CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2019 and 2018
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.
Opinion
We have audited the consolidated financial statements of Highland Copper Company Inc.
(the "Entity"), which comprise:
•
•
•
•
•
the consolidated statements of financial position as at June 30, 2019 and 2018
the consolidated statements of net loss and comprehensive loss for the years then ended
the consolidated statements of changes in equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of significant accounting
policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Entity as at June 30, 2019 and 2018, and its consolidated
financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the "Auditors’ Responsibilities for
the Audit of the Financial Statements" section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our
audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
Material Uncertainty Related to Going Concern
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 been yet
generated and it has incurred net losses for the last two years, and has an accumulated deficit and a
working capital deficiency as at June 30, 2019. In addition, Highland Copper Company Inc. was in
breach of the terms of a promissory note agreement arising from the non-payment of $3,000,000
which was to be made on May 30, 2019.
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
As stated in Note 2 in the financial statements, these events or conditions, along with other matters
as set forth in Note 2 in the consolidated financial statements, indicate that a material uncertainty
exists that may cast significant doubt on Highland Copper Company Inc.'s ability to continue as a
going concern.
Our opinion is not modified in respect of this matter.
Other Information
Management is responsible for the other information. Other information comprises:
•
the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
Our opinion on the financial statements does not cover the other information and we do not and will
not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for
indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the
relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the
work we have performed on this other information, we conclude that there is a material misstatement
of this other information, we are required to report that fact in the auditors’ report.
We have nothing to report in this.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with International Financial Reporting Standards (IFRS), and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Entity or to
cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial reporting
process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report
that includes our opinion.
3
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one
intentional omissions,
resulting
misrepresentations, or the override of internal control.
involve collusion,
from error, as
fraud may
forgery,
• Obtain an understanding of internal control relevant to the audit 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.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the Entity's ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in
our auditors’ report to the related disclosures in the financial statements or, if such disclosures
are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditors’ report. However, future events or conditions may cause the Entity
to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
4
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the group Entity to express an opinion on the financial statements. We
are responsible for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
The engagement partner on the audit resulting in this auditors’ report is Nathalie Labelle.
Montréal, Canada
October 28, 2019
*CPA auditor, CA, public accountancy permit No. A119245
5
Highland Copper Company Inc.
Consolidated Statements of Financial Position
(in US dollars)
ASSETS
Current
Cash and cash equivalents (Note 5)
Sales taxes receivable
Prepaid expenses and other
Non-current
Capital assets (Note 6)
Exploration and evaluation assets (Note 7)
TOTAL ASSETS
LIABILITIES
Current
Accounts payable and accrued liabilities
Credit facility, including accrued interest (Note 8)
Note payable (Note 9)
Balance of purchase price payable (Note 10)
Promissory note, including accrued interest (Note 11)
Non-current
Note payable (Note 9)
Promissory note (Note 11)
Environmental liability (Note 12)
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Share capital (Note 13)
Contributed surplus
Deficit
Cumulative translation adjustment
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
June 30,
June 30,
2019
$
2018
$
605,046
3,487,847
12,767
36,899
132,093
123,663
654,712
3,743,603
81,768
140,006
20,385,814
31,795,832
21,122,294
35,679,441
913,359
1,356,742
2,495,484
-
110,000
110,000
-
1,004,333
15,128,068
2,501,248
18,646,911
4,972,323
55,000
165,000
-
6,244,239
257,004
252,678
18,958,915
11,634,240
66,137,274
66,137,274
11,681,150
11,349,577
(77,278,822)
(55,123,241)
1,623,777
1,681,591
2,163,379
24,045,201
21,122,294
35,679,441
Going Concern (Note 2); Commitments and Contingencies (Note 7 and 24); Events after the Reporting Date (Note 26).
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
6 Highland Copper Company Inc.
Consolidated Statements of Net Loss and Comprehensive Loss
(in US dollars)
Expenses and other items
Exploration and evaluation (Note 15)
Management and administration (Note 16)
Share-based compensation
Depreciation and amortization (Note 6)
Write-down of exploration and evaluation assets (Note 7)
Accretion on environmental liability (Note 12)
Finance expense (Note 17)
Finance income
Gain on foreign exchange
Net loss for the year
Other comprehensive income
Item that will not be subsequently reclassified to income
Foreign currency translation adjustment
Item that may be subsequently reclassified to income
Years ended June 30,
2018
2019
$
$
2,410,219
1,359,322
168,612
48,252
18,010,770
4,326
219,908
(19,005)
(46,823)
8,766,614
1,698,615
503,512
44,609
654,405
6,363
31,833
(112,343)
(21,915)
(22,155,581)
(11,571,693)
(248,958)
651,987
Foreign currency translation adjustment
191,144
(450,553)
Comprehensive loss for the year
(22,213,395)
(11,370,259)
Basic and diluted loss per common share (Note 19)
(0.05)
(0.02)
Weighted average number of common shares - basic and diluted
472,933,689
464,575,595
The accompanying notes form an integral part of these consolidated financial statements.
7
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, 2018
472,933,689
66,137,274
11,349,577
(55,123,241)
1,681,591
24,045,201
Share-based compensation
Below market element of credit facility (Note 8)
Net loss for the year
Foreign currency translation adjustment
-
-
-
-
-
-
-
-
168,612
162,961
-
-
-
-
(22,155,581)
-
-
-
-
(57,814)
168,612
162,961
(22,155,581)
(57,814)
Balance at June 30, 2019
472,933,689
66,137,274
11,681,150
(77,278,822)
1,623,777
2,163,379
Balance at June 30, 2017
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 13)
Share-based compensation
Net loss for the year
Foreign currency translation adjustment
13,785,536
-
-
-
1,939,644
-
-
-
(330,016)
503,512
-
-
-
-
(11,571,693)
-
-
-
-
201,434
1,609,628
503,512
(11,571,693)
201,434
Balance at June 30, 2018
472,933,689
66,137,274
11,349,577
(55,123,241)
1,681,591
24,045,201
The accompanying notes form an integral part of these consolidated financial statements.
8 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
Accretion on environmental liability
Gain on sale of capital assets
Unrealized gain on foreign exchange
Finance expense
Finance income accrued
Finance income received
Changes in other working capital items
Sales taxes receivable
Prepaid expenses and other
Accounts payable and accrued liabilities
Investing activities
Acquisition of capital assets (Note 6)
Proceeds on sale of capital assets (Note 6)
Additions to exploration and evaluation assets (Note 7)
Financing activities
Issue of share capital (Note 13)
Credit facility, net of transaction costs (Note 8)
Reimbursement of note payable (Note 9)
Reimbursement of balance of purchase price payable (Note 10)
Reimbursement of promissory note (Note 11)
Effect of exchange rate changes on cash held in foreign currency
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Years ended June 30,
2019
$
2018
$
(22,155,581)
(11,571,693)
168,612
48,252
18,010,770
4,326
(19,776)
(46,823)
199,596
(19,005)
21,884
118,777
86,795
503,512
44,609
654,405
6,363
-
(21,915)
-
(112,343)
117,200
(93,614)
(60,073)
(447,462)
(143,554)
(4,029,635)
(10,668,437)
-
(126,777)
29,379
(352,752)
(323,373)
-
(239,995)
(366,772)
-
1,609,628
2,586,917
(110,000)
(1,000,000)
-
(110,000)
(250,000)
-
(1,000,000)
1,476,917
249,628
(6,710)
211,723
(2,882,801)
(10,573,858)
3,487,847
14,061,705
605,046
3,487,847
Accretion of promissory note included in exploration and evaluation assets (Note 7)
Below market element of credit facility in contributed surplus (Note 8)
6,254,513
1,849,960
162,961
-
The accompanying notes form an integral part of these consolidated financial statements.
9 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
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 and on the OTCQB Venture Marketplace (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 referred to as the UPX Property, which was acquired in
May 2017 from Kennecott Exploration Company and Rio Tinto Nickel Company (“RTX”), subsidiaries of the Rio Tinto
Group.
1. BASIS OF PRESENTATION
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The Board of Directors approved these consolidated financial statements on October 28, 2019.
Basis of measurement
These consolidated financial statements were prepared on a going concern and historical cost basis. Financial assets
and liabilities are measured at fair value at inception pursuant to IFRS 9, Financial Instruments, and equity-classified
share-based payment arrangements are measured at fair value at grant date pursuant to IFRS 2, Share-based
payment.
The methods used to measure fair value are discussed further in Note 4.
Functional and reporting currency
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. The exchange
difference resulting from the conversion of the consolidated financial statements from its functional currency to its
reporting currency is included in other comprehensive income presented in equity.
10 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
2. GOING CONCERN
These consolidated financial statements have been prepared on the basis of a going concern, which assumes that
the Company will continue its operations in the foreseeable future and will be able to realize its assets and discharge
its liabilities and commitments in the normal course of operations.
The Company is subject to a number of risks and uncertainties associated with its future exploration and development
activities. The recovery of amounts recorded for exploration and evaluation assets depend on the ability of the
Company to complete the acquisition of the White Pine Project, the ability of the Company to obtain the necessary
financing to complete the development of the projects, and future profitable production from the projects or proceeds
from their disposition thereof.
To date, the Company has not earned revenues and is in the exploration and development stage. The Company has
incurred a net loss of $22,155,581 during the year ended June 30, 2019 ($11,571,693 in 2018) and has a deficit of
$77,278,822 at June 30, 2019 (a deficit of $55,123,241 at June 30, 2018). The Company also has a working capital
deficiency of $17,992,199 at June 30, 2019 (a working capital deficiency of $1,228,729 at June 30, 2018), including
an amount due of $15,128,068 related to the promissory note described in Note 11, which amount is payable on
demand, following default by the Company of the payment of $3,000,000 which was to be made on May 30, 2019.
The Company requires additional funds to settle its working capital deficiency, to meet all existing commitments, to
complete the acquisition of the White Pine Project and to provide for management and administration expenses for
the next 12 months. The Company has engaged BMO Nesbitt Burns Inc. in July 2019 to act as financial advisor to
the Company to review all funding options available, including the sale of assets, the issuance of securities, a merger
or other type of arrangement or a combination of assets or entities. However, there is no assurance that the Company
will be successful in completing any such transactions. Should the Company not be successful in completing any such
transactions, this will 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.
11 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
3. CHANGE IN ACCOUNTING POLICY
Adoption of IFRS 9, Financial instruments (“IFRS 9”)
On July 1, 2018, the Company adopted IFRS 9 on a retrospective basis with restatement of comparative periods in
accordance with the transitional provision of IFRS 9. IFRS 9 sets out the requirements for recognizing financial assets
and liabilities and replaces IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). The adoption of
IFRS 9 resulted in a change in classification of the financial assets to the financial assets at amortized cost category
while they were classified as loans and receivables under the classification prescribed by IAS 39. There was no
change in the classification of financial liabilities. There was no impact on carrying values as a result of the adoption
on IFRS 9; therefore, comparative amounts have not been restated.
