CONSOLIDATED FINANCIAL STATEMENTS
As at June 30, 2016 and 2015
In Canadian dollars
KPMG LLP
600 de Maisonneuve Blvd. West
Suite 1500, Tour KPMG
Montréal (Québec) H3A 0A3
Canada
Telephone
Fax
Internet
(514) 840-2100
(514) 840-2187
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Highland Copper Company Inc.
We have audited the accompanying consolidated financial statements of Highland Copper
Company Inc., which comprise the consolidated statements of financial position as at June 30, 2016
and June 30, 2015, the consolidated statements of comprehensive (loss) income, changes in
shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of
significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control relevant
to the entity’s preparation and fair presentation of the consolidated financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
the
estimates made by management, as well as evaluating
consolidated financial statements.
the overall presentation of
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
("KPMG International"), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
2 Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Highland Copper Company Inc. as at June 30, 2016 and June 30,
2015, and its consolidated financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Emphasis of Matter
Without modifying our opinion, we draw attention to Note 2 in the consolidated financial statements
which indicates that Highland Copper Company Inc. is still in the exploration stage and, as such, no
revenue has yet been generated from its operating activities. Accordingly, Highland Copper
Company Inc. depends on its ability to raise financing in order to discharge its commitments and
liabilities in the normal course of business. These conditions, along with other matters as set forth in
Note 2, indicate the existence of a material uncertainty that may cast significant doubt about Highland
Copper Company Inc.’s ability to continue as a going concern.
October 25, 2016
Montréal, Canada
*CPA auditor, CA, public accountancy permit No. A119245
3 Highland Copper Company Inc.
Consolidated Statements of Financial Position
(audited, in Canadian dollars)
ASSETS
Current
Cash
Sales taxes receivable
Prepaid expenses and other
Non-current
Capital assets (Note 4)
Exploration and evaluation assets (Note 5)
TOTAL ASSETS
LIABILITIES
Current
Accounts payable and accrued liabilities
Due to a related party (Note 14)
Current portion of balance of purchase price payable (Note 8)
Deposit on sale of royalty (Note 6)
Non-current
Balance of purchase price payable (Note 8)
Environmental liability (Note 9)
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Share capital (Note 10)
Contributed surplus
Deficit
Cumulative translation adjustment
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
June 30,
June 30,
2016
$
201,998
-
6,233
208,231
114,990
53,827,188
54,150,409
3,019,495
25,543
1,445,087
-
4,490,125
1,289,355
306,606
6,086,086
2015
$
1,042,341
54,496
52,441
1,149,278
233,615
61,568,034
62,950,927
3,146,097
8,022
-
10,000,000
13,154,119
2,207,430
281,749
15,643,298
51,754,469
6,253,329
48,115,461
6,173,571
(17,809,014)
(13,592,922)
7,865,539
48,064,323
54,150,409
6,611,519
47,307,629
62,950,927
Going Concern (Note 2); Commitments and Contingencies (Note 5); Event after the Reporting Date (Note 21).
The accompanying notes form an integral part of these consolidated financial statements.
On behalf of the Board,
/s/ David Fennell
David Fennell, Director
/s/ Jo Mark Zurel
Jo Mark Zurel, Director
4 Highland Copper Company Inc.
Consolidated Statements of Comprehensive (Loss) Income
(audited, in Canadian dollars)
Expenses and other items
Management and administration (Note 13)
Pre-exploration
Write-down of exploration and evaluation assets (Note 5)
Accretion on environmental liability (Note 9)
Finance income
Gain on foreign exchange
Net loss for the year
Other comprehensive income
Item that will not be subsequently reclassified to income
Year ended June 30,
2015
2016
$
$
1,486,118
3,087,579
79,783
2,655,495
15,637
(3,930)
(17,011)
81,765
-
17,403
(10,358)
(33,595)
(4,216,092)
(3,142,794)
Foreign currency translation adjustment
1,254,020
6,363,495
Total comprehensive (loss) income for the year
(2,962,072)
3,220,701
Basic and diluted loss per common share (Note 12)
(0.03)
(0.03)
Weighted average number of common shares - basic and diluted
147,428,215
106,419,831
The accompanying notes form an integral part of these consolidated financial statements.
5 Highland Copper Company Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(audited, in Canadian dollars)
Number of issued
and outstanding
common shares
Share
capital
$
Contributed
surplus
$
Deficit
$
Cumulative
translation
adjustment
$
Total
shareholders'
equity
$
Balance at June 30, 2015
129,542,192
48,115,461
6,173,571
(13,592,922)
6,611,519
47,307,629
Shares issued pursuant to a private placement (Note 10)
Share issue expenses (Note 10)
Share-based compensation
Net loss for the year
Other comprehensive income
Foreign currency translation adjustment
Balance at June 30, 2016
24,426,434
-
-
24,426,434
-
3,663,965
(24,957)
-
3,639,008
-
-
-
79,758
79,758
-
-
-
-
-
(4,216,092)
-
-
-
-
-
-
153,968,626
-
51,754,469
-
6,253,329
-
(17,809,014)
1,254,020
7,865,539
3,663,965
(24,957)
79,758
3,718,766
(4,216,092)
1,254,020
48,064,323
Balance at June 30, 2014
96,966,745
41,394,661
4,221,734
(10,450,128)
248,024
35,414,291
Shares issued pursuant to a mineral lease agreement (Note 10)
Shares issued pursuant to a private placement (Note 10)
Share issue expenses (Note 10)
Share-based compensation
Net loss for the year
Other comprehensive income
Foreign currency translation adjustment
Balance at June 30, 2015
2,164,701
30,410,746
-
-
32,575,447
-
485,840
6,458,496
(223,536)
-
6,720,800
-
-
129,542,192
-
48,115,461
-
1,144,191
-
807,646
1,951,837
-
-
6,173,571
-
-
-
-
-
(3,142,794)
-
-
-
-
-
-
(13,592,922)
6,363,495
6,611,519
485,840
7,602,687
(223,536)
807,646
8,672,637
(3,142,794)
6,363,495
47,307,629
The accompanying notes form an integral part of these consolidated financial statements.
6 Highland Copper Company Inc.
Consolidated Statements of Cash Flows
(audited, in Canadian dollars)
Operating activities
Net loss for the year
Adjustments
Share-based compensation
Depreciation and amortization
Write-down of exploration and evaluation assets
Unrealized gain on foreign exchange
Accretion on environmental liability
Finance income accrued
Finance income received
Changes in working capital items
Sales taxes receivable
Prepaid expenses and other
Accounts payable and accrued liabilities
Due to a related party
Investing activities
Acquisition of capital assets
Disposal of capital assets
Additions to exploration and evaluation assets
Financing activities
Issue of shares
Share issue expenses
Deposit on sale of royalty
Reimbursement of promissory note
Effect of exchange rate changes on cash held in foreign currency
Net change in cash
Cash, beginning of the year
Cash, end of the year
Supplemental cash flow information (Note 19)
The accompanying notes form an integral part of these consolidated financial statements.
Year ended June 30,
2016
$
2015
$
(4,216,092)
(3,142,794)
48,206
40,202
2,655,495
(17,011)
15,637
(3,930)
4,551
54,496
46,208
181,627
17,521
667,777
24,237
-
(33,595)
17,403
(10,358)
11,151
104,937
7,215
(426,925)
8,022
(1,173,090)
(2,772,930)
(34,947)
83,577
(3,392,160)
(3,343,530)
3,663,965
(24,957)
-
-
(68,072)
27,837
(8,418,953)
(8,459,188)
7,602,687
(223,536)
10,000,000
(8,141,000)
3,639,008
9,238,151
37,269
(206,402)
(840,343)
1,042,341
201,998
(2,200,369)
3,242,710
1,042,341
7 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
1. GENERAL INFORMATION
Highland Copper Company Inc. is a Canadian-based company. Highland and its subsidiaries (together “Highland” or
the “Company”) are primarily engaged in the acquisition, exploration and development of mineral properties in
Michigan, USA.
The Company has assembled a number of advanced-stage copper projects located in Michigan’s Upper Peninsula
region, including Copperwood, a feasibility stage project (the “Copperwood Project”), White Pine (subject to final
closing pursuant to the May 2014 agreement with Copper Range Company (“CRC”), a wholly-owned subsidiary of
First Quantum Minerals Ltd.) (the “White Pine Project”), and Keweenaw which hosts the 543S deposit, the G-2
project and other target areas (subject to the exercise of an option to acquire a 65% interest in the project from BRP
LLC) (the “Keweenaw Project”).
To date, the Company has not earned significant revenues and is considered to be in the exploration and
development stage. The address of the Company’s registered office is 1055 West Georgia Street, Suite 1500,
Vancouver, British Columbia, Canada, V6E 4N7. All financial results in these consolidated financial statements are
expressed in Canadian dollars unless otherwise indicated. Highland’s common shares are listed on the TSX
Venture Exchange (the “TSXV”) under the symbol HI. The Board of Directors approved these consolidated financial
statements on October 25, 2016.
8 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
2. GOING CONCERN
These consolidated financial statements have been prepared on the basis of a going concern, which assumes that
the Company will continue its operations in the foreseeable future and will be able to realize its assets and
discharge its liabilities and commitments in the normal course of operations.
The Company is subject to a number of risks and uncertainties associated with its future exploration and
development activities, including raising additional funds, completing the acquisition of the White Pine Project,
acquiring a 65% interest in the Keweenaw Project and retaining its rights under the White Pine lease agreement.
As is common with many exploration and development companies, the Company has relied on equity financing to
fund its operations, including its investments in exploration and evaluation assets. The Company has incurred a net
loss of $4,216,092 during the year ended June 30, 2016 ($3,142,794 in 2015) and has a deficit of $17,809,014 at
June 30, 2016 (a deficit of $13,592,922 at June 30, 2015). The Company has a working capital deficiency of
$4,281,894 at June 30, 2016.
The Company requires additional funds to settle its working capital deficiency, to complete the acquisition of the
White Pine Project, to pursue exploration and development work on its mineral projects, and to provide for
management and administration expenses for at least the next 12 months. Although such funding requirements may
be met in the future in a number of ways, including the issuance of securities, debt financing, joint venture or other
arrangements, there is no assurance that the Company will be successful in raising such funds. Should the
Company not be successful in raising additional funds, it may be required to further delay, reduce the scope of, or
eliminate its current or future exploration and development activities, and / or sell some of its assets, any of which
could have a negative impact on the business, financial condition and results of operation of the Company.
The conditions and uncertainties described above indicate the existence of a material uncertainty that may cast
significant doubt about the Company’s ability to continue as a going concern. If the going concern assumption was
not appropriate for these consolidated financial statements, adjustments which could be material would be
necessary to the carrying value of assets and liabilities, in particular an impairment of exploration and evaluation
assets, as well as adjustments to reported expenses.
9 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES
a)
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”). The significant accounting policies that have been applied in the preparation of the consolidated
financial statements are summarized below.
b)
Basis of measurement
These consolidated financial statements have been prepared on a historical cost basis.
c)
Basis of consolidation
These consolidated financial statements include the accounts of Highland and its subsidiaries. All intercompany
transactions, balances, income and expenses are eliminated upon consolidation. The Company wholly owns Upper
Peninsula Holding Company Inc. (“UPHC”) (the Company’s US-based holding company, incorporated in February
2014 in the state of Delaware, USA), which in turn wholly owns: Keweenaw Copper Co. (“Keweenaw”), incorporated
in July 2011 in the state of Michigan, USA; White Pine LLC (“WP LLC”), formed in February 2014 in the state of
Delaware, USA; and Orvana Resources US Corp. (“Orvana US”), acquired in June 2014 and incorporated in the
state of Michigan, USA. Highland and its subsidiaries have an annual reporting date of June 30.
d)
Foreign currency translation
These consolidated financial statements are presented in Canadian dollars. The functional currency of Highland is
the Canadian dollar and the functional currency of the Company’s US-based subsidiaries is the US dollar. The
functional currencies of Highland and its subsidiaries have remained unchanged during the reporting years.
Monetary assets and liabilities denominated in a foreign currency other than the functional currency of each entity
are translated at the exchange rate in effect at the reporting date, whereas non-monetary assets and liabilities
denominated in a foreign currency are translated at the exchange rate in effect at the transaction date. Revenues
and expenses denominated in a foreign currency are translated at the exchange rate in effect at the transaction
date. Gains and losses on exchange arising from the translation of foreign operations are recorded in profit or loss
under gain or loss on foreign exchange.
On consolidation, assets and liabilities of the Company’s US-based subsidiaries are translated into Canadian dollars
at the closing rate in effect at the reporting date and components of equity are translated using the historical rate.
Income and expenses are translated into Canadian dollars at the average rate over the reporting year. Exchange
differences are presented as other comprehensive income and recognised in the currency translation adjustment
reserve in equity.
10 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
e)
Financial assets and liabilities
Financial assets
Financial assets held by the Company consist of cash which includes deposits held with banks. This financial asset
is classified as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Such assets are initially recognized at fair value
plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are
measured at amortized cost using the effective interest method, less any impairment losses. Financial assets are
derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial
asset and all substantial risks and rewards are transferred. Income relating to financial assets that are recognized in
profit or loss are presented as finance income.
