CONSOLIDATED FINANCIAL STATEMENTS
As at June 30, 2018 and 2017
In US 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, 2018, June 30,
2017, and July 1, 2016, the consolidated statements of comprehensive loss, changes in
shareholders’ equity and cash flows for the years ended June 30, 2018, and June 30, 2017, 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
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
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, 2018, June 30, 2017,
and July 1, 2016, and its consolidated financial performance and its consolidated cash flows for the
years ended June 30, 2018, and June 30, 2017, 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 in the
consolidated financial statements, 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.
Comparative information
Without modifying our opinion, we draw attention to Note 1 in the consolidated financial statements
which indicates that the comparative information presented as at and for the year ended June 30,
2017, has been restated and that the comparative information presented as at July 1, 2016, has been
derived from the consolidated financial statements as at and for the year ended June 30, 2016.
September 11, 2018
Montréal, Canada
*CPA auditor, CA, public accountancy permit No. A119245
3
Highland Copper Company Inc.
Consolidated Statements of Financial Position
(in US dollars)
ASSETS
Current
Cash and cash equivalents (Note 4)
Sales taxes receivable
Prepaid expenses and other
Non-current
Capital assets (Note 5)
Exploration and evaluation assets (Note 6)
TOTAL ASSETS
LIABILITIES
Current
Accounts payable and accrued liabilities
Current portion of note payable (Note 7)
Current portion of balance of purchase price payable (Note 8)
Current portion of promissory note (Note 9)
Due to a related party (Note 16)
Non-current
Note payable (Note 7)
Balance of purchase price payable (Note 8)
Promissory note (Note 9)
Environmental liability (Note 10)
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Share capital (Note 11)
Contributed surplus
Deficit
Cumulative translation adjustment
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
June 30,
June 30,
2018
$
2017
$
July 1,
2016
$
(Note 1- restated)
(Note 1- restated)
3,487,847
14,061,705
156,382
132,093
123,663
42,423
64,283
-
4,825
3,743,603
14,168,411
161,207
140,006
58,453
89,022
31,795,832
30,351,733
19,773,626
35,679,441
44,578,597
20,023,855
1,356,742
1,499,435
2,337,613
110,000
1,004,333
2,501,248
-
110,000
-
1,139,767
1,118,748
835,074
-
-
19,775
4,972,323
3,584,276
3,476,136
165,000
275,000
-
-
-
998,185
6,244,239
7,170,686
-
252,678
246,315
237,366
11,634,240
11,276,277
4,711,687
66,137,274
64,197,630
47,531,970
11,349,577
11,176,081
5,756,400
(55,123,241)
(43,551,548)
(39,069,008)
1,681,591
1,480,157
1,092,806
24,045,201
33,302,320
15,312,168
35,679,441
44,578,597
20,023,855
Going Concern (Note 2); Commitments and Contingencies (Note 6 and 21); Event after the Reporting Date (Note 24).
The accompanying notes form an integral part of these consolidated financial statements.
On behalf of the Board,
/s/ Denis Miville-Deschenes
Denis Miville-Deschenes, Director
/s/ Jo Mark Zurel
Jo Mark Zurel, Director
4
Highland Copper Company Inc.
Consolidated Statements of Comprehensive Loss
(in US dollars)
Expenses and other items
Exploration and evaluation (Note 13)
Management and administration (Note 14)
Business development
Share-based compensation
Depreciation and amortization (Note 5)
Write-down of exploration and evaluation assets (Note 6)
Accretion on environmental liability (Note 10)
Finance expense on loan from a director (Note 16)
Finance expense
Finance income
(Gain) loss on foreign exchange
Year ended June 30,
2017
2018
$
$
(Note 1 - restated)
8,584,241
1,698,615
182,373
503,512
44,609
654,405
6,363
-
31,833
(112,343)
(21,915)
2,874,270
1,048,024
199,638
20,318
51,581
-
8,949
8,664
17,050
(39,270)
293,316
Net loss for the year
(11,571,693)
(4,482,540)
Other comprehensive income
Item that will not be subsequently reclassified to income
Foreign currency translation adjustment
201,434
387,351
Total comprehensive loss for the year
(11,370,259)
(4,095,189)
Basic and diluted loss per common share (Note 15)
(0.02)
(0.02)
Weighted average number of common shares - basic and diluted
464,575,595
251,264,795
The accompanying notes form an integral part of these consolidated financial statements.
5
Highland Copper Company Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(in US dollars)
Number of issued
and outstanding
common shares
Share
capital
$
Contributed
surplus
$
Deficit
$
Cumulative
translation
adjustment
$
Total
shareholders'
equity
$
Balance at June 30, 2017 (Note 1 - restated)
459,148,153
64,197,630
11,176,081
(43,551,548)
1,480,157
33,302,320
Shares issued on exercise of warrants (Note 11)
Share-based compensation
Net loss for the year
Foreign currency translation adjustment
Balance at June 30, 2018
13,785,536
-
-
-
472,933,689
1,939,644
-
-
-
66,137,274
(330,016)
503,512
-
-
11,349,577
-
-
(11,571,693)
-
(55,123,241)
-
-
-
201,434
1,681,591
1,609,628
503,512
(11,571,693)
201,434
24,045,201
Balance at June 30, 2016 (Note 1 - restated)
153,968,626
47,531,970
5,756,400
(39,069,008)
1,092,806
15,312,168
Private placement (Note 11)
Share issue expenses (Note 11)
Debt settlement (Note 11)
Share-based compensation
Net loss for the year
Foreign currency translation adjustment
Balance at June 30, 2017
300,229,670
-
4,949,857
-
-
-
459,148,153
17,215,885
(885,138)
334,913
-
-
-
64,197,630
5,276,902
85,148
37,313
20,318
-
-
11,176,081
-
-
-
-
(4,482,540)
-
(43,551,548)
-
-
-
-
-
387,351
1,480,157
22,492,787
(799,990)
372,226
20,318
(4,482,540)
387,351
33,302,320
The accompanying notes form an integral part of these consolidated financial statements.
6
Highland Copper Company Inc.
Consolidated Statements of Cash Flows
(in US dollars)
Operating activities
Net loss for the year
Adjustments
Share-based compensation
Depreciation and amortization
Write-down of exploration and evaluation assets
Unrealized (gain) loss on foreign exchange
Accretion on environmental liability
Finance expense on loan from a director
Finance income accrued
Finance income received
Changes in other 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
Additions to exploration and evaluation assets
Financing activities
Issue of share capital (Note 11)
Share capital issue expenses (Note 11)
Loan from a director (Note 11)
Reimbursement of note payable (Note 7)
Reimbursement of balance of purchase price payable (Note 8)
Reimbursement of promissory note (Note 9)
Effect of exchange rate changes on cash held in foreign currency
Net change in Cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Supplemental cash flow information (Note 22)
The accompanying notes form an integral part of these consolidated financial statements.
Year ended June 30,
2018
$
2017
$
(Note 1 - restated)
(11,571,693)
(4,482,540)
503,512
44,609
654,405
(21,915)
6,363
-
(112,343)
117,200
(93,614)
(60,073)
(139,221)
-
20,318
51,581
-
293,316
8,949
8,664
(39,270)
30,006
(42,423)
(59,458)
(413,178)
(19,775)
(10,668,437)
(4,643,810)
(126,777)
(239,995)
(21,779)
(2,284,922)
(366,772)
(2,306,701)
1,609,628
22,492,787
-
-
(110,000)
(250,000)
(1,000,000)
(799,990)
363,562
(40,000)
(1,250,00)
-
249,628
20,766,359
211,723
89,475
(10,573,858)
13,905,323
14,061,705
156,382
3,487,847
14,061,705
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Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
1. GENERAL INFORMATION AND CHANGE IN PRESENTATION CURRENCY
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 address of the Company’s registered office is 1055 West Georgia Street, Suite 1500, Vancouver,
British Columbia, Canada, V6E 4N7. Highland’s common shares are listed on the TSX Venture Exchange (the
“TSXV”) under the symbol HI. On October 23, 2017, the Company’s common shares started trading on the OTCQB
Venture Marketplace (the "OTCQB"), a U.S. trading platform that is operated by the OTC Markets Group in New York.
The Company trades on the OTCQB under the symbol "HDRSF".
The Company’s principal assets, located in Michigan’s Upper Peninsula region, include the 100%-owned Copperwood
copper project (the “Copperwood Project”), the White Pine copper project (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 a mineral exploration property covering approximately 448,000 acres in the Upper
Peninsula region, referred to as the UPX property.
The Board of Directors approved these consolidated financial statements on September 11, 2018.
Change in presentation currency
Prior to July 1, 2017, the Company reported its annual and quarterly consolidated statements of financial position,
comprehensive loss, shareholder’s equity and cash flows in Canadian dollars. Effective July 1, 2017, the Company
changed its reporting currency to the United States dollar to facilitate the comparability of the Company’s financial
information with similar mining companies. In accordance with International Accounting Standard 21, The Effects of
Changes in Foreign Exchange Rates, the Company’s consolidated financial statements for all periods presented have
been translated into US dollars. The consolidated statements of comprehensive loss and the consolidated statements
of cash flows for each year have been translated into the presentation currency using the average exchange rate
prevailing during each year. All assets and liabilities have been translated using the exchange rate prevailing at the
statements of financial position dates. Equity transactions have been translated at the exchange rate in effect on the
date of the specific transaction. All resulting exchange differences arising from the translation are included in other
comprehensive income or loss as foreign currency translation adjustments. All comparative financial information has
been restated to reflect the Company’s results as if they had been historically reported in US dollars.
8
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
2. GOING CONCERN
To date, the Company has not earned revenues and is in the exploration and development stage. 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 and completing the acquisition of the White Pine Project.
The Company has incurred a net loss of $11,571,693 during the year ended June 30, 2018 ($4,482,540 in 2017) and
has a deficit of $55,123,241 at June 30, 2018 (a deficit of $43,551,548 at June 30, 2017). The Company has a working
capital deficiency of $1,228,720 at June 30, 2018 (a working capital of $10,584,135 at June 30, 2017).
The Company will require additional funds to settle its working capital deficiency, to meet all existing commitments, to
complete the acquisition of the White Pine Project, to provide for management and administration expenses for the
next 12 months and to carry-out its planned exploration and development work, including the development of the
Copperwood Project. The Company’s primary objective is to raise sufficient funds to ensure that working capital
requirements are met for at least the next 12 months. The Company is also working to put in place a project financing
package as soon as possible for the development of the Copperwood Project. Although such funding requirements
may be met 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 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, 2018 and 2017 (in US 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, except for the promissory note
and balance of purchase price payable which are recognized at fair value.
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. Highland and its subsidiaries have
an annual reporting date of June 30. Details of the Company’s Subsidiaries are as follows:
Upper Peninsula Holding Company Inc. (“UPHC”); UPHC is the Company’s US-based holding company,
incorporated in February 2014 in the state of Delaware, USA), which in turn wholly owns the following four (4)
companies;
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;
Copperwood Resources Inc. (“CRI”), previously known as Orvana Resources US Corp., acquired in June 2014
and incorporated in the state of Michigan, USA; and;
UPX Minerals Inc, incorporated in March 2017 in the state of Michigan, USA.
d) Foreign currency translation
These consolidated financial statements are presented in US 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.
10
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
d) Foreign currency translation (continued)
On consolidation, assets and liabilities of Highland are translated into US 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 US 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.
e) Financial assets and liabilities
Financial assets
Financial assets held by the Company consist of cash and cash equivalents which include deposits held with banks.