4. SUMMARY OF ACCOUNTING POLICIES
a)
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”) 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.
12
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
b)
Foreign currency translation
Transactions in foreign currencies are translated to the functional currency at exchange rates in effect at the date of
transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to
the functional currency in effect at that date. The foreign currency gain or loss on monetary items is the difference
between amortized cost in the functional currency at the beginning of the reporting year, adjusted for effective interest
and payments during the reporting year, and the amortized cost in foreign currency translated at the exchange rate in
effect at the end of the reporting year.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated
to the functional currency at the exchange rate in effect at the date on which the fair value was determined. Non-
monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate in
effect at the date of the transaction. Foreign currency differences arising on translation are recognized in net loss.
The assets and liabilities in foreign operations whose functional currency is not the Canadian dollar are translated into
Canadian dollars at the exchange rate prevailing at the balance sheet rate. Revenues and expenses are translated at
the exchange rate in effect at the transaction date. Unrealized exchange gains and losses resulting from translation
are presented in other comprehensive income.
c)
Financial instruments
Financial instruments are measured on initial recognition at fair value, plus, in the case of financial instruments other
than those classified as fair value through profit or loss ("FVPL"), directly attributable transaction costs. Financial
instruments are recognized when the Company becomes party to the contracts that give rise to them and are classified
as amortized cost, FVPL or fair value through other comprehensive income (“FVOCI”), as appropriate. The Company
considers whether a contract (other than a financial asset) contains an embedded derivative when the entity first
becomes a party to it. The embedded derivatives are separated from the host contract if the host contract is not
measured at fair value through profit or loss and when the economic characteristics and risks are not closely related
to those of the host contract. Reassessment only occurs if there is a change in the terms of the contract that
significantly modifies the cash flows that would otherwise be required. The Company has no financial assets at FVPL
and at FVOCI.
13 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
c)
Financial instruments (continued)
Financial assets at amortized cost
A financial asset is measured at amortized cost if it is held within a business model whose objective is to hold assets
to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding, and is not designated as FVPL. Financial
assets classified as amortized cost are measured subsequent to initial recognition at amortized cost using the effective
interest method. Cash and cash equivalents, including accrued interest, are classified as and measured at amortized
cost.
Financial liabilities
Financial liabilities are recognized initially at fair value, net of transaction costs. After initial recognition, financial
liabilities are subsequently measured at amortized cost using the effective interest method. Gains and losses are
recognized in profit or loss when the liabilities are derecognized as well as through the amortization process. Accounts
payable and accrued liabilities, credit facility, including accrued interest, note payable, balance of purchase price
payable and promissory note are classified as and measured at amortized cost.
Fair values
Financial instruments that are measured at fair value subsequent to initial recognition, if any, are grouped into a
hierarchy based on the degree to which the fair value is observable as follows: Level 1: Quoted prices in active markets
for identical items (unadjusted); Level 2: Observable direct or indirect inputs other than Level 1 inputs; or Level 3:
Unobservable inputs (not derived from market data).
Impairment of financial assets
A loss allowance for expected credit losses is recognized in net loss for financial assets measured at amortized cost.
At each balance sheet date, on a forward-looking basis, the Company assesses the expected credit losses associated
with its financial assets carried at amortized cost and, if any, FVOCI. The impairment methodology applied depends
on whether there has been a significant increase in credit risk. The expected credit losses are required to be measured
through a loss allowance at an amount equal to the 12-month expected credit losses (expected credit losses that
result from those default events on the financial instrument that are possible within 12 months after the reporting date)
or full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of
the financial instrument). A loss allowance for full lifetime expected credit losses is required for a financial instrument
if the credit risk of that financial instrument has deteriorated significantly since initial recognition and whose credit risk
is low.
14 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
c) Financial instruments (continued)
Derecognition of financial assets and liabilities
A financial asset is derecognised when either the rights to receive cash flows from the asset have expired or the
Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the
received cash flows in full without material delay to a third party. If neither the rights to receive cash flows from the
asset have expired nor the Company has transferred its rights to receive cash flows from the asset, the Company will
assess whether it has relinquished control of the asset or not. If the Company does not control the asset, then
derecognition is appropriate.
A financial liability is derecognised when the associated obligation is discharged or canceled or has expired. When an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of
an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the
original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised
in profit or loss.
d) Cash and cash equivalents
Cash and cash equivalents include cash balances and highly liquid investments with original maturities of three
months or less.
15 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
e) 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.
16 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
f)
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.
17 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
g)
Impairment of non-financial assets
At the end of each reporting date, the Company reviews the carrying amounts of its non-financial assets with finite
lives to determine whether there is any indication that those assets have suffered an impairment loss. Where such an
indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment
loss. Factors which could trigger an impairment review include, but are not limited to, the expiration of the right to
explore in the specific area during the period or said right will expire in the near future and is not expected to be
renewed; substantive expenditures in a specific area are neither budgeted nor planned; exploration for and evaluation
of mineral resources in a specific area have not led to the discovery of commercially viable quantities of mineral
resources and the entity has decided to discontinue such activities in the specific area; or sufficient data exists to
indicate that the carrying amount of the assets is unlikely to be recovered in full from successful development or by
sale due to significant negative industry or economic trends and a significant drop in commodity prices.
The recoverable amount of the asset is estimated 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.
18 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
h)
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.
19
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
i)
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.
j)
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’s 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.
20
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
k)
Transactions with shareholders
Transactions entered into with shareholders, where the Company is receiving a benefit when compared to a similar
transaction entered into with an arm’s length party, are divided between a capital transaction and a deemed arm’s
length transaction. The portion of the deemed arm’s length transaction, measured at fair value, is recognised in profit
or loss and the remaining portion of the transaction is recognised in equity as contributed surplus.
l)
Share-based payment transactions
Equity-settled share-based payments are made in exchange for services received and transactions related to mineral
properties and are measured at their fair value. The fair value of the services rendered or the mineral property
transaction is determined indirectly by reference to the fair value of the equity instruments granted when the fair value
of services rendered or the mineral property transaction cannot be reliably estimated. The fair value of share-based
payments to directors, officers, employees and consultants with employee-related functions is recognized as an
expense over the vesting period (the vesting being conditional in certain instances on the achievement of defined
performance conditions) with a corresponding increase to contributed surplus. Financing warrants and warrants to
brokers, in respect of an equity financing, are recognized as a share issue expense with a corresponding increase to
contributed surplus. The fair value of stock options granted is measured at the grant date and recognized over the
period during which the options vest. The fair value of the options granted is measured using the Black-Scholes option
pricing model and taking into account an estimated forfeiture rate and the terms and conditions upon which the options
were granted. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect
the actual number of stock options that are expected to vest. Upon the exercise of share-based payments, the
proceeds received, net of any direct expenses, as well as the related compensation expense previously recorded as
contributed surplus, are credited to share capital.
m)
Loss per share
The Company presents basic and diluted loss per share data for its common shares. Basic loss per share is calculated
by dividing the loss attributable to common shareholders of the Company by the weighted average number of common
shares outstanding during the period. Diluted loss per share is determined by adjusting the loss attributable to common
shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential
common shares. Dilutive potential common shares are deemed to have been converted into common shares at the
beginning of the period or, if later, at the date of issue of the potential common shares. For the purpose of calculating
diluted loss per share, the Company assumes the exercise of its dilutive options and warrants. The assumed proceeds
from these instruments are regarded as having been received from the issue of common shares at the average market
price of its shares during the period.
21
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
n)
Significant accounting judgments and estimates
The preparation of these consolidated financial statements requires management to make certain estimates,
judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from
these estimates. These consolidated financial statements include estimates which, by their nature, are uncertain and
may require accounting adjustments based on future occurrences. Revisions to accounting estimates, judgments and
assumptions are recognized in the period in which the estimate is revised and future period if the revision affects both
current and future period. These estimates, judgments and assumptions are based on historical experience, current
and future economic conditions and other factors, including expectations of future events that are believed to be
reasonable under the circumstances. Significant assumptions about the future and other sources of estimation
uncertainty that management has made at the financial position reporting date, that could result in a material
adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from the assumptions
made, relate to, but are not limited to the following:
Title to mineral property interests
Although the Company has taken steps to verify title to mineral properties in which it has an interest, these procedures
are subject to certain assumptions and do not guarantee the Company‘s title. Such properties may be subject to prior
agreements or transfers and title may be affected by undetected defects.
The final closing of the acquisition of the White Pine Project can only be completed once the Company has i) released
Copper Range Company (“CRC”) of a $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, 2019, and on that date was further extended to January 31, 2020
(Note 26). The Company will also need to post the required financial assurance bond with the MDEQ, estimated at
$1.7 million. 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.
22 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
n)
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 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. The Company’s financial
condition at June 30, 2019 and the related engagement of BMO as financial advisor to the Company to review all
funding options available to the Company are factors which have triggered an impairment review of all of the
Company’s exploration and evaluation assets.
Fair value of liabilities
The Company determined the fair value of the credit facility, the non-interest-bearing promissory note and the balance
of purchase price payable at inception using the discounted cash flow method. The discount rate used is 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).
23 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
o)
Accounting standards issued but not yet applied
Standards, amendments and interpretations issued but not yet effective up to the date of the issuance of these
consolidated financial statements that are expected to be relevant to the Company are listed below. Certain other
standards and interpretations have been issued but are not expected to have a material impact on the Company’s
consolidated financial statements.
IFRS 16, Leases (“IFRS 16”)
In January 2016, the IASB issued IFRS 16. IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases. IFRS 16 replaces IAS 17, Leases, and related interpretations. Accordingly,
IFRS 16 will eliminate the classification of leases as either operating leases or finance leases as is required by IAS
17 and, instead, introduces a single lessee accounting model. The new standard is effective for annual periods
beginning on or after January 1, 2019. The Company will adopt IFRS 16 effective July 1, 2019.
During the year ended June 30, 2019, the Company progressed in its assessment and implementation of IFRS 16.
This work consisted in reviewing contracts, aggregating data to support the evaluation of the financial impact and
performing a preliminary calculation of the impact of the adoption of IFRS 16 on the Company’s consolidated financial
statements.