All financial assets are assessed for indicators of impairment at the end of each reporting year. Financial assets are
impaired when there is objective evidence that, as a result of one or more events that occurred after the initial
recognition of the financial assets, the estimated future cash flows of the investments have been negatively
impacted. The carrying amount of financial assets is reduced by any impairment loss. If, in a subsequent year, the
amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the
impairment was recognized, the reversal of the previously recognized impairment loss is reversed through profit or
loss.
Financial liabilities
The Company’s financial liabilities which consist of accounts payable and accrued liabilities, due to a related party,
royalty-based obligation (deposit on sale of royalty) and balance of purchase price payable are initially recognized at
fair value plus any directly attributable transaction costs. Contractual contingent payments arising from exploration
and evaluation assets purchase agreements, for which the realization of the event that triggers the additional
payment is within the control of the Company, are recorded as financial liabilities when the event occurs.
Subsequent to initial recognition, the financial liabilities are accounted for at amortized cost, using the effective
interest rate method. Financial liabilities are derecognized when the obligations are extinguished, discharged,
cancelled or expired.
11 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
f) Capital assets
Intangibles
Intangible assets, which consist of software licenses, are carried at cost (which includes the purchase price and any
costs directly attributable to bringing the asset to the condition necessary for its intended use), less accumulated
amortization and accumulated impairment losses. Amortization of software licenses begins when the asset is ready
for use and is recognized based on the cost of the item on a straight-line basis, over its useful life estimated to be
two years. Each intangible's residual value, useful life and depreciation method are reassessed, and adjusted if
appropriate, at each annual reporting date. The carrying amount of an item of intangible assets is derecognized
upon disposal or when no future economic benefits are expected from its use. The gain or loss arising from
derecognition is included in profit or loss when the item is derecognized.
Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment
losses. The cost of an item of property, plant and equipment consists of the purchase price and all other costs
directly attributable to bringing the asset to the location and condition necessary for its intended use. Where parts of
an item of property, plant and equipment have a different useful life, they are accounted for as separate items of
property, plant and equipment. Depreciation is recognized on a straight-line basis using the cost of the item less its
estimated residual value, over its estimated useful life. Each asset's residual value, useful life and depreciation
method are reassessed, and adjusted if appropriate, at each annual reporting date. Vehicles are depreciated over
three years, computer equipment is depreciated over two years, office equipment and furniture is depreciated over
five years, exploration equipment is depreciated over three years and leasehold improvements are depreciated over
the lease period. The carrying amount of an item of property, plant and equipment is derecognized upon disposal or
when no future economic benefits are expected from its use. The gain or loss arising from derecognition is included
in profit or loss when the item is derecognized.
12 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
g)
Exploration and evaluation assets
Exploration and evaluation expenditures are costs incurred in the course of initial search for mineral deposits with
economic potential. Costs incurred before the legal right to undertake exploration and evaluation activities are
recognized in profit or loss when they are incurred. Once the legal right to undertake exploration and evaluation
activities has been obtained, all option and lease payments, costs of acquiring mineral rights and expenses related
to the exploration and evaluation of mining properties are capitalized as exploration and evaluation assets.
Expenses related to exploration and evaluation which are capitalized include topographical, geological, geochemical
and geophysical studies, exploration drilling, trenching, sampling and other costs related to the evaluation of the
technical feasibility and commercial viability of extracting a mineral resource. The various costs are capitalized on a
property-by-property basis pending determination of the technical feasibility and commercial viability of extracting a
mineral resource. These assets are carried at cost less any accumulated impairment losses. No depreciation
expense is recognized for these assets during the exploration and evaluation phase. Whenever a mining property is
considered no longer viable, or is abandoned, the capitalized amounts are written down to their recoverable
amounts with the difference recognized in profit or loss. When the technical feasibility and the commercial viability of
extracting a mineral resource are demonstrable, exploration and evaluation assets related to the mining property are
transferred as tangible assets and related development expenditures are capitalized. Before the reclassification, the
related exploration and evaluation assets are tested for impairment and any impairment loss is then recognized in
profit or loss.
Borrowing costs directly attributable to the acquisition of exploration and evaluation assets are added to the cost of
the project until such time as the assets are substantially ready for their intended use or sale, which in the case of
mining properties is when they are capable of commercial production.
13 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
h)
Impairment of non-financial assets
At the end of each reporting date, the Company reviews the carrying amounts of its non-financial assets with finite
lives to determine whether there is any indication that those assets have suffered an impairment loss. Where such
an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the
impairment loss. Factors which could trigger an impairment review include, but are not limited to, the expiration of
the right to explore in the specific area during the period or said right will expire in the near future and is not
expected to be renewed; substantive expenditures in a specific area are neither budgeted nor planned; exploration
for and evaluation of mineral resources in a specific area have not led to the discovery of commercially viable
quantities of mineral resources and the entity has decided to discontinue such activities in the specific area; or
sufficient data exists to indicate that the carrying amount of the assets is unlikely to be recovered in full from
successful development or by sale due to significant negative industry or economic trends and a significant drop in
commodity prices. The recoverable amount of the asset is estimated in order to determine the extent of the
impairment loss. The recoverable amount is the higher of an asset’s fair value less cost to sell or its value in use.
Value in use takes into account estimated future cash flows associated with the asset, such value being discounted
to their present value using a pre-tax discount rate that reflects current market assessment of the time value of
money and the risks specific to the asset. In the case of exploration and evaluation assets, impairment reviews are
carried out on a property-by-property basis, with each property representing a potential cash-generating unit. A
previous impairment is reversed if the asset’s recoverable amount subsequently exceeds its carrying amount.
14 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
i)
Provisions and contingent liabilities
A provision is recognized when the Company has a present legal or constructive obligation as a result of a past
event, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of
the obligation can be reliably estimated. Timing or amount of the outflow may still be uncertain. If the time value of
money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that
reflects current market assessment of the time value of money. Provisions are measured at the estimated
expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting
date, including the risks and uncertainties associated with the present obligation. Any reimbursement that the
Company can be virtually certain to collect from a third party with respect to the obligation is recognised as a
separate asset. However, this asset may not exceed the amount of the related provision. All provisions are reviewed
at each reporting date and adjusted to reflect the current best estimate. In those cases where the possible outflow of
economic resources as a result of present obligations is considered improbable or remote, no liability is recognized,
unless it was assumed in the course of a business combination.
A legal or constructive obligation to incur restoration, rehabilitation and environmental costs may arise when
environmental disturbance is caused by the exploration, development or ongoing production of a mineral property
interest. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their
net present value, are provided for and capitalized at the start of each project to the carrying amount of the related
asset, as soon as the obligation to incur such costs arises and to the extent that such cost can be reasonably
estimated.
15 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
j)
Income taxes
When applicable, income tax on the profit or loss comprises current and deferred tax. Income tax is recognized in
profit or loss except to the extent that it relates to items recognized in other comprehensive income or directly in
equity, in which case it is recognized in other comprehensive income or directly in equity.
Current tax is the expected tax payable on the taxable profit for the period, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the liability method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
However, deferred tax is not provided on the initial recognition of goodwill or on the initial recognition of an asset or
liability unless the related transaction is a business combination which affects tax or accounting profit. Deferred tax
on temporary differences associated with investments in subsidiaries is not provided for if reversal of these
temporary differences can be controlled by the Company and it is probable that reversal will not occur in the
foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or
settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the
financial position reporting date and which are expected to apply when the related deferred income tax asset is
realized or the deferred income tax liability is settled. A deferred tax asset is recognized only to the extent that it is
probable that future taxable income will be available against which the asset can be utilized. Deferred tax assets
and liabilities are offset only when the Company has a legally enforceable right and intention to set-off current tax
assets and liabilities from the same taxation authority.
k)
Equity
Share capital represents the amount received on the issue of shares, less issuance costs. Contributed surplus
includes changes related to stock options and warrants until such equity instruments are exercised. Deficit includes
all current and prior year losses. Cumulative translation adjustment includes the impact of converting the accounts
of the Company’s foreign subsidiary into Canadian dollars. All transactions with owners of the parent company are
recorded separately within equity.
The Company allocates the proceeds from an equity financing between common shares and share purchase
warrants based on the relative fair values of each instrument. The fair value of the common shares is calculated by
using the TSXV share price on the date of the issuance and is accounted for in share capital and the fair value of
the share purchase warrants is determined using the Black-Scholes valuation model and is accounted for in
contributed surplus. In the event of a modification of the original terms of warrants, the Company elects to not
recognize the fair value adjustment.
16 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
l)
Share-based payment transactions
Equity-settled share-based payments are made in exchange for services received and transactions related to
mineral properties and are measured at their fair value. The fair value of the services rendered or the mineral
property transaction is determined indirectly by reference to the fair value of the equity instruments granted when
the fair value of services rendered or the mineral property transaction cannot be reliably estimated. The fair value of
share-based payments to directors, officers, employees and consultants with employee-related functions is
recognized as an expense over the vesting period (the vesting being conditional in certain instances on the
achievement of defined performance conditions) with a corresponding increase to contributed surplus. Financing
warrants and warrants to brokers, in respect of an equity financing, are recognized as a share issue expense with a
corresponding increase to contributed surplus. The fair value of stock options granted is measured at the grant date
and recognized over the period during which the options vest. The fair value of the options granted is measured
using the Black-Scholes option pricing model and taking into account an estimated forfeiture rate and the terms and
conditions upon which the options were granted. At each financial position reporting date, the amount recognized as
an expense is adjusted to reflect the actual number of stock options that are expected to vest. Upon the exercise of
share-based payments, the proceeds received, net of any direct expenses, as well as the related compensation
expense previously recorded as contributed surplus are credited to share capital.
m)
Loss per share
The Company presents basic and diluted loss per share data for its common shares. Basic loss per share is
calculated by dividing the loss attributable to common shareholders of the Company by the weighted average
number of common shares outstanding during the period. Diluted loss per share is determined by adjusting the loss
attributable to common shareholders and the weighted average number of common shares outstanding for the
effects of all dilutive potential common shares. Dilutive potential common shares are deemed to have been
converted into common shares at the beginning of the period or, if later, at the date of issue of the potential common
shares. For the purpose of calculating diluted loss per share, the Company assumes the exercise of its dilutive
options and warrants. The assumed proceeds from these instruments are regarded as having been received from
the issue of common shares at the average market price of its shares during the period.
17 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
n)
Significant accounting judgments and estimates
The preparation of these consolidated financial statements requires management to make certain estimates,
judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ
from these estimates. These consolidated financial statements include estimates which, by their nature, are
uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates,
judgments and assumptions are recognized in the period in which the estimate is revised and future period if the
revision affects both current and future period. These estimates, judgments and assumptions are based on historical
experience, current and future economic conditions and other factors, including expectations of future events that
are believed to be reasonable under the circumstances. Significant assumptions about the future and other sources
of estimation uncertainty that management has made at the financial position reporting date, that could result in a
material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from the
assumptions made, relate to, but are not limited to the following:
Title to mineral property interests
Although the Company has taken steps to verify title to mineral properties in which it has an interest, these
procedures are subject to certain assumptions and do not guarantee the Company‘s title. Such properties may be
subject to prior agreements or transfers and title may be affected by undetected defects.
The final closing of the acquisition of the White Pine Project can only be completed once the Company has i)
released Copper Range Company (“CRC”) of a US$2.85 million financial assurance letter of credit associated with
the remediation and closure plan of the previous White Pine operation in a manner that is acceptable to all parties
involved, including the applicable governmental authorities; and ii) released CRC from its environmental obligations
with the Michigan Department of Environmental Quality (“MDEQ”). Final closing, which initially was to occur by
December 31, 2015 has been extended to December 2, 2016. The Company also requires additional funds to post
the required financial assurance bond with the MDEQ. The Company believes that it will be able to meet these
conditions. However, meeting these conditions is dependent on a number of factors, not all of which are under the
Company’s control, and there is no assurance that they will be met. Should the Company not be able to meet the
final closing conditions, it will not be able to complete the acquisition of the White Pine Project which would trigger
an impairment evaluation of the related exploration and evaluation assets.
18 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
n)
Significant accounting judgments and estimates (continued)
Lease Agreement, White Pine
The Company was required to make cash payments of US$450,000 in April 2016 to the Lessor of certain mineral
rights located in White Pine. Given its current financial position, the Company has not yet made these cash
payments. The Company is continuing discussions with the Lessor and believes that this matter will be resolved
once it has successfully raised the funds necessary to continue its activities. However, there is no assurance that
the Company will be successful in raising such funds. Should the Company not be able to resolve this situation, an
impairment evaluation of the related exploration and evaluation assets would be required.
Exploration and evaluation expenditures
The application of the Company‘s accounting policy for exploration and evaluation expenditure requires judgment in
determining whether it is likely that future economic benefits will flow to the Company. If, after exploration and
evaluation expenditures are capitalized, information becomes available suggesting that the carrying amount of an
exploration and evaluation asset may exceed its recoverable amount, the Company carries out an impairment test in
the year the new information becomes available.
Environmental liability
The Company’s accounting policy for the recognition of an environmental liability requires significant estimates and
assumptions such as the requirements of the relevant legal and regulatory framework, the magnitude of possible
disturbance, the timing, extent, and costs of rehabilitation activities and the determination of an appropriate discount
factor. Changes to these estimates and assumptions may result in future actual expenditures differing from the
amounts currently provided for. The environmental liability is periodically reviewed and updated based on the
available facts and circumstances.