These financial assets are 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, note payable, promissory
note, balance of purchase price payable and due to a related party 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, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
f) Cash and cash equivalents
Cash and cash equivalents include cash balances and highly liquid investments with original maturities of three
months or less.
g) 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, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
h) Exploration and evaluation assets
Costs related to exploration and evaluation of mineral properties are recognized in profit or loss as incurred. All option
and lease payments and costs of acquiring mineral rights are capitalized as exploration and evaluation assets.
Exploration and evaluation assets are assessed for impairment indicators at the end of each reporting period.
Any option payments or proceeds from the sale of royalty interests received by the Company are credited to the
capitalized cost of the related exploration and evaluation asset. If payments received exceed the capitalized cost of
the exploration and evaluation assets, the excess is recognized as income in the period received.
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 and a mine development decision has been
made by the Company, 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.
The establishment of technical feasibility and commercial viability of a mineral property is assessed based on a
combination of factors, including a) the extent to which mineral reserves or mineral resources as defined in National
Instrument 43-101 have been identified through a feasibility study or similar document; b) the results of optimization
studies and further technical evaluation carried out to mitigate project risks identified in the feasibility study; c) the
status of environmental permits; and d) the status of mining leases or permits.
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.
i) 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
13
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
i) Impairment of non-financial assets (continued)
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 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 considers 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.
j) 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.
14
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
k) 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.
l) 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
Highland’s expenses into US 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.
15
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
m) 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.
n) 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.
16
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
o) 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 $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, was
extended on a number of occasions until August 31, 2018, and on that date was further extended to November 30,
2018 (Note 24). The Company will also need 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.
17
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
o) Significant accounting judgments and estimates (continued)
Exploration and evaluation assets
The application of the Company‘s accounting policy for exploration and evaluation assets requires judgment in
determining whether it is likely that future economic benefits will flow to the Company. If, after exploration and
evaluation activities have been conducted, 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.
Fair value of liabilities
The Company estimated the fair value of the non-interest-bearing promissory note and the balance of purchase price
payable at inception using a discounted rate of 20%, based on management’s judgment of its cost of capital given
that it is considered to be in the exploration and development stage.
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.
Going concern
The assessment of the Company’s ability to execute its strategy by funding future working capital requirements
involves judgment. Estimates and assumptions are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under the circumstances
(Note 2).
18
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
p) 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.
IFRS 9, Financial Instruments
The 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”). IFRS 9 replaces the current multiple
classification and measurement models for financial assets and liabilities with a single model that has three
classification categories: amortized cost, fair value through other comprehensive income and fair value through profit
and loss. The basis of classification depends on the entity’s business model and the contractual cash flow
characteristics of the financial asset or liability. It also introduces limited changes relating to financial liabilities and
aligns hedge accounting more closely with risk management. The new standard is effective for annual periods
beginning on or after January 1, 2018 with early adoption permitted. The accounting for the instruments held by the
Company and the line item in which they are included in the consolidated statements of financial position will not be
affected on the adoption of IFRS 9 (effective July 1, 2018), and no measurement adjustments will be required to the
Company’s financial assets and liabilities.
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. 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. The new standard and its clarifications become mandatory for financial years
beginning on or after January 1, 2018. The Company intends to adopt IFRS 15 and the clarifications in its consolidated
financial statements for the annual period beginning on July 1, 2018. The adoption of this standard is not expected to
have a material impact in future periods until the Company commences generating revenues from its mineral
properties.
19
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
3. SUMMARY OF ACCOUNTING POLICIES (continued)
p) Accounting standards issued but not yet applied (continued)
IFRS 16, Leases
In January 2016, the IASB published IFRS 16, Leases (“IFRS 16”) which will replace IAS 17, Leases (“IAS 17”). IFRS
16 is effective for annual reporting periods beginning on or after January 1, 2019 with early application permitted.
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. Leases become an on-balance-sheet liability that attract interest, together with a new
asset. The Company has yet to assess the impact of this new standard on its consolidated financial statements.
IFRIC 23, Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC Interpretation 23, Uncertainty over Income Tax Treatments. The
Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances
in which there is uncertainty over income tax treatments. The Interpretation is applicable for annual periods beginning
on or after January 1, 2019. Earlier application is permitted. The Company intends to adopt the Interpretation in its
consolidated financial statements for the annual period beginning on July 1, 2019. The Company does not expect the
Interpretation to have a material impact on its consolidated financial statements.
4. CASH AND CASH EQUIVALENTS
Cash
Cash equivalents
June 30,
June 30,
2018
$
2017
$
734,984
14,061,705
2,752,863
-
3,487,847
14,061,705
Cash equivalents is comprised of a term deposit amounting to $2,750,000, which bears interest at a rate of 1.9% and
matures on July 11, 2018.
20
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
5. CAPITAL ASSETS
Capital assets subject to depreciation and amortization are presented below.
Computer
Intangible
equipment
Exploration
Leasehold
assets
Vehicles and furniture
equipment
improvements
$
$
$
$
$
Total
$
Cost
Balance at June 30, 2016
106,767
71,319
152,329
372,169
Additions
Disposals
Effect of foreign exchange
Balance at June 30, 2017
Additions
Write-down
Effect of foreign exchange
-
(61,421)
(205)
45,141
-
-
-
-
-
119
71,438
37,384
-
-
Balance at June 30, 2018
45,141
108,822
Accumulated depreciation and amortization
1,329
-
65,744
20,450
768,328
21,779
(83,412)
(163,378)
(65,744)
(373,955)
(1,032)
69,214
62,943
(32,650)
(1,255)
98,252
188
208,979
11,450
(34,179)
-
(450)
20,000
15,000
-
-
186,250
35,000
(1,380)
414,772
126,777
(66,829)
(1,255)
473,465
Balance at June 30, 2016
106,462
47,028
137,370
322,702
65,744
679,306
Disposals
(61,421)
-
(83,412)
(163,378)
(65,744)
(373,955)
Depreciation and amortization
Effect of foreign exchange
296
(196)
Balance at June 30, 2017
45,141
Depreciation and amortization
Write-down
Effect of foreign exchange
-
-
-
19,164
34
66,226
12,891
-
-
Balance at June 30, 2018
45,141
79,117
Carrying amounts
Balance at June 30, 2016
305
24,291
Balance at June 30, 2017
Balance at June 30, 2018
-
-
5,212
29,705
(640)
45,696
14,959
2,635
52,556
13,259
(638)
66,579
12,407
18,862
187
178,373
9,589
(32,650)
(34,179)
-
-
-
-
9,722
-
-
51,581
(613)
356,319
44,609
(66,829)
(640)
153,783
9,722
333,459
49,467
30,606
32,467
-
20,000
25,278
89,022
58,453
140,006
21
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
6. EXPLORATION AND EVALUATION ASSETS
Amounts invested in exploration and evaluation assets are as follows:
Copperwood
White Pine
UPX
Other
Project
Project
Property
properties
Total
$
$
$
$
$
Balance, June 30, 2016
16,121,707
2,932,246
-
719,673
19,773,626
Property payments in cash
Finance expense
Effect of foreign exchange
110,510
272,834
-
150,000
9,885,288
24,412
10,170,210
-
-
131,242
-
404,076
-
3,821
3,821
383,344
150,000
10,016,530
28,233
10,578,107
Balance, June 30, 2017
16,505,051
3,082,246
10,016,530
747,906
30,351,733
Property payments in cash
Finance expense
Write-down
Effect of foreign exchange
186,100
110,233
-
-
25,000
-
28,895
239,995
-
-
-
1,739,727
-
1,849,960
-
-
(654,405)
(654,405)
8,549
8,549
296,333
25,000
1,739,727
(616,961)
1,444,099
Balance, June 30, 2018
16,801,384
3,107,246
11,756,257
130,945
31,795,832
22
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
6. 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 CRI. As part of the acquisition of the Copperwood
Project, the Company paid in cash as additional consideration an amount of $1,250,000 on June 17, 2017 and was
required to pay in cash or shares of Highland, at Orvana’s option, an additional amount of $1,250,000 on June 17,
2018. On May 28, 2018, the Company and Orvana agreed to amend the terms of the payment due on June 17, 2018,
as described in Note 8.
An additional amount of $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 $4.25/lb; and an additional amount of $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 $4.50/lb (for a total of $2,500,000 accounted for as a “Contingent
Consideration”). 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, the Company will have
mineral rights until the later of the 20th anniversary of the date of the lease or the date the Company ceases to be
actively engaged in development, mining, or related operations on the property. The mineral leases may be terminated
by the Company on 60 days’ notice.
23
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
6. 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. The final closing of the acquisition will be completed once Highland has (i) released CRC of a
$2.85 million financial assurance letter of credit associated with the remediation and closure plan of the previous White
Pine operation; 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, was extended on a number of occasions until August 31, 2018, and was further extended on that
date to November 30, 2018 (Note 24). 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 $2 million.
Upon completion of a feasibility study and receipt of all necessary permits for the development of a mine at White
Pine, the Company will pay to CRC as additional consideration, in cash or in common shares of Highland, at the option
of CRC, an amount equal to $0.005 (one half of one cent) per pound for the first 1 billion pounds of proven and
probable reserves of copper and $0.0025 (one quarter of one cent) for each additional pound of proven and probable
reserves of copper (the “Contingent Consideration”). At June 30, 2018, 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.
24
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
6. 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. In accordance with the terms of the agreement with the holder
of the mineral rights (the “Lessor”), an additional cash payment of $575,000 was to be made to the Lessor by the
Company. On December 30, 2016, the Company entered into an amended agreement with the Lessor providing a
revised schedule of payments for the amount of $575,000 owed to the Lessor, as described in Note 7. The lease
agreement also calls for annual lease payments of $25,000 for the first five years, $30,000 for the sixth and seventh
years and $1,000,000 thereafter.
Upon commencement of production, Highland will have to pay to the Lessor 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.
Osisko royalty and option to purchase silver production
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 to convert the C$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 final 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.
In December 2014, the Company also granted to Osisko an option to purchase for $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 $26 million
to the Company within 60 days following the delivery to Osisko of a feasibility study on the Michigan Projects.
25
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
6. EXPLORATION AND EVALUATION ASSETS (continued)
UPX Property
On May 30, 2017, the Company acquired from Kennecott Exploration Company and Rio Tinto Nickel Company
(“RTX”), subsidiaries of the Rio Tinto Group, a mineral property covering approximately 448,000 acres in the Upper
Peninsula of the State of Michigan, USA (the “UPX Property”).
The UPX Property was acquired for a total consideration of $18.0 million. A cash payment of $2.0 million was made
at the acquisition date and the Company issued a $16 million secured non-interest-bearing promissory note (the
“Note”) that provides for the payment of $1.0 million on the first anniversary of the acquisition (payment made on May
30, 2018), and $3.0 million on each of the second, third, fourth, fifth and sixth anniversary of the acquisition. The
payments under the Note will be accelerated if Highland publicly releases a feasibility study covering any portion of
the UPX Property. The Note is secured by a 1st priority security interest over the acquired property.
RTX has retained a 2% net smelter return royalty (the “NSR”) on all mineral interests. Highland has an option to buy-
down half of the 2% NSR by paying $8 million to RTX. The option will be exercisable at any time prior to May 30,
2028.
The Company determined that the UPX Property was not a business in accordance with the definition in IFRS 3,
Business Combinations, and therefore accounted for the acquisition as an asset acquisition rather than a business
combination.