The Company is using the modified retrospective approach for transition. As a result, comparative information will not
be restated. Accordingly, the Company will make use of the practical expedient available on transition to IFRS 16 not
to reassess whether a contract is or contains a lease and the definition of a lease in accordance with IAS 17, and
IFRIC 4 will continue to apply to those leases entered or modified before April 1, 2019. Also, the Company will apply
recognition exemptions across its portfolio of leased assets for short-term leases and leases of low value items.
The Company is still evaluating the impact of the adoption of this standard and does not expect IFRS 16 to have a
material impact on its consolidated financial statements.
On implementation of IFRS 16, the Company expects i) an increase in right-of-use assets and liabilities as some
leases currently classified as operating leases will be recognized on the consolidated statement of financial position;
ii) a reduction in exploration or administration expenses and an increase in amortization expense of the right-of-use
asset and an increase in finance expense on the related lease liabilities; and iii) an increase in cash flows from
investing activities and a decrease in cash flows from operating activities as operating lease payments will be
reclassified to financing cash flows as components of interest and lease liabilities.
24 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
4. SUMMARY OF ACCOUNTING POLICIES (continued)
o) Accounting standards issued but not yet applied (continued)
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.
5.
CASH AND CASH EQUIVALENTS
Cash
Cash equivalents
June 30,
June 30,
2019
$
2018
$
605,046
734,984
-
2,752,863
605,046
3,487,847
At June 30, 2019, the cash position of $605,046 is restricted to be disbursed pursuant to an approved budget by the
lenders of the Credit Facility (Note 8).
At June 30, 2018, cash equivalents were comprised of a term deposit amounting to $2,750,000, which bore interest
at a rate of 1.9% and matured on July 11, 2018.
25 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
6. CAPITAL ASSETS
Capital assets subject to depreciation and amortization are presented below.
Computer
Intangible
equipment
Exploration
Leasehold
assets
Vehicles and furniture
equipment
improvements
$
$
$
$
$
Cost
Balance at June 30, 2017
45,141
71,438
Additions
Write-down
Effect of foreign exchange
-
-
-
37,384
-
-
Balance at June 30, 2018
45,141
108,822
DIsposals
Write-down
Effect of foreign exchange
Balance at June 30, 2019
-
(83,284)
(45,141)
-
-
-
-
25,538
69,214
62,943
(32,650)
(1,255)
98,252
-
-
(932)
97,320
208,979
11,450
(34,179)
-
186,250
(5,380)
-
-
Total
$
414,772
126,777
(66,829)
(1,255)
20,000
15,000
-
-
35,000
473,465
-
-
-
(88,664)
(45,141)
(932)
Accumulated depreciation and amortization
Balance at June 30, 2017
45,141
66,226
Depreciation and amortization
Write-down
Effect of foreign exchange
-
-
-
12,891
-
-
Balance at June 30, 2018
45,141
79,117
Disposals
Depreciation and amortization
-
-
(73,681)
10,903
-
-
16,339
Write-down
(45,141)
Effect of foreign exchange
Balance at June 30, 2019
Carrying amounts
Balance at June 30, 2018
Balance at June 30, 2019
-
-
-
-
180,870
35,000
338,728
66,579
12,407
178,373
9,589
(32,650)
(34,179)
-
-
9,722
-
-
356,319
44,609
(66,829)
(640)
(640)
45,696
-
19,520
-
(549)
64,667
153,783
9,722
333,459
(5,380)
6,162
-
-
-
11,667
-
-
(79,061)
48,252
(45,141)
(549)
154,565
21,389
256,960
29,705
9,199
52,556
32,653
32,467
26,305
25,278
13,611
140,006
81,768
26
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
7. 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, 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
Property payments in cash
Finance expense (a)
Write-down (b)
Effect of foreign exchange
168,600
132,500
-
-
25,000
-
26,652
220,252
-
-
-
6,254,513
(18,010,770)
-
-
6,387,013
(18,010,770)
-
(6,513)
(6,513)
301,100
25,000
(11,756,257)
20,139
(11,410,018)
Balance, June 30, 2019
17,102,484
3,132,246
-
151,084
20,385,814
(a) The amount of $6,254,513 under the UPX Property represents the amount of accretion related to the Note issued to RTX in May
2017 following the event of default described in Note 11 and the reclassification of the full amount of the Note as a current liability.
(b) At June 30, 2019, the Company has written off the amount of $18,010,770 in exploration and evaluation assets related to the
UPX Property as it does not plan to conduct any work on this property in the near future.
27 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
7. 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 the outstanding shares of CRI. The Company paid in May 2019, as additional
consideration, the final amount due of $1,000,000 (Note 10).
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.
28 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
7. 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 ongoing environmental obligations. Final closing, which initially was to occur by
December 31, 2015, was extended on a number of occasions until August 31, 2019, and was further extended on that
date to January 31, 2020 (Note 26). 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, 2019, 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.
29 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
7. 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 9. 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
In accordance with an agreement entered into in December 2014 (and subsequently amended in June 2016), Osisko
holds a 3.0% net smelter return (“NSR”) royalty on all metals produced from the mineral rights and leases associated
with the Copperwood Project. The June 2016 amendment also provided 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%. To secure the payment of future
NSR royalty, Osisko has a mortgage on the Copperwood property and a general security agreement over all the
assets of the Company and includes specifically a pledge of the shares of the following subsidiaries: Copperwood
Resources Inc., Upper Peninsula Copper Holdings Inc., White Pine Copper LLC and Keweenaw Copper Co
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. 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.
30 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
7. 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, mineral properties 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”) payable over a period of 6 years (Note 11). The Note is secured by a first priority security interest over the
UPX 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 is exercisable at any time prior to May 30, 2028.
At June 30, 2019, the Company has written off the amount of $18,010,770 in exploration and evaluation assets related
to the UPX Property as it does not plan to conduct any work on this property in the near future.
Other properties
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.
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 has no plans to conduct any work on this property in the near term.
31 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
8. CREDIT FACILITY
On May 20, 2019, the Company entered into a related party loan agreement with two of its shareholders, Greenstone
and Osisko (collectively, the "Lenders"), which are deemed to have significant influence over the Company. Under the
terms of the loan agreement, the Lenders have agreed to provide the Company with a loan of up to $4,500,000 (the
“Principal Amount”). The loan bears interest at a rate of 12% per annum, has a maturity date of February 28, 2020
(the “Maturity Date”) and is to be disbursed in a number of tranches pursuant to an approved budget, including the
settlement of certain outstanding liabilities, expenses to conduct a scoping study on the White Pine Project and
expenses to conduct a strategic review process. The Principal Amount of the loan as well as accrued interest are
payable at the latest on the Maturity Date of the loan. The loan is secured by a mortgage on the Copperwood property
and a general security agreement over all the assets of the Company and includes specifically a pledge of the shares
of the following subsidiaries: Copperwood Resources Inc., Upper Peninsula Copper Holdings Inc., White Pine Copper
LLC and Keweenaw Copper Co.
On May 24, 2019, the Company made an initial drawdown for $2,750,000. The Company accounted for the estimated
fair value of the loan using a discount rate of 20%. The fair value adjustment of $162,961 representing the below
market element of the loan was recorded in contributed surplus. Transaction costs of $163,083, consisting of an
arrangement fee and legal fees, were presented as a reduction of the loan. These expenses are amortized over the
loan period of nine months using the effective interest rate method. The effective interest rate of the loan is 23.6%.
The balance of the loan is determined as follows:
Balance, beginning of year
Loan, discounted at the rate of 20%
Transaction costs
Interest payable
Accretion of loan and amortization of transactions costs
Balance, end of year
Years ended June 30,
2019
$
-
2,587,039
(163,083)
32,823
38,705
2,495,484
2018
$
-
-
-
32 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
9. 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 7 - 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 is determined as follows:
Balance, beginning of year
Reimbursements
Balance, end of year
Current liability
Non-current liability
Years ended June 30,
2019
$
275,000
(110,000)
165,000
110,000
55,000
165,000
2018
$
385,000
(110,000)
275,000
110,000
165,000
275,000
33 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
10. 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 of $1,250,000 and, as such, a payment of $250,000 was made
on June 17, 2018. The remaining amount of $1,000,000, which was due by November 30, 2018, bore interest on a
monthly basis at a rate of 12% per annum until November 30, 2018 and 15% per annum subsequently. The Company
also agreed that in the event it was not able to repay the remaining amount of $1,000,000 by November 30, 2018, it
would pay a 2% penalty amount to Orvana. On May 28, 2019, the Company made a final payment of $1,000,000 plus
the 2% penalty amount of $20,000. The interest paid of $112,500 in 2019 and the penalty amount of $20,000 were
added to the cost of the Copperwood Project in accordance with its accounting policy on borrowing costs.
The balance of purchase price payable is as follows:
Balance, beginning of year
Accretion included in exploration and evaluation assets
Reimbursement
Accrued interest
Balance, end of year
Years ended June 30,
2019
$
1,004,333
-
(1,004,333)
-
-
2018
$
1,139,767
110,233
(250,000)
4,333
1,004,333
34
Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
11. PROMISSORY NOTE
On May 30, 2017, the Company issued a $16 million secured non-interest-bearing promissory note (the “Note”) to
RTX, as part of the consideration for the acquisition of the UPX Property described in Note 7. The Note provided 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 anniversaries of the acquisition. The Note has an effective
interest rate of 20%. The Company did not make the payment of $3.0 million due on May 30, 2019. In accordance
with the provisions of the Note, the failure to make the payment on May 30, 2019 constitutes an event of default, and
upon such occurrence and continuance, the amount of the Note then outstanding bears interest at an annual rate of
Libor plus 8% (a rate of 10.39% at June 30, 2019) and becomes payable on demand. The Note is secured by a
mortgage over the acquired property and a general security agreement over all the assets of UPX Minerals Inc.
The balance of the Note is determined as follows:
Balance, beginning of year
Accretion until May 30, 2019, included in exploration and evaluation assets
Accretion on revised estimated cash flows at May 30, 2019, included in exploration and evaluation assets
Interest payable since May 30, 2019
Reimbursement
Balance, end of year
Current liability
Non-current liability
Years ended June 30,
2019
$
2018
$
8,745,487
8,005,760
1,743,859
1,739,727
4,510,654
128,068
-
-
-
(1,000,000)
15,128,068
8,745,487
15,128,068
2,501,248
-
6,244,239
15,128,068
8,745,487
35 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
12. ENVIRONMENTAL LIABILITY
The environmental liability consists of a provision for reclamation costs related to the acquisition of the White Pine
Project (Note 7). The undiscounted cash flow amount of the liability is estimated at $316,000. The present value of
the
liability was calculated using a discount rate of 8.0% and
is reflecting payments
to be made
until 2029, inclusively.