19 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
o)
Accounting standards issued but not yet applied
Standards, amendments and interpretations issued but not yet effective up to the date of the issuance of these
consolidated financial statements that are expected to be relevant to the Company are listed below. Certain other
standards and interpretations have been issued but are not expected to have a material impact on the Company’s
consolidated financial statements.
Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
On June 20, 2016, the IASB issued amendments to IFRS 2 Share-based Payment, clarifying how to account for
certain types of share-based payment transactions. The amendments apply for annual periods beginning on or after
January 1, 2018. As a practical simplification, the amendments can be applied prospectively. Retrospective, or
early, application is permitted if information is available without the use of hindsight. The amendments provide
requirements on the accounting for: the effects of vesting and non-vesting conditions on the measurement of cash-
settled share-based payments; share-based payment transactions with a net settlement feature for withholding tax
obligations; and a modification to the terms and conditions of a share-based payment that changes the classification
of the transaction from cash-settled to equity-settled. The Company intends to adopt the amendments to IFRS 2 in
its financial statements for the annual period beginning on July 1, 2018. The extent of the impact of adoption of the
standard has not yet been determined.
IFRS 9, Financial Instruments
The International Accounting Standards Board (“IASB”) released IFRS 9, Financial Instruments (2014) (“IFRS 9”),
representing the completion of its project to replace IAS 39, Financial Instruments: Recognition and Measurement
(“IAS 39”). The new standard introduces extensive changes to IAS 39’s guidance on the classification and
measurement of financial assets and introduces a new “expected credit loss model” for the impairment of financial
assets. IFRS 9 also provides new guidance on the application of hedge accounting. The Company’s management
has yet to assess the impact of IFRS 9 on its consolidated financial statements. The new standard is required to be
applied for annual reporting periods beginning on or after January 1, 2018.
20 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
3.
SUMMARY OF ACCOUNTING POLICIES (continued)
o)
Accounting standards issued but not yet applied (continued)
IFRS 15, Revenue from Contracts with Customers
On May 28, 2014 the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard is effective
for annual periods beginning on or after January 1, 2018. Earlier application is permitted. IFRS 15 will replace IAS
11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the
Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue – Barter
Transactions Involving Advertising Services. On April 12, 2016, the IASB issued Clarifications to IFRS 15, Revenue
from Contracts with Customers, which is effective at the same time as IFRS 15. The standard contains a single
model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or
over time. The model features a contract-based five-step analysis of transactions to determine whether, how much
and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may
affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It
does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other
IFRSs. The clarifications to IFRS 15 provide additional guidance with respect to the five-step analysis, transition,
and the application of the Standard to licenses of intellectual property. The Company intends to adopt IFRS 15 and
the clarifications in its financial statements for the annual period beginning on July 1, 2018. The extent of the impact
of adoption of the standard has not yet been determined.
IFRS 16, Leases
In January 2016, the IASB published IFRS 16, Leases (“IFRS 16”) which will replace IAS 17, Leases (“IAS 17”).
IFRS 16 eliminates the classification as an operating lease and requires lessees to recognize a right-of-use asset
and a lease liability in the statement of financial position for all leases with exemptions permitted for short-term
leases and leases of low value assets. In addition, IFRS 16 changes the definition of a lease; sets requirements on
how to account for the asset and liability, including complexities such as non-lease elements, variable lease
payments and option periods; changes the accounting for sale and leaseback arrangements; largely retains IAS
17’s approach to lessor accounting; and introduces new disclosure requirements. IFRS 16 is effective for annual
reporting periods beginning on or after January 1, 2019 with early application permitted in certain circumstances.
The Company has yet to assess the impact of this new standard on its consolidated financial statements.
21 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
4.
CAPITAL ASSETS
Capital assets subject to depreciation and amortization are presented below.
Computer
Intangible
equipment
Exploration
Leasehold
assets
Vehicles and furniture
equipment
improvements
$
$
$
$
$
Cost
Balance at June 30, 2014
122,712
232,315
133,310
Additions
Disposals
1,406
49,229
1,280
-
(21,399)
-
425,797
16,157
-
Effect of foreign exchange
11,138
40,450
22,015
73,414
Balance at June 30, 2015
135,256
300,595
156,605
515,368
Additions
Disposals
-
-
-
34,947
-
(218,567)
-
(52,256)
Effect of foreign exchange
2,655
Balance at June 30, 2016
137,911
10,095
92,123
5,211
17,619
196,763
480,731
70,196
-
-
11,918
82,114
-
-
2,807
84,921
Accumulated depreciation and amortization
Balance at June 30, 2014
53,152
122,627
110,036
204,639
65,419
Disposals
-
(1,336)
Depreciation and amortization
45,687
Effect of foreign exchange
8,163
86,197
26,217
-
15,619
18,970
Balance at June 30, 2015
107,002
233,705
144,625
Disposals
-
(218,567)
Depreciation and amortization
28,131
38,775
Effect of foreign exchange
2,384
6,833
-
28,279
4,537
-
140,378
43,860
388,877
(52,256)
68,686
11,527
Balance at June 30, 2016
137,517
60,746
177,441
416,834
-
5,251
11,444
82,114
-
-
2,807
84,921
Total
$
984,330
68,072
(21,399)
158,935
1,189,938
34,947
(270,823)
38,387
992,449
555,873
(1,336)
293,132
108,654
956,323
(270,823)
163,871
28,088
877,459
Carrying amounts
Balance at June 30, 2015
28,254
66,890
Balance at June 30, 2016
394
31,377
11,980
19,322
126,491
63,897
-
-
233,615
114,990
Included in capital assets are assets with a carrying amount of $15,469 at June 30, 2016 ($20,725 at June 30, 2015)
for use at the Company’s corporate office. All other capital assets relate to the Company’s exploration activities.
22 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
5.
EXPLORATION AND EVALUATION ASSETS
Amounts invested in exploration and evaluation assets are as follows:
White Pine
Copperwood
Keweenaw
Leased
Project
Project
Project
Properties
$
$
$
$
Total
$
Balance, June 30, 2014
5,028,094
23,898,745
13,203,414
515,681
42,645,934
Property payments in cash
Property payments in shares
Site preparation, drilling and assaying
Labour
Studies
Other exploration expenses
Depreciation and amortization
Gain on disposal of capital assets
Share-based compensation
Finance expense
275,701
485,840
4,027,384
1,780,645
1,459,535
806,237
200,619
-
-
-
127,313
-
35,217
220,683
171,758
100,357
6,089
(7,774)
-
-
1,884
141,431
16,815
50,011
62,187
-
-
139,869
1,083,301
-
49,304
452,318
-
-
-
-
-
-
-
-
-
485,840
4,064,485
2,142,759
1,648,108
956,605
268,895
(7,774)
139,869
1,083,301
Effect of foreign exchange
1,383,146
4,168,972
2,027,221
108,355
7,687,694
10,419,107
5,905,916
2,439,418
157,659
18,922,100
Balance, June 30, 2015
15,447,201
29,804,661
15,642,832
673,340
61,568,034
Property payments in cash
596,981
146,605
-
29,815
773,401
Labour
Studies
Other exploration expenses
Depreciation and amortization
Write-down
Gain on disposal of capital assets
Share-based compensation
Finance expense
Conversion of loan into NSR royalty (Note 6)
1,014,986
554,824
474,219
40,176
-
-
-
-
-
97,867
(2,960)
(54,381)
5,802
-
-
-
463,755
(10,000,000)
104,757
2,574
40,113
77,691
-
-
-
-
1,217,610
554,438
459,951
123,669
(2,381,614)
(273,881)
(2,655,495)
(83,577)
31,552
-
-
-
-
-
-
(83,577)
31,552
463,755
(10,000,000)
Effect of foreign exchange
459,143
1,001,419
(97,033)
10,321
1,373,850
3,140,329
(8,341,893)
(2,305,537)
(233,745)
(7,740,846)
Balance, June 30, 2016
18,587,530
21,462,768
13,337,295
439,595
53,827,188
23 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
5.
EXPLORATION AND EVALUATION ASSETS (continued)
White Pine Project, Michigan, USA
On May 13, 2014 (the interim closing date), the Company acquired from CRC all of CRC’s rights, title and interest in
the White Pine Project and issued to CRC 3,000,000 of its common shares valued at $1,500,000. Highland further
agreed that, upon completion of a feasibility study and receipt of all necessary permits for the development of a
mine at White Pine, it will pay as additional consideration, in cash or in common shares of Highland, at the option of
CRC, an amount equal to US$0.005 (one half of one cent) per pound for the first 1 billion pounds of proven and
probable reserves of copper and US$0.0025 (one quarter of one cent) for each additional pound of proven and
probable reserves of copper (the “Contingent Consideration”). At June 30, 2016, the Company has not yet estimated
any proven and probable reserves at the White Pine Project and has not yet completed a feasibility study or initiated
the activities required to obtain the necessary permits. Consequently, the Company has not yet accounted for this
contractual contingent liability.
The final closing of the acquisition will be completed once Highland has (i) released CRC for a US$2.85 million
financial assurance letter of credit associated with the remediation and closure plan of the previous White Pine
operation in a manner that is acceptable to all parties involved, including the applicable governmental authorities;
and (ii) released CRC from its environmental obligations with the Michigan Department of Environmental Quality. At
that time, Highland will assume all of CRC’s environmental liabilities related to White Pine and will also be
responsible for all on-going environmental obligations. Final closing, which initially was to occur by December 31,
2015, has been extended to December 2, 2016. Should the Company not be able to meet the final closing
conditions, it will not be able to complete the acquisition of the White Pine Project.
Until final closing, Highland has access to White Pine under an access agreement entered into on March 5, 2014,
which entitles it to perform exploration, engineering and environmental studies and other activities associated with
the potential development of a new copper mine at White Pine, and CRC continues to be responsible for
environmental obligations and for remediation work up to a maximum of US$2 million.
24 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
5.
EXPLORATION AND EVALUATION ASSETS (continued)
Lease Agreement, White Pine, Michigan, USA
In April 2015, the Company entered into a 20-year lease agreement, with an option for an additional 5 years, for
certain mineral rights located in White Pine, Michigan. Payment at closing consisted of US$225,000 in cash and the
issuance of 2,164,701 common shares of Highland valued at an amount of $485,840 (the number of shares being
the equivalent of US$400,000 divided by the 20‐day volume weighted average trading price of Highland as of the
day prior to closing). In accordance with the terms of the agreement with the holder of the mineral rights (the
“Lessor”), additional cash payments of US$425,000 and US$150,000 were payable in April 2016 and April 2017,
respectively and an annual rent was also payable on each anniversary of the lease. Given its current financial
position, the Company did not make the cash payment of US$425,000 or the initial rent payment of US$25,000 on
the due date. These amounts were accounted for at June 30, 2016 and included in accounts payable and accrued
liabilities. The Company is continuing discussions with the Lessor and believes that this matter will be resolved once
it has successfully raised the funds necessary to continue its activities. However, there is no assurance that the
Company will be successful in raising such funds.
Upon commencement of production, Highland will have to pay a sliding scale royalty on copper and silver
production from the leased mineral rights with a base royalty of 2% for copper and 2.5% for silver. The Company
has an option to repurchase 50% of the royalties. Highland may terminate the lease at any time upon a 30 day
notice. Expenses related to this agreement are presented as part of the White Pine Project as the related mineral
rights are located within the White Pine Project.
25 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
5.
EXPLORATION AND EVALUATION ASSETS (continued)
Copperwood Project, Michigan, USA
In June 2014, the Company acquired the Copperwood Project through the acquisition from Orvana Minerals Corp.,
a TSX-listed company (“Orvana”), of all of the outstanding shares of Orvana Resources US Corp. (“Orvana US”).
Highland paid US$13 million in cash at closing and issued a US$7 million secured promissory note (the “Note”) as
described in Note 7. The Note was fully reimbursed on December 15, 2014. An additional consideration of up to
US$5,000,000 may be paid by Highland in cash or shares of Highland, at Orvana’s option, of which US$2,500,000
was accounted for as “Future Consideration” and described in Note 8; an amount of US$1,250,000 may also be
payable if the average copper price for any 60 calendar day period following the first anniversary and preceding the
second anniversary of commencement of commercial production is greater than US$4.25/lb; and an additional
amount of US$1,250,000 may be payable if the average copper price for any 60 calendar day period following the
second anniversary and preceding the third anniversary of the commencement of commercial production is greater
than US$4.50/lb (for a total of US$2,500,000 accounted for as the “Contingent Consideration”).
The fair value of the Future Consideration has been included in the purchase consideration, using a discount rate of
20%, as these payments have a set maturity date. The contractual Contingent Consideration will only be recognized
if and when the contingency is satisfied.
The Copperwood Project consists of a number of mineral leases, which call for annual rental payments until 2036.
The mineral leases are also subject to quarterly Net Smelter Return (“NSR”) royalty payments that will range from
2% to 4% on a sliding scale based on inflation-adjusted copper prices. Under the mineral leases, Orvana US will
have mineral rights until the later of the 20th anniversary of the date of the lease or the date Orvana US ceases to be
actively engaged in development, mining, or related operations on the property. The mineral leases may be
terminated by Orvana US, the Company’s wholly owned subsidiary, on 60 days’ notice.
26 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
5.