Other properties
Under a Mining Venture Agreement with BRP dated July 2011 and subsequently amended, the Company has an
option to acquire a 65 percent interest in the Keweenaw Project by spending $11,500,000 in exploration work,
providing a feasibility study by December 31, 2018 and securing some of the historical shafts located on the
Keweenaw region. At June 30, 2018, the Company has written-off the amount of $654,405 in exploration and
evaluation assets related to the Keweenaw Project as it does not plan to conduct any significant work on this property
in the near term.
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.
26
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
7. NOTE PAYABLE
On December 30, 2016, the Company entered into an amended agreement with the Lessor of certain mineral rights
located in White Pine, Michigan (Note 6 - Lease Agreement, White Pine, Michigan, USA) for the remaining amount of
$575,000 owed to the Lessor. Under the terms of the amended agreement, the Company paid an amount of $135,000
on December 30, 2016 and agreed to pay the balance of $440,000 in sixteen equal quarterly principal amounts of
$27,500, plus interest accruing at the rate of 8% per annum, until December 31, 2020.
The balance of the Note Payable was determined as follows:
Balance, beginning of year
Conversion of accounts payable to note payable
Addition
Reimbursements
Balance, end of year
Current liability
Non-current liability
Year ended June 30,
2018
$
385,000
-
-
(110,000)
275,000
110,000
165,000
275,000
2017
$
-
425,000
150,000
(190,000)
385,000
110,000
275,000
385,000
27
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
8. BALANCE OF PURCHASE PRICE PAYABLE
In connection with the acquisition of the Copperwood Project, the Company accounted for the estimated fair value of
the balance of purchase price payable using a discount rate of 20%. On May 28, 2018, the Company and Orvana
amended the repayment terms of the final amount due and as such, a payment of $250,000 was made on
June 17, 2018 and the remaining amount of $1,000,000 bears interest at a rate of 12% per annum and is repayable
in cash at the earlier of (a) 10 days after the closing of an equity financing by the Company of at least $4,000,0000
and (b) November 30, 2018. If the amount due of $1,000,000 is not repaid by November 30, 2018, the unpaid amount
will bear interest at the rate of 15% per annum from then on and the Company will be required to pay a 2% penalty
amount to Orvana.
The balance of purchase price payable is as follows:
Balance, beginning of year
Accretion included in exploration and evaluation assets
Reimbursement
Accrued interest at the rate of 12% per annum
Balance, end of year
Year ended June 30,
2018
$
1,139,767
110,233
2017
$
2,116,933
272,834
(250,000)
(1,250,000)
4,333
-
1,004,333
1,139,767
28
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
9. PROMISSORY NOTE
The Company issued a $16 million secured non-interest-bearing promissory note (the “Note”) to RTX, as remaining
consideration for the acquisition of the UPX Property described in Note 6, that provides for the payment of $1.0 million
on the first anniversary of the acquisition (payment made on May 30, 2018) and $3.0 million on each of the second,
third, fourth, fifth and sixth anniversary of the acquisition. The payments under the Note will be accelerated if Highland
publicly releases a feasibility study covering any portion of the UPX Property. Given that the Note is non-interest
bearing, the Company accounted for its estimated fair value using a discount rate of 20%. The balance of the Note
was determined as follows:
Balance, beginning of year
Promissory Note from RTX, discounted at the rate of 20%
Accretion included in exploration and evaluation assets
Reimbursement
Balance, end of year
Current liability
Non-current liability
10. ENVIRONMENTAL LIABILITY
Year ended June 30,
2018
$
8,005,760
-
1,739,727
(1,000,000)
2017
$
-
7,874,518
131,242
-
8,745,487
8,005,760
2,501,248
6,244,239
8,745,487
835,074
7,170,686
8,005,760
The environmental liability consists of a provision for reclamation costs related to the acquisition of the White Pine
Project (Note 6). The undiscounted cash flow amount of the liability is estimated at $270,000. The present value of
the
liability was calculated using a discount rate of 8.0% and
is reflecting payments
to be made
until 2028, inclusively.
Balance, beginning of year
Accretion expense
Balance, end of year
Year ended June 30,
2018
$
246,315
6,363
252,678
2017
$
237,366
8,949
246,315
29
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
11. SHARE CAPITAL
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
During the year, the Company issued a total of 13,785,536 common shares following the exercise of an equivalent
number of share purchase warrants at a price of C$0.15 per share for total proceeds of $1,609,628
(C$2,067,830). A total of 138,804,226 unexercised share purchase warrants expired during the year.
Between November 30, 2016 and March 24, 2017, the Company completed in four tranches a non-brokered private
placement for gross proceeds of $22,492,787 (C$30,022,967) (the “Financing”). A total of 300,229,670 units, each
unit comprised of one common share of the Company and one half of one share purchase warrant (“Warrant”), were
sold at C$0.10 per unit. Each Warrant was exercisable for a period of 12 months from its respective closing date at
an exercise price of C$0.15 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 weighted-average risk-free interest rate of 0.74%, an expected life of the
Warrants of one year, an annualized weighted-average volatility of 96% and a dividend rate of 0%. An amount of
$5,276,902 was allocated to such Warrants and was presented as part of contributed surplus.
As part of the Financing, Greenstone Resources II LP (“Greenstone”) and OMF Fund II (H) LP, a subsidiary of Orion
Mine Finance (“Orion), acquired such number of units resulting in Greenstone and Orion holding respectively 17.5%
and 14.6% of the issued and outstanding common shares of the Company at that time. Greenstone and Orion each
received participation rights to maintain their equity ownership level in future equity financings. Greenstone also
received nomination rights for the sale of Highland’s production pro-rata to its shareholding, and Orion entered into
an offtake agreement with the Company entitling Orion to purchase 15% of all concentrates to be produced at the
Copperwood Project. Orion also received a right of first refusal on any debt financing for the Copperwood project until
September 17, 2018, excluding any royalty or stream financings. Osisko continues to have the right of first refusal on
any other debt financing entered into by the Company.
30
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
11. SHARE CAPITAL (continued)
Issuance of common shares (continued)
As part of the Financing, the Company paid finders’ fees totaling $710,120 and granted 1,000,000 compensation
warrants exercisable into 1,000,000 common shares at an exercise price of C$0.15 per share expiring on March 17,
2020. The fair value of the compensation warrants, estimated at $85,148 and presented as share issue expenses,
was measured based on the Black-Scholes option pricing model, using a risk-free interest rate of 0.75%, an expected
life of three years, an annualized volatility of 100% and a dividend rate of 0%. The Company also incurred other share
issue expenses of $89,870.
On December 12, 2016, the Company settled an outstanding indebtedness in the amount of $372,226 (C$494,986)
owing to Laurentian Mountains Investments Limited, a company owned by David Fennell, the Company’s chairman,
by issuing 4,949,857 common shares and 2,474,928 Warrants (the “Debt Settlement”). Each Warrant entitled the
holder to purchase one common share of the Company for a period of 12 months from the closing date at an exercise
price of C$0.15 to acquire one common share. The amount of the Debt Settlement was 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 Debt Settlement and the value of the Warrants was measured based on the Black-Scholes
option pricing model, using a risk-free interest rate of 0.69%, an expected life of the Warrants of one year, an
annualized volatility of 89% and a dividend rate of 0%. An amount of $37,313 was allocated to such Warrants and
was presented as part of contributed surplus.
The underlying expected volatility described above was determined by reference to historical data of the Company’s
share price over the expected life of the warrants.
Share purchase warrants
The following table sets out the activity in share purchase warrants:
Number of warrants
Balance, beginning of year
Granted
Exercised
Expired
Balance, end of year
Year ended June 30,
2018
2017
153,589,762
56,455,373
-
153,589,762
(13,785,536)
-
(138,804,226)
(56,455,373)
1,000,000
153,589,762
31
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
11. SHARE CAPITAL (continued)
The following table reflects the number of issued and outstanding share purchase warrants at June 30, 2018:
Grant date
November 30, 2016
December 12, 2016
February 22, 2017
March 17, 2017
March 17, 2017
March 24, 2017
Number of
warrants
June 30,
2017
Exercised
Expired
15,140,000
(8,391,250)
(6,748,750)
2,474,928
-
(2,474,928)
9,574,545
(4,185,986)
(5,388,559)
76,730,714
(1,000,000)
(75,730,714)
Number of
warrants
June 30,
2018
-
-
-
-
Price
per
share
(C$)
-
-
-
-
Expiry
date
-
-
-
-
1,000,000
-
-
1,000,000
0.15 Mar 17, 2020
48,669,575
(208,300)
(48,461,275)
-
-
-
153,589,762
(13,785,536)
(138,804,226)
1,000,000
0.15
Average price (C$)
0.15
0.15
(0.15)
0.15
The closing market price of the Company’s shares when the share purchase warrants were exercised between
November 30, 2017 and March 24, 2018 varied between C$0.12 and C$0.14 per share.
12. STOCK OPTIONS
The following table sets out the activity in stock options:
Year ended
June 30,
2018
Year ended
June 30,
2017
Average exercise
Number
price (C$)
Average exercise
price (C$)
Number
7,455,000
12,045,000
(4,300,000)
15,200,000
0.48
0.12
(0.58)
0.17
7,522,000
-
(67,000)
7,455,000
0.48
-
(0.43)
0.48
Number of options
Balance, beginning of year
Granted
Expired
Balance, end of year
On August 28, 2017, the Company granted a total of 9,025,000 stock options to its directors, officers, employees and
consultants. The stock options granted will vest over 2 years.
On October 26, 2017, the Company granted a total of 2,070,000 incentive stock options to a director, an officer and
employees. The stock options granted will vest over 2 years.
32
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
12. STOCK OPTIONS (continued)
On May 15, 2018, the Company granted a total of 950,000 stock options to employees. The stock options granted will
vest over 2 years.
The following table provides a summary of stock options granted and related Black-Scholes option pricing model input
factors used:
Number of stock options granted during the year
Weighted-average exercise price (C$)
Weighted average grant date market price (C$)
Expected stock option life (years)
Expected volatility (%)
Risk-free interest rate (%)
Weighted-average grant date fair value (Black-Scholes value) (C$)
2018
$
12,045,000
0.12
0.12
5
84.0%
1.60%
0.07
Year ended June 30,
2017
$
-
-
-
-
-
-
-
The following table reflects the stock options issued and outstanding at June 30, 2018:
Issue date
options
price
contratual life
options
options
Number of
Exercise
Remaining
exercisable
exercisable
Number of
Exercise
price of
August 1, 2014
April 21, 2015
November 20, 2015
August 28, 2017
October 26, 2017
May 15, 2018
1,400,000
1,555,000
200,000
9,025,000
2,070,000
950,000
15,200,000
C$
0.50
0.25
0.13
0.11
0.17
0.10
0.17
(years)
1.1
1.8
2.4
4.2
4.3
4.9
3.7
1,400,000
880,000
200,000
3,008,333
690,000
316,667
6,495,000
C$
0.50
0.25
0.13
0.11
0.17
0.10
0.22
33
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
13. EXPLORATION AND EVALUATION EXPENSES
The Company incurred the following exploration and evaluation expenses:
Drilling and assaying
Labour
Studies
Office, overhead and other administrative costs
14. MANAGEMENT AND ADMINISTRATION EXPENSES
The Company incurred the following management and administration expenses:
Administrative and general
Office
Professional fees
Investor relations and travel
Reporting issuer costs
15. LOSS PER SHARE
2018
$
1,386,707
2,450,433
3,836,509
910,592
8,584,241
2018
$
1,032,772
119,500
271,862
209,881
64,600
Year ended June 30,
2017
$
1,152,522
857,770
412,543
451,535
2,874,270
Year ended June 30,
2017
$
700,716
114,152
139,339
72,073
21,744
1,698,615
1,048,024
The calculation of basic and diluted loss per share for the year ended June 30, 2018 was based on the loss attributable
to common shareholders of $11,571,693 ($4,482,540 in 2017) and the weighted average number of common shares
outstanding of 464,575,595 (251,264,795 in 2017). Excluded from the calculation of the diluted loss per share for the
year ended June 30, 2018 are 1,000,000 share purchase warrants and 15,200,000 stock options (153,589,762 share
purchase warrants and 7,455,000 stock options in 2017) because to include them would be anti-dilutive as they would
have the effect of decreasing the loss per share.