Balance, beginning of year
Accretion expense
Balance, end of year
Years ended June 30,
2019
$
252,678
4,326
257,004
2018
$
246,315
6,363
252,678
36 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
13. 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 ended June 30, 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). A total of 138,804,226 unexercised share purchase warrants expired in 2018.
Share purchase warrants
The following table sets out the activity in share purchase warrants:
Number of warrants
Balance, beginning of year
Exercised
Expired
Balance, end of year
Years ended June 30,
2019
2018
1,000,000
153,589,762
-
-
(13,785,536)
(138,804,226)
1,000,000
1,000,000
The issued and outstanding share purchase warrants at June 30, 2019 are exercisable at a price of C$0.15 per share
until March 17, 2020.
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$0.14 per share.
37 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
14. STOCK OPTIONS
The following table sets out the activity in stock options:
Number of options
Balance, beginning of year
Granted
Expired
Balance, end of year
Years ended June 30,
2019
2018
Average exercise
Average exercise
Number
price (C$)
Number
price (C$)
15,200,000
0.17
7,455,000
-
-
12,045,000
(1,515,000)
13,685,000
(0.14)
0.17
(4,300,000)
15,200,000
0.48
0.12
(0.58)
0.17
On May 15, 2018, the Company granted a total of 950,000 stock options to employees. The stock options granted will
vest over 2 years.
On October 26, 2017, the Company granted a total of 2,070,000 incentive stock options to a director, an officer and
employees. The stock options granted will vest over 2 years.
On August 28, 2017, the Company granted a total of 9,025,000 stock options to its directors, officers, employees and
consultants. The stock options granted will vest over 2 years.
The following table provides a summary of stock options granted and related Black-Scholes option pricing model input
factors used:
Number of stock options granted during the year
Weighted-average exercise price (C$)
Weighted average grant date market price (C$)
Expected stock option life (years)
Expected volatility (%)
Risk-free interest rate (%)
Weighted-average grant date fair value (Black-Scholes value) (C$)
Years ended June 30,
2019
$
-
-
-
-
-
-
-
2018
$
12,045,000
0.12
0.12
5
84.0%
1.60%
0.07
38 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
14. STOCK OPTIONS (continued)
The following table reflects the stock options issued and outstanding at June 30, 2019:
Number of
Exercise
price of
Issue date
options
price
contratual life
options
options
Number of
Exercise
Remaining
exercisable
exercisable
August 1, 2014
April 21, 2015
August 28, 2017
October 26, 2017
May 15, 2018
1,400,000
1,240,000
8,175,000
2,070,000
800,000
13,685,000
C$
0.50
0.25
0.11
0.17
0.10
0.17
(years)
0.1
0.8
3.2
3.3
3.9
2.7
1,400,000
662,500
5,450,000
1,380,000
533,333
9,425,833
C$
0.50
0.25
0.11
0.17
0.10
0.19
15. EXPLORATION AND EVALUATION EXPENSES
The Company incurred the following exploration and evaluation expenses:
Drilling and assaying
Labour
Studies
Office, overhead and other administrative costs
Gain on sale of capital assets
16. 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
Years ended June 30,
2019
$
40,973
1,474,815
338,828
575,379
(19,776)
2018
$
1,386,707
2,450,433
3,836,509
1,092,965
-
2,410,219
8,766,614
Years ended June 30,
2019
$
946,300
107,345
191,879
85,161
28,637
2018
$
1,032,772
119,500
271,862
209,881
64,600
1,359,322
1,698,615
39 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
17. FINANCE EXPENSE
The Company incurred the following finance expense:
Effective interest on credit facility from shareholders with significant influence (Note 8)
Interest on note payable (Note 9)
Interest on promissory note (Note 11)
Other
18.
INCOME TAXES
The reconciliation of the effective tax rate is as follows:
Years ended June 30,
2019
$
71,528
18,700
128,068
1,612
219,908
2018
$
-
27,500
-
4,333
31,833
2019
$
Years ended June 30,
2018
$
(Note 1 - restated)
Loss before income tax
(22,155,581)
(11,571,693)
Tax using the Company’s domestic tax rate
26.65%
(5,904,462)
26.75%
(3,095,428)
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
(0.2%)
(0.02%)
(0.85%)
(24.58%)
-
44,790
3,361
188,855
5,444,944
(1.16%)
(0.04%)
3.92%
0.94%
134,384
4,553
(453,352)
(109,280)
-
(29.00%)
3,356,060
(1.00%)
222,512
(1.41%)
163,063
-
-
-
-
40 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
18.
INCOME TAXES (continued)
Recognized deferred tax assets and liabilities are attributable to the following:
Assets
Liabilities
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
June 30, 2019
Net
$
$
(376,623)
(376,623)
-
376,623
(376,623)
376,623
-
-
-
-
June 30, 2018
Net
$
$
(412,808)
(412,808)
-
412,808
(412,808)
412,808
-
-
-
-
$
-
376,623
376,623
(376,623)
-
$
-
412,808
421,808
(412,808)
-
Assets
Liabilities
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, 2019
Total
$
USA
$
9,751,521
27,646,369
37,397,890
87,347
107,153
194,500
2,088,309
23,787,100
25,875,409
330,280
238,313
-
-
330,280
238,313
12,495,770
51,540,622
64,036,392
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
41 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
18.
INCOME TAXES (continued)
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.
Non-capital losses expire as follows:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
USA
$
-
-
-
-
-
-
-
-
1,256,944
7,599,667
1,101,253
4,408,457
8,638,707
4,641,341
Canada
$
78,875
91,947
231,955
411,318
568,805
726,594
1,047,059
73,494
868,112
1,883,991
790,140
1,641,897
1,798,233
960,318
27,646,369
11,172,738
The deferred income tax on non-capital losses has been partially recognized for an amount of $1,421,217 ($1,557,765 in 2018).
19.
LOSS PER SHARE
The calculation of basic and diluted loss per share for the year ended June 30, 2019 was based on the loss attributable
to common shareholders of $22,155,581 ($11,571,693 in 2018) and the weighted average number of common shares
outstanding of 472,933,689 (464,575,595 in 2018). Excluded from the calculation of the diluted loss per share for the
year ended June 30, 2019 are 1,000,000 share purchase warrants and 13,685,000 stock options (1,000,000 share
purchase warrants and 15,200,000 stock options in 2018) because to include them would be anti-dilutive as they
would have the effect of decreasing the loss per share.
42 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
20. RELATED PARTY TRANSACTIONS
In addition to the loan agreement with two of the Company’s shareholders described in Note 8, the detail of
transactions between the Company and its related parties is as follows:
During the year ended June 30, 2019, the Company incurred administration expenses of $101,833 from Reunion Gold
Corporation, a related party by virtue of common management and directors ($67,151 in 2018).
During the year ended June 30, 2019, the Company recovered amounts of $223,698 for management services to
other TSXV-listed companies, related by virtue of common key management, including Odyssey Resources Limited
and Reunion Gold Corporation ($186,010 in 2018). The services are provided at cost.
At June 30, 2019, the Company had an amount payable of $33,610 to Reunion Gold Corporation, included in accounts
payable and accrued liabilities on the consolidated statements of financial position (nil at June 30, 2018) and had an
amount receivable from Odyssey Resources Limited of $1,920, included in prepaid expenses and other on the
consolidated statements of financial position ($3,935 at June 30, 2018).
These charges were measured at the exchange amount, which is the amount agreed upon by the transacting parties.
Remuneration of directors and key management of the Company
The remuneration awarded to directors and to senior key management, including the Executive Chairman, the
President and CEO and the CFO, is as follows:
Wages and consulting fees, included in management and administration expenses
Share-based compensation
Years ended June 30,
2019
$
576,918
91,383
668,301
2018
$
664,346
282,537
946,883
43 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
21. CAPITAL MANAGEMENT
The Company defines capital that it manages as loans (including credit facility, 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, 2019, managed capital was $19,951,931 ($34,070,021 at June 30, 2018).
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 (Note 2). The only sources of future funds presently available to the Company are through
shareholder loans, the sale of equity capital of the Company 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, 2019. The Company is not subject to any externally imposed capital requirements as at June 30, 2019.
44 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
22.
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, 2019.
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, which may involve the completion of a strategic transaction as described in Note 2. The
Company generates cash flow only from its financing activities.
The following table summarizes the contractual maturities of the Company’s financial liabilities at June 30, 2019:
Carrying
Settlement
amount
amount
$
$
Within
1 year
$
Accounts payable and accrued liabilities
913,357
913,357
913,357
Over
2 years
2 years
$
-
-
$
-
-
-
-
-
2,495,484
3,002,823
3,002,823
165,000
176,540
119,900
56,640
15,128,068
15,128,068
15,128,068
-
18,701,909
19,220,788
19,164,148
56,640
Credit facility
Note payable
Promissory note
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 $6,000.
45 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
22.
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, 2019, financial assets and liabilities denominated in a foreign currency consisted of cash and cash
equivalents of $426,471, accounts payable and accrued liabilities of $30,819 and credit facility of $2,495,484. The
impact on profit or loss of a 10% increase or decrease in the US dollar against the Canadian dollar would be
approximately $210,000.
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, credit facility, note payable,
balance of purchase price payable and promissory note 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 also approximates its carrying value
as the effective interest rate of the note is similar to market conditions at year-end.
24. OTHER COMMITMENTS
In addition to the commitments described in Note 7, the Company has entered into long-term lease agreements
expiring in September 2020 which call for minimum lease payments of $74,100 for the rental of office space. Minimum
lease payments amount to $61,600 in 2020 and $12,500 in 2021.
46 Highland Copper Company Inc.
Notes to Consolidated Financial Statements
Years ended June 30, 2019 and 2018 (in US dollars)
25. SEGMENTED INFORMATION
The Company has one reportable operating segment being the acquisition and exploration of mineral properties in
Michigan, USA. Assets are located as follows:
Current assets
Capital assets
Exploration and evaluation assets
Total assets
Current assets
Capital assets
Exploration and evaluation assets
Total assets
26. EVENTS AFTER THE REPORTING DATE
Canada
$
586,867
9,156
June 30, 2019
Total
$
654,712
81,768
USA
$
67,845
72,612
-
20,385,814
20,385,814
596,023
20,526,271
21,122,294
Canada
$
June 30, 2018
USA
$
Total
$
3,450,383
17,459
293,220
122,547
3,743,603
140,006
-
31,795,832
31,795,832
3,467,842
32,211,599
35,679,441
On August 30, 2019, the Company and CRC agreed to further extend the period to complete the acquisition of the
White Pine Project to January 31, 2020 (Note 7).
The Company made additional drawdowns totalling $850,000 since June 30, 2019 under the terms of the Credit
Facility described in Note 8.
27. COMPARATIVE INFORMATION
Certain comparative information has been reclassified to conform with the financial statement presentation adopted
in the current year.
