Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
General
We were
incorporated under the laws of British Columbia, Canada in 1984. In 2004, we changed our corporate jurisdiction from a
British Columbia company to a Canadian corporation. In December 2011, we amended our articles to change our name
from “i-minerals inc.” to “I-Minerals Inc.”
The
Company is engaged in the exploration, evaluation and development of our Helmer-Bovill industrial minerals property (the
“Helmer-Bovill Property”). The Helmer-Bovill Property, in which we hold a 100% interest, is comprised of 11
mineral leases totaling 5,140.64 acres located approximately 6 miles northwest of Bovill, Latah County, Idaho.
Since inception, the Company has been in the exploration stage but moved into the development stage in fiscal
2018. In fiscal 2019, the Company reverted back to the evaluation stage.
Our
principal executive office is located at Suite 880, 580 Hornby Street, Vancouver, British Columbia, Canada and our
telephone number is (877) 303-6573. Our operations office is located at 13403 N. Government Way, #102, Hayden,
Idaho.
To date,
we have not earned significant revenues from the operation of our Helmer-Bovill Property. Accordingly, we are
dependent on debt and equity financing as our primary source of operating working capital. Our capital resources
are largely determined by the strength of the junior resource markets and by the status of our projects in relation to
these markets, and its ability to compete for investor support of its projects.
Our
Principal Projects
Our
activities at the Helmer-Bovill Property are focused on developing the Bovill Project.
The
Bovill Project
Our lead project, the Bovill Project, is a strategically
located long term resource of quartz, potassium feldspar (“K-spar”), halloysite and kaolinite formed through weathering
of a border phase of the Idaho Batholith causing all minerals to be contained within a fine white clay-sand mixture
referred to as “primary clay.” The Bovill Project is located within 3 miles of state
highways with electricity and natural gas already at the property boundary.
Since 2010, our exploration work has focused diamond
drilling on the Bovill Project. To date, a total of 322 diamond drill holes have been drilled totaling 35,909
feet. As a result of these drill campaigns, four deposits have been identified: Kelly’s Hump, Kelly’s Hump South,
Middle Ridge and WBL.
In June 2014, we completed an updated pre-feasibility
study on the Bovill Kaolin Project (the “2014 PFS”) and on March 8, 2016, we announced the economic results of our
initial feasibility study (the “2016 FS”). However, based on the results of an updated independent market study it
is apparent that fundamental changes in the businesses that consume our minerals has taken place over the past several
years. These changes include offshoring and reformulation wherein industries that had previously used K-spar for
example have reformulated their production batches using alternate minerals. Markets do exist for all of the
minerals contained within the Bovill Kaolin Project but not in the volumes contemplated in the 2016 FS.
Accordingly, the 2016 FS is considered not to be current and should not be relied upon.
The mineral resources stated in the 2016 FS remain current
and have recently been re-stated in a standalone technical report prepared by SRK Consulting (U.S.) recently completed
an updated resource estimate. The updated mineral resource statement from this report, summarized below, contains
the same tonnages and grades as were disclosed in the 2016 FS and is the basis of the reserves defined in the 2020
Pre-Feasibility Report.
16
2020 Pre-Feasibility
Study
The Company engaged MillCreek Engineering of Salt Lake
City, Utah to estimate the capital and operating costs for a smaller plant capable of producing up to 20,000 tons of
metakaolin and 10,000 tons of halloysite per year. The estimated Operating Costs and Capital Cost fell in line
with expectations and the Company retained MillCreek to complete a Pre-Feasibility Study of a metakaolin and halloysite
operation. It is envisioned that the sand fraction (K-spar and quartz) will be screened and sold into lower value
industrial applications.
On March 3, 2020, we announced a
pre-feasibility study of our metakaolin and halloysite operation (the “2020 PFS”). The 2020 PFS was led by
Millcreek Engineering, who were responsible for overall project management and the process plant and infrastructure
design (including OPEX and CAPEX) and economic analyses. Other engineering and geological services were provided
by Mine Development Associates (mine modelling; ore scheduling; mineral reserve estimation); SRK Consulting (U.S.) Inc.
(mineral resource estimation); and, HDR Engineering Inc. (environmental review).