34
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
16. RELATED PARTY TRANSACTIONS
The detail of transactions between the Company and its related parties, in addition to the loan settlement transaction
described in Note 11, are as follows:
During the year ended June 30, 2018, the Company incurred administration expenses of $67,151 from Reunion Gold
Corporation, a related party by virtue of common management and directors (administration expenses of $76,474
from Reunion Gold Corporation in 2017).
During the year ended June 30, 2018, the Company recovered amounts of $186,010 for management services to
other TSXV-listed companies, related by virtue of common key management, including Odyssey Resources Limited
and Reunion Gold Corporation (an amount of $114,696 was recovered during the year ended June 30, 2017). The
services are provided at cost. At June 30, 2018, the Company had an amount receivable from Odyssey Resources
Limited of $3,935, included in prepaid expenses and other on the consolidated statements of financial position (nil at
June 30, 2017).
These charges were measured at the exchange amount, which is the amount agreed upon by the transacting parties.
Settlement payment to the Company’s former president and CEO
In March 2017, the Company paid to its former president and CEO an amount of $150,000 as full and final settlement
of all unpaid amounts related to his employment with the Company due at the date of his resignation in February
2016, in accordance with a settlement agreement entered into at that time.
Remuneration of directors and key management of the Company
The remuneration awarded to directors and to senior key management, including the Executive Chairman, the
President and CEO and the CFO, is as follows:
Management and administration expenses
Exploration and evaluation expenses
Share-based compensation included in management and administration expenses
Share-based compensation included in exploration and evaluation expenses
Year ended June 30,
2018
$
664,346
-
282,537
-
946,883
2017
$
504,311
187,719
11,414
2,148
705,592
35
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
17. INCOME TAXES
The reconciliation of the effective tax rate is as follows:
2018
$
Year ended June 30,
2017
$
(Note 1 - restated)
Loss before income tax
(11,571,693)
(4,482,540)
Tax using the Company’s domestic tax rate
26.75%
(3,095,428)
26.90%
(1,205,779)
Share-based compensation
Non-deductible expenses and non-taxable revenues
Effect of tax rate in foreign jurisdictions
Unrecognized tax assets
Impact of newly-enacted tax rates
Other
Deferred income tax
(1.16%)
(0.04%)
3.92%
0.94%
(29.00%)
(1.41%)
-
134,384
(0.08%)
4,553
(453,352)
0.00%
7.92%
3,462
83
(354,873)
(109,280)
(34.54%)
1,548,418
3,356,060
163,063
-
(0.88%)
0.68%
-
39,042
(30,353)
-
Recognized deferred tax assets and liabilities are attributable to the following:
Advances in foreign currency
Non-capital loss carry-forwards
Offsetting of tax assets and liabilities
Advances in foreign currency
Non-capital loss carry-forwards
Offsetting of tax assets and liabilities
Assets
$
-
412,808
421,808
(412,808)
-
June 30, 2018
Net
Liabilities
$
$
(412,808)
(412,808)
-
412,808
(412,808)
412,808
-
-
-
-
Assets
Liabilities
June 30, 2017
Net
$
$
(335,990)
(335,990)
-
335,990
(335,990)
335,990
-
-
-
-
36
$
-
335,990
335,990
(335,990)
-
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
17. INCOME TAXES (continued)
Deductible temporary differences for which no deferred tax assets have been recognized are as follows:
Non-capital loss carry-forwards
Capital assets
Exploration and evaluation assets
Share issue expenses
Financing expenses
Non-capital loss carry-forwards
Capital assets
Exploration and evaluation assets
Share issue expenses
Financing expenses
Canada
$
June 30, 2018
Total
$
USA
$
8,591,819
25,595,301
34,187,120
78,448
298,313
376,761
2,081,172
5,859,997
7,941,169
528,218
18,056
-
-
528,218
18,056
11,297,713
31,753,611
43,051,324
Canada
$
June 30, 2017
Total
$
USA
$
7,211,931
14,038,898
21,250,829
73,661
316,159
389,820
1,546,177
8,756,973
10,303,150
851,131
36,644
-
-
851,131
36,644
9,719,544
23,112,030
32,831,574
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, 2018 and 2017 (in US dollars)
17. INCOME TAXES (continued)
Non-capital losses expire as follows:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
USA
$
-
-
-
-
-
-
-
-
1,256,944
7,589,259
1,101,253
4,408,457
11,239,388
25,595,301
Canada
$
78,391
91,381
230,527
408,787
565,305
722,123
1,040,617
73,041
862,771
1,872,399
785,278
1,631,795
1,787,169
10,149,584
The deferred income tax on non-capital losses have been partially recognized for an amount of $1,557,765 ($1,267,889 in 2017).
18. CAPITAL MANAGEMENT
The Company defines capital that it manages as loans (including note payable, balance of purchase price payable
and promissory note) 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, 2018, managed capital was $34,320,021 ($42,832,847 at June 30, 2017).
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, 2018. The Company is not subject to any externally imposed capital requirements as
at June 30, 2018.
38
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
19. 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, 2018.
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, 2018:
Carrying
Settlement
Within
Within
Over
amount
amount
6 months
1 year
2-3 years
3 years
Accounts payable and accrued liabilities
1,356,742
1,356,742
855,617
501,125
$
$
$
$
$
-
Note payable
275,000
275,000
55,000
55,000
165,000
Balance of purchase price payable
1,004,333
1,004,333
1,004,333
-
-
$
-
-
-
Promissory note
8,745,487
15,000,000
-
3,000,000
6,000,000 6,000,000
11,381,562
17,636,075
1,914,950
3,556,125
6,165,000 6,000,000
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 and cash equivalents which are mainly held in
accounts with a major Canadian-based chartered bank.
Interest rate risk
The Company’s interest rate risk relates to cash and cash equivalents. 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
and cash equivalents are subject to floating interest rates. Sensitivity to a plus or minus 1% change in interest rates
would affect profit or loss by approximately $35,000
39
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
19. 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 does not presently enter into hedging arrangements to hedge its currency risk. All foreign currency
transactions are recorded at spot rates. The Board considers this policy appropriate, considering the consolidated
entity’s size, current stage of operations, financial position and the Board’s approach to risk management.
At June 30, 2018, financial assets and liabilities denominated in a foreign currency consisted of cash and cash
equivalents of $3,155,805 and accounts payable and accrued liabilities of $37,639. The impact on profit or loss of a
10% increase or decrease in foreign currencies against the Canadian dollar would be approximately $312,000.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, 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 note payable and the balance of purchase price payable (at June 30, 2018) is considered to be a
reasonable approximation of fair value as it bears interest at a rate negotiated between the parties. The fair value of
the promissory note and the balance of purchase price payable was determined, at inception, based on discounted
cash flows using a rate of 20%, a rate similar to other debt instruments at the date of the consolidated statements of
financial position.
21. OTHER COMMITMENTS
In addition to the commitments described in Note 6, the Company has entered into long-term lease agreements
expiring in June 2021 which calls for minimum lease payments of $193,300 for the rental of office space. Minimum
lease payments are $82,900 in 2019, $68,600 in 2020 and $41,800 in 2021.
40
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
June 30, 2018 and 2017 (in US dollars)
22. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash items
Reclassification of accounts payable to note payable
Note payable related to exploration and evaluation assets
Promissory note related to exploration and evaluation assets
Accretion included in exploration and evaluation assets (Note 6)
Loan from a director settled by the issue of shares and warrants
23. SEGMENTED INFORMATION
Year ended June 30,
2018
$
-
-
-
1,849,960
-
2017
$
425,000
150,000
7,885,288
404,076
372,226
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
24. EVENT AFTER THE REPORTING DATE
Canada
$
June 30, 2018
USA
$
Total
$
3,450,383
17,459
293,220
122,547
3,743,603
140,006
368,955
31,426,877
31,795,832
3,836,797
31,842,644
35,679,441
Canada
$
June 30, 2017
USA
$
Total
$
14,077,348
1,318
91,063
57,135
14,168,411
58,453
-
30,351,733
30,351,733
14,078,666
30,499,931
44,578,597
On August 31, 2018, the Company and CRC agreed to further extend the period to complete the acquisition of the
White Pine Project to November 30, 2018.
41
MANAGEMENT’S DISCUSSION & ANALYSIS
Year ended June 30, 2018
HIGHLAND COPPER COMPANY INC.
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
YEAR ENDED JUNE 30, 2018
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 September 11, 2018, covers the years ended June 30, 2018 and
2017 and should be read in conjunction with the audited consolidated financial statements and related notes at June 30, 2018
and 2017 (the “June 30, 2018 and 2017 consolidated financial statements”). The June 30, 2018 and 2017 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 US dollars unless otherwise indicated. Effective July 1, 2017, the
Company changed its reporting currency to the United States dollar to facilitate the comparability of the Company’s financial
information with those of similar mining companies. All comparative financial information included in this MD&A have been
restated as if they had been historically reported in US dollars.
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 the State of 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, 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 deposit (subject to the exercise of an option to acquire a 65% interest
in the project from BRP LLC). Also, in May 2017, the Company acquired from subsidiaries of the Rio Tinto Group a mineral
property covering approximately 448,000 acres in the Upper Peninsula region, referred to as UPX Property.
Highland was incorporated under the Business Corporations Act (British Columbia) in 2006. Highland’s common shares are
listed on the TSX Venture Exchange (“TSXV”) under the symbol HI. On October 23, 2017, the Company’s common shares
started trading on the OTCQB Venture Marketplace (the "OTCQB"), a U.S. trading platform that is operated by the OTC Markets
Group in New York. The Company trades on the OTCQB under the symbol "HDRSF".
At September 11, 2018, the Company has 472,933,689 common shares and 1,000,000 share purchase warrants issued and
outstanding.
Financial Condition
At June 30, 2018, the Company had a working capital deficiency of $1,228,720. The Company requires additional funds to settle
its working capital deficiency, to meet all existing commitments, to complete the acquisition of the White Pine property (including
an amount to replace the current environmental financial assurance bond), to provide for management and administration
expenses for at least the next 12 months and to carry-out its planned exploration and development work, including the
development of the Copperwood Project. The Company’s primary objective is to raise sufficient funds to ensure that working
Management’s Discussion and Analysis
Year ended June 30, 2018
capital requirements are met for at least the next 12 months. The Company is also working to put in place a project financing
package as soon as possible for the development of the Copperwood Project. 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 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 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.
Copperwood Project Feasibility Study
In May 2017, the Company had initiated the work required to update the 2012 feasibility study prepared by Orvana on the
Copperwood Project. On June 15, 2018, the Company announced the results of the feasibility study (the “Feasibility Study”)
for its Copperwood Project and on July 31, 2018, the Company filed on SEDAR a technical report supporting the results of
the Feasibility Study in accordance with Canadian Securities National Instrument 43-101 Standards of Disclosure for Mineral
Properties (“NI 43-101”).