47 MANAGEMENT’S DISCUSSION & ANALYSIS
Year ended June 30, 2019
HIGHLAND COPPER COMPANY INC.
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
YEAR ENDED JUNE 30, 2019
The following management’s discussion and analysis (“MD&A”) of the operations, results, and financial position of Highland
Copper Company Inc. (“Highland” or the “Company”), dated October 28, 2019, covers the years ended June 30, 2019 and
2018 and should be read in conjunction with the audited consolidated financial statements and related notes at June 30, 2019
and 2018 (the “June 30, 2019 and 2018 consolidated financial statements”). The June 30, 2019 and 2018 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.
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 projects located in Michigan’s Upper Peninsula region, including Copperwood, a
feasibility stage copper project, acquired in June 2014 from Orvana Minerals Corp. (“Orvana”), White Pine, a copper project on
which a PEA was completed in September 2019 (subject to final closing of the acquisition from Copper Range Company (“CRC”),
a wholly-owned subsidiary of First Quantum Minerals Ltd.), and a mineral exploration property covering approximately 448,000
acres referred to as the UPX Property, which was acquired in May 2017 from Kennecott Exploration Company and Rio Tinto
Nickel Company (“RTX”).
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 and on the OTCQB Venture Marketplace (the "OTCQB")
under the symbol "HDRSF". At October 28, 2019, the Company has 472,933,689 common shares issued and outstanding.
In June 2019, as part of a series of transactions, Osisko Gold Royalties Ltd (“Osisko”) transferred to an entity managed by Orion
Resource Partners (“Orion”), all of the shares that Osisko held in the Company (74,420,434 shares). Following this transfer of
shares, Orion now owns 141,670,434 shares of the Company (or 30.0% of its issued and outstanding shares) and Greenstone
Resources II LP (“Greenstone”) owns 80,700,000 shares of the Company (or 17.1% of its issued and outstanding shares).
Financial Condition and Strategic Review Process
At June 30, 2019, the Company had a working capital deficiency of $17,995,199, including an amount due of $2,495,484 under
a credit facility provided by two of the Company’s shareholders and an amount due of $15,128,068 to RTX as consideration for
the acquisition of the UPX Property in May 2017.
On May 20, 2019, the Company entered into a secured loan agreement (the “Loan”) with two of its significant shareholders,
Greenstone and Osisko (collectively, the "Lenders"). Under the terms of the Loan, the Lenders have agreed to provide the
Company with a loan of up to $4,500,000 to be disbursed in a number of tranches pursuant to an approved budget. The Loan,
Management’s Discussion and Analysis
Year ended June 30, 2019
which is secured by a mortgage on the Copperwood property and a general security agreement over all the assets of the
Company, bears interest at a rate of 12% per annum and matures on February 28, 2020. The principal amount of the Loan as
well as accrued interest will be payable at the latest on the maturity date. A first drawdown of $2,750,000 occurred on May 24,
2019 and subsequent drawdowns to this date totaled $850,000.
On May 30, 2017, the Company acquired the UPX Property for a total consideration of $18.0 million of which $2.0 million was
paid in cash at closing. The Company also issued a 6-year $16 million non-interest bearing promissory note (the “Note”) to RTX,
as part of the consideration for the acquisition of the UPX Property. The Note provided 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 anniversaries of the acquisition. The Company did not make the payment of $3.0 million due on May 30, 2019. In
accordance with the provisions of the Note, the failure to make the payment on May 30, 2019, constitutes an event of default
and upon such occurrence and continuance, the amount of the Note then outstanding ($15.0 million) bears interest at an annual
rate of Libor plus 8% and becomes payable on demand. The Note is secured by a mortgage over the acquired property and a
general security agreement over all the assets of UPX Minerals Inc., a wholly-owned subsidiary of the Company. The Company
has initiated discussions with RTX to restructure the schedule of payments provided under the secured promissory note or find
another suitable resolution. There can be no assurance that RTX will agree to reschedule the payments or to another resolution;
given the Company’s inability to pay there is a risk that RTX initiates legal proceedings to demand the full payment of the Note
and enforce its securities over the UPX Property.
The Company needs additional funds to reimburse the Loan, to meet all existing commitments (including the Note of $15.1
million due to RTX), to complete the acquisition of White Pine (including an amount of approximately $1.7 million to replace the
current environmental financial assurance bond) and to provide for management and administration expenses for the next 12
months.
The Company has engaged BMO Nesbitt Burns Inc. in July 2019 to act as financial advisor to the Company to review all funding
options available, including the sale of assets, the issuance of securities, a merger or other type of arrangement or a combination
of assets or entities. However, given the state of the capital markets for a company such as Highland and current copper prices,
there is no assurance that additional funds will be available or available on terms acceptable to the Company or that the Company
will be able to complete a strategic transaction. These conditions and uncertainties indicate the existence of a material
uncertainty that may cast a significant doubt about the Company’s ability to continue as a going concern.
All exploration and development activities were suspended in early 2019, including field work, studies and efforts to finance the
development of the Copperwood Project, to minimize cash requirements. Also, the number of employees has been reduced to
its minimum level.
3
Management’s Discussion and Analysis
Year ended June 30, 2019
Copperwood Project
Copperwood is a development stage copper project. A feasibility study, 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, was completed in June 2018. 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”).
Permitting
The Company has received all major permits required to build and operate the Copperwood Project.
In December 2018, the Michigan Department of Environmental Quality (“MDEQ”) approved the Company’s request to amend
the Mining Permit originally granted in 2012 to Copperwood Resources Inc. (“CRI”), the Company’s 100%-owned subsidiary,
under the provisions of Part 632, Nonferrous Metallic Mineral Mining, of the Natural Resources and Environmental Protection
Act. The amendment was required to allow the Company to begin construction at Copperwood in accordance with the changes
to the mine plan and facilities described in the updated feasibility study released on June 15, 2018. The amendment was
approved under certain conditions that the Company will have to meet, namely: i) provide a revised subsidence monitoring plan
for the life of mine and post closure period; ii) provide a plan to conduct confirmation baseline environmental sampling and review
prior to the start of mining operations; iii) reclaim the ore stockpile area and dispose of the geomembrane liner according to
regulations; and iv) reclaim or remove water intake and power supply infrastructure according to approved plans unless beneficial
use agreements are established with another party.
In November 2018, the Company received three permits from the MDEQ, those being the Part 301/303/325 Wetland Permit, the
Part 55 Air Discharge Permit, and the Part 315 Dam Safety Permit-Tailing Dam. The grant of the Part 301/303/325 Wetland
Permit included the following mitigation requirements: i) the preservation of 717 acres of high-quality wetlands and 93 acres of
forested upland in the headwaters area of the wild and scenic Black River and the creation of 18.3 acres of forested and emergent
wetlands on-site at the Copperwood project; and ii) stream mitigation by creating 13,700 feet of natural stream channel on-site
at the Copperwood Project and replacing a culvert that is blocking brook trout passage in a tributary to the wild and scenic Cisco
Branch to the Ontonagon River.
The application to obtain a Lake Superior water intake permit from the US Army Corps of Engineers (COE) is outstanding and
a final decision is expected shortly.
June 2018 Feasibility Study Summary
The assumptions used in the preparation of the June 2018 feasibility study 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 $0.07/lb, an average copper payable
rate of 95.8% and an average silver payable rate of 46.9%.
4
Economics for the Copperwood Project
Summary Economics for the Copperwood Project
Total
Management’s Discussion and Analysis
Year ended June 30, 2019
Pre
tax NPV @8% ($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
5
The total estimated Measured and Indicated Mineral Resources of the Copperwood deposit, as prepared by GMSI, are as
follows:
1.0% Cu Cut-off Grade – April 30, 2018
Management’s Discussion and Analysis
Year ended June 30, 2019
Deposits
Resource
Tonnage
Category
(M t)
Measured
Indicated
M + I
Inferred
Measured
Indicated
M + I
Inferred
Inferred
Inferred
27.3
14.9
42.2
1.6
-
7.1
7.1
-
34.4
15.5
LCBS
UCBS
Satellite LCBS
Satellite UCBS
Notes on Mineral Resources:
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.
6
The Proven and Probable Reserves stated below were estimated based on the unconstrained Measured and Indicated
Resources and the work carried out for the Feasibility Study. 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
presented above are inclusive of Proven and Probable Reserves.
Management’s Discussion and Analysis
Year ended June 30, 2019
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 $3.00/lb Cu price, a sliding scale 3.0% NSR royalty on the Copperwood Project is payable to leaseholders. Assuming closing
of the acquisition of the White Pine Project, a 3% NSR royalty on the Copperwood Project payable to Osisko Gold Royalties Ltd. is reduced
to a 1.5% NSR royalty.
5) Mineral Reserves are estimated using an ore loss of 3%, a dilution of 0.1 m for the floor and a 0.25 m for the back of the stope and the
6)
7)
8)
9)
development.
The economic viability of the mineral reserve has been demonstrated.
A minimum mining height of 2.1 m was used.
The copper recovery was estimated at 86%.
The qualified person for the estimate is Carl Michaud, P. Eng., Underground Engineering Manager for GMSI. The estimate has an effective
date of May 25, 2018
10) The number of metric tonnes was rounded to the nearest thousand. Any discrepancies in the totals are due to rounding effects; rounding
followed the recommendations in NI 43-101.
7
Operating Cash Flow
Management’s Discussion and Analysis
Year ended June 30, 2019
Sensitivity Analysis
Operating Cash Flow
LOM
($M)
$/t ore
$/lb Cu
Payable
Cu Revenue
Ag Revenue
Total revenues
Concentrate Transportation Costs
Treatment & Refining Charges
Net Smelter Return
Royalties
Mining Costs
Processing Costs
G&A Costs
Total OPEX (incl. royalties)
Operating Cash Flow
2,047
17
2,064
94
149
1,821
85
531
308
72
996
81.92
0.67
82.59
3.75
5.96
72.88
3.39
21.26
12.31
2.88
39.84
3.15
0.03
3.17
0.14
0.23
2.80
0.13
0.82
0.47
0.11
1.53
826
33.03
1.27
Variance
After-Tax Results
NPV 0%
NPV 8%
($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
Operating Cost Sensitivities
150.7
233.5
316.0
398.6
481.2
22.8
69.8
116.8
163.9
210.9
13.2%
15.4%
18.0%
21.1%
24.7%
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
8
Management’s Discussion and Analysis
Year ended June 30, 2019
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.
