Ivanhoe Electric Inc. (IE) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and combined carve-out financial statements and the related notes to those statements included elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A. Risk Factors and elsewhere in this Annual Report. See “Cautionary Note Regarding Forward-Looking Statements.”
Separation from HPX
We were incorporated under the laws of the State of Delaware on July 14, 2020, as a wholly-owned subsidiary of HPX.
On April 30, 2021, HPX completed a reorganization whereby HPX contributed (i) all of the issued and outstanding shares of HPX’s subsidiaries, other than those holding direct or indirect interests in its Nimba Iron Ore Project in Guinea; (ii) certain property, plant and equipment; and (iii) certain financial assets in exchange for shares of our common stock. HPX then distributed the shares of our common stock to HPX stockholders by way of a dividend, with each HPX stockholder receiving one share of our common stock for each HPX share of common stock then held by the stockholder.
The Company has historically operated as part of the HPX business and not as a standalone company. Financial information for historical periods presented prior to April 30, 2021, the spinoff date, were derived from the consolidated financial statements and accounting records of HPX prepared on a carve-out and combined basis. The combined carve-out financial information may not be indicative of our future performance and does not necessarily reflect what the financial position, results of operations, and cash flows would have been had we operated as an independent company during such periods, particularly because of changes arising subsequently as a result of the separation, including changes in the financing, cash management, operations, cost structure, and personnel needs of our business.
The combined carve-out financial information for periods prior to April 30, 2021 included certain assets and liabilities that were historically held at the HPX corporate level, but are specifically identifiable to or otherwise attributable to us.
Prior to completing the spinoff, HPX incurred corporate and technical costs attributable to the Company and the Nimba Iron Ore Project. Accordingly, the combined carve-out financial information includes cost allocations from HPX, including executive oversight, occupancy, office overhead, accounting, tax, treasury, legal, information technology, human resources and mineral exploration. These allocations were made on the basis of direct usage. All such amounts were deemed incurred and settled by the Company in the period in which the costs were recorded and are included in net parent investment in the consolidated financial statements up to the date of the spinoff.
Allocated costs for the period from January 1, 2021 to April 30, 2021 totaled $1.3 million and were primarily included in general and administrative expenses and exploration expenses in the consolidated statements of loss.
Reverse Stock Split
On June 16, 2022, we effected a reverse stock split of our outstanding common stock at a ratio of 3-for-1 (the “Reverse Stock Split”). The number of authorized shares and the par value of the common stock were not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, per share data and related information have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.
Initial Public Offering
On June 30, 2022, we completed an initial public offering of 14,388,000 shares of our common stock at a price of $11.75 per share, resulting in gross proceeds from the offering of $169.1 million. The Company’s shares were listed on the NYSE American and the TSX under the ticker symbol “IE”.
Business Overview
We are a United States domiciled minerals exploration and development company with a focus on developing mines from mineral deposits principally located in the United States in order to support American supply chain independence and to deliver the critical metals necessary for electrification of the economy. We believe the United States is significantly underexplored and will yield major new discoveries of these metals. Our mineral projects focus on copper, nickel, vanadium, cobalt, platinum group elements, gold and silver.
90
Table of Contents
“Our” mineral projects refers to our interests in such projects which may be a direct ownership interest in mineral titles (including through subsidiary entities), a right to acquire mineral titles through an earn-in or option agreement, or, in the case of our investments in publicly listed companies in Canada, through our ownership of the equity of those companies, that have an interest in such mineral projects.
Our two material mineral projects are the Santa Cruz Copper Project (“Santa Cruz” or the “Santa Cruz Project”) in Arizona and the Tintic Copper-Gold Project (“Tintic” or the “Tintic Project”) in Utah. We have the option to acquire 100% of the mineral rights constituting the Santa Cruz and Tintic projects.
Our other key mineral projects are the Hog Heaven Project, located in Montana (the “Hog Heaven Project”), and the Ivory Coast Project located in West Africa, which is held through our 22.8% equity interest in Sama Resources Inc. (“Sama”) and our 30% direct interest in the Sama Nickel Corporation Inc. joint venture.
We also have investments in publicly traded companies in Canada, and through our ownership of equity in those companies, we have an indirect interest in mineral projects in the United States, Canada, Colombia, Ivory Coast and Peru.