The Feasibility Study was conducted by, and under the supervision of, G Mining Services Inc. (“GMSI”) in collaboration with
SGS Canada Inc. (Lakefield), Lycopodium Minerals Canada Ltd, Golder Associates Ltd. and Foth Infrastructure and Environment.
The study provides a comprehensive overview of the Copperwood Project and defines an economically feasible, technically and
environmentally sound project. The effective date of the Feasibility Study is June 14, 2018.
The Copperwood Project is located, by road, approximately 22.5 km to the north of Wakefield and 40 km from the town of
Ironwood, both in Gogebic County, western Upper Peninsula, Michigan.
The Copperwood and its “satellite” deposits are hosted by the limbs of the northwest dipping Presque Isle Syncline within the
Nonesuch Formation. The Nonesuch Formation contains two mineralized sequences, one located at the base, the Lower Copper
Bearing Sequence (“LCBS”), and a stratigraphically higher one, the Upper Copper Bearing Sequence (“UCBS”), separated by
poorly mineralized sediments with a variable thickness of 0.5 m to 6.0 m.
Feasibility Study assumptions used include an average copper price of $3.15 / lb, an average silver price of $16 per oz, treatment
charges of $70 / tonne and refining charges of $0.07 / lb, an average copper payable rate of 95.8% and an average silver
payable rate of 46.9%.
3
Summary Economics for the Copperwood Project
Summary Economics for the Copperwood Project
Total
Management’s Discussion and Analysis
Year ended June 30, 2018
Pre-tax NPV @8% ($M)
Pre-tax IRR
After-tax NPV@ 8% ($M)
After-tax IRR
Undiscounted After-Tax Cashflow (LOM) ($M)
Payback Period from start of processing-years
Initial Capital expenditures ($M)
LOM Sustaining Capital Expenditures ($M)
LOM C-1 Cash Costs $/lb (net of bi-product)
Nominal Process capacity mt/d
Mine Life-years
Annual Payable Metal Production
Copper million pounds
Silver thousand ounces
LOM Average Process Recovery
Copper %
Silver %
$
$
$
$
$
$
162.1
21%
116.8
18%
316.0
3.2
275.0
156.5
1.75
6,600
10.7
61.7
100
86.0
73.4
Copperwood Mineral Resources
GMSI prepared a Mineral Resource estimate for the Copperwood Project based on data provided up to and including April 12,
2018. The mineral estimate was prepared under the supervision of Réjean Sirois, P. Eng. of GMSI, an independent “qualified
person” as defined in NI 43-101. Geovia GEMS™ and Leapfrog Geo™ software were used to facilitate the resource estimation
process.
An 8-hole (2,550 meters) drilling program on and around Section 5, which aimed at completing the drill program initiated in 2017,
was completed in March 2018 with results handed over to GMSI in early April 2018 for integration into the mineral resource
model and subsequently incorporated in the updated mine plan included in the Feasibility Study.
4
Management’s Discussion and Analysis
Year ended June 30, 2018
Total estimated Measured and Indicated Mineral Resources of the Copperwood deposit are as follows:
1.0% Cu Cut-off Grade – April 30, 2018
Deposits
Resource
Tonnage
Category
(M t)
LCBS
UCBS
Measured
Indicated
M + I
Inferred
Measured
Indicated
M + I
Inferred
Satellite LCBS
Inferred
Satellite UCBS
Inferred
Notes on Mineral Resources:
27.3
14.9
42.2
1.6
-
7.1
7.1
-
34.4
15.5
Copper
Grade
Silver
Grade
Copper
Silver
Contained
Contained
(%)
1.68
1.46
1.60
1.18
-
1.21
1.21
-
1.17
1.12
(g/t)
4.58
2.47
3.84
1.55
-
3.26
3.26
-
2.29
5.92
(M lbs)
(M oz)
1,009
479
1,488
43
-
189
189
-
888
384
4.0
1.2
5.2
0.1
-
0.7
0.7
-
2.5
3.0
A payable rate of 96.5% for copper and 90% for silver was assumed.
The Copperwood Feasibility Study reported metallurgical testing with recovery of 86% for copper and 73.5% for silver.
Cut-off grade of 1.0% copper was used, based on an underground “room and pillar” mining scenario.
1) Mineral Resources are reported using a copper price of $3.00/lb and a silver price of $18/oz.
2)
3)
4)
5) Operating costs are based on a processing plant located at the Copperwood site.
6)
Assuming a $3.00/lb Cu price, a sliding scale 3.0% NSR royalty on the Copperwood Project is payable to leaseholders. Assuming closing
of the acquisition of the White Pine Project, a 3% NSR royalty on the Copperwood Project payable to Osisko Gold Royalties Ltd. is reduced
to a 1.5% NSR royalty.
No mining dilution and mining loss were considered for the Mineral Resources.
Rock bulk densities are based on rock types.
7) Measured, Indicated and Inferred Mineral Resources have a drill hole spacing of 175 m, 250 m and 350 m, respectively.
8)
9)
10) Classification of Mineral Resources conforms to CIM definitions.
11) The qualified person for the estimate is Réjean Sirois, P.Eng., Vice President Geology and Resources for GMSI. The estimate has an
effective date of April 30, 2018.
12) Mineral Resources that are not mineral reserves do not have demonstrated economic viability. The estimate of Mineral Resources may
be materially affected by environmental, permitting, legal, title, taxation, sociopolitical, marketing, or other relevant issues.
13) LCBS: Lower Copper Bearing Sequence.
14) UCBS: Upper Copper Bearing Sequence.
15) The quantity and grade of reported Inferred Resources in this estimation are uncertain in nature and there has been insufficient exploration
to define these Inferred Resources as Indicated or Measured Mineral Resources.
Copperwood Mineral Reserves
The Mineral Reserves estimate was prepared by Carl Michaud, P. Eng. of GMSI, in accordance with the CIM Standards on
Mineral Resources and Mineral Reserves. Mineral Reserves are based on Measured and Indicated Mineral Resources dated
April 30, 2018 and do not include Inferred Mineral Resources. Measured and Indicated Mineral Resources are inclusive of
Proven and Probable Reserves.
5
Management’s Discussion and Analysis
Year ended June 30, 2018
The Proven and Probable Reserves stated below were estimated based on these unconstrained Measured and Indicated
Resources and the work carried out for the Feasibility Study.
Reserve by Category
Proven
Probable
Proven & Probable
Tonnes
(M t)
17.5
7.9
25.4
Cu
Grade
(%)
1.50
1.28
1.43
Ag
Grade
(g/t)
4.43
2.50
3.83
Cu
contained
(M lbs)
579.6
222.2
801.8
Ag
contained
(M oz)
2.5
0.6
3.1
Notes:
1)
The Mineral Reserves were estimated using the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) Standards for Mineral
Resources and Reserves, Definitions and Guidelines prepared by the CIM Standing Committee on Reserve Definitions and adopted by
CIM Council May 10th, 2014.
2) Mineral Reserves are estimated at a cut-off grade of 1% Cu. The cut-off will vary depending on the economic context and the operating
parameters.
3) Mineral Reserves are estimated using a long-term copper price of $3.00/lb and a silver price of $16.00/oz.
4)
Assuming a $3.00/lb Cu price, a sliding scale 3.0% NSR royalty on the Copperwood Project is payable to leaseholders. Assuming closing
of the acquisition of the White Pine Project, a 3% NSR royalty on the Copperwood Project payable to Osisko Gold Royalties Ltd. is reduced
to a 1.5% NSR royalty.
5) Mineral Reserves are estimated using an ore loss of 3%, a dilution of 0.1 m for the floor and a 0.25 m for the back of the stope and the
6)
7)
8)
9)
development.
The economic viability of the mineral reserve has been demonstrated.
A minimum mining height of 2.1 m was used.
The copper recovery was estimated at 86%.
The qualified person for the estimate is Carl Michaud, P. Eng., Underground Engineering Manager for GMSI. The estimate has an effective
date of May 25, 2018
10) The number of metric tonnes was rounded to the nearest thousand. Any discrepancies in the totals are due to rounding effects; rounding
followed the recommendations in NI 43-101.
Mine Operations
In the Feasibility Study, it is proposed to mine the deposit with a conventional highly mechanized, drill and blast room-and-pillar
mining method. The method consists of the extraction of a series of entries and cross-cuts in the ore, leaving pillars in place to
support the back. The mine will be accessed via covered box-cut to establish a portal at the mine entrance from the surface,
located at the central-west part of the deposit. The mine consists of two mining sectors: West and East. The western part, being
higher grade with a thicker mineralized zone, will be mined in priority.
The LOM concentrate production for the Copperwood Project is estimated at 1.264 million dmt at a grade of 24.7% Cu. Payable
copper production is estimated at 300,000 tonnes (660 million pounds) with an annual average of 28,000 tonnes (61.7 million
pounds) over the 10.7-year mine life which includes a 3-month commissioning and ramp-up period. The average payable rate
is 95.8% which includes a 0.2% concentrate loss. Payable silver production over the LOM is 1.1 million ounces with an annual
average of 101,000 ounces of silver.
6
Management’s Discussion and Analysis
Year ended June 30, 2018
Environment and Permitting
Environmental baseline studies were done for the Copperwood Project from late 2008 through the spring of 2011. These studies
were used to identify existing and historical conditions in the project area and select potential siting of infrastructures based on
an environmental management and permit approvals perspective.
An Environmental Impact Assessment was prepared to comply with the State of Michigan requirements of Part 632 of
Act No. 451 of the Public Acts of 1994 as amended. This document outlines the baseline monitoring and studies conducted for
the Copperwood Project including the natural, social, economic, cultural, and historical aspects of the environment that may be
potentially impacted by the project design.
In order to construct and operate the Copperwood Project, a number of permits must be obtained and agreed upon between
Highland and environmental regulatory agencies on both the state and federal levels. Highland maintains an open and proactive
approach with both state and federal regulators. The major environmental permits required to develop the Copperwood Project
include: Part 632 Non-Ferrous Metallic Mining Permit; Part 31 National Pollutant Discharge Elimination System Permit; Part 55
Air Permit to Install; Part 301 Inland Lakes and Streams Permit; Part 303 Wetland Permit; Part 315 Dam Safety Permit; Part 325
Great Lakes Submerged Lands Permit; and Section 10 US Army Corps of Engineers Water Intake Permit. Highland has filed
amendment requests, renewals or new applications (as applicable) for these permits and expects to have all required permits
by the end of 2018.