Contingencies related to the Copperwood Project
As part of the consideration for the acquisition of the Copperwood Project, the Company will have to pay to Orvana an amount
of $1.25 million 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 future NSR royalty, Osisko has a mortgage on the Copperwood property and a general security
agreement over all the assets of the Company and includes specifically a pledge of the shares of the following subsidiaries:
Copperwood Resources Inc., Upper Peninsula Copper Holdings Inc., White Pine Copper LLC and Keweenaw Copper Co..
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. 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. The Company has
delivered the June 2018 feasibility study on Copperwood to Osisko.
9
Management’s Discussion and Analysis
Year ended June 30, 2019
White Pine North Project
In May 2014, Highland completed the interim closing of the acquisition of the White Pine North Project from CRC. 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 is subject to several conditions including releasing
CRC from certain environmental obligations associated with the remediation and closure plan of the historical White Pine mine
site and replacing the related environmental bond for an amount expected to be approximately $1.7 million. The deadline to
complete the acquisition of the White Pine North Project from CRC has been extended to January 31, 2020.
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 White Pine North Project is located in the historical copper
range district of the Upper Peninsula of Michigan, U.S.A.
In June 2019, in connection with the Company’s ongoing strategic review process, the Company undertook to prepare a
preliminary economic assessment ("PEA") and a mineral resource estimate for the White Pine North Project (the “Project”).
The PEA and mineral resource estimate were prepared by GMSI. The results of the PEA, which considers White Pine North as
a stand-alone project and utilizes existing infrastructure to minimize initial capital expenditures, were released on September 23,
2019. The highlights are presented below.
PEA Highlights
• Base case using a copper price of $3.00/lb and a silver price of $16.00/oz
• After-tax internal rate of return (“IRR”) of 16.8%
• After-tax net present value (“NPV”) at 8% of $416 million
•
•
•
Initial capital expenditures of $457 million, net of pre-production revenue of $56 million
Life-of-mine (“LOM”) cash costs of $1.40/pound, including royalties
Indicated mineral resource of 133.4 M tonnes at 1.07% Cu and 14.9 g/t Ag, containing 3.2 billion pounds of copper and
63.8 million ounces of silver.
Inferred mineral resources of 97.2 M tonnes at 1.03% Cu and 8.7 g/t Ag, containing 2.2 billion pounds of copper and
27.2 million ounces of silver
•
• Mineral resources included in the mine plan of 121.4 M tonnes @ 0.98% Cu and 11.80 g/t Ag, containing 2.6 billion
pounds of copper and 46.1 million ounces of silver
• Mine life of 25 years, including one year of ramp-up, with average annual LOM payable copper production of 89 million
pounds and 1.3 million ounces of silver
The reader is advised that a PEA is preliminary in nature and is intended to provide only an initial, high-level review of the project
potential and design options. The PEA mine plan and economic model include numerous assumptions and the use of Inferred
resources. Inferred resources are too speculative geologically to have the economic considerations applied to them that would
10
enable them to be categorized as mineral reserves and to be used in an economic analysis except as allowed for in PEA studies.
There is no guarantee that Inferred resources can be converted to Indicated or Measured resources, and as such, there is no
guarantee the Project economics described herein will be achieved.
Management’s Discussion and Analysis
Year ended June 30, 2019
Mineral Resources
GMSI prepared a Mineral Resource estimate for the White Pine North Project based on data provided up to and including March
2015. The resource estimate was reported in accordance with NI 43-101. The Mineral Resource estimate was prepared under
the supervision of Réjean Sirois, P. Eng. of GMSI, an independent “qualified person” as defined in NI 43-101.
The modelling of the copper mineralization horizons was based on the footwall and hanging wall of the three selected “columns”
(sedimentary sequences), namely the Parting Shale, the Full Column and the Upper Shale. These columns were modelled with
a minimum true thickness of 2 m. In instances where the columns were less than 2 m, dilution was applied in the footwall to
ensure that the 2 m thickness was honored. Only the Parting Shale column was reported as a Mineral Resource. A 300 m buffer
zone around existing workings was excised from the Mineral Resource.
Total Indicated Mineral Resources of the White Pine North deposit are reported at 133.4 M tonnes grading an average of
1.07% Cu and 14.9 g/t Ag, containing 3.2 billion pounds of copper and 63.8 million ounces of silver using a cut-off grade of
0.9% Cu for the Parting Shale column only. Inferred Mineral Resources are reported at 97.2 M tonnes grading an average of
1.03% Cu and 8.7 g/t Ag, containing 2.2 billion pounds of copper and 27.2 million ounces of silver using a cut-off grade of
0.9% Cu.
Mineral Resource for the Parting Shale Column – White Pine North Deposit
0.9% Cu Cut-off Grade – August 30, 2019
Resource
Category
Indicated
Inferred
Tonnage
(M tonnes)
133.4
97.2
Copper
Grade
(%)
1.07
1.03
Silver
Grade
(g/t)
14.9
8.7
Copper
Contained
(M lbs)
3,154
2,210
Silver
Contained
(M oz)
63.8
27.2
Mineral Resources are reported using a copper price of US$ 3.00/lb and a silver price of US$ 16/oz
A payable rate of 96.5% for copper and 89.3% for silver was assumed.
Metallurgical recoveries of 88% for copper and 76% of silver were assumed.
A cut-off grade of 0.9% Cu was used based on an underground “room and pillar” mining scenario
Operating costs are based on a processing plant located at the White Pine site.
A flat NSR royalty rate of $0.05/lb Cu payable was applied, which incorporates two royalties on the project (Osisko Gold Royalty and Great Lakes Royalty)
The Parting Shale Column was modelled using a minimum true thickness of 2 m
No mining dilution or mining loss was considered for the Mineral Resources
Mineralized rock bulk density is assumed at 2.7 g/cc
Notes on Mineral Resources:
1)
2)
3)
4)
5)
6)
7)
8)
9)
10) Classification of Mineral Resources conforms to CIM definitions
11)
The qualified person for the estimate is Mr. Réjean Sirois, P.Eng., Vice President - Geology and Resource for GMSI. The estimate has an effective date of
August 30, 2019
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) Parting Shale: Interval defined from the base of the Lower Transition to the top of the Tiger units
14)
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.
11
Management’s Discussion and Analysis
Year ended June 30, 2019
Life-of-Mine (LOM) Metal Production
The production schedule is based on mining a fixed target of 5.4 M tonnes/year. The PEA LOM production estimate for the White
Pine North Project is shown below. Payable copper production is estimated at 1 Mt (2.2 billion pounds) with an annual average
of 40,000 tonnes (89 million pounds) over the 25-year mine life which includes a 1-year commissioning and ramp-up period. The
average payable rate is 96.5% which includes a 0.2% concentrate loss. Payable silver production over the LOM is 31.3 million
ounces with an annual average of 1.3 million ounces of silver.
Production Physicals
Total
k of dmt
Concentrate
Cu con. Grade % Cu
M lbs
Cu metal production
k oz
Ag metal production
M lbs
Cu payable metal
k oz
Ag payable metal
3,421
30.5
2,305
35,012
2,224
31,257
Capital Costs
The initial capital costs, including all direct and indirect costs, are estimated at $512.5 million, including a contingency of
$90.8 million. It is anticipated that pre-production revenue of $55.7 million will reduce the capital expenditures to $456.7 million.
The total LOM sustaining capital is estimated at $459.3 million.
Operating Cash Flow
Operating Cash Flow
Cu Revenue
Ag Credits
Revenue
Concentrate Transportation Costs
Treatment & Refining Charges
Net Smelter Return
Royalties
Mining Costs
Processing Costs
G&A Costs
Total OPEX (incl. royalties)
Operating Cash Flow
$/t ore
$/lb Cu
Payable
LOM
($M)
6,615
496
7,111
(260)
(407)
6,444
(113)
55.07
4.13
59.20
(2.17)
(3.39)
53.65
(0.94)
(2,038)
(16.96)
(740)
(193)
(6.16)
(1.60)
(3,084)
(25.67)
3,359
27.97
3.00
0.23
3.23
(0.12)
(0.18)
2.92
(0.05)
(0.92)
(0.34)
(0.09)
(1.40)
1.52
12
Sensitivity Analysis
After-Tax Results
Management’s Discussion and Analysis
Year ended June 30, 2019
Variance
20%
10%
0%
-10%
-20%
20%
10%
0%
-10%
-20%
20%
10%
0%
-10%
-20%
NPV 0%
($M)
IRR
(%)
NPV 8%
($M)
Metal Price Sensitivities
832
626
416
205
-6
Initial Capital Cost Sensitivities
361
389
416
443
470
Operating Cost Sensitivities
369
392
416
439
462
3,126
2,520
1,907
1,292
676
1,845
1,876
1,907
1,938
1,969
1,772
1,839
1,907
1,974
2,042
23.8%
20.5%
16.8%
12.7%
7.8%
15.0%
15.8%
16.8%
17.8%
19.0%
15.9%
16.3%
16.8%
17.2%
17.6%
Payback
(years)
3.6
4.2
5.2
7.0
9.7
5.9
5.6
5.2
4.9
4.6
5.6
5.4
5.2
5.0
4.9
Estimated Timeline
Upon receipt of required permits and necessary approvals a 48-month mine development, construction and commissioning
period is foreseen followed by 24 years of commercial production.
Preliminary Economic Assessment
Summary
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 t/d
‐
‐
Mine Life
years
Annual Payable Metal Production
‐
Copper (M lbs)
Silver (M ozs)
LOM Average Process Recovery Rate
Copper %
Silver %
Total
557.2
19.2%
416
16.8%
1,907
5.2
456.8
459.3
1.43
15,500
24.0
89.0
1.25
88.0
76.0
13
Management’s Discussion and Analysis
Year ended June 30, 2019
Environmental liabilities
The former White Pine mine ceased operation in 1995 and has been the subject of an extensive remediation program outlined
in judicial Consent Decree and Remedial Action Plan agreements between CRC, Michigan’s Attorney General and the Michigan
Department of Environment Quality. The entire surface area overlying the underground mine along with the associated surface
component area and tailings impoundments are listed as a “facility” under Part 201, Environmental Remediation, of Michigan’s
Public Act 451 of 1994 as Amended, the Natural Resource and Environmental Protection Act.
Pending final closing of the acquisition, the Company began mineral exploration and baseline environmental surveys under an
access agreement with CRC. Historical environmental data for the former White Pine mine site operated by CRC was reviewed
and compared with the Company’s initial project plans and Michigan’s Part 632 regulatory requirements. CRC had compiled
extensive information on surface water, ground water and near-surface soils at the project site. Biological monitoring data in the
project area was mostly limited to very brief descriptions, e.g. the Remedial Investigation Report of 1999, or the more thorough
description of the 1978 Baker report that is now over 40 years old. Data from limited nearby stream monitoring completed by the
State of Michigan in 1999 and earlier is also available.