In addition to our mineral projects, we also own controlling interests in two technology companies: VRB and CGI. As of December 31, 2022, we owned 90.0% of the outstanding shares of VRB. VRB and its subsidiary companies are primarily engaged in the design, manufacture, installation, and operation of energy storage systems. As of December 31, 2022, we owned 94.3% of CGI’s outstanding shares. CGI has developed technology that consists of sophisticated codes to process geophysical data and build 3D subsurface images that could indicate the presence of various natural resources, including metallic minerals and water. CGI offers mineral prospectivity and drill target identification services, data analytic tools and optimization of operational processes. CGI provides fee-for-service and licensing agreements for one-off technology applications to customers in the area of critical minerals, energy and water exploration.
Impact of the COVID-19 Pandemic
The COVID-19 global pandemic has caused governments worldwide to implement measures to slow the spread of the outbreak through quarantines, travel restrictions, business shutdowns, and other measures. The COVID-19 pandemic has negatively affected the global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly affected global supply chains, all of which have and are expected to continue to affect our future exploration activities and business. To the extent the COVID-19 pandemic adversely affects our business prospects, financial condition, and results of operation, it may also have the effect of exacerbating many of the other risks described in the Item 1A. Risk Factors section. See Item 1A. Risk Factors for a further discussion of the potential adverse impact of COVID-19 on our business, results of operations, and financial condition.
Selected Financial Information
The selected financial information set forth below is presented in accordance with U.S. GAAP and is derived from our audited consolidated and combined carve-out financial statements for the years ended December 31, 2022 and 2021. We did not declare or pay any dividends or distributions in any financial reporting period.
| (In thousands, except per share amounts) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||
|---|---|---|---|---|---|---|
| Revenue | $ | 8,440 | $ | 4,652 | ||
| Cost of sales | (3,135) | (1,520) | ||||
| Gross profit | 5,305 | 3,132 | ||||
| Expenses: | ||||||
| Exploration expenses | 105,286 | 39,505 | ||||
| General and administrative expenses | 26,971 | 20,402 | ||||
| Research and development expenses | 5,040 | 3,825 | ||||
| Net loss attributable to: | ||||||
| Common stockholders or parent | 149,813 | 59,320 | ||||
| Comprehensive loss attributable to: | ||||||
| Common stockholders or parent | 149,501 | 59,284 | ||||
| Basic and diluted loss per share attributable to common stockholders or parent | $ | 1.91 | $ | 0.96 | ||
| Total assets | 260,486 | 153,531 | ||||
| Total non-current liabilities | 40,606 | 85,134 |
91
Table of Contents
Segments
We account for our business in three business segments – (i) critical metals, (ii) data processing and software licensing services and (iii) energy storage systems.
Significant Components of Results of Operations
Revenue, Cost of Sales and Gross Profit
We generate revenue from our technology businesses CGI and VRB, which are included in the data processing and energy storage systems business segments, respectively. We have not generated any revenue from our mining projects because they are in the exploration stage. We do not expect to generate any revenue from our mining projects for the foreseeable future.
For the years ended December 31, 2022 and 2021, the majority of our revenue came from CGI’s sale of data processing services to the mining and oil and gas industries, which included amounts from a customer under a three-year contract that covered the period from August 2018 to August 2021. Revenue from this customer represented 82%, and 74% of sales for the years ended December 31, 2022 and 2021. During the fourth quarter of 2021, CGI entered into a new agreement with this customer whereby it agreed to license certain software for a one-time fee of $6.5 million, which was received and recognized in the first quarter of 2022. The agreement also provided for $0.5 million of service fees payable in two installments, one in the first quarter of 2022 and one in the first quarter of 2023. This agreement resulted in $6.9 million of revenue from this customer being recognized in the year ended December 31, 2022. We cannot provide any assurance that we will enter into any additional contracts with this customer in the future.
We also generate revenue from VRB, which develops, manufactures and sells energy storage systems.
| (In thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||
|---|---|---|---|---|---|---|
| Revenues: | ||||||
| CGI: Software licensing and data processing services | $ | 7,729 | $ | 4,512 | ||
| VRB: Energy storage systems | 711 | 140 | ||||
| Total | $ | 8,440 | $ | 4,652 | ||
| Cost of sales: | ||||||
| CGI: Software licensing and data processing services | $ | 577 | $ | 1,427 | ||
| VRB: Energy storage systems | 2,558 | 93 | ||||
| Total | $ | 3,135 | $ | 1,520 | ||
| Gross profit: | ||||||
| CGI: Software licensing and data processing services | $ | 7,152 | $ | 3,085 | ||
| VRB: Energy storage systems | (1,847) | 47 | ||||
| Total | $ | 5,305 | $ | 3,132 |
Exploration Expenses
Exploration expenses include topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling and activities in relation to identifying a mineral resource and then evaluating the technical feasibility and commercial viability of extracting the mineral resource, as well as value-added taxes in relation to these direct exploration and evaluation costs incurred in foreign jurisdictions where recoverability of those taxes is uncertain. Exploration expenses also include salaries, benefits and stock-based compensation expenses of the employees performing these activities.