Operating Cash Flow
Operating Cash Flow
LOM
($M)
$/t ore
$/lb Cu
Payable
Cu Revenue
Ag Revenue
Total revenues
Concentrate Transportation Costs
Treatment & Refining Charges
Net Smelter Return
Royalties
Mining Costs
Processing Costs
G&A Costs
Total OPEX (incl. royalties)
Operating Cash Flow
2,047
81.92
17
0.67
2,064
82.59
94
149
3.75
5.96
1,821
72.88
85
531
308
72
996
826
3.39
21.26
12.31
2.88
39.84
33.03
3.15
0.03
3.17
0.14
0.23
2.80
0.13
0.82
0.47
0.11
1.53
1.27
7
Sensitivity Analysis
Management’s Discussion and Analysis
Year ended June 30, 2018
After-Tax Results
NPV 0%
NPV 8%
Variance
($M)
($M)
IRR
(%)
Payback
(yrs)
20%
10%
0%
-10%
-20%
20%
10%
0%
-10%
-20%
20%
10%
0%
-10%
-20%
Metal Price Sensitivities
655.1
486.1
316.0
145.6
-31.8
318.8
218.1
116.8
15.4
-89.2
31.9%
25.3%
18.0%
9.5%
0.0%
Initial Capital Cost Sensitivities
266.1
290.8
316.0
341.4
366.8
70.2
93.3
116.8
140.4
164.0
13.2%
15.4%
18.0%
21.1%
24.7%
Operating Cost Sensitivities
150.7
233.5
316.0
398.6
481.2
22.8
69.8
116.8
163.9
210.9
10.3%
14.4%
18.0%
21.3%
24.3%
2.1
2.5
3.2
5.2
10.5
3.9
3.5
3.2
2.8
2.5
4.2
3.6
3.2
2.9
2.6
Project Timeline
Subject to receipt of all necessary permits and the Company completing the required financing, construction could begin in
January 2019. A 24-month construction period would see commissioning in the first quarter of 2021, with commercial production
beginning in the second quarter of 2021.
Project Timeline
Total
Construction and commissioning (months)
Mine development (months)
Commercial production (yrs)
Closure (months)
27
20
10.7
27
8
Management’s Discussion and Analysis
Year ended June 30, 2018
Opportunities to Increase the Value of the Copperwood Project
Highland and its consultants have identified a number of opportunities to increase the value of the Copperwood Project. These
include upgrading inferred mineral resources, increasing mine productivity utilizing innovative continuous mining technologies,
conducting further geotechnical studies to optimize ore recovery and minimize mining dilution, reviewing tailings disposal
alternatives, and conducting additional testing to maximize metallurgical recoveries.
Remaining commitments and contingencies related to the Copperwood Project
In June 2014, the Company had acquired 100% of the Copperwood Project from Orvana for a cash consideration of $20 million.
As part of the acquisition of the Copperwood Project, the Company paid in cash as additional consideration an amount of $1.25
million on June 17, 2017 and was required to pay in cash or shares of Highland, at Orvana’s option, an additional amount of
$1.25 million on June 17, 2018. On May 28, 2018, the Company and Orvana amended the repayment terms of the final amount
due and as such, a payment of $250,000 was made on June 17,2018. The remaining amount of $1,000,000 bears interest at a
rate of 12% per annum and is repayable in cash at the earlier of (a) 10 days after the closing of an equity financing by the
Company of at least $4,000,0000 and (b) November 30, 2018. If the amount due of $1,000,000 is not repaid by November 30,
2018, the unpaid amount will bear interest at the rate of 15% per annum from then on and the Company will be required to pay
a 2% penalty amount to Orvana.
An amount of $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 $4.25/lb; and an
additional payment of $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 $4.50/lb.
Osisko royalty and option to purchase silver production
On June 30, 2016, the Company and Osisko Gold Royalties Ltd. (“Osisko”) amended the terms of their agreement entered into
in December 2014 and converted a C$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 provided
that upon final closing of the acquisition of the White Pine Project, the Company will grant to Osisko a 1.5% NSR royalty on all
metals from the White Pine North Project, and Osisko’s 3.0% NSR royalty on the Copperwood Project will be reduced to 1.5%.
To secure the payment of the NSR royalty, Osisko has a general security over all of the Company’s assets except the UPX
Property.
In December 2014, the Company had also granted to Osisko an option to purchase for $26 million a 100% NSR on any future
silver production from the Company’s projects, including the White Pine, Copperwood and Keweenaw projects. Osisko may
elect to exercise the option to purchase the silver production by paying $26 million to the Company within 60 days following the
delivery to Osisko of a feasibility study on the Michigan Projects.
9
Management’s Discussion and Analysis
Year ended June 30, 2018
White Pine North Project
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 Project. 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 $0.005 (one half of one cent) per pound for the first one billion pounds of proven and
probable reserves of copper and $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 $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. On August 31, 2018, Highland and CRC
agreed to further extend the period to complete the acquisition of the White Pine Project to November 30, 2018.
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
of ore 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 mineral resource was completed in October 1995 by the former White Pine chief geologist based on
526 diamond drill holes. The total historical estimate at that time was 118.7 million short tons averaging 20.7 pounds of copper
per ton, for approximately 2.5 billion pounds of contained copper.
The resources reported for the White Pine North are provided as historical data only. A qualified person has not
completed the work necessary to verify the quality of the historic exploration data or to classify the historical estimate
as current mineral resources or mineral reserves. The Company is not treating the historical estimate as current mineral
resources or mineral reserves and the historical data should not be relied upon until they have been verified.
Highland intends to develop a conceptual approach to mine development at the White Pine North Project in the near future.
Based on the historical resource estimate already identified at the White Pine North deposit, this Project represents a significant
medium-term copper production growth opportunity for the Company.
Mineral Lease Agreement, White Pine, Michigan
In April 2015, the Company entered into an agreement to lease certain mineral rights located in White Pine from a private
Michigan limited liability corporation under which the Company was required to make payments of $225,000 on closing, and
$425,000 and $150,000 on the first and second anniversary of closing. On December 30, 2016, the Company entered into an
amended agreement with the lessor to revise the payment schedule of the remaining amount of $575,000 owed by the Company
to the Lessor. Under the terms of the amended agreement, the Company paid an amount of $135,000 on December 30, 2016
10
Management’s Discussion and Analysis
Year ended June 30, 2018
and agreed to pay the balance of $440,000 in sixteen equal quarterly principal amounts of $27,500, plus interest accruing at the
rate of 8% per annum until December 2020. The mineral lease is for 20 years, with an option for an additional five years. Annual
lease payments are $25,000 for the first five years, $30,000 for the sixth and seventh years and $1,000,000 thereafter.
Keweenaw Project
The Keweenaw Project, which covers an area of approximately 9,000 acres, includes the 543S deposit. Under a Mining Venture
Agreement with BRP dated July 2011 and subsequently amended, the Company has an option to acquire a 65% interest in the
Keweenaw Project by spending $11,500,000 in exploration work (which amount has been spent), providing a feasibility study
by December 31, 2018 and securing historical shafts. At June 30, 2018, the Company has written-down to nil the costs related
to the Keweenaw Project (an amount of $654,405 was charged to the consolidated statement of comprehensive loss during the
year ended June 30, 2018) as the Company does not plan to conduct any significant work on this property in the near term.
UPX Property
In May 2017, UPX Minerals Inc. (“UPX”), a wholly owned subsidiary of Highland, acquired from Kennecott Exploration Company
and Rio Tinto Nickel Company (“RTX”), subsidiaries of the Rio Tinto Group, a mineral property located in central Upper Peninsula
of Michigan. The UPX Property is comprised of non-contiguous mineral rights covering approximately 1,800 square kilometers
(448,000 acres).
The consideration for the acquisition of the UPX Property was $18.0 million of which $2.0 million was paid at closing and UPX
issued a $16 million secured non-interest bearing promissory note (the “Note”) that provides for the payment of $1.0 million on
the first anniversary of the acquisition (paid on May 30, 2018) and $3.0 million on each of the second, third, fourth, fifth and sixth
anniversary dates of the acquisition. The payments under the Note will be accelerated if Highland publicly releases a feasibility
study covering any portion of the UPX Property. The Note is secured by a first priority security interest over the acquired property.
RTX has retained a 2% NSR on all mineral interests. Highland has an option to buy-down half of the 2% NSR by paying $8
million to RTX. The option will be exercisable at any time prior to May 30, 2028.
The UPX Property covers several Precambrian geological domains with known potential for nickel-copper massive sulphide
deposits, gold deposits, and sediment-hosted base metal deposits. For each of these geological domains, the Company’s
exploration team is carrying out a systematic compilation of significant historical data obtained with the acquisition of the UPX
Property to better understand the potential of the property and is identifying exploration targets using ongoing geological mapping,
rock and soil sampling programs, and interpretation of high-resolution magnetic data covering the full extent of the UPX Property.
More detail on these activities has been provided by the Company in a press release dated November 21, 2017.
The Company is currently evaluating various options to finance exploration work programs on the UPX Property.
Qualified Persons
The technical information related to the Copperwood Project Feasibility Study has been reviewed and approved by Sylvain
Collard, P. Eng., General Manager, Michigan Operations and a qualified person under NI 43-101.
11
Management’s Discussion and Analysis
Year ended June 30, 2018
Corporate activities
Board Appointment
On October 26, 2017, the Board of Directors appointed Mr. Jean Desrosiers as a director of the Company. Mr. Desrosiers is a
retired mining engineer with over 40 years of experience in the mining industry. During his career, Mr. Desrosiers has held senior
management positions with Noranda, Falconbridge, Xstrata and Glencore Xstrata.
Exercise of Warrants
During the year, the Company issued a total of 13,785,536 common shares following the exercise of an equivalent number of
share purchase warrants at a price of C$0.15 per share for total proceeds of $1,609,628 (C$2,067,830). A total of 138,804,226
unexercised share purchase warrants expired during the year. At June 30, 2018, there are 1,000,000 warrants outstanding
exercisable at a price of Can $0.15 per share, expiring in March 2020.
Grant of Stock Options
During the year ended June 30, 2018, the Company granted a total of 12,045,000 incentive stock options to directors, officers,
employees and consultants of the Company at an average exercise price of C$0.12 per share. These stock options will vest
over two years and, if not exercised, will expire five years from their grant date. At June 30, 2018, there are 15,200,000 stock
options outstanding exercisable at an average price of C$0.17 per share, expiring at various dates until May 2023.
Rights of Certain Shareholders
Between November 30, 2016 and March 24, 2017, the Company completed in four tranches a non-brokered private placement
of units (common shares and warrants) for gross proceeds of $22,492,787 (C$30,022,967). As part of this financing, Greenstone
Resources II LP (“Greenstone”), Osisko and OMF Fund II (H) LP, a subsidiary of Orion Mine Finance, (“Orion”) acquired such
number of units resulting in Greenstone, Osisko and Orion holding respectively 17.5%, 16.0% and 14.6% of the issued and
outstanding common shares of the Company at that time. Greenstone also received nomination rights for the sale of Highland’s
production pro-rata to its shareholding, and Orion entered into an offtake agreement with the Company entitling Orion to
purchase 15% of all concentrates to be produced at the Copperwood Project. Orion also received a right of first refusal on any
debt financing for the Copperwood project until September 17, 2018, excluding any royalty or stream financings. Osisko has the
right of first refusal on any other debt financing by the Company. So long as they hold not less than 10% of the issued and
outstanding number of shares of the Company, Greenstone, Osisko and Orion each have participation rights to maintain their
equity ownership level in future equity financings.