EXPLORATION AND EVALUATION ASSETS (continued)
Keweenaw Project, Michigan, USA
Under a Mining Venture Agreement (the “Venture Agreement”) with BRP dated July 2011 and subsequently
amended on May 30, 2012, on April 29, 2013 and on November 20, 2015, the Company has an option to acquire a
65 percent interest in the Keweenaw Project by spending US$11,500,000 in exploration work, providing a feasibility
study by December 31, 2017 (amended from October 26, 2015 as part of the November 20, 2015 amendment) and
securing some of the historical shafts located on the Keweenaw region. At June 30, 2016, a cumulative amount of
US$13,096,000 had been spent on the Keweenaw Project. Upon providing a feasibility study and exercising the
option, the Company will have a 65% interest and BRP will have a 35% interest in the property. In addition, BRP will
be entitled to a sliding scale NSR royalty from production on those properties contributed by BRP based on the price
per pound of copper with a minimum of 2% up to a maximum of 5%. For other properties, BRP will be entitled to a
1% NSR.
The Company recorded a write-down of exploration and evaluation assets of $2,381,614 during the year ended
June 30, 2016 related to the G-2 project. The amount capitalized on the G-2 project was written-down to nil given
that the exploration work conducted in the past has not led to the discovery of commercially viable quantities of
mineral resources and the Company does not intend to conduct further activities on the G-2 project in the near term.
Leased Properties, Michigan, USA
In December 2012, the Company entered into a lease agreement with a Michigan corporation for the exploration
and development of mineral properties in the Upper Peninsula of the State of Michigan, which lease agreement was
subsequently amended in September 2016 following the non renewal of a portion of the leased area. The lease has
a primary term of 10 years and may be extended for an additional 10 years under certain conditions. The Company
paid an amount of US$21,000 as rent during the year ended June 30, 2016 (US$40,000 in 2015). Annual payments
will increase by US$2,500 per year until year 10. For years 11 to 20, the annual rental payments will be US$50,000
and will be treated as advance royalty payments. If the Company completes a feasibility study and constructs and
operates a mine on any part of the leased premises, it has agreed to make certain fixed-amount payments and to
pay a sliding scale NSR from production based on the price per pound of copper.
The Company recorded a write-down of exploration and evaluation assets of $273,881 during the year ended June
30, 2016 related to the leased properties. The Company wrote-down to nil the portion of the leased properties which
was not renewed.
27 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
6. DEPOSIT ON SALE OF ROYALTY
On June 30, 2016, the Company and Osisko Gold Royalties Ltd. (“Osisko”) agreed to amend the terms of their
agreement entered into in December 2014 and to convert the $10 million deposit on sale of royalty into a 3.0% net
smelter return (“NSR”) royalty on all metals produced from the mineral rights and leases associated with the
Copperwood Project. The amendment also provides that upon closing of the acquisition of the White Pine Project,
the Company will grant Osisko a 1.5% NSR royalty on all metals from the White Pine North Project, and Osisko’s
royalty on the Copperwood Project will be reduced to 1.5%. Osisko retains security over all of the Company’s
assets. On June 30, 2016, the amount of $10 million was recorded as a reduction of the carrying amount of the
related exploration and evaluation assets (Note 5).
In December 2014, Osisko had made a $10 million refundable deposit on a 3% sliding-scale NSR royalty on all
metals from the White Pine North Project (the “White Pine North Royalty”). The Osisko deposit was secured against
all of the Company’s assets. Upon completion of the acquisition of the White Pine Project, the Osisko deposit was to
be exchanged for the White Pine North Royalty.
Option to purchase future silver production
In December 2014, the Company also granted to Osisko an option to purchase for US$26 million a 100% NSR on
any future silver production from the Company’s projects, including White Pine, Copperwood and Keweenaw (the
“Michigan Projects”). Osisko may elect to exercise the option to purchase the silver production by paying US$26
million to the Company within 60 days following the delivery to Osisko of a feasibility study on the Michigan Projects.
7.
PROMISSORY NOTE
In June 2014, in connection with the acquisition of the Copperwood Project (Note 5), the Company had issued a
Note in the amount of US$7,000,000 to Orvana, bearing interest at an effective rate of 15.2%. On December 15,
2014, the Company reimbursed the Note in full and paid to Orvana an amount of $8,761,412, including accrued
interest of $620,412.
28 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
8. BALANCE OF PURCHASE PRICE PAYABLE
In connection with the acquisition of the Copperwood Project (Note 5), the Company has accounted for the
estimated fair value of the Future Consideration using a discount rate of 20%. The Future Consideration in the
amount of US$2,500,000 may be paid by Highland to Orvana in cash or shares of Highland, at Orvana’s option, with
US$1,250,000 payable upon the earliest of (i) commencement of commercial production of Copperwood and (ii) the
date that is 36 months after closing of the acquisition, being June 17, 2017; and an additional US$1,250,000 on the
first anniversary of this payment. The balance of purchase price payable was determined as follows:
Balance, beginning of year
Accretion included in exploration and evaluation assets
Effect of foreign exchange
Balance, end of year
Current portion
Non-current portion
9.
ENVIRONMENTAL LIABILITY
Year ended June 30,
2016
$
2015
$
2,207,430
1,434,850
463,755
63,257
499,325
273,255
2,734,442
2,207,430
June 30,
2016
$
1,445,087
1,289,355
2,734,442
June 30,
2015
$
-
2,207,430
2,207,430
The environmental liability consists of a provision for reclamation costs related to the acquisition of the White Pine
Project (Note 5). The undiscounted cash flow amount of the liability was estimated at $344,074. The present value
of the liability was calculated using a discount rate of 8.0% and reflecting payments to be made from 2017 to 2025,
inclusively.
Balance, beginning of year
Accretion expense
Effect of foreign exchange
Balance, end of year
Year ended June 30,
2016
$
281,749
15,637
9,220
306,606
2015
$
225,022
17,403
39,324
281,749
29 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
10.
SHARE CAPITAL AND WARRANTS
Authorized
An unlimited number of common shares, issuable in series. The holders of common shares are entitled to one vote
per share at meetings of the Company and to receive dividends, which are declared from time-to-time. No dividends
have been declared by the Company since its inception. All shares are ranked equally with regard to the Company’s
residual assets.
Issuance of common shares
On October 6, 2015, the Company completed a non brokered private placement of 24,426,434 common shares with
Osisko at a price of $0.15 per share for gross proceeds of $3,663,965. Following completion of the private
placement, Osisko owns 29,420,434 shares, representing approximately 19.1% of the issued and outstanding
shares of Highland on a non-diluted basis. The Company incurred share issue expenses of $24,957 in connection
with the private placement.
On April 24, 2015, the Company issued to a private Michigan limited liability corporation 2,164,701 of its common
shares at a value of $485,840 as partial consideration to enter into an agreement to lease certain mineral rights
located in White Pine, Michigan, as further described in Note 5.
In March 2015, the Company completed in three (3) tranches a non brokered private placement for gross proceeds
of $7,602,687 (the “Financing”). A total of 30,410,746 units, each unit comprised of one common share of the
Company and one half of one share purchase warrant (“Warrant”), were sold at $0.25 per unit. Each Warrant is
exercisable for a period of 18 months from the closing at an exercise price of $0.50 to acquire one common share.
Proceeds of the Financing were allocated between common shares and Warrants based on their relative fair values.
The fair value of the common shares was calculated by using the subscription price of the Financing and the value
of the Warrants was measured based on the Black-Scholes option pricing model, using a risk-free interest rate of
0.56%, an expected life of the Warrants of 1.5 years, an annualized volatility of 104% (determined by reference to
historical data) and a dividend rate of 0%. An amount of $1,144,191 was allocated to such Warrants and was
presented as part of contributed surplus. The Company paid finders’ fees totaling $181,250 and incurred other share
issue expenses of $42,286.
30 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
10.
SHARE CAPITAL AND WARRANTS (continued)
Share purchase warrants
The following table sets out the activity in share purchase warrants:
Number of warrants
Balance, beginning of year
Issued
Balance, end of year
Year ended June 30,
2016
2015
56,455,373
-
56,455,373
41,250,000
15,205,373
56,455,373
The following table reflects the number of issued and outstanding share purchase warrants at June 30, 2015:
Number of
warrants
June 30,
2015
Issued Exercised
41,250,000
12,275,020
1,680,000
1,250,353
56,455,373
0.68
-
-
-
-
-
-
-
-
-
-
-
-
Number of
warrants
June 30,
2016
41,250,000
12,275,020
1,680,000
1,250,353
56,455,373
0.68
Price
per
share
$
0.75
0.50
0.50
0.50
0.68
Expiry date
Mar 31, 2017
Sep 11, 2016
Sep 20, 2016
Sep 27, 2016
Private placement – May 2012 (1)
Private placement – March 11, 2015
Private placement – March 20, 2015
Private placement – March 27, 2015
Average price
(1)
In March 2016, the Company further extended the expiry date of the 41,250,000 share purchase warrants
originally issued in three tranches in May 2012 as part of a non brokered private placement of the Company’s
securities. The original expiry dates of May 2014 were previously extended to March 31, 2015 and to March 31,
2016. The new expiry date is March 31, 2017 and the exercise price of $0.75 remains unchanged.
31 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
11.
STOCK OPTIONS
The following table sets out the activity in stock options:
Year
ended
June 30,
2016
Year
ended
June 30,
2015
Average exercise
Average exercise
Number
price ($)
Number
price ($)
7,597,000
200,000
(275,000)
7,522,000
0.49
0.13
(0.40)
0.48
4,442,000
3,305,000
(150,000)
7,597,000
0.59
0.36
(0.65)
0.49
Number of options
Balance, beginning of year
Granted
Expired
Balance, end of year
On November 20, 2015, the Company granted 200,000 stock options to a director of the Company. The stock
options have a five year term and are exercisable at a price of $0.13 per share. The stock options granted will vest
over a two-year period. The fair value of the stock options was estimated at $0.11 per option by applying the Black-
Sholes option pricing model, using an expected time-period of 5 years, a semi-annual weighted-average risk-free
interest rate of 0.93%, a volatility rate of 136% and a 0% dividend factor.
On April 22, 2015, the Company granted 1,905,000 stock options to directors, officers, employees and consultants
of the Company. Of this total, 830,000 options will vest subject to the achievement of certain defined performance
objectives. The balance of 1,075,000 options will vest over a two-year period. The options have a five-year term and
are exercisable at a price of $0.25 per share. The fair value of the stock options was estimated at $0.14 per option
by applying the Black-Sholes option pricing model, using an expected time-period of 5 years, a semi-annual
weighted-average risk-free interest rate of 1.00%, a volatility rate of 137% and a 0% dividend factor.
On August 1, 2014, the Company granted 1,400,000 stock options to officers of the Company. The stock options
have a five year term and are exercisable at a price of $0.50 per share. A total of 700,000 of the stock options
granted vested on the date of grant and 700,000 vested on December 1, 2014. The fair value of the stock options
was estimated at $0.44 per option by applying the Black-Sholes option pricing model, using an expected time-period
of 5 years, a semi-annual weighted-average risk-free interest rate of 1.46%, a volatility rate of 145% and a 0%
dividend factor.
32 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
11.
STOCK OPTIONS (continued)
The following table reflects the stock options issued and outstanding at June 30, 2016:
Issue date
options
price
contratual life
options
options
Number of
Exercise
Remaining
exercisable
exercisable
Number of
Exercise
price of
September 22, 2006
July 6, 2012
November 5, 2012
August 1, 2014
April 21, 2015
November 20, 2015
12.
LOSS PER SHARE
2,000
400,000
3,770,000
1,400,000
1,750,000
200,000
7,522,000
$
1.00
0.50
0.60
0.50
0.25
0.13
0.48
(years)
0.2
1.0
1.3
3.1
3.8
4.4
2.3
2,000
400,000
3,770,000
1,400,000
651,666
66,666
6,290,332
$
1.00
0.50
0.60
0.50
0.25
0.13
0.53
The calculation of basic and diluted loss per share for the year ended June 30, 2016 was based on the loss
attributable to common shareholders of $4,216,092 ($3,142,794 in 2015) and the weighted average number of
common shares outstanding of 147,428,215 (106,419,831 in 2015). Excluded from the calculation of the diluted
loss per share for the year ended June 30, 2016 are 56,455,373 share purchase warrants and 7,522,000 stock
options (56,455,373 share purchase warrants and 7,597,000 stock options in 2015) because to include them would
be anti-dilutive as they would have the effect of decreasing the loss per share.
33 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
13. MANAGEMENT AND ADMINISTRATION EXPENSES
The Company incurred the following management and administration expenses:
Administrative and general (1)
Office
Professional fees
Investor relations and travel
Reporting issuer costs
Share-based compensation
Depreciation and amortization
Year ended June 30,
2015
$
1,348,384
257,624
459,894
298,152
31,511
667,777
24,237
2016
$
858,049
237,159
260,796
24,128
17,578
48,206
40,202
1,486,118
3,087,579
(1) includes an amount of US$150,000 payable to the Company’s former president and CEO following his
resignation in February 2016. As full and final settlement of all unpaid amounts related to his employment with the
Company due at that time, the Company agreed to pay to its former president and CEO a lump sum amount of
US$150,000 in cash on the earliest of (a) five business days following the completion by the Company of an equity
or debt financing or an asset sale of at least $10 million, and (b) five business days following the completion of a
corporate transaction such as a business combination.
34 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
14. RELATED PARTY TRANSACTIONS
During the year ended June 30, 2016, the Company incurred administration expenses of $270,658 and purchased
office furniture and computer equipment for an amount of $31,681 from Reunion Gold Corporation, a related party
by virtue of common management and directors (administration expenses of $495,633 in 2015). At June 30, 2016,
the Company had an amount due to Reunion Gold Corporation of $25,543 ($8,022 at June 30, 2015).