Upon completion of the final closing of the acquisition of the mineral and surface rights from CRC, the Company will assume all
environmental liabilities related to the Consent Decree and on-going environmental obligations.
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
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.
UPX Property
In May 2017, UPX Minerals Inc., a wholly owned subsidiary of Highland, acquired from RTX, a mineral property located in central
Upper Peninsula of Michigan. See Financial Condition and Strategic Review Process section for additional information.
The UPX Property is comprised of non-contiguous mineral rights covering approximately 1,800 square kilometers (448,000
acres). The 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 has carried 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 has identifying exploration targets using ongoing geological
14
mapping, rock and soil sampling programs, and interpretation of high-resolution magnetic data covering the full extent of the
Management’s Discussion and Analysis
Year ended June 30, 2019
UPX Property.
Keweenaw Project
Under a Mining Venture Agreement with BRP dated July 2011 and subsequently amended, the Company had an option to
acquire a 65% interest in the Keweenaw Project (which included the 543S deposit) by providing a feasibility study by December
31, 2018. This condition to exercise the option was not met and the option agreement expired, unexercised.
Qualified Persons
The technical information included in this MD&A has been reviewed and approved by Mr. Denis Miville-Deschênes, P. Eng.,
President and CEO of the Company and a qualified person under NI 43-101.
Corporate activities
Board changes
On February 21, 2019, Mr. Luc Lessard resigned from the Company’s board of directors, for personal reasons. Mr. Allen Winters
did not stand for re-election at the 2018 annual general meeting held on December 6, 2018. The board of directors is now
composed of five directors, three of whom are independent.
Rights of Certain Shareholders
Following their participation in the Company’s non-brokered private placement of units completed in early 2017, Greenstone
received nomination rights for the sale of Highland’s production pro-rata to its shareholding in the Company 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. So long as they hold not less than 10% of the issued and outstanding number of shares of the Company,
Greenstone and Orion each have participation rights to maintain their equity ownership level in future equity financings. Osisko
has a right of first refusal on any royalty, streaming and project financing by the Company and is entitled to nominate one director
to the board of directors of the Company.
15
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:
Management’s Discussion and Analysis
Year ended June 30, 2019
Year ended June 30, 2019
Property payments in cash
Finance expense
Write-down
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
$
$
$
$
168,600
132,500
-
-
25,000
-
-
-
$
-
6,254,513
(18,010,770)
26,652
220,252
-
-
6,387,013
(18,010,770)
-
(6,513)
(6,513)
201,100
25,000
(11,756,257)
20,139
(11,410,018)
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, 2019 included lease payments of $168,600 related to the Copperwood
Project, $25,000 related to the White Pine North Project and $26,652 related to other properties. Capitalized finance expense
included interest payments of $112,500 and a 2% penalty fee of $20,000 related to the final amount of $1,000,000 which was
due to Orvana for payment on June 17, 2018, but was paid on May 8, 2019. The capitalized accretion expense of $6,254,513
relates to the increase of the non-interest-bearing promissory note in favor of RTX to its face value of $15.0 million following the
non-payment of the amount of $3.0 million which was due on May 30, 2019. Following such occurrence and continuance, the
full amount of the promissory note in favor of RTX became payable on demand. At June 30, 2019, the Company wrote-down
the full amount capitalized on the UPX Property, as the Company does not plan to conduct any work on this property in the near
future.
The amounts capitalized during the year ended June 30, 2018 included lease payments of $186,100 related to the Copperwood
Project, $25,000 related to the White Pine North 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 remaining amount capitalized on the Keweenaw Project of $654,405, as the Company was not planning to
conduct any significant work on this property in the near term.
16
Exploration and evaluation expenses charged to the statements of comprehensive loss during the years ended June 30, 2019
and 2018 are as follows:
Management’s Discussion and Analysis
Year ended June 30, 2019
Site preparation, drilling and assaying
Labour
Studies
Copperwood
White Pine
UPX
June 30, 2019 June 30, 2018
Project
Project
Project
Total
Total
Year ended
Year ended
$
1,865
$
-
$
$
$
39,108
40,973
1,386,707
934,226
100,987
439,602
1,474,815
2,450,433
127,733
211,095
-
338,828
3,836,509
Office, overhead and other administrative costs
208,451
124,086
223,066
555,603
1,092,965
1,272,275
436,168
701,776
2,410,219
8,766,614
17
Selected Consolidated Financial Information (1)(2)
The following selected financial information should be read in conjunction with the Company’s June 30, 2019 and 2018
consolidated financial statements.
Management’s Discussion and Analysis
Year ended June 30, 2019
Financial Position
Cash
Exploration and evaluation assets
Total assets
Credit Facility, due on February 28, 2020
Note payable, due until December 31, 2020
Promissory note, including accrued interest, on demand
Non-current portion of promissory note
Balance of purchase price payable
Shareholders' equity
Comprehensive Loss
Net loss for the year
Basic and diluted loss per share
Cash Flows
Operating activities
Investing activities
Financing activities
June 30,
June 30,
2019
$
2018
$
605,046
3,487,847
20,385,814
31,795,832
21,122,294
35,679,441
2,495,484
-
165,000
275,000
15,128,068
2,501,248
-
-
6,244,239
1,004,333
2,163,379
24,045,201
Year ended
Year ended
June 30,
2019
$
June 30,
2018 (3)
$
Year ended
June 30,
2017 (3)
$
(22,155,581)
(11,571,693)
(4,482,540)
(0.05)
(0.02)
(0.02)
(4,029,635)
(10,668,437)
(4,643,810)
(323,373)
1,476,917
(366,772)
(2,306,701)
249,628
20,769,215
1) The Selected Consolidated Financial Information was derived from the Company’s June 30, 2019 and 2018 consolidated financial
statements, prepared in accordance with IFRS.
2) The Company’s June 30, 2019 and 2018 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. The recovery of amounts recorded for exploration
and evaluation assets depends on the ability of the Company to complete the acquisition of the White Pine Project, the ability of
the Company to obtain the necessary financing to complete the development of the projects, and future profitable production from
the projects or proceeds from their disposition thereof. The Company requires additional funds to settle its working capital
deficiency, to meet all existing commitments, to complete the acquisition of the White Pine Project and to provide for management
and administration expenses for the next 12 months. To that end, the Company engaged BMO Nesbitt Burns Inc. in July 2019 to
act as financial advisor to the Company to review all funding options available to it, which process can result in the sale of assets,
the issuance of securities, a merger or other type of arrangement or a combination of assets or entities. However, there is no
assurance that the Company will be successful in completing any such transactions. Should the Company not be successful in
completing any such transactions, this will have a negative impact on the business, financial condition and results of operation of
18
Management’s Discussion and Analysis
Year ended June 30, 2019
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, 2019 and 2018 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.
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.
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, 2019 compared to year ended June 30, 2018
The Company incurred a net loss of $22,155,581 ($0.05 per share) during the year ended June 30, 2019 (“FY 2019”) compared
to a net loss of $11,571,693 ($0.02 per share) during the year ended June 30, 2018 (“FY 2018”).
In FY 2019, the Company recorded an impairment of the UPX Property in the amount of $18,010,770. Given the Company’s
financial condition as more fully described in the Financial Condition and Strategic Review Process section, the Company does
not plan to conduct any work on this property in the near future and as result has written-down to nil at June 30, 2019 the value
of the UPX Property. The amount of $18,010,770 represents the cost of the property acquired in 2017 from RTX. At June 30,
2018, the Company had written down to nil the costs related to the Keweenaw Project ($654,405) as it did not plan to conduct
any further work on this project in the near term.
The Company incurred exploration and evaluation expenses of $2,410,219 in FY 2019 compared to $8,766,614 in FY 2018. A
total amount of $1,272,275 was spent at Copperwood in FY 2019 ($6,077,029 in FY 2018) with efforts during the early part of
the financial year focused on ensuring that all amendment requests, renewals and new applications concerning the grant of
permits were complete and filed in a timely manner. In FY 2018, the Company completed an 8-hole (2,550 meters) drilling
program on and around Section 5 located at the Copperwood Project and focused all of its efforts towards completing the
Copperwood feasibility study which results were released on June 15, 2018. An amount of $436,168 was spent at the White
Pine Project in FY 2019 ($503,845 in 2018), mostly related to maintaining the tailings facilities at the former White Pine site. At
the UPX Property, the Company incurred expenses of $701,776 in FY 2019 ($1,966,518 in 2018) as it continued its systematic
review and compilation of significant historical data obtained with the acquisition of the UPX Property in 2017 to better understand
the potential of the property.
Management and administration expenses of $1,359,322 in FY 2019 compared to $1,698,615 in FY 2018 reflect lower wages
and fees to consultants following the reduction in wages of certain officers and the reduction of personnel at the corporate office
(wages and fees of $946,300 in FY 2019 compared to $1,032,772 in FY 2018), lower professional fees due mostly to reduced
legal fees ($191,879 in FY 2019 compared to $271,862 in FY 2018), reduced investor relations and travel expenses mostly due
19
Management’s Discussion and Analysis
Year ended June 30, 2019
to negative market conditions for copper projects and taking into account the Company’s financial condition ($85,161 in FY 2019
compared to $209,881 in FY 2018) and lower reporting issuer costs, as FY 2018 expenses included a one-time listing fee on
the OTCQB ($28,637 in FY 2019 compared to $64,600 in FY 2018).
Share-based compensation totaled $168,612 in FY 2019 ($503,512 in FY 2018) following the grant of options to employees,
directors, officers and consultants of the Company in August 2017, October 2017 and May 2018.
The Company incurred a finance expense of $219,908 in FY 2019 ($31,833 in FY 2018) related mostly to i) the credit facility of
up to $4,500,000 provided by two of the Company’s shareholders (Greenstone and Osisko) (finance expense of $71,528 in FY
2019 consisting of interest at the effective rate of 23.6% compared to nil in FY 2018); ii) the interest-bearing note payable to the
lessor of certain mineral rights located in White Pine (finance expense of $18,700 in FY 2019 compared to $27,500 in FY 2018);
and iii) the promissory note in favour of RTX, which on default of the amount due of $3.0 million on May 30, 2019, the full amount
of the outstanding amount due to RTX now bears interest at an annual rate of Libor plus 8% (a rate of 10.39% at June 30, 2019)
for a finance expense of $128,068 in FY 2019 compared to nil in FY 2018.
During the financial year, the Company realized $19,005 ($112,343 in 2018) in finance income on liquidities held.