12
Management’s Discussion and Analysis
Year ended June 30, 2018
Exploration and Evaluation Assets
Amounts invested in exploration and evaluation assets and capitalized in accordance with the Company’s accounting policy on
exploration and evaluation expenses, are as follows:
Year ended June 30, 2017
Property payments in cash
Finance expense
Effect of foreign exchange
Year ended June 30, 2018
Property payments in cash
Finance expense
Write-down
Effect of foreign exchange
Copperwood
White Pine
UPX
Other
Project
Project
Property
properties
$
$
$
$
Total
$
110,510
150,000
9,885,288
24,412
10,170,210
272,834
-
-
-
131,242
-
404.076
-
3,821
3,821
383,344
150,000
10,016,530
28,233
10,578,107
186,100
110,233
-
-
25,000
-
28,895
239,995
-
-
-
1,739,727
-
1,849,960
-
-
(654,405)
(654,405)
8,549
8,549
296,333
25,000
1,739,727
(616,961)
1,444,099
The amounts capitalized during the year ended June 30, 2018 included lease payments of $186,100 related to the Copperwood
Project and $28,895 related to other properties, a total accretion expense of $1,849,960 related to the non-interest-bearing
promissory note in favor of RTX and the balance of purchase price payable in favor of Orvana until June 17, 2018 and an
unrealized loss on foreign of exchange of $8,549. At June 30, 2018, the Company wrote-down its amount capitalized on the
Keweenaw Project, as the Company does not plan to conduct any significant work on this property in the near term. In 2017,
the amounts capitalized included the acquisition cost of the UPX property for an amount of $9,885,288 (which consist of the
amount of $2,000,000 paid at closing and the fair value of the non-interest bearing note of $16,000,000 payable over a period
of 6 years in favor of the vendor, using a discount rate of 20%), lease payments of $110,510 related to the Copperwood Project
and $24,412 related to other properties, the balance of the additional payment of $150,000 owing to the lessor of mineral rights
in White Pine, a total accretion amount of $404,076 related to the non-interest bearing promissory note in favor of RTX and the
non-interest bearing balance of purchase price payable in favor of Orvana and an unrealized loss on foreign of exchange of
$3,821.
Exploration and evaluation expenses charged to the statements of comprehensive loss during the years ended June 30, 2018
and 2017 are as follows:
Site preparation, drilling and assaying
Copperwood
White Pine
UPX
Other
June 30, 2018 June 30, 2017
Project
Project
Project
projects
Total
Total
$
1,181,703
$
-
$
205,004
$
-
$
$
1,386,707
1,152,422
Year ended
Year ended
Labour
999,444
118,511
1,327,165
5,313
2,450,433
857,770
Studies and consultants
3,587,107
249,402
-
-
3,836,509
412,543
Office, overhead and other administrative costs
308,775
135,932
434,349
31,536
910,592
451,535
6,077,029
503,845
1,966,518
36,849
8,584,241
2,874,270
13
Management’s Discussion and Analysis
Year ended June 30, 2018
Selected Consolidated Financial Information (1)(2)
The following selected financial information should be read in conjunction with the Company’s June 30, 2018 and 2017
consolidated financial statements.
Financial Position
Cash
Working capital (deficiency)
Exploration and evaluation assets
Total assets
Non-current portion of promissory note
Non-current portion of note 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,
2018
$
2017
$
3,487,847
14,061,705
(1,228,720)
10,584,135
31,795,832
30,351,733
35,679,441
44,578,597
6,244,239
7,710,686
165,000
275,000
24,045,201
33,302,320
Year ended
Year ended
June 30,
2018
$
June 30,
2017 (3)
$
Year ended
June 30,
2016 (3)
$
(11,571,693)
(4,482,540)
(3,006,281)
(0.02)
(0.02)
(0.02)
(10,668,437)
(4,643,810)
(3,233,927)
(366,772)
(2,306,701)
(171,175)
249,628
20,769,215
2,743,109
1) The Selected Consolidated Financial Information was derived from the Company’s June 30, 2018 and 2017 consolidated financial
statements, prepared in accordance with IFRS.
2) The Company’s June 30, 2018 and 2017 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 and completing
the acquisition of the White Pine Project. 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. These conditions and uncertainties 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, 2018 and 2017 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.
14
Management’s Discussion and Analysis
Year ended June 30, 2018
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 near future.
Change in presentation currency
Prior to July 1, 2017, the Company reported its annual and quarterly consolidated statements of financial position,
comprehensive loss, shareholder’s equity and cash flows in Canadian dollars. Effective July 1, 2017, the Company changed its
reporting currency to the United States dollar to facilitate the comparability of the Company’s financial information with those of
similar mining companies. In accordance with International Accounting Standard 21, The Effects of Changes in Foreign
Exchange Rates, the Company’s consolidated financial statements for all periods presented have been translated into US dollars
and all comparative financial information has been restated to reflect the Company’s results as if they had been historically
reported in US dollars.
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.
Year ended June 30, 2018 compared to year ended June 30, 2017
The Company incurred a net loss of $11,571,693 ($0.02 per share) during the year ended June 30, 2018 compared to a net loss
of $4,482,540 ($0.02 per share) in 2017.
The increased loss in 2018 is mostly due to the increased exploration and evaluation expenses incurred ($8,584,241 in 2018
compared to $2,874,270 in 2017). In 2018, the Company incurred higher studies expenses related to the preparation of the
Copperwood Feasibility Study ($3,836,509 in 2018 compared to $412,543 in 2017) and additional labor costs due to the hiring
of additional staff to support the completion of the Copperwood Feasibility Study and to conduct exploration activities on the
UPX Property ($2,450,433 in 2018 vs $857,770 in 2017).
Management and administration expenses of $1,698,615 in 2018 compared to $1,048,024 in 2017 reflect higher wages and
fees following the hiring of additional corporate staff (wages and fees of $1,032,772 in 2018 compared to $700,716 in 2017),
higher professional fees due mostly to increased legal fees ($271,862 in 2018 compared to $139,339 in 2017), and higher
investor relations and travel expenses related to attending key mining conferences and other investor relations events and listing
fees on the OTCQB ($209,881 in 2018 compared to $72,073 in 2017).
Share-based compensation totaled $503,512 in 2018 ($20,318 in 2017) following the grant of 12,045,000 options to employees,
directors, officers and consultants of the Company in August 2017, October 2017 and May 2018.
At June 30, 2018, the Company has written-down to nil the costs related to the Keweenaw Project ($654,405) as it does not
plan to conduct any significant work on this project in the near term.
15
Management’s Discussion and Analysis
Year ended June 30, 2018
The Company incurred a finance expense of $31,833 in 2018 ($17,050 in 2017) related to the interest-bearing note payable
owed to the lessor of certain mineral rights located in White Pine and the balance of the purchase price payable to Orvana.
During the year, the Company realized $112,343 ($39,270 in 2017) in finance income on liquidities held following the completion
of private placements during the year ended June 30, 2017.
4th quarter ended June 30, 2018 compared to the 4th quarter ended June 30, 2017
During the 4th quarter ended June 30, 2018, the Company incurred a net loss of $2,700,885 ($0.01 per share), compared to a
net loss of $1,447,412 (nil per share) during the 4th quarter ended June 30, 2017. The increased loss during the 4th quarter
ended June 30, 2018 compared to 2017 is mainly due to increased exploration and evaluation expenses of $575,389 related to
the Copperwood Project Feasibility Study, increased management expenses of $162,499 due to the hiring of additional corporate
staff, the write-down in the amount of $654,405 related to the Keweenaw Project, share-based remuneration of $98,831 following
the grant of stock options in 2017 and 2018, partially offset by an unrealized gain on foreign exchange of $73,479, compared to
a loss of $110,069 in 2017, on the conversion of the cash and cash equivalents held in US dollars by Highland at June 30, 2018.
Selected Quarterly Financial Information
The following is a summary of the Company’s financial results for the past eight quarters:
Period ended
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
Liquidity and Capital Resources
Revenues
Net loss
per share
Basic and
diluted loss
$
26,127
25,545
31,933
28,738
31,376
6,724
1,143
27
$
2,700,885
2,934,837
3,236,605
2,699,366
1,447,412
2,035,614
456,901
542,613
$
(0.01)
(0.01)
(0.01)
(0.00)
(0.00)
(0.01)
(0.00)
(0.00)
At June 30, 2018, the Company had a working capital deficiency of $1,228,720 compared to a working capital of $10,584,135
at June 30, 2017. The decrease in the working capital during the year ended June 30, 2018 is mainly attributable to exploration
and evaluation expenses of $8,584,241, management and administration expenses of $1,698,615, business development
expenses of $182,373, the acquisition of capital assets of $126,777 (consisting mostly of leasehold improvements and the
acquisition of vehicles and computer-related equipment), lease payments of $239,995 related to the Copperwood Project and
other mineral leases held, the reimbursement of an amount of $110,000 under a 4-year note payable related to certain mineral
rights located in White Pine, Michigan, the reimbursement of an amount of $250,000 under the balance of purchase price payable
16
Management’s Discussion and Analysis
Year ended June 30, 2018
to Orvana, the reimbursement of an amount of $1,000,000 under the promissory note due to RTX, with all such expenditures
partially offset with the proceeds of $1,609,628 received following the exercise of 13,785,536 share purchase warrants.
In November 2017, February 2018 and March 2018, the Company issued a total of 13,785,536 common shares following the
exercise of an equivalent number of share purchase warrants at a price of C$0.15 per share for total proceeds of $1,609,628
(C$2,067,830).
During the year ended June 30, 2017, the Company had completed a private placement, which resulted in the issuance of
300,229,670 units (each unit comprising one common share and one half of one common share purchase warrant) at a price of
C$0.10 per unit for total gross proceeds of $22,492,787 ($30,022,967), partially offset by share issue expenses of $799,990.
The Company will require additional funds to settle its working capital deficiency, to meet all existing commitments, to provide
for management and administration expenses for the next 12 months and to further pursue exploration and development
activities on its mineral properties, including the development of the Copperwood Project. The Company’s primary objective is
to raise sufficient funds to ensure that working capital requirements are met for at least the next 12 months. The Company is
also working to put in place a project financing package as soon as possible for the development of the Copperwood Project.
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 delay, reduce the scope of, or eliminate
its future exploration and development activities, and / or it may have to sell some or all of its assets, any of which could have a
negative impact on the business, financial condition and results of operation of the Company.
Capital Management
The Company defines capital that it manages as loans (including note payable, promissory note 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, 2018, managed capital was $34,320,021
($42,832,847 at June 30, 2017). There were no changes in the Company’s approach to capital management during the year
ended June 30, 2018. The Company is not subject to any externally imposed capital requirements as at June 30, 2018.
Off-Balance Sheet Arrangements
At June 30, 2018, the Company has no off-balance sheet arrangements.
Transactions with Related Parties
During the year ended June 30, 2018, the Company incurred administration expenses of $67,151 for office-related services
provided by Reunion Gold Corporation (“Reunion”), a related party by virtue of common key management and director
(administration expenses of $76,474 from Reunion in 2017).
17
Management’s Discussion and Analysis
Year ended June 30, 2018
During the year ended June 30, 2018, the Company recovered amounts of $186,010 for management services provided to other
TSXV-listed companies, related by virtue of common key management, including Odyssey Resources Limited and Reunion (an
amount of $114,696 was recovered during the year ended June 30, 2017). The services are provided at cost. At June 30, 2018,
the Company had an amount receivable from Odyssey Resources Limited of $3,935 included in prepaid expenses and other on
the consolidated statements of financial position (nil at June 30, 2017).
Remuneration to directors and key management of the Company, including the Executive Chairman, the President and CEO
and the CFO, totaled $946,883 during the year ended June 30, 2018 ($705,592 in 2017), as more fully detailed in Note 16 to
the June 30, 2018 and 2017 consolidated financial statements filed on SEDAR.
Outstanding Share Data
At September 11, 2018, the Company has 472,933,689 common shares issued and outstanding, 1,000,000 share purchase
warrants exercisable at a price of $0.15 per share until March 17, 2020, and 15,200,000 stock options outstanding with an
average exercise price of $0.17, expiring at various dates until May 2023.
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 Note 3 to the June 30, 2018 and 2017 consolidated financial statements filed on SEDAR.