On January 1, 2016, the Company entered into separate agreements to provide management and administration
services to other TSXV-listed companies, related by virtue of common management, including Odyssey Resources
Limited and Reunion Gold Corporation. The services are provided at cost. Amounts recovered for management and
administration services during the year ended June 30, 2016 amounted to $120,810 (nil in 2015).
These charges were measured at the exchange amount, which is the amount agreed upon by the transacting
parties.
Remuneration of directors and key management of the Company
The remuneration awarded to directors and to senior key management, including the Executive Chairman and
interim President and CEO, the Executive Vice-President and the CFO, is as follows:
Administrative and general
Labour included in exploration and evaluation assets
Share-based compensation
Share-based compensation included in exploration and evaluation assets
2016
$
627,004
234,710
41,773
9,190
912,677
Year ended June 30,
2015
$
865,304
218,607
555,908
12,953
1,652,772
35 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
15.
INCOME TAXES
The reconciliation of the effective tax rate is as follows:
2016
$
Year ended June 30,
2015
$
Loss before income tax
(4,216,092)
(3,142,794)
Tax using the Company’s domestic tax rate
26.90%
(1,134,129)
26.90%
(845,412)
Share-based compensation
Non-deductible expenses and non-taxable revenues
Effect of tax rate in foreign jurisdictions
Unrecognized tax assets
Other
Deferred income tax
(0.31%)
(0.01%)
6.41%
(46.69%)
13.70%
-
12,967
263
(270,246)
(5.72%)
(0.05%)
0.58%
1,968,562
(29.94%)
179,632
1,603
(18,347)
941,013
(577,417)
8.23%
(258,489)
-
-
-
Recognized deferred tax assets and liabilities are attributable to the following:
Exploration and evaluation assets
Advances in foreign currency
Non-capital loss carry-forwards
Offsetting of tax assets and liabilities
Exploration and evaluation assets
Advances in foreign currency
Non-capital loss carry-forwards
Offsetting of tax assets and liabilities
$
-
-
$
-
-
Assets
Liabilities
June 30, 2016
Net
$
$
(988,426)
(988,426)
(641,005)
(641,005)
1,629,431
-
1,629,431
1,629,431
(1,629,431)
(1,629,431)
1,629,431
-
-
-
-
-
Assets
Liabilities
June 30, 2015
Net
$
$
(2,270,440)
(2,270,440)
(472,975)
(472,975)
2,743,415
-
2,743,415
2,743,415
(2,743,415)
(2,743,415)
2,743,415
-
-
-
-
-
36 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
15.
INCOME TAXES (continued)
Unrecognized deductible temporary differences for which no deferred tax assets have been recognized are as
follows:
Non-capital loss carry-forwards
Advances in foreign currency
Capital assets
Exploration and evaluation assets
Share issue expenses
Financing expenses
Non-capital loss carry-forwards
Advances in foreign currency
Capital assets
Exploration and evaluation assets
Share issue expenses
Financing expenses
Canada
$
June 30, 2016
Total
$
USA
$
9,548,000
6,288,000
15,836,000
(2,382,000)
-
(2,382,000)
80,106
514,726
1,547,773
451,895
71,329
-
-
-
594,832
1,547,773
451,895
71,329
9,317,103
6,802,726
16,119,829
Canada
$
June 30, 2015
Total
$
USA
$
7,778,259
2,393,403
10,171,662
(3,516,544)
-
(3,516,544)
39,904
528,035
1,294,069
675,483
148,651
-
-
-
567,939
1,294,069
675,483
148,651
6,419,822
2,921,438
9,341,260
Deferred tax assets have not been recognised in respect of these items because of the uncertainties that future
taxable profit will be available against which the Company can utilise these benefits.
37 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
15.
INCOME TAXES (continued)
Non-capital losses expire as follows:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
Canada
$
103,000
120,000
304,000
538,000
744,000
951,000
1,370,000
96,000
1,136,000
2,466,000
1,720,000
9,548,000
USA
$
-
-
-
-
-
-
-
-
-
4,109,000
2,179,000
6,288,000
16. CAPITAL MANAGEMENT
The Company defines capital that it manages as loans (including deposit on sale of royalty and balance of purchase
price payable) and shareholders’ equity. When managing capital, the Company’s objectives are a) to ensure the
entity continues as a going concern; b) to increase the value of the entity’s assets; and c) to achieve optimal returns
to shareholders. These objectives will be achieved by identifying the right exploration projects, adding value to these
projects and ultimately taking them to production or obtaining sufficient proceeds from their disposal. As at June 30,
2016, managed capital was $50,798,765 ($59,515,059 at June 30, 2015).
The Company’s properties are in the exploration and development stage and, as a result, the Company currently
has no source of operating cash flows. The Company intends to raise such funds as and when required to complete
the exploration and development of its projects. There is no assurance that the Company will be able to raise
additional funds on reasonable terms. The only sources of future funds presently available to the Company are
through the sale of equity capital of the Company, the exercise of outstanding warrants or stock options, or the sale
by the Company of an interest in any of its properties in whole or in part. The ability of the Company to arrange such
financing in the future will depend in part upon the prevailing capital market conditions as well as the business
performance of the Company. There can be no assurance that the Company will be successful in its efforts to
arrange additional financing on terms satisfactory to the Company. There were no changes in the Company’s
approach to capital management during the year ended June 30, 2016. The Company is not subject to any
externally imposed capital requirements as at June 30, 2016.
38 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
17.
FINANCIAL RISK MANAGEMENT
The Company thoroughly examines the various financial risks to which it is exposed and assesses the impact and
likelihood of those risks. Where material, these risks are reviewed and monitored by the Board of Directors. There
were no changes to the financial objectives, policies and processes during the year ended June 30, 2016.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The
Company’s ability to continue as a going concern is dependent on management’s ability to raise the funds required
for its continued operations as the Company generates cash flow from its financing activities (Note 2).
The following table summarizes the contractual maturities of the Company’s financial liabilities at June 30, 2016:
Carrying
Settlement
Within
Within
Over
amount
amount
6 months
1 year
2-3 years
3 years
$
$
$
Accounts payable and accrued liabilities
3,019,495
3,019,495
3,019,495
Due to a related party
25,543
25,543
25,543
$
-
-
$
-
-
Balance of purchase price payable
2,734,442
3,229,250
-
1,614,625
1,614,625
5,779,480
6,274,288
3,045,038
1,614,625
1,614,625
$
-
-
-
-
Credit risk
Credit risk is the risk that the Company will incur losses due to the non-payment of contractual obligations by third
parties. The Company is exposed to credit risk with respect to cash.
Interest rate risk
The Company’s interest risk relates to cash. The Company's current policy on its cash balances is to invest excess
cash in guaranteed investment certificates or interest bearing accounts with a major Canadian-based chartered
bank. The Company regularly monitors compliance to its cash management policy. Cash is subject to floating
interest rates. Sensitivity to a plus or minus 1% change in interest rates would affect profit or loss by approximately
$2,000.
39 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
17.
FINANCIAL RISK MANAGEMENT (continued)
Currency risk
In the normal course of operations, the Company is exposed to currency risk on transactions that are denominated
in a currency other than the respective functional currencies of each of the entities within the consolidated group.
The currencies in which these transactions are denominated are primarily the Canadian and the US dollar. The
consolidated entity seeks to minimise its exposure to currency risk by monitoring exchange rates and entering into
foreign currency transactions that maximize the consolidated entity’s position. The consolidated entity does not
presently enter into hedging arrangements to hedge its currency risk. All foreign currency transactions are entered
into at spot rates. The Board considers this policy appropriate, taking into account the consolidated entity’s size,
current stage of operations, financial position and the Board’s approach to risk management. At June 30, 2016,
financial assets and liabilities denominated in a foreign currency consisted of cash of $7,782 and accounts payable
and accrued liabilities of $1,274,644. The impact on profit or loss of a 10% increase or decrease in foreign
currencies against the Canadian dollar would be approximately $127,000.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts payable and accrued liabilities and due to a related party are considered to be
a reasonable approximation of fair value due to their immediate or short-term maturity. The fair value of the balance
of purchase price payable of $2,734,442 at June 30, 2016 was determined based on discounted cash flows using a
rate of 20% (20% at June 30, 2015), a rate similar to other debt instruments at the date of the consolidated
statement of financial position.
40 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
19. SUPPLEMENTAL CASH FLOW INFORMATION
Year ended June 30,
Non-cash items
Change in payables and accruals related to exploration and evaluation assets
Depreciation and amortization included in exploration and evaluation assets
Gain on disposal included in exploration and evaluation assets
Accretion on balance of purchase price payable included in exploration and evaluation assets
Share-based compensation included in exploration and evaluation assets
2016
$
(386,760)
123,669
(83,577)
463,755
31,552
Conversion of Osisko deposit on sale of royalty, as a reduction of exploration and evaluation assets
10,000,000
2015
$
717,242
268,895
(7,774)
499,325
139,869
-
Payment in shares included in exploration and evaluation assets
-
485,840
20. SEGMENTED INFORMATION
The Company has one reportable operating segment being the acquisition and exploration of mineral properties in
Michigan, USA. Assets are located as follows:
Current assets
Capital assets
Exploration and evaluation assets
Total assets
Current assets
Capital assets
Exploration and evaluation assets
Total assets
Canada
$
182,915
15,469
June 30, 2016
Total
$
208,231
114,990
USA
$
25,316
99,521
-
53,827,188
53,827,188
198,384
53,952,025
54,150,409
Canada
$
June 30, 2015
USA
$
Total
$
1,107,655
41,623
1,149,278
20,725
212,890
233,615
-
61,568,034
61,568,034
1,128,380
61,822,547
62,950,927
41 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2016 and 2015 (audited, in Canadian dollars)
21. EVENT AFTER THE REPORTING DATE
David Fennell, the Company’s chairman and interim president and CEO has advanced funds of $400,000 since the
end of the reporting date, to ensure that critical payments to maintain the Company in good standing are being
made. These advances bear interest at the rate of 1% per month and the principal and accrued interest will be
repayable by the Company on the earlier of the completion of a financing for a minimum amount of $10 million or
upon demand at any time after June 30, 2017.
42 MANAGEMENT’S DISCUSSION & ANALYSIS
Year ended June 30, 2016
HIGHLAND COPPER COMPANY INC.
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
YEAR ENDED JUNE 30, 2016
The following management’s discussion and analysis (“MD&A”) of the operations, results, and financial position of Highland
Copper Company Inc. (“Highland” or the “Company”), dated October 25, 2016, covers the years ended June 30, 2016 and
2015 and should be read in conjunction with the audited consolidated financial statements and related notes at June 30, 2016
and 2015 (the “June 30, 2016 and 2015 consolidated financial statements”). The June 30, 2016 and 2015 consolidated
financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All financial
results presented in this MD&A are expressed in Canadian dollars unless otherwise indicated.
DESCRIPTION OF BUSINESS
Highland is a Canadian-based company engaged in the acquisition, exploration and development of mineral properties. The
Company’s mineral projects are located in Michigan, USA. Highland’s common shares are listed on the TSX Venture
Exchange (“TSXV”) under the symbol HI. At October 25, 2016, the Company had 153,968,626 common shares issued and
outstanding.
The Company has assembled a number of advanced-stage copper projects located in Michigan’s Upper Peninsula region,
including Copperwood, a feasibility stage project, acquired in June 2014 from Orvana Minerals Corp. (“Orvana”), White Pine
subject to final closing of the acquisition from Copper Range Company (“CRC”), a wholly-owned subsidiary of First Quantum
Minerals Ltd.), and Keweenaw, which includes the 543S and the G-2 deposits (subject to the exercise of an option to acquire
a 65% interest in the project from BRP LLC). The Company has also entered into lease agreements entitling the Company to
explore and develop certain other projects located in the same area.
FINANCIAL CONDITION
At June 30, 2016, the Company had a working capital deficiency of $4,281,894. The Company requires additional funds to
settle its working capital deficit, to meet its exploration and development objectives, to complete the acquisition of the White
Pine property (including an amount to replace the current environmental financial assurance bond), to maintain its mineral
leases in good standing, and to provide for management and administration expenses for at least the next 12 months. Such
funding requirements may be met in the future in a number of ways, including the issuance of securities, debt financing, joint
venture or other arrangements. Since August 1, 2016, critical payments required to maintain the Company in good standing
are being made through advances received from the Company’s chairman. At October 25, 2016, such advances made to the
Company total $400,000 (terms of the advances are described in the Transactions with Related Parties section).
There can be no assurance that the Company will be able to raise the funds required. If the Company is not successful in
raising additional funds, it may be required to further delay, reduce the scope of, or eliminate its current or future exploration
and development activities, any of which could have a negative impact on the business, financial condition and results of
operation of the Company.
2
Management’s Discussion and Analysis
Year ended June 30, 2016
ACTIVITIES DURING THE FINANCIAL YEAR ENDED JUNE 30, 2016
Given the Company’s limited financial resources and the current copper price environment, the Company has suspended all of
its exploration and development activities, including field work and feasibility and environmental baseline studies, to minimize
cash requirements. Additional drilling on the Company’s projects, studies and metallurgical tests will recommence as soon as
the Company has raised the required funds.