Exploration expenses also include payments under earn-in and option agreements where the option right is with respect to ownership interests in legal entities owning the underlying mineral project in the exploration project phase. Through our earn-in and option agreements, we have the right (and in some cases, the obligation) to fund and conduct exploration on the underlying mineral project prior to determining whether to acquire a minority or majority ownership interest through further funding the costs of such exploration and, in some cases, through direct payments to the owners of the project. In the event we cease making expenditures on an exploration mineral project or fail to incur the agreed level of exploration expenditures, we will not obtain an ownership right beyond any which may have been acquired as of the date of termination.
92
Table of Contents
During 2021, Cordoba’s San Matias project accounted for a significant portion of our exploration expenses. In 2022, expenditures at our Santa Cruz Project accounted for the majority of exploration expenses which are expected to continue to be significant as we advance the project with proceeds from our initial public offering.
Included in exploration expenses are exploration costs that we incur in relation to generating new projects. These activities may or may not proceed to earn-in agreements depending on our evaluation. These are categorized as “Project generation and other”.
| (In thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||
|---|---|---|---|---|---|---|
| Exploration Expenses: | ||||||
| Santa Cruz, USA | $ | 61,172 | $ | 9,966 | ||
| San Matias, Colombia | 18,454 | 13,789 | ||||
| Pinaya, Peru | 2,616 | 1,774 | ||||
| Tintic, USA | 2,282 | 2,474 | ||||
| Hog Heaven, USA | 2,216 | 2,029 | ||||
| Yangayu, Papua New Guinea | 2,128 | 497 | ||||
| Perseverance, USA | 1,785 | 742 | ||||
| Carolina, USA | 1,307 | — | ||||
| Lincoln, USA | 1,312 | 235 | ||||
| Bitter Creek, USA | 644 | 340 | ||||
| Ivory Coast Project, Ivory Coast | 70 | 1,931 | ||||
| Project generation and other | 11,300 | 5,728 | ||||
| Total | $ | 105,286 | $ | 39,505 |
General and Administrative Expenses
Our general and administrative expenses consist of salaries and benefits, stock-based compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses have increased significantly now that we are operating as a public company and have added to our management team. We expect higher costs related to salaries, benefits, stock-based compensation, legal fees, compliance and corporate governance, accounting and audit expenses, stock exchange listing fees, transfer agent and other shareholder-related fees, directors’ and officers’ and other insurance costs and other administrative costs.
Research and Development Expenses
Expenditures on research and development activities are recognized as an expense in the period in which they are incurred. Since 2018, the majority of our research and development expenses came from CGI’s data processing business, which includes amortization expenses related to its artificial intelligence intellectual property acquired in 2018. VRB also conducts research and development activities to continue to advance its energy storage system technology. We expect research and development expenses to increase as our technology-based businesses continue to grow.
| (In thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||
|---|---|---|---|---|---|---|---|
| Research and development expenses: | |||||||
| CGI: Software licensing and data processing services | $ | 3,342 | $ | 2,606 | |||
| VRB: Energy storage systems | 1,453 | 1,031 | |||||
| Other | 245 | 188 | |||||
| Total | $ | 5,040 | $ | 3,825 |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
For the year ended December 31, 2022 we recorded a net loss attributable to common stockholders of $149.8 million ($1.91 per share), compared to $59.3 million ($0.96 per share) for the year ended December 31, 2021, which was an increase of $90.5 million. Significant contributors to this increase in the year ended December 31, 2022 included an increase of $65.8 million in exploration expenditures, an increase of $14.4 million in non-cash loss on revaluation of
93
Table of Contents
convertible debt and an increase of $6.6 million in general and administrative expenses, offset by an increase of $3.8 million in revenue compared to the year ended December 31, 2021.