Significant accounting judgments 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. 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,
include title to mineral property interests, exploration and evaluation assets, fair value of liabilities, environmental liability and
going concern. Details of the significant accounting judgments and estimates are presented in Note 3 to the June 30, 2018 and
2017 consolidated financial statements filed on SEDAR.
Accounting Standards Issued but not yet Applied
Standards, amendments and interpretations issued but not yet effective up to the date of the issuance of the Company’s
consolidated financial statements that are expected to be relevant to the Company are presented in Note 3 to the June 30, 2018
and 2017 consolidated financial statements filed on SEDAR.
18
Management’s Discussion and Analysis
Year ended June 30, 2018
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 has no
history of earnings and has limited financial resources. The Company does not expect to receive revenues from operations in
the foreseeable future, if at all. 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.
The following table summarizes the contractual maturities of the Company’s financial liabilities at June 30, 2018:
Carrying
Settlement
Within
Within
Over
amount
amount
6 months
1 year
2-3 years
3 years
Accounts payable and accrued liabilities
1,356,742
1,356,742
855,617
501,125
$
$
$
$
$
-
Note payable
275,000
275,000
55,000
55,000
165,000
Balance of purchase price payable
1,004,333
1,004,333
1,004,333
-
-
$
-
-
-
Promissory note
8,745,487
15,000,000
-
3,000,000
6,000,000 6,000,000
11,381,562
17,636,075
1,914,950
3,556,125
6,165,000 6,000,000
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 and cash equivalents which are mainly held in accounts with a major
Canadian-based chartered bank.
Interest Rate Risk
The Company’s interest rate risk relates to cash and cash equivalents. 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 and cash equivalents are subject to
floating interest rates. Sensitivity to a plus or minus 1% change in interest rates would affect profit or loss by approximately
$35,000.
19
Management’s Discussion and Analysis
Year ended June 30, 2018
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 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, 2018, financial assets and liabilities denominated in a foreign currency consisted of cash and cash equivalents of
$3,155,805 and accounts payable and accrued liabilities of $37,639. The impact on profit or loss of a 10% increase or decrease
in foreign currencies against the Canadian dollar would be approximately $312,000.
Other Risks and Uncertainties
Highland is subject to a number of significant risks and uncertainties due to the nature of its business which includes the
acquisition, exploration and development of mineral projects. Failure to successfully address such risks and uncertainties could
have a significant negative impact on Highland’s overall operations and financial condition and could materially affect the value
of Highland’s assets and impact its future operating results and business plans. Therefore, an investment in the securities of
Highland involves significant risks and should be considered speculative. The risks and uncertainties described below are not
necessarily the only ones that Highland could be facing. Additional risks or uncertainties not presently known to Highland or that
Highland currently considers immaterial may also impair its business operations. Highland cannot give assurance that it will
successfully address these risks. Readers should carefully consider these risks and uncertainties.
Requirement for additional capital
The ability of Highland to achieve its plans and objectives is dependent on its ability to raise sufficient amounts of capital through
equity financings, debt financings, joint venturing of projects, sale of projects and / or other means.
Highland requires substantial amount of funds to continue its planned activities including: a) for the development of its
Copperwood Project and to place it into commercial production; if adequate financing is not available, the construction of the
Copperwood mine and the commencement of production may be delayed indefinitely; b) to complete the acquisition of the White
Pine Project, Highland requires funds to replace an environmental bond posted by CRC in relation with the remediation and
closure plan of the historical White Pine mine site; if adequate financing is not available, the acquisition of the White Pine Project
may be delayed or not be completed; c) to conduct exploration programs on its UPX Property and to repay the outstanding
principal of a secured promissory note under which annual payments of $3.0 million will be due in May of each of the years 2019
to 2023; if adequate financing is not available, exploration programs may be delayed and RTX could enforce its rights under the
secured promissory note and repossess the RTX Property; and d) for general and administrative expenses.
20
Management’s Discussion and Analysis
Year ended June 30, 2018
Highland’s ability to raise the necessary funds depends in part upon the market’s perception of its mineral projects including the
results of the Copperwood Feasibility Study, the price of and demand for copper and other metals, the results of exploration
programs, the state of the market to finance resource projects and global market conditions in general. No assurance can be
given that additional capital will be available at all or available on terms acceptable to Highland.
Other Company Specific Risks
The mineral resources and mineral reserves of the Copperwood deposits are estimates and depend upon geological
interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be inaccurate.
Actual recoveries of copper from a deposit may be lower than those indicated by test work. Any material change in the
quantity of mineralization, grade or stripping ratio may affect the economic viability of the Copperwood Project. In
addition, there can be no assurance that metal recoveries in small-scale laboratory tests will be duplicated in larger
scale tests under on-site conditions or during production. Mineral resources that are not mineral reserves do not have
demonstrated economic viability.
The market price of Highland’s common shares, the Copperwood resource and reserve estimates, the assumptions
used in the Copperwood feasibility study, and Highland’s ability to complete a financing may be significantly and
adversely affected by declines in the price of copper. Copper prices are volatile and can be affected by many factors
beyond the control of Highland, including, amongst others: changes in supply and demand, speculative activities,
international economic conditions, political conflicts and wars. The price of copper has fluctuated widely in recent years.
Putting a mining project into production requires substantial planning and expenditures and, while several members of
the Company’s management have mine construction and operating experience, as a corporation, Highland does not
have any experience in taking a mining project to production; as a result, Highland’s future success is more uncertain
than if it had a proven history of mine construction and operation.
In Michigan, mineral rights are property rights that can be sold, transferred or leased. Highland has taken steps to verify
title with respect to its most material mineral properties. Although Highland believes that title to its mineral properties
are in good standing there is no guarantee that title to such properties will not be challenged or impugned.
Highland’s operations are subject to various laws and regulations governing the protection of the environment,
exploration, development, production, occupational health, waste disposal, safety and other matters. Environmental
legislation provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in
association with certain mining operations which would result in environmental pollution. A breach of such legislation
by Highland may result in the imposition of fines and penalties which can be substantial.
Highland has applied to renew, amend or obtain certain permits required to begin construction of the Copperwood mine
and commence production. Although the Company is confident that it can obtain the required permits, there is no
assurance it will obtain all necessary permits within the anticipated timeline or at all. Failure to obtain such permits
could delay or prevent the beginning of construction and production.
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 which Highland may be unable or choose
not to insure.
21
Management’s Discussion and Analysis
Year ended June 30, 2018
The executive officers, directors, and several shareholders of the Company (including Osisko, Orion and Greenstone)
and their affiliated entities together beneficially own a majority of the Company’s outstanding common shares. As a
result, these shareholders, if they act together or in a block, could have significant influence over most matters that
require approval by our shareholders, including the election of directors and approval of significant corporate
transactions, even if other shareholders oppose them. This concentration of ownership might also have the effect of
delaying or preventing a change of control of Highland that other shareholders may view as beneficial.
It may be difficult for Highland to find and hire qualified people in the mining industry currently residing in Michigan or
to obtain all of the necessary services or expertise to conduct operations in Michigan. If qualified people and services
or expertise cannot be obtained in Michigan, Highland may need to seek and obtain those services from people located
outside of these areas, which will require work permits and compliance with applicable laws and could result in delays
and higher costs.
The Company faces substantial competition within the mining industry from other mineral companies with much greater
financial and technical resources.
Future issuance of common shares into the public market may result in dilution to the existing shareholders.
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.
Development projects are uncertain and actual capital and operating costs and economic returns may differ significantly
from those estimated for a project prior to production. The economic feasibility of development projects is based on
many factors such as: estimation of mineral reserves, anticipated metallurgical recoveries, environmental
considerations and permitting, future metals prices, and anticipated capital and operating costs of these projects. Any
of the following events, among others, could affect the profitability or economic feasibility of a project: unanticipated
changes in grade and tonnes of ore to be mined and processed, unanticipated adverse geological conditions,
unanticipated metallurgical recovery problems, incorrect data on which engineering assumptions are made, availability
and costs of labour, costs of processing and refining facilities, availability of economic sources of power, adequacy of
water supply, availability of surface on which to locate processing and refining facilities, adequate access to the site,
unanticipated transportation costs, government regulations (including regulations with respect to royalties, duties,
taxes, permitting, restrictions on production, quotas on exportation of minerals, and the environment), fluctuations in
metals prices, and accidents, labour actions and force-majeure events. It is not unusual in new mining operations to
experience unexpected problems during the start-up phase, and delays can often occur at the start of production. It is
likely that actual results for a project will differ from estimates and assumptions, and these differences may be material.
In addition, experience from actual mining or processing operations may identify new or unexpected conditions that
could reduce production below, or increase capital or operating costs above, estimates.
Title to mineral rights and surface rights may be disputed.
22
Management’s Discussion and Analysis
Year ended June 30, 2018
Environmental legislation is evolving in the direction of stricter standards and enforcement, higher fines and penalties
for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of
responsibility for companies and their directors, officers and employees. Compliance with changing environmental laws
and regulations may require significant capital outlays, including obtaining additional permits, and may cause material
changes or delays in, or the cancellation of, operations.
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 in the mining sector.
Social and environmental groups may be opposed to the development of mining projects.
Cautionary Note Regarding Forward-Looking Information
This MD&A contains “forward-looking information” within the meaning of Canadian securities legislation and “forward-looking
statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, “forward-
looking statements”). These forward-looking statements are made as of the date of this MD&A and the Company does not intend,
and does not assume any obligation, to update these forward-looking statements, except as required under applicable securities
legislation. Forward-looking statements relate to future events or future performance and reflect our expectations or beliefs
regarding future events. Forward-looking statements include, but are not limited to: statements with respect to the completion of
a financing to fund the Company’s plans and objectives; statements with respect to the Copperwood Project including the
estimation of mineral resources and mineral reserves, the timing and cost of the construction of the mine, the timing and amount
of estimated future production, costs of production and capital expenditures; and statements with respect to the acquisition of
the White Pine Project. In certain cases, forward-looking statements can be identified by the use of words such as “plans”,
“expects”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates”, “believes” or variations of such words and
phrases, or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be
achieved” or the negative of these terms or comparable terminology. In this document certain forward-looking statements are
identified by words including “anticipation”, “plan” and “expected”.
By their very nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to, the
Company’s ability to raise capital, risks inherent to future prices of copper and other metals, the accuracy of mineral resource
and mineral reserve estimates, increased operating and capital costs, changes to governmental regulations, compliance with
governmental regulations and environmental laws and regulations, reliance on approvals and permits from governmental
authorities, uncertainties and risks related to the acquisition of the White Pine Project, uncertainties and risks related to the
potential development of the UPX Property, challenges to title to the Company’s mineral properties, maintaining social license
to operate, dependence on key management personnel, competition in the mining industry, and other risks of the mining industry
as well as those factors detailed from time to time in the Company’s interim and annual financial statements and MD&A, all of
which are filed and available for review under the Company’s profile on SEDAR at www.sedar.com. Although the Company has
attempted to identify important factors that could cause our actual results, performance or achievements to differ materially from
those described in our forward-looking statements, there may be other factors that cause our results, performance or
achievements not to be as anticipated, estimated or intended.
23
Management’s Discussion and Analysis
Year ended June 30, 2018
There can be no assurance that our forward-looking statements will prove to be accurate, as our actual results, performance or
achievements could differ materially from those anticipated in such statements. Accordingly, readers should not place undue
reliance on our forward-looking statements.
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 “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 September 11, 2018. 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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