Highlights of the PFS include:
-
20% Pre-Tax IRR; 18% After Tax IRR
-
US$48.3 million Pre-Tax NPV; US$33.7 million After Tax NPV
-
Initial Capital Cost of US$48.3 million
-
Total Life of Operation Capital Costs of US$54.2 million
-
25 year mine life with 1.04:1 strip ratio
The 2020 PFS is based on the production of two minerals, halloysite and kaolinite. The halloysite is
beneficiated into two mineral products; HalloPure which is about 70% halloysite and 30% kaolinite and premium quality
Ultra-Hallopure which is greater than 90% halloysite with the balance kaolinite. The quality of Bovill Halloysite is
regarded as being exceptional and the research on halloysite applications has dramatically increased over the past 5
years involving polymers, filtration, extruded polystyrene insulation, green technology and life sciences. The kaolinite
is flash calcined to produce metakaolin, a Supplementary Cementitious Material (“SCM”) and highly reactive pozzolan that
when added to concrete increases strength and durability, reduces permeability, reduces the effect of alkali-silica
reactivity and increases resistance to chloride ingress and sulfate attack. By using metakaolin the sustainability of
the concrete is increased through longer service life and the carbon footprint is reduced by lowering the quantity of
Portland cement. Sand is produced during the production process which meets the specifications of a number of
applications including arena sand, USGA bunker and top-dressing sand. There is a potential upside from sale of sand
which is not included in the project economics and accordingly the sand is not included in the
reserves.
A conservative approach to the build-up of sales has been
assumed with full production being achieved in the first quarter of the 5th year of operation as some product
applications will require development. There is potential for full production to be achieved earlier which would have a
corresponding positive effect on the NPV and IRR.
Updated Measured and Indicated Resource
Estimate
-
Measured Resources of 5.7 million tons containing 76.5% quartz/K-spar sand, 12.3% Kaolinite and 4.0%
Halloysite.
-
Indicated Resources of 15.5 million tons containing 57.0% quartz/K-spar sand, 15.5% Kaolinite and 2.8%
Halloysite.
-
667,000 tons of contained halloysite, 3,119,000 tons of contained kaolinite and
13,235,000 tons of contained quartz/K-spar.
17
Updated Mineral
Reserves
|
Proven
|
Probable
|
Total P&P
|
K Tons
|
1,310
|
1,868
|
3,178
|
Halloysite %
|
8.8
|
8.0
|
8.3
|
Halloysite K
Tons
|
115
|
149
|
264
|
Kaolinite %
|
11.1
|
22.4
|
17.7
|
Kaolinite K Tons
|
145
|
418
|
563
|
NSR
|
$ 109
|
$ 123
|
$
117
|
*
Notes on Mineral Reserves:
-
Reserves are based on a $40.00 NSR cutoff grade and pit designs.
-
Rounding of numbers in mineral reserves listed above may cause apparent inconsistencies.
-
The reference point for Mineral Reserves is at the plant stockpile
The full 2020 PFS was filed
on www.sedar.com on April 16, 2020 and is available on the Company’s website.
Plan of Operation and
Outlook
The company is taking a sequential approach to the
development of the Bovill Project. The first phase is the amendment of our Operations and Reclamation Plan (“ORP”)
with the Idaho Department of Lands (the “IDL”). With the changes to the business plan, now focusing on the
production of halloysite and metakaolin, the mine plan was developed based on areas with increased concentrations of
halloysite and kaolin. This resulted in a reconfiguration of the open pits where these minerals are proposed to be
mined. As a result of the reconfiguration of the open pits, the areas of disturbance and road design to service
the mining operations has changed, triggering the need to amend the previously approved ORP. In general, the
disturbed area is smaller than the disturbed area in the prior ORP. The amended ORP
was submitted to the IDL on August 28, 2020.
Concurrent with the updating
of the ORP, the development of a market for sand is ongoing. Target markets include bunker sand and top dressing
for golf courses, equestrian sand and other applications. Market development for the halloysite is ongoing with
global interest in our products continuing to develop with strong interest being shown by several South Korean
companies. Treated halloysite is also being tested in air filtration activities as an environmentally friendly
alternative to activated charcoal.
