids. The
Shareholder Rights Plan is intended to provide time for shareholders to properly
assess any take-over bid and to provide non-abstaining members of the Board of
Directors with sufficient time to explore and develop alternatives for
maximizing shareholder value, including, if considered appropriate, identifying
and locating other potential bidders.
Effective December 4, 2003, the Company adopted the Shareholder
Rights Plan (“Rights Plan”), which was approved by the Company’s shareholders on
May 28, 2004, modified and further ratified and reconfirmed by the Company’s
shareholders most recently on July 9, 2013. Under the Rights Plan, the Company
has issued one right for no consideration in respect of each outstanding common
share held by the shareholder of the Company 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 if
not reapproved at every third annual shareholder meeting.
17
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
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 non-abstaining Board of
Directors. Each Right entitles the registered holder to purchase one common
share of the Company at the price of CDN$43.06 per share, subject to adjustment
which was triggered upon close of the Rights Offering (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 purchase that number of common
shares having a market value at the date of the Flip-in Event equal to twice the
Exercise Price upon payment of the Exercise Price.
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.
Critical Accounting Estimates and Judgments
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 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.
18
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
(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 or when events or changes in circumstances
occur that indicate the asset may not be recoverable 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 of disposal. 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 resulting in an increase in the estimated
service potential of an asset.
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 mineral property interests. Internal sources of information the
Company considers include indications of economic performance of the asset. No
impairment loss on the mineral property interests was recorded for the six
months ended July 31, 2015 or the year ended January 31, 2015.
(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.
It is possible that the Company’s estimates of its ultimate
environmental rehabilitation liabilities could be affected by 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.
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:
19
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
IFRS 15 – Revenue from Contracts with
Customers
IFRS 15 establishes principles for reporting the
nature, amount, timing, and uncertainty of revenue and cash flows arising from
an entity’s contract with customers and is effective for annual periods
beginning on or after January 1, 2018 with early adoption permitted. The Company
is currently assessing the impact of adopting IFRS 15 on its consolidated
financial statements.
IFRS 9 – Financial instruments - classification and
measurement
IFRS 9 provides a revised model for recognition,
measurement and impairment of financial instruments and is effective for annual
periods beginning on or after January 1, 2018 with early adoption permitted. The
Company is currently assessing the impact of adopting IFRS 9 on its consolidated
financial statements.
Other MD&A Requirements
Outstanding Share Data
Authorized Capital: Unlimited common shares without par value.
The following table summarizes the outstanding share
information as at August 28, 2015:
| |
|
Number |
|
|
Weighted Average |
|
|
Type of Security |
|
Outstanding |
|
|
Exercise Price |
|
| Issued and outstanding common shares |
|
276,576,088 |
|
$ |
- |
|
| Restricted share units |
|
1,656,336 |
|
$ |
- |
|
| Share options |
|
20,548,002 |
|
$ |
1.29 * |
|
| Share purchase warrants |
|
8,168,602 |
|
$ |
1.09 |
|
| Convertible debt including capitalized and |
|
|
|
|
|
|
| accrued interest |
|
26,606,934 |
|
$ |
1.29 |
|
| * |
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 August
28, 2015 of US$1.00 = CDN$1.3249. |
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, 2015
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, 2015 occur, the
Company’s business, operating results and financial condition could be seriously
harmed and investors could lose all of their investment.
20
| PolyMet Mining Corp. |
| Management Discussion and Analysis |
| As at July 31, 2015 and for the three and six months ended
July 31, 2015 |
| Tabular amounts in thousands of U.S. Dollars, except for
price per share and number of shares |
| |
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, have
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e)
of the US Exchange Act and the rules of Canadian Securities Administration, as
at January 31, 2015. Based on this evaluation, the CEO and CFO have concluded
that the Company’s disclosure controls and procedures were effective at January
31, 2015.
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
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
and 15d-15(f) of the U.S. Exchange Act and National Instrument 52-109
Certification of Disclosure in Issuer’s Annual and Interim filings. 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. Management has used the criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of the Company’s internal control over financial reporting. Based
on this assessment, management has concluded that as at January 31, 2015, the
Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over
financial reporting has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, which has expressed its opinion
in its report included with the Company’s annual consolidated financial
statements.
There have been no changes in the Company’s internal control
over financial reporting during the six month period ended July 31, 2015 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.
21