4th quarter ended June 30, 2019 compared to the 4th quarter ended June 30, 2018
During the 4th quarter ended June 30, 2019, the Company incurred a net loss of $18,581,306 ($0.04 per share) compared to a
net loss of $2,700,885 ($0.01 per share) during the 4th quarter ended June 30, 2018. The increased loss during the 4th quarter
ended June 30, 2019 compared to 2018 is mainly due the impairment of the UPX Property in the amount of $18,010,770, partially
offset by lower exploration and evaluation expenses of $1,235,198 due to the suspension in early 2019 of all exploration and
evaluation activities in Michigan, lower management and administration expenses of $277,677 following the reduction in wages
of certain officers and the reduction of personnel at the corporate office, and the reduction in investor relations and travel
expenses and the write-off in the amount of $654,405 of the Keweenaw Project in FY 2018.
20
Selected Quarterly Financial Information
The following is a summary of the Company’s financial results for the past eight quarters:
Management’s Discussion and Analysis
Year ended June 30, 2019
Period ended
June 30, 2019 (a)
March 31, 2019
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
Revenues
Net loss
per share
Basic and
diluted loss
$
1,697
625
3,929
12,754
26,127
25,545
31,933
28,738
$
18,581,306
877,703
1,037,350
1,659,222
2,700,885
2,934,837
3,236,605
2,699,366
$
(0.04)
(0.00)
(0.00)
(0.00)
(0.01)
(0.01)
(0.01)
(0.00)
(a) Includes an impairment of $18,010,770 of the UPX Property.
Liquidity and Capital Resources
At June 30, 2019, the Company had a working capital deficiency of $17,995,199 compared to a working capital deficiency of
$1,228,720 at June 30, 2018. The increase in the working capital deficiency during the year ended June 30, 2019 is mainly
attributable to i) the reclassification of the promissory note in favour of RTX as a demand note and the recording of interest
payable on the full amount of the note due of $15.0 million for the period from May 30, 2019 to June 30, 2019 of $128,068 (total
impact of $12,626,820 on the working capital deficiency for the year); ii) exploration and evaluation expenses of $2,410,219 ; iii)
management and administration expenses of $1,359,322; iv) lease payments of $352,752 related to the Copperwood Project
and other mineral leases held; v) the reimbursement of an amount of $110,000 under a 4-year note payable related to certain
mineral rights located in White Pine, Michigan; vi) the reimbursement of the balance of purchase price payable of $1,000,000 to
Orvana plus finance expenses of $132,500; with all such items partially offset with the net proceeds of the credit facility of
$2,495,484 described below.
On May 20, 2019, the Company entered into a loan agreement with two of its then shareholders, Greenstone and Osisko
(collectively, the "Lenders"), which are deemed to have significant influence over the Company. Under the terms of the loan
agreement, the Lenders have agreed to provide the Company with a loan of up to $4,500,000 (the “Principal Amount”). The
loan bears interest at a rate of 12% per annum, has a maturity date of February 28, 2020 (the “Maturity Date”) and is to be
disbursed in a number of tranches pursuant to an approved budget, including the settlement of certain outstanding liabilities,
expenses to conduct a scoping study on the White Pine North Project and expenses to conduct a strategic review process. The
Principal Amount of the loan as well as accrued interest are payable at the latest on the Maturity Date of the loan. The loan is
secured by a mortgage on the Copperwood property and a general security agreement over all the assets of the Company and
includes specifically a pledge of the shares of the following subsidiaries: Copperwood Resources Inc., Upper Peninsula Copper
Holdings Inc., White Pine Copper LLC and Keweenaw Copper Co.
21
Management’s Discussion and Analysis
Year ended June 30, 2019
On May 24, 2019, the Company made an initial drawdown on the loan facility of $2,750,000. The Company accounted for the
estimated fair value of the loan using a discount rate of 20%. The fair value adjustment of $162,961 representing the below
market element of the loan was presented in equity. Transaction costs of $163,083, consisting of an arrangement fee and legal
fees, were presented as a reduction of the loan. These expenses are amortized over the loan period of nine months using the
effective interest rate method. The effective interest rate of the loan is 23.6%. Subsequent to the FY 2019, the Company made
additional drawdowns totaling $850,000.
On May 28, 2018, the Company and Orvana amended the repayment terms of the final amount due of $1,250,000 and as such,
a payment of $250,000 was made on June 17, 2018. The remaining amount of $1,000,000, which was due by November 30,
2018, bore interest on a monthly basis at a rate of 12% per annum until November 30, 2018 and 15% per annum subsequently.
The Company also agreed that in the event it was not able to repay the remaining amount of $1,000,000 by November 30, 2018,
it would pay a 2% penalty amount to Orvana. On May 28, 2019, the Company made a final payment of $1,000,000 plus the 2%
penalty amount of $20,000. The interest paid of $112,500 in 2019 and the penalty amount of $20,000 were added to the cost of
the Copperwood Project in accordance with the Company’s accounting policy on borrowing costs.
The Company requires additional funds to reimburse the loan to the Lenders, to meet all existing commitments (including the
Note of $15.1 million due to RTX), to complete the acquisition of White Pine (including an amount of approximately $1.7 million
to replace the current environmental financial assurance bond) and to provide for management and administration expenses for
the next 12 months.
To that end, the Company engaged BMO Nesbitt Burns Inc. in July 2019 to act as financial advisor to the Company to review
all funding options available to it, including the sale of assets, the issuance of securities, a merger or other type of arrangement
or a combination of assets or entities. However, given the state of the capital markets for a company such as Highland and
current copper prices, there is no assurance that additional funds will be available or available on terms acceptable to the
Company or that the Company will be able to complete a strategic transaction. These conditions and uncertainties indicate the
existence of a material uncertainty that may cast a significant doubt about the Company’s ability to continue as a going concern.
Capital Management
The Company defines capital that it manages as loans (including credit facility, note 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. At June 30, 2019, managed capital was $19,951,931 ($34,070,021 at June 30, 2018).
There were no changes in the Company’s approach to capital management during the year ended June 30, 2019. The Company
is not subject to any externally imposed capital requirements as at June 30, 2019.
Off-Balance Sheet Arrangements
At June 30, 2019, the Company has no off-balance sheet arrangements.
22
Management’s Discussion and Analysis
Year ended June 30, 2019
Transactions with Related Parties
In addition to the loan agreement with two of the Company’s shareholders described in the Liquidity and Capital Resources
section, during the year ended June 30, 2019, the Company incurred administration expenses of $101,833 from Reunion Gold
Corporation (“Reunion”), a related party by virtue of common key management and director ($67,151 in 2018).
During the year ended June 30, 2019, the Company recovered amounts of $223,698 for management services provided to other
TSXV-listed companies, related by virtue of common key management, including Odyssey Resources Limited and Reunion
($186,010 in 2018). The services are provided at cost.
At June 30, 2019, the Company had an amount payable of $33,610 to Reunion (nil at June 30, 2018) and had an amount
receivable from Odyssey Resources Limited of $1,920 (nil at June 30, 2018).
Remuneration to directors and key management of the Company, including the Executive Chairman, the President and CEO
and the CFO, totaled $668,301 during the year ended June 30, 2019 ($946,883 in 2018), as more fully detailed in Note 20 to
the June 30, 2019 and 2018 consolidated financial statements filed on SEDAR.
Outstanding Share Data
At October 28, 2019, 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 9,915,000 stock options outstanding with an average
exercise price of $0.13, expiring at various dates until October 2022.
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, except for the adoption of IFRS 9, Financial
Instruments, described below. The significant accounting policies of Highland are presented in Note 4 to the June 30, 2019 and
2018 consolidated financial statements filed on SEDAR.
Change in accounting policy – adoption of IFRS 9, Financial instruments
On July 1, 2018, the Company adopted IFRS 9 on a retrospective basis with restatement of comparative periods in accordance
with the transitional provision of IFRS 9. IFRS 9 sets out the requirements for recognizing financial assets and liabilities and
replaces IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). The adoption of IFRS 9 resulted in a change
in classification of the financial assets to the financial assets at amortized cost category while they were classified as loans and
receivables under the classification prescribed by IAS 39. There was no change in the classification of financial liabilities. There
was no impact on carrying values as a result of the adoption on IFRS 9, therefore, comparative amounts presented in the
Company’s consolidated financial statements were not restated.
23
Management’s Discussion and Analysis
Year ended June 30, 2019
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 4 to the June 30, 2019
and 2018 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 4 to the June 30, 2019 and
2018 consolidated financial statements filed on SEDAR.
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 or sale of assets.
The following table summarizes the contractual maturities of the Company’s financial liabilities at June 30, 2019:
Carrying
Settlement
amount
amount
$
$
Within
1 year
$
Accounts payable and accrued liabilities
913,357
913,357
913,357
Credit facility
Note payable
Promissory note
2,495,484
3,002,823
3,002,823
165,000
176,540
119,900
56,640
15,128,068
15,128,068
15,128,068
-
18,701,909
19,220,788
19,164,148
56,640
Over
2 years
2 years
$
-
-
$
-
-
-
-
-
24
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
Management’s Discussion and Analysis
Year ended June 30, 2019
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
$6,000.
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, 2019, financial assets and liabilities denominated in a foreign currency consisted of cash and cash equivalents of
$426,471, accounts payable and accrued liabilities of $30,819 and credit facility of $2,495,484. The impact on profit or loss of a
10% increase or decrease in the US dollar against the Canadian dollar would be approximately $210,000.
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.
25
Management’s Discussion and Analysis
Year ended June 30, 2019
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 venture, 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 repay the outstanding secured promissory note and to conduct exploration programs
on its UPX Property; if adequate financing is not available, RTX may demand payment of the $15.0 million plus interest due
under the Note and given the Company’s inability to pay such amount, RTX may initiate legal proceedings to demand the full
payment of the Note and enforce its securities over the UPX Property; ; and d) for general and administrative expenses.
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 and the results of the White Pine PEA, the price of and demand for copper and other
metals, the state of the capital 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/or mineral reserves of the Copperwood and White Pine North 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 and silver 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
those projects. 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 in the White Pine PEA, and Highland’s ability to complete a financing may
be significantly and adversely affected by various factors including a decline 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 the past.
• 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.
26
Management’s Discussion and Analysis
Year ended June 30, 2019
•
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.
The Company is subject to environmental risks and most particularly as it relates to the White Pine property which is
subject to a consent decree; 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.
The executive officers, directors, and several shareholders of the Company (including 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,
27
Management’s Discussion and Analysis
Year ended June 30, 2019
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.
• 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 result of the
strategic review process and the funding requirement; 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, the result of the discussion with RTX with
respect to the Note; and the Company’s plans and objectives. 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, challenges to title to the Company’s
28
Management’s Discussion and Analysis
Year ended June 30, 2019
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.
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 October 28, 2019. 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).
29