Upon approval of the ORP, we
intend to initiate a Feasibility Study (“FS”) and Front End Engineering Design Study (“FEED Study”). Based upon
the feedback from the various consultants working on the ORP, we expect to commence the FS and FEED Study early in the
fourth calendar quarter of 2020.
Results of Operation
Three months ended July 31, 2020
We recorded a net loss of $1,184,135 ($0.01
per share) for the three months ended July 31, 2020 as compared to a net loss of $1,231,824 ($0.01 per share) for the
three months ended July 31, 2019. The decrease in
the net loss recorded for the three months ended July 31, 2020 as compared to the net
loss for the three months ended July 31, 2019 is the net result of changes to a
number of expenses. Of note are the following items:
-
Management and consulting fees of $50,159 (2019 - $56,944) are comprised of fees to
manage our Company and stock-based compensation. The stock-based compensation recognized in the current period was
$nil (2019 - $858). Approximately 75% of the fees to manage our Company are charged to management and consulting
fees and the other 25% is charged to mineral property expenditures.
-
Mineral property expenditures of $138,490 (2019 - $279,238) are costs incurred on our
Helmer-Bovill Property. The expenditures in the current period are pre-development costs that have been expensed
during the period. The main components of costs during the current period included engineering and consulting
($34,043) and metallurgy ($46,168). During the current period, the Company continued to optimize the metallurgical
processes and detailed engineering. Effective January 31, 2019, the Company returned to the evaluation stage for
accounting purposes and therefore stopped capitalizing development costs.
18
-
General and miscellaneous expenses of $37,912 (2019 - $63,883) are comprised of office
and telephone expenses, payroll taxes, medical benefits, insurance premiums, travel expenses, promotional expenses,
shareholder communication fees, transfer agent fees and filing fees. The decrease during the current period was
due primarily to a reduction in shareholder communications fees and travel expenses.
-
Professional fees of $70,382 (2019 - $62,368) include legal fees, audit fees and
financial consulting fees.
-
Accretion expense of $nil (2019 - $25,538) was the amortization of the fair value of
bonus shares and bonus warrants issued to the Lender of the promissory notes. The amounts were fully amortized in
fiscal 2020.
-
Interest expense of $890,109 (2019 - $737,510) is from promissory notes that bear
interest at the rates of 12%-14% per year. Interest increased as additional funds were advanced.
-
We recorded a loss on change in fair value of derivative liabilities of in fiscal 2019
of $4,314. The change in fair value of derivative liabilities was based on the change in remaining term of
derivative instruments and our stock price. The derivatives included stock options granted to non-employees.
The derivative liabilities did not represent cash liabilities. On May 1, 2020, we adopted ASU 2018-07 which
eliminated the derivative liabilities against opening deficit.
Liquidity and Capital Resources
Our aggregate operating, investing and financing
activities during the three months ended July 31, 2020 resulted in a net cash outflow
of $128,831 (2019 – outflow of $166,693). As at July 31, 2020, we had a working
capital deficiency of $30,135,897.
During the three months ended July 31, 2020, $248,831 was used in operations (2019 - $404,082). During the three months ended July 31, 2020, we spent $nil on investing activities (2019 - $7,611) and we received
$120,000 from financing activities (2019 - $245,000).
We have been financed by advances pursuant to
promissory notes advanced by BV Lending LLC, an entity controlled by Allen L. Ball, a member of our Board of Directors
and our largest shareholder (the “Lender”). During the three months ended July 31, 2020, the Company was receiving
advances pursuant to the Sixth Promissory Notes. As at July 31, 2020, the balance of the promissory notes was
$29,384,334. On July 8, 2020, the Lender agreed to provide an additional $1,200,000 of advances. On July 20,
2020, we received $120,000 of advances.
As at April 30, 2020, the Third Promissory Notes,
the Fifth Promissory Notes and the Sixth Promissory Notes had a maturity date of the earlier of (i) June 30, 2020 and
(ii) 60 days after a pre-feasibility study has been filed on SEDAR. On June 4, 2020, the promissory notes maturity date
was extended from June 30, 2020 to December 15, 2020 for no consideration. All other terms remained the same.