During the year, the Company focused its efforts on advancing discussions with CRC and the Michigan Department of
Environmental Quality (“MDEQ”) with the aim of completing the acquisition of the White Pine property, assessing various
options to finance the Company’s exploration and development plans and continuing some of the baseline studies undertaken
in prior years.
The Company’s priorities for the current financial year is to complete a financing to settle its current liabilities and fund ongoing
obligations, including the payment of general and administration expenses for at least the next 12 months, to complete the
acquisition of the White Pine property and to recommence activities required to update the feasibility study for its Copperwood
Project.
SIGNIFICANT EVENTS DURING THE FINANCIAL YEAR ENDED JUNE 30, 2016
On October 6, 2015, the Company completed a non-brokered private placement of 24,426,434 common shares with
Osisko Gold Royalties Ltd. (“Osisko”) at a price of $0.15 per share for gross proceeds of $3,663,965. Osisko currenty
owns 29,420,434 shares, representing approximately 19.1% of the issued and outstanding shares of Highland on a
non-diluted basis;
In November 2015, BRP LLC (“BRP”) and the Company agreed to amend the Venture Agreement to provide the
Company more time to exercise its option to acquire a 65% interest in the Keweenaw project from BRP. Under the
amended Venture Agreement, the period to provide a feasibility study on at least one deposit covered by the Venture
Agreement was extended from October 26, 2015 to December 31, 2017. As consideration for this extension, the
Company agreed to secure some of the shafts located on the Keweenaw property and submitted a budget for
environmental work to be completed as part of the feasibility study;
On November 20, 2015, Luc Lessard of Osisko Gold Royalties Ltd. joined the board of directors;
On February 9, 2016, the then Company’s interim president and CEO tendered his resignation. David Fennell, the
Company’s Executive Chairman, was appointed as interim president and CEO of the Company;
In March 2016, the Company further extended the expiry date of the share purchase warrants originally issued in May
2012 to March 2017 with the exercise price of $0.75 remaining unchanged;
In April 2015, the Company entered into a 20-year lease, with an option for an additional 5 years, for certain mineral
rights located in White Pine, Michigan (the “White Pine Lease”); the leased mineral rights cover an area of
approximately 1,816 acres and are located within the White Pine North Project area, but do not belong to the owner
of the former White Pine mine. In accordance with the terms of the White Pine Lease, an additional cash payment of
US$425,000 was payable by Highland in April 2016 and a cash payment of US$150,000 is due in April 2017; an
annual rent of US$25,000 is also payable on each anniversary of the lease, starting in April 2016; given the
Company’s financial position, the Company did not make the cash payment of US$425,000 or the initial rent payment
3
Management’s Discussion and Analysis
Year ended June 30, 2016
of US$25,000 on the due date; the Company is continuing discussions with the lease holder and believes that this
matter will be resolved once it has successfully raised the funds necessary to continue its activities;
During the year, the Company and CRC entered into a number of extension agreements to complete the acquisition
of the White Pine property from the original maturity date of December 31, 2015 to December 2, 2016; discussions
have been held throughout the year with representatives from CRC, the MDEQ and Highland, supported by various
experts in the fields of environmental assessments and water management, with the aim of determining the amount
of the environmental financial assurance and completing the final acquisition of the White Pine property; such
discussions have been suspended until the Company has successfully raised the funds necessary to continue its
activities as described in the Financial Condition section, including the posting of the required financial assurance
bond with the MDEQ; the Company may need to seek additional extensions from CRC to complete the final
acquisition of the White Pine property but there is no assurance that such extensions will be granted;
As a result of the delay in completing the acquisition of the White Pine property, the Company and Osisko periodically
agreed to extend the maturity date of the $10 million secured loan from December 31, 2015 to June 15, 2016; on
June 30, 2016, the Company and Osisko agreed to amend the terms of their agreement entered into in December
2014 and to convert the $10 million deposit on sale of royalty into a 3.0% net smelter return (“NSR”) royalty on all
metals produced from the mineral rights and leases associated with the Copperwood Project; upon closing of the
acquisition of the White Pine property, the Company will grant Osisko a 1.5% NSR royalty on all metals from the
White Pine North Project, and Osisko’s royalty on the Copperwood Project will be reduced to 1.5%; Osisko retains
security over all of the Company’s assets;
In June 2016, the Company recorded a write-down of the capitalized expenses related to the G-2 deposit
($2,381,614), part of the Keweenaw Project, and the non-renewal of certain leased properties ($273,881) for a total
amount of $2,655,495; the exploration work conducted at G-2, mostly during the 2013 financial year, has not resulted
in the discovery of commercially viable quantities of mineral resources and given that the Company does not intend to
conduct further activities on the G-2 project in the near future has led to the write-down;
The Company incurred a net loss of $4,216,092 during the year ended June 30, 2016 compared to a net loss of
$3,142,794 in 2015.
COPPERWOOD PROJECT
In June 2014, the Company acquired the Copperwood Project through the acquisition from Orvana of all of the outstanding
shares of Orvana Resources US Corp. (“Orvana US”) for a cash consideration of US$20 million. An additional consideration of
up to US$5,000,000 may be paid by Highland in cash or shares of Highland, at Orvana’s option, of which US$1.25 million will
become due on June 17, 2017 and US$1.25 million on June 17, 2018. An amount of US$1.25 million may also be payable if
the average copper price for any 60 calendar day period following the first anniversary and preceding the second anniversary
of commencement of commercial production is greater than US$4.25/lb; and an additional payment of US$1.25 million if the
average copper price for any 60 calendar day period following the second anniversary and preceding the third anniversary of
the commencement of commercial production is greater than US$4.50/lb.
The Copperwood deposit is located in Gogebic County in the Upper Peninsula of Michigan, USA within the Porcupine
Mountains copper district and about 35 kilometers west of the White Pine property. Copperwood is comprised of long-term
mineral leases covering an aggregate of 936 contiguous hectares held by Orvana US. Copperwood is a project at the final
feasibility stage. All major permits required for mining the Copperwood Project were obtained or approved in 2012 and 2013,
4
Management’s Discussion and Analysis
Year ended June 30, 2016
subject to certain conditions, including providing financial assurance.
WHITE PINE PROPERTY
In May 2014 (the interim closing date), the Company entered into an agreement to acquire from CRC, all of CRC’s rights, title
and interest in mineral and surface rights forming the White Pine property. The Company issued to CRC at that time 3,000,000
of its common shares. Highland further agreed that, upon completion of a feasibility study and receipt of all necessary permits
for the development of a mine at White Pine, it will pay as additional consideration, in cash or in common shares of Highland,
at the option of CRC, an amount equal to US$0.005 (one half of one cent) per pound for the first one billion pounds of proven
and probable reserves of copper and US$0.0025 (one quarter of one cent) for each additional pound of proven and probable
reserves of copper.
The final closing of the acquisition will be completed once Highland has (i) released CRC for a US$2.85 million financial
assurance letter of credit associated with the remediation and closure plan of the previous White Pine mine site in a manner
that is acceptable to all parties involved, including the applicable governmental authorities; and (ii) released CRC from its
environmental obligations with the MDEQ. At that time, Highland will assume all of CRC’s environmental liabilities related to
the former White Pine mine site and will also be responsible for all on-going environmental obligations.
CRC acquired the original White Pine mine in 1937. Subsequent drilling revealed the widespread nature of the mineralization
and underground mining by room and pillar methods began in 1952. Production from 1952 to 1995 was 198,070,985 short
tons averaging 1.14% copper for approximately 4.5 billion pounds of copper. In 1995, as a result of depressed copper prices,
CRC, then a subsidiary of Inmet Mining Corporation, closed the White Pine mine, although significant amounts of
mineralization remained, particularly to the northeast of the mine, referred to as the White Pine North Project. An historical
estimate of the White Pine North Project was completed in October 1995 by the then White Pine chief geologist based on 526
diamond drill holes, a portion of which is located within the White Pine Lease area. The Company has initiated the work
required to verify the historical data with the objective of completing a resource estimate.
KEWEENAW PROJECT
The Keweenaw Project, which covers an area of approximately 9,000 acres, includes the 543S and G-2 deposits. Under a
Mining Venture Agreement (the “Venture Agreement”) with BRP, the Company has an option to acquire a 65 percent interest
in the Keweenaw Project, by spending US$11,500,000 in exploration and development work, providing a feasibility study by
December 31, 2017 (amended from October 2015 as part of the November 2015 amendment) and securing some of the
historical shafts located in the Keweenaw region. At June 30, 2016, a cumulative amount of US$13,096,000 has been spent
on the Keweenaw Project. Upon providing a feasibility study and exercising the option, the Company will have a 65% interest
and BRP will have a 35% interest in the property. In addition, BRP will be entitled to a sliding scale NSR royalty from
production on those properties contributed by BRP based on the price per pound of copper with a minimum of 2% up to a
maximum of 5%.
5
Management’s Discussion and Analysis
Year ended June 30, 2016
ROYALTY AGREEMENTS WITH OSISKO
On June 30, 2016, the Company and Osisko agreed to amend the terms of their agreement entered into in December 2014
and to convert the $10 million refundable deposit into a 3.0% net smelter return (“NSR”) royalty on all metals produced from
the mineral rights and leases associated with the Copperwood Project. Upon closing of the acquisition of the White Pine
property, the Company will grant Osisko a 1.5% NSR royalty on all metals from the White Pine North Project, and Osisko’s
royalty on the Copperwood Project will be reduced to 1.5%. Osisko retains security over all of the Company’s assets.
In December 2014, Osisko had made a $10 million refundable deposit on a 3% sliding-scale NSR royalty on all metals from
the White Pine North Project (the “White Pine North Royalty”). The Osisko deposit was secured against all of the Company’s
assets. Upon completion of the acquisition of the White Pine property, the Osisko deposit was to be exchanged for the White
Pine North Royalty.
In December 2014, the Company had also granted to Osisko an option to purchase for US$26 million any future silver
production from the Company’s Michigan projects, including White Pine and Copperwood (the “Silver Royalty”). Osisko may
elect to exercise the option to purchase the silver production by paying US$26 million to the Company within 60 days following
the delivery to Osisko of a feasibility study on the Michigan projects. The option is for a period of 35 years.
As part of the White Pine North Royalty transaction, Osisko has the right to nominate one director to the Board of Highland. To
that effect, Luc Lessard was appointed in November 2015. Osisko will also be entitled to nominate one additional director to
the Board of Highland if it exercises the Silver Royalty option.
QUALIFIED PERSON
Carlos H. Bertoni, P. Geo., a Qualified Person under NI 43-101, has reviewed and approved all of the technical information in
this MD&A. Mr. Bertoni is the Company’s executive vice president, project development.
6
EXPLORATION EXPENSES
Amounts invested in exploration and evaluation assets and capitalized in accordance with the Company’s accounting policy,
during the years ended June 30, 2016 and 2015 are as follows:
Management’s Discussion and Analysis
Year ended June 30, 2016
Additions
Property payments
Site preparation, drilling and assaying
Labour
Studies
Finance expense on promissory note
Other expenses
Non-cash items
Property payments in shares
Depreciation and amortization
Gain on disposal of capital assets
Share-based compensation
Accretion on purchase price payable
Effect of foreign exchange
Sub-total – net additions
Other items
Write-down
Conversion of Osisko loan into NSR royalty
Year ended June 30,
2016
$
2015
$
773,401
452,318
-
4,064,485
1,217,610
2,142,759
554,438
1,648,108
-
459,951
583,976
956,605
3,005,400
9,848,251
-
123,669
(83,577)
31,552
463,755
485,840
268,895
(7,774)
139,869
499,325
1,373,850
7,687,694
1,909,249
9,073,849
4,914,649
18,922,100
(2,655,495)
(10,000,000)
-
-
Net change to exploration and evaluation assets during the year
(7,740,846)
18,922,100
Cumulative amounts invested by projects are as follows:
Copperwood
White Pine
Keweenaw
Others
June 30,
June 30,
2016
$
2015
$
21,462,768
29,804,661
18,587,530
15,447,201
13,337,295
15,642,832
439,595
673,340
53,827,188
61,568,034
7
SELECTED CONSOLIDATED FINANCIAL INFORMATION (1 )(2)
The following selected financial information should be read in conjunction with the Company’s June 30, 2016 and 2015
consolidated financial statements.
Management’s Discussion and Analysis
Year ended June 30, 2016
Financial Position
Cash
Working capital deficit
Exploration and evaluation assets
Total assets
Non-current portion of balance of purchase price payable
Shareholders' equity
Comprehensive Loss
Net loss for the year
Basic and diluted loss per share
Cash Flows
Operating activities
Investing activities
Financing activities
June 30,
June 30,
2016
$
2015
$
201,998
1,042,341
(4,281,894)
(12,004,841)
53,827,188
54,150,409
1,289,355
48,064,323
Year ended
Year ended
June 30,
June 30,
2016
$
2015
$
61,568,034
62,950,927
2,207,430
47,307,629
Year ended
June 30,
2014
$
(4,216,092)
(3,142,794)
(3,423,219)
(0.03)
(0.03)
(0.06)
(1,173,090)
(3,343,530)
3,639,008
(2,772,930)
(2,166,128)
(8,459,188)
(21,026,360)
9,238,151
20,082,935
1) The Selected Consolidated Financial Information was derived from the Company’s June 30, 2016 and 2015 consolidated financial
statements, prepared in accordance with IFRS.