We have
not as yet put into commercial production any mineral properties and as such have no operating revenues.
Accordingly, we are dependent on debt and equity financing as its primary source of operating working capital. Our
capital resources are largely determined by the strength of the junior resource markets and by the status of our
projects in relation to these markets, and our ability to compete for investor support of our projects.
We remain
dependent on additional financing to fund development requirements on the Helmer-Bovill property and for general
corporate costs. With respect to funds required for capital cost items, State-sponsored debt financing instruments
may be available on attractive terms, and we intend to pursue such financial instruments to cover portions of the
capital costs associated with placing the Bovill Project deposits into production.
We do not
have the ability to internally generate sufficient cash flows to support our operations for the next twelve
months. We have been receiving funds from a company controlled by a director of the Company through promissory
notes. We have no formal plan in place to address this going concern issue but consider that we will be able to
obtain additional funds by equity financing and/or debt financing; however, there is no assurance of additional funding
being available.
During
2020, there was an outbreak of COVID-19 that has impacted the economic environment and the capital markets. As the
Company is at the stage of exploration and evaluation and is looking to fund mine development leading to production, the
impacts of COVID-19 are not determinable at this date. COVID-19 however, could have a material impact on the
Company's financial position, results of operation and cash flows. The Company's liquidity and its ability to continue
as a going concern may also be impacted.
19
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to shareholders.
Critical Accounting
Policies
Measurement
Uncertainty
The preparation of these consolidated financial statements
in conformity with US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. We regularly evaluate estimates and
assumptions related to the useful life and recoverability of long lived assets, stock-based compensation, valuation of
convertible debentures and derivative liabilities, and deferred income tax asset valuation allowances. We base our
estimates and assumptions on current facts, historical experience and various other factors that it believes to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by us may differ materially and adversely from our estimates. To the extent there
are material differences between the estimates and the actual results, future results of operations will be
affected. The most significant estimates with regard to our condensed consolidated financial statements relate to
the determination of fair values of derivative liabilities and stock-based transactions.
Mineral Property
Acquisition and Exploration Costs
Mineral property acquisition costs are capitalized when
incurred. Acquisition costs include cash consideration and the fair market value of shares issued on the
acquisition of mineral property claims.
Costs related to the
development of our mineral reserves are capitalized when it has been determined an ore body can be economically
developed. The development stage begins when an ore body is determined to be economically recoverable based on
proven and probable reserves and appropriate permits are in place, and ends when the production stage or exploitation of
reserves begins. Major mine development expenditures are capitalized, including primary development costs such as
costs of building access ways, tailings impoundment, development of water supply and infrastructure
developments.
Exploration costs include
those relating to activities carried out (a) in search of previously unidentified mineral deposits, or (b) at
undeveloped concessions. Pre-development activities involve costs incurred in the exploration stage that may
ultimately benefit production that are expensed due to the lack of evidence of economic development, which is necessary
to demonstrate future recoverability of these expenses. Secondary development costs are incurred for preparation
of an ore body for production in a specific ore block or work area, providing a relatively short-lived benefit only to
the mine area they relate to, and not to the ore body as a whole.
Once production has commenced,
capitalized costs will be depleted using the units-of-production method over the estimated life of the proven and
probable reserves. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged
to the Consolidated Statements of Loss in that period.
We assess the carrying cost of
our mineral properties for impairment whenever information or circumstances indicate the potential for impairment.
Such evaluations compare estimated future net cash flows with our carrying costs and future obligations on an
undiscounted basis. If it is determined that the future undiscounted cash flows are less than the carrying value
of the property, a write down to the estimated fair value is charged to the Consolidated Statements of Loss for the
period. Where estimates of future net cash flows are not available and where other conditions suggest impairment,
management assesses if the carrying value can be recovered.
For significant exploration and development projects,
interest is capitalized as part of the historical cost of developing and constructing assets in accordance with ASC
835-20. Interest is capitalized until the asset is ready for service. Capitalized interest is determined by multiplying
the Company’s weighted-average borrowing cost on general debt by the average amount of qualifying costs incurred. Once
an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is
expensed through depletion or impairment.
20