2) The Company’s June 30, 2016 and 2015 consolidated financial statements have been prepared on the basis of a going concern,
which assumes that the Company will continue its operations in the foreseeable future and will be able to realize its assets and
discharge its liabilities and commitments in the normal course of operations. The Company is subject to a number of risks and
uncertainties associated with its future exploration and development activities, including raising additional fund, completing the
acquisition of the White Pine property, acquiring a 65% interest in the Keweenaw Project and retaining its rights under the White
Pine lease agreement. There can be no assurance that the Company will be able to raise the funds required. If the Company is
not successful in raising additional funds, it may be required to further delay, reduce the scope of, or eliminate its current or future
exploration and development activities, and/or sell some of its assets, any of which could have a negative impact on the
business, financial condition and results of operation of the Company. The conditions and uncertainties described above indicate
the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going
concern. If the going concern assumption was not appropriate for the Company’s June 30, 2016 and 2015 consolidated financial
statements, adjustments which could be material would be necessary to the carrying value of assets and liabilities, in particular
an impairment of exploration and evaluation assets, as well as adjustments to reported expenses.
8
ended
June 30,
Since its incorporation, the Company has not paid any cash dividend on its outstanding common shares. Any future dividend
payments will depend on the Company’s financial needs to fund its exploration and development programs and any other
factor that the board of directors may deem necessary to consider. It is highly unlikely that any dividends will be paid in the
Management’s Discussion and Analysis
Year ended June 30, 2016
near future.
Financial Review
The Company is in the exploration and development phase and does not yet have revenue-generating activities. Accordingly,
the Company’s financial performance is largely a function of the level of exploration and development activities undertaken on
its projects and the management and administrative expenses required to operate and carry out its activities as well as other
items such as foreign exchange gains or losses.
In accordance with its accounting policy, an amount of $4,914,649 in exploration and evaluation expenses was capitalized
during the year ended June 30, 2016. These include cash expenses of $3,005,400 (consisting mostly of labor, environmental
and tailings related studies and property payments) and non-cash expenses of $1,909,249, including the impact of the
weakening of the Canadian dollar during the reporting period in the amount of $1,373,850. In 2016, the capitalized amounts
were reduced by an amount of $2,655,495 related mostly to the write-down of the G-2 project expenditures and an amount of
$10,000,000 following the conversion of the Osisko deposit on sale of royalty into a 3% NSR royalty on the Copperwood
Project.
During the comparative period in 2015, the Company capitalized an amount of $18,922,100 as exploration and evaluation
assets, including cash expenses of $9,848,251 (consisting mostly of direct costs related to the completion of 27 drill holes for
19,152 meters at the White Pine North Project, labor, pre-feasibility level studies which had begun in September 2004 on the
development of the Company’s Michigan projects, property payments and finance expense on the Orvana promissory note
which was fully reimbursed in December 2014) and non-cash expenses of $9,073,849, including the impact of the weakening
of the Canadian dollar during the 2015 reporting period in the amount of $7,687,694.
The detail of the capitalized exploration and evaluation expenses and the exploration and evaluation assets by project is
presented in the Exploration expenses section.
Year ended June 30, 2016 compared to year ended June 30, 2015
The Company incurred a net loss of $4,216,092 during the year ended June 30, 2016 compared to a net loss of $3,142,794 in
2015. The increased loss in 2016 is mostly due to the write-down of the capitalized expenses related to the G-2 project and
the non-renewal of certain leased properties for a total amount of $2,655,495, partially offset by lower management and
administration expenses which totaled $1,486,118 in 2016 compared to $3,087,579 in 2015.
The Company wrote-down to nil the amount capitalized for the G-2 project of $2,381,614 as the exploration conducted at G-2
has not led to the discovery of commercially viable quantities of mineral resources and the Company does not intend to
conduct further work at G-2 in the near term. A write-down of $273,881 related to certain leased properties was also recorded
9
Management’s Discussion and Analysis
Year ended June 30, 2016
in 2016 following the non renewal of these leases.
Management and administration expenses in 2016 reflect lower wages and fees due to reduced activities and the reversal of
$263,000 in accrued wages related to the Company’s former president and CEO following his resignation in February 2016,
lower professional fees (2015 professional fees included legal, audit and tax fees related to the acquisition of the Copperwood
project and legal fees related to the $10 million deposit from Osisko), a reduction in investor relations and travel expenses, due
to the non-renewal of the investor relations program in the last quarter of 2015, and lower share-based compensation expense
(an amount of $48,206 in 2016 compared to $667,777 in 2015, mostly due to the grant in August 2014 of 1,400,000 stock
options at a fair value of $0.44 per share compared to 200,000 stock options at a fair value of $0.11 per share during the
current reporting period).
At June 30, 2016, unpaid compensation to the Company’s directors and officers total $651,000. The payment of these
amounts will only be settled once the Company has raised sufficient funds to recommence its activities.
Year ended June 30, 2015 compared to year ended June 30, 2014
The Company incurred a net loss of $3,142,794 during the year ended June 30, 2015 compared to a net loss of $3,423,219 in
2014. Pre-exploration expenses of $1,745,437 incurred at White Pine North in 2014 before the legal right to undertake
exploration and evaluation activities had been obtained were partially offset in 2015 by higher administrative and general
expenses of $1,363,354 as a result of the increased activities following the acquisition of the White Pine North Project and the
Copperwood Project in May and June 2014 and professional fees incurred in relation to the Royalty Agreements with Osisko.
Higher share-based remuneration expense was charged to income in 2015 compared to 2014 due to the grant of 1,905,000
stock options in April 2015 and 1,400,000 stock options in August 2014.
4th quarter ended June 30, 2016 compared to the 4th quarter ended June 30, 2015
During the 4th quarter ended June 30, 2016, the Company incurred a net loss of $2,865,206 ($0.02 per share), compared to a
net loss of $529,381 ($0.01 per share) during the 4th quarter ended June 30, 2015. Results for the 4th quarter ended June 30,
2016 include a write-down of the amount capitalized at the G-2 deposit of $2,381,614 compared to nil in 2015. Management
and administration expenses totaled $491,461 during the period ended June 30, 2016 compared to $528,340 in 2015.
10
Selected Quarterly Financial Information
The following is a summary of the Company’s financial results for the past eight quarters:
Management’s Discussion and Analysis
Year ended June 30, 2016
Period ended
June 30, 2016
March 31, 2016
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
Liquidity and Capital Resources
Revenues
Net loss
per share
Basic and
diluted loss
$
302
700
2,340
588
3,359
2,325
582
4,092
$
(2,865,206)
(373,666)
(493,768)
(483,452)
(529,381)
(436,823)
(1,011,470)
(1,165,120)
$
(0.02)
(0.00)
(0.00)
(0.00)
(0.01)
(0.00)
(0.01)
(0.01)
The Company’s working capital deficiency at June 30, 2016 totaled $4,281,894 compared to a working capital deficiency of
$12,004,841 at June 30, 2015. The reduction in the working capital deficiency during the year ended June 30, 2016 is mainly
attributable to a) the conversion on June 30, 2016 of the $10,000,000 deposit from Osisko into a 3% NSR royalty on metals
produced at the Copperwood Project; b) the net proceeds of $3,639,008 received on October 6, 2015 from a non brokered
private placement with Osisko of 24,426,434 common shares at $0.15 per share; partially offset by c) the reclassification to
current liabilities of a portion of the balance of purchase price payable in the amount of $1,445,087 related to the Copperwood
Project, due in June 2017; and d) investments made on the Company’s exploration and evaluation assets ($3,005,400,
excluding non-cash items) and management and administration expenses ($1,397,710, excluding non-cash items).
The Company needs to raise additional funds to meet all of its obligations, to pursue exploration and development work on its
mineral projects and to provide for management and administration expenses. The Company’s properties are in the
exploration and development stage and, as a result, the Company currently has no source of operating cash flow. The
potential sources of future funds presently available to the Company are through the sale of equity capital of the Company,
debt financing, joint venture or other arrangements. The ability of the Company to arrange the required financing depends in
part upon the price of copper, global economic and capital market conditions as well as the business performance of the
Company. There can be no assurance that the Company will be successful in its efforts to arrange additional financing on
terms satisfactory to the Company. The Company’s ability to continue as a going concern is dependent on management’s
ability to raise the funds required for continued operations.
11
Management’s Discussion and Analysis
Year ended June 30, 2016
Capital Management
The Company defines capital that it manages as loans (including deposit on sale of royalty and balance of purchase price
payable) and shareholders’ equity. When managing capital, the Company’s objectives are a) to ensure the entity continues as
a going concern; b) to increase the value of the entity’s assets; and c) to achieve optimal returns to shareholders. These
objectives will be achieved by identifying the right exploration projects, adding value to these projects and ultimately taking
them to production or obtaining sufficient proceeds from their disposal. At June 30, 2016, managed capital was $50,798,765
($59,515,059 at June 30, 2015). There were no changes in the Company’s approach to capital management during the year
ended June 30, 2016. The Company is not subject to any externally imposed capital requirements as at June 30, 2016.
Off-Balance Sheet Arrangements
At June 30, 2016, the Company has no off-balance sheet arrangements.
Transactions with Related Parties
During the year ended June 30, 2016, the Company incurred administration expenses of $270,658 and purchased office
furniture and computer equipment for an amount of $31,681 from Reunion Gold Corporation (“Reunion”), a related party by
virtue of common management and directors (administration expenses of $495,633 in 2015). At June 30, 2016, the Company
had an amount due to Reunion of $25,543 ($8,022 at June 30, 2015).
On January 1, 2016, the Company entered into separate agreements to provide management and administration services to
other TSXV-listed companies, related by virtue of common management, including Odyssey Resources Limited and Reunion
Gold Corporation. The services are provided at cost. Amounts recovered for management and administration services during
the year ended June 30, 2016 amounted to $120,810 (nil in 2015).
David Fennell, the Company’s chairman and interim president and CEO has advanced funds of $400,000 since August 1,
2016, to ensure that critical payments to maintain the Company in good standing are being made. These advances bear
interest at the rate of 1% per month and the principal and accrued interest will be repayable by the Company on the earlier of
the completion of a financing for a minimum amount of $10 million or upon demand at any time after June 30, 2017.
These transactions were measured at the exchange amount, which is the amount agreed upon by the transacting parties. The
services provided by Reunion under the service agreement include administrative support, corporate and regulatory services,
office space, and office equipment and supplies.
Remuneration to directors and key management of the Company totaled $912,677 during the year ended June 30, 2016
($1,652,772 in 2015).
12
Management’s Discussion and Analysis
Year ended June 30, 2016
Outstanding Share Data
At October 25, 2016, the Company has 153,968,626 common shares issued and outstanding, 41,250,000 share purchase
warrants exercisable at a price of $0.75 per share until March 31, 2017, and 7,520,000 stock options outstanding with an
average exercise price of $0.48, expiring at various dates until November 2020.
Basis of Presentation of Financial Statements
The Company’s consolidated financial statements have been prepared in accordance with IFRS as issued by the International
Accounting Standards Board. The accounting policies, methods of computation and presentation applied in the Company’s
consolidated financial statements are consistent with those of the previous year. The significant accounting policies of
Highland are detailed in the notes to the June 30, 2016 and 2015 consolidated financial statements filed on SEDAR.
Significant accounting judgements and estimates
The preparation of the Company’s consolidated financial statements requires management to make certain estimates,
judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial
statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates.
The Company’s consolidated financial statements include estimates which, by their nature, are uncertain and may require
accounting adjustments based on future occurrences. Revisions to accounting estimates, judgments and assumptions are
recognized in the period in which the estimate is revised and future period if the revision affects both current and future period.
These estimates, judgments and assumptions are based on historical experience, current and future economic conditions and
other factors, including expectations of future events that are believed to be reasonable under the circumstances. Significant
assumptions about the future and other sources of estimation uncertainty that management has made at the financial position
reporting date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that
actual results differ from the assumptions made, relate to, but are not limited to the following:
Title to mineral property interests
Although the Company has taken steps to verify title to mineral properties in which it has an interest, these procedures are
subject to certain assumptions and do not guarantee the Company‘s title. Such properties may be subject to prior agreements
or transfers and title may be affected by undetected defects.
The final closing of the acquisition of the White Pine Project can only be completed once the Company has i) released Copper
Range Company (“CRC”) of a US$2.85 million financial assurance letter of credit associated with the remediation and closure
plan of the previous White Pine operation in a manner that is acceptable to all parties involved, including the applicable
governmental authorities; and ii) released CRC from its environmental obligations with the Michigan Department of
Environmental Quality (“MDEQ”). Final closing, which initially was to occur by December 31, 2015 has been extended to
December 2, 2016. The Company also requires additional funds to post the required financial assurance bond with the MDEQ.
The Company believes that it will be able to meet these conditions. However, meeting these conditions is dependent on a
13
Management’s Discussion and Analysis
Year ended June 30, 2016
number of factors, not all of which are under the Company’s control, and there is no assurance that they will be met. Should
the Company not be able to meet the final closing conditions, it will not be able to complete the acquisition of the White Pine
Project which would trigger an impairment evaluation of the related exploration and evaluation assets.
Lease Agreement, White Pine
The Company was required to make cash payments of US$450,000 in April 2016 to the Lessor of certain mineral rights
located in White Pine. Given its current financial position, the Company has not yet made these cash payments. The Company
is continuing discussions with the Lessor and believes that this matter will be resolved once it has successfully raised the
funds necessary to continue its activities. However, there is no assurance that the Company will be successful in raising such
funds. Should the Company not be able to resolve this situation, an impairment evaluation of the related exploration and
evaluation assets would be required.
Exploration and evaluation expenditures
The application of the Company‘s accounting policy for exploration and evaluation expenditure requires judgment in
determining whether it is likely that future economic benefits will flow to the Company. If, after exploration and evaluation
expenditures are capitalized, information becomes available suggesting that the carrying amount of an exploration and
evaluation asset may exceed its recoverable amount, the Company carries out an impairment test in the year the new
information becomes available.
Environmental liability
The Company’s accounting policy for the recognition of an environmental liability requires significant estimates and
assumptions such as the requirements of the relevant legal and regulatory framework, the magnitude of possible disturbance,
the timing, extent, and costs of rehabilitation activities and the determination of an appropriate discount factor. Changes to
these estimates and assumptions may result in future actual expenditures differing from the amounts currently provided for.
The environmental liability is periodically reviewed and updated based on the available facts and circumstances.
Accounting Standards Issued but not yet Applied
Standards, amendments and interpretations issued but not yet effective up to the date of the issuance of these consolidated
financial statements that are expected to be relevant to the Company are listed below. Certain other standards and
interpretations have been issued but are not expected to have a material impact on the Company’s consolidated financial
statements.
Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
On June 20, 2016, the IASB issued amendments to IFRS 2 Share-based Payment, clarifying how to account for certain types
of share-based payment transactions. The amendments apply for annual periods beginning on or after January 1, 2018. As a
14
Management’s Discussion and Analysis
Year ended June 30, 2016
practical simplification, the amendments can be applied prospectively. Retrospective, or early, application is permitted if
information is available without the use of hindsight. The amendments provide requirements on the accounting for: the effects
of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-based payment
transactions with a net settlement feature for withholding tax obligations; and a modification to the terms and conditions of a
share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Company
intends to adopt the amendments to IFRS 2 in its financial statements for the annual period beginning on July 1, 2018. The
extent of the impact of adoption of the standard has not yet been determined.
IFRS 9, Financial Instruments
The International Accounting Standards Board (“IASB”) released IFRS 9, Financial Instruments (2014) (“IFRS 9”), representing
the completion of its project to replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). The new
standard introduces extensive changes to IAS 39’s guidance on the classification and measurement of financial assets and
introduces a new “expected credit loss model” for the impairment of financial assets. IFRS 9 also provides new guidance on
the application of hedge accounting. The Company’s management has yet to assess the impact of IFRS 9 on its consolidated
financial statements. The new standard is required to be applied for annual reporting periods beginning on or after January 1,
2018.
IFRS 15, Revenue from Contracts with Customers
On May 28, 2014 the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard is effective for annual
periods beginning on or after January 1, 2018. Earlier application is permitted. IFRS 15 will replace IAS 11 Construction
Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real
Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving Advertising
Services. On April 12, 2016, the IASB issued Clarifications to IFRS 15, Revenue from Contracts with Customers, which is
effective at the same time as IFRS 15. The standard contains a single model that applies to contracts with customers and two
approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of
transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds
have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to
contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the
scope of other IFRSs. The clarifications to IFRS 15 provide additional guidance with respect to the five-step analysis, transition,
and the application of the Standard to licenses of intellectual property. The Company intends to adopt IFRS 15 and the
clarifications in its financial statements for the annual period beginning on July 1, 2018. The extent of the impact of adoption of
the standard has not yet been determined.
IFRS 16, Leases
In January 2016, the IASB published IFRS 16, Leases (“IFRS 16”) which will replace IAS 17, Leases (“IAS 17”). IFRS 16
eliminates the classification as an operating lease and requires lessees to recognize a right-of-use asset and a lease liability in
the statement of financial position for all leases with exemptions permitted for short-term leases and leases of low value
15
Management’s Discussion and Analysis
Year ended June 30, 2016
assets. In addition, IFRS 16 changes the definition of a lease; sets requirements on how to account for the asset and liability,
including complexities such as non-lease elements, variable lease payments and option periods; changes the accounting for
sale and leaseback arrangements; largely retains IAS 17’s approach to lessor accounting; and introduces new disclosure
requirements. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019 with early application
permitted in certain circumstances. The Company has yet to assess the impact of this new standard on its consolidated
financial statements.
FINANCIAL RISK FACTORS
The Company thoroughly examines the various financial risks to which it is exposed and assesses the impact and likelihood of
those risks. These risks include liquidity risk, currency risk, credit risk and interest rate risk. Where material, these risks are
reviewed by the board of directors.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s
ability to continue as a going concern is dependent on management’s ability to raise the funds required for continued
operations through future financings (see ‘Financial Condition’ section).
The following table summarizes the contractual maturities of the Company’s financial liabilities at June 30, 2016:
Carrying
Settlement
Within
Within
Over
amount
amount
6 months
1 year
2-3 years
3 years
Accounts payable and accrued liabilities
3,019,495
3,019,495
3,019,495
Due to a related party
25,543
25,543
25,543
$
$
$
$
-
-
$
-
-
Balance of purchase price payable
2,734,442
3,229,250
-
1,614,625
1,614,625
5,779,480
6,274,288
3,045,038
1,614,625
1,614,625
$
-
-
-
-
Credit Risk
Credit risk is the risk that the Company will incur losses due to the non-payment of contractual obligations by third parties. The
Company is exposed to credit risk with respect to cash.
Interest Rate Risk
The Company’s interest rate risk relates to cash. The Company's current policy on its cash balances is to invest excess cash
in guaranteed investment certificates or interest bearing accounts with major Canadian-based chartered banks. The Company
16
regularly monitors compliance to its cash management policy. Cash is subject to floating interest rates. Sensitivity to a plus or
minus 1% change in interest rates would affect profit or loss by approximately $2,000.
Management’s Discussion and Analysis
Year ended June 30, 2016
Currency Risk
In the normal course of operations, the Company is exposed to currency risk on transactions that are denominated in a
currency other than the respective functional currencies of each of the entities within the consolidated group. The currency in
which these transactions are denominated are primarily the Canadian and the US dollar. The consolidated entity seeks to
minimise its exposure to currency risk by monitoring exchange rates and entering into foreign currency transactions that
maximize the consolidated entity’s position. The consolidated entity does not presently enter into hedging arrangements to
hedge its currency risk. All foreign currency transactions are entered into at spot rates. The board of directors considers this
policy appropriate, taking into account the consolidated entity’s size, current stage of operations, financial position and the
board’s approach to risk management. At June 30, 2016, financial assets and liabilities denominated in a foreign currency
consisted of cash of $7,782 and accounts payable and accrued liabilities of $1,274,644. The impact on profit or loss of a 10%
increase or decrease in foreign currencies against the Canadian dollar would be approximately $127,000.
OTHER RISKS AND UNCERTAINTIES
The Company is subject to a number of significant risks and uncertainties which include but are not limited to the nature of its
business and the present stage of exploration and development of its mineral projects, the requirement for additional funds to
settle its obligations and commitments, and to pursue its planned exploration and development activities on all of its projects.
Failure to successfully address such risks and uncertainties could have a significant negative impact on the Company’s overall
operations and financial condition and could materially affect the value of the Company’s assets and future operating results.
Therefore, an investment in the securities of the Company involves significant risks and should be considered speculative. The
risks and uncertainties described herein are not necessarily the only ones that the Company could be facing. The Company
cannot give assurance that it will successfully address these risks or other unknown risks that may affect its business. Readers
should carefully consider the risks and uncertainties described below.
Company Specific Risks
•
•
•
•
The Company may be unable to continue funding the exploration and development of its projects and achieve its
business objectives and milestones.
The Company may be unable to complete the acquisition of the White Pine property if it cannot meet the final closing
conditions. This would negatively impact the Company’s business plan.
The Company’s plans and objectives as well as its ability to raise funds are affected by low copper prices.
The Company is subject to environmental risks related to the fact that the White Pine property is subject to a consent
decree and, as part of the acquisition of White Pine, the Company will have to assume certain environmental
responsibilities and risks related to the closure of the former White Pine Mine.
•
In Michigan, mineral rights are property rights that can be sold, transferred or leased. The Company is taking steps
to verify title with respect to its most material mineral properties. Although the Company believes that title to its
17
Management’s Discussion and Analysis
Year ended June 30, 2016
mineral properties are in good standing there is no guarantee that title to such properties will not be challenged or
impugned.
•
The Company’s mineral resource estimates are not mineral reserves. There is no assurance that minerals will be
discovered in sufficient quantities to justify commercial operations and that the Company will be able to demonstrate
the economic viability of its deposits.
•
•
•
•
The Company may not obtain all necessary permits to conduct its activities and operate a mine.
Future issuance of common shares into the public market may result in dilution to the existing shareholders.
The Company faces substantial competition within the mining industry from other mineral companies with much
greater financial and technical resources.
The Company has no history of earnings and does not expect to receive revenues from operations in the
foreseeable future.
• Certain directors and senior officers of the Company also serve as officers and/or directors of other mineral resource
companies, which may give rise to conflicts.
Industry Risks
Mineral exploration and development is a high risk, speculative business. Few properties that are explored are
ultimately developed into producing mines.
Mineral exploration is subject to geological uncertainties and interpretation.
Mineral exploration is subject to numerous industry operating and environmental hazards and risks, many of which
are beyond the Company’s control.
Substantial expenditures are required to explore mineral projects, define mineral resources, and complete all
metallurgical, engineering, environmental, financial and other studies required to complete a feasibility study.
Changes in mining and environmental laws.
Necessary permits to operate may not be granted or may be granted later than anticipated.
Current economic uncertainties globally have created market volatility and risk aversion among investors, limiting
capital raising options.
Commodity prices including the price of copper have fluctuated widely in the past and are expected to continue to do
so in the future.
Mining operations including exploration and development activities are subject to numerous laws and regulations.
Title to mineral rights and surface rights may be disputed.
Social and environmental groups may be opposed to the development of mining projects.
18
Management’s Discussion and Analysis
Year ended June 30, 2016
Cautionary Note Regarding Forward-Looking Information
This MD&A contains “forward-looking information” within the meaning of applicable Canadian securities laws. Forward-looking
information can often be identified by forward-looking words such as “anticipate”, “believe”, “expect”, “goal”, “plan”, “intend”,
“estimate”, “may” and “will” or similar words suggesting future outcomes, or other expectations, beliefs, plans, objectives,
assumptions, intentions or statements about future events or performance. Forward-looking information is based on the
reasonable assumptions, estimates, analysis and opinions of management made in light of its experience and its perception of
trends, current conditions and expected developments, as well as other factors that management believes to be relevant and
reasonable in the circumstances at the date that such statements are made. Forward-looking information is inherently subject
to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or
achievements of the Company to be materially different from those expressed or implied by the forward-looking information.
Specifically, this MD&A contains forward-looking information regarding the Company’s plans going forward including plans to
raise additional funds to pursue the Company’s activities and to meet its current obligations, plans to complete the acquisition
of the White Pine property and of a 65% interest in the Keweenaw Project, and plans to complete technical studies, additional
drilling programs and resource estimates. Other forward looking information in this MD&A includes, but is not limited to,
forward-looking information with respect to the requirement for additional capital and other statements relating to the financial
and business prospects of the Company.
There can be no assurance that the Company will be successful in its efforts to complete its plans and achieve its objectives
and that such forward-looking information will prove to be accurate. Actual results could differ materially from those currently
anticipated due to any number of factors, including the inability of the Company to secure the funds necessary to meet its
plans and obligations, the inability to complete a resource estimate and technical studies, the conclusions of such studies, and
other variables such as lower than expected grades and quantities of resources, changes in demand for and prices of copper,
mining rates and recovery rates, legislative, environmental and other regulatory approval or political changes, delays in
obtaining or failures to obtain required governmental, environmental or other approvals and sufficient financing, changes in
exchange rates, and other factors.
Accordingly, readers should not place undue reliance on forward-looking information. The Company undertakes no obligation
to update publicly or otherwise revise any forward-looking information, except as may be required by law.
Cautionary Note to U.S. Investors Concerning Resource Estimates
The resource estimates in this MD&A were prepared in accordance with NI 43-101 adopted by the Canadian Securities
Administrators and it contains the terms “measured”, “indicated” and “inferred” resources. Although these terms are
recognized and required in Canada, the U.S. Securities and Exchange Commission ("SEC") does not recognize them. The
SEC permits US mining companies, in their filings with the SEC, to disclose only those mineral deposits that constitute
“reserves”. Under United States standards, mineralization may not be classified as a reserve unless the determination has
been made that the mineralization could be economically and legally extracted at the time the determination is made. United
States investors should not assume that all or any portion of a measured or indicated resource will ever be converted into
19
Management’s Discussion and Analysis
Year ended June 30, 2016
“reserves”. Further, “inferred resources” have a great amount of uncertainty as to their existence and whether they can be
mined economically or legally, and United States investors should not assume that “inferred resources” exist or can be legally
or economically mined, or that they will ever be upgraded to a higher category.
Additional Information and Continuous Disclosure
This MD&A has been prepared as at October 25, 2016. Additional information on the Company is available through regular
filings of press releases, financial statements and MD&A on SEDAR (www.sedar.com) and on the Company’s website
(www.highlandcopper.com).
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