Exploration expenses were $105.3 million for the year ended December 31, 2022 an increase of $65.8 million from $39.5 million for the year ended December 31, 2021. During the year ended December 31, 2022, expenditures largely focused on exploration activities at:
•the Santa Cruz Project where $61.2 million of exploration expenditure was incurred in the year ended December 31, 2022 compared to $10.0 million incurred in the year ended December 31, 2021. Activities during the year ended December 31, 2022 at Santa Cruz were focused on a program of exploration and infill resource, geotechnical, hydrological and metallurgical drilling, advancing technical studies along with completing an Updated Mineral Resource estimate for the Santa Cruz Copper Project. In addition, a 26.5 km2 (6,500 acre) Typhoon™ 3D IP survey that was completed in July 2022. Included in the $61.2 million of exploration expenditure was a $5.7 million expense related to amounts that had been previously capitalized as part of an agreement to purchase certain land adjacent to the Santa Cruz Project. In September 2022, this agreement was terminated by the Company.
•the San Matias Project where $18.5 million of exploration expenditure was incurred by Cordoba Minerals in the year ended December 31, 2022 focused on the commencement of a Feasibility Study on the Alacran deposit in May 2022. A total 40,000-metre infill diamond drilling campaign is planned.The 25,000-metre initial phase drill program focused on the central area of the Alacran Deposit was completed during the fourth quarter of 2022.
•the Pinaya Project where $2.6 million of exploration expenditure was incurred by Kaizen Discovery in the year ended December 31, 2022. Activities included a 3,046-meter drill program that began in November 2021 which was completed in January 2022 as well as expenditures related to the IP-resistivity survey, which began in March 2022 and that was completed in June 2022.
General and administrative expenses were $27.0 million for the year ended December 31, 2022, an increase of $6.6 million from $20.4 million in the year ended December 31, 2021. Several items contributed to the increase, including:
•a $3.4 million increase in directors and officers insurance expenses during the year ended December 31, 2022 in relation to the new director and officers insurance policy we entered into when we became a public company in June 2022. There was no similar expense in the prior year;
•a $1.1 million increase in stock-based compensation expense due to Ivanhoe Electric stock option and RSU grants in November 2022;
•a $1.1 million increase in administration expenses at VRB primarily due to an increase in professional fees in relation to certain technical studies that it was conducting; and
•a $0.9 million increase in administration expenses at Cordoba Minerals due to increased professional fees related to costs incurred related to entering into the strategic arrangement for the Alacran Project with JCHX.
During the year ended December 31, 2022, we recorded a non-cash $19.0 million loss on revaluation of convertible debt which related to the convertible notes that were automatically converted into shares of common stock upon the completion of our initial public offering on June 30, 2022.
94
Table of Contents
Revenue for the year ended December 31, 2022 was $8.4 million, an increase of $3.8 million from $4.7 million for the year ended December 31, 2021.
| Year Ended December 31, 2022 | Year Ended December 31, 2021 | Percentage changeyear-over-year | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||
| Software licensing and data processing services: | ||||||||||
| Revenue | $ | 7,729 | $ | 4,512 | 71 | % | ||||
| Cost of sales | (577) | (1,427) | (60) | % | ||||||
| Gross profit | 7,152 | 3,085 | 132 | % | ||||||
| Energy storage systems: | ||||||||||
| Revenue | $ | 711 | $ | 140 | 409 | % | ||||
| Cost of sales | $ | (2,558) | $ | (93) | 2664 | % | ||||
| Gross (loss) profit | (1,847) | 47 | -4028 | % | ||||||
| Total | ||||||||||
| Revenue | 8,440 | 4,652 | 81 | % | ||||||
| Cost of sales | (3,135) | (1,520) | 106 | % | ||||||
| Gross profit | 5,305 | 3,132 | 69 | % |
CGI’s software licensing and data processing services to the mining and oil and gas industries represented 91.6% of our revenue for the year ended December 31, 2022 ($7.7 million) and 97.0% for the year ended December 31, 2021 ($4.5 million). The increase in CGI’s revenue was a result of a new contract that CGI entered into with one of its customers upon the expiration in 2021 of a previous three-year contract. Under the new agreement with this customer, CGI agreed to license certain software for a one-time fee of $6.5 million, which was received and recognized in the first quarter of 2022. The agreement also provided for $0.5 million of service fees payable in two installments, one in the first quarter of 2022 and one in the first quarter of 2023. This agreement resulted in $6.9 million of revenue from this customer being recognized in the year ended December 31, 2022. We cannot provide any assurance that we will enter into any additional contracts with this customer in the future.
CGI’s gross profit for the year ended December 31, 2022 was $7.2 million, a $4.1 million or 132% increase from $3.1 million for the year ended December 31, 2021. The licensing of certain software for a one-time fee of $6.5 million had a direct impact on gross profit as the licenses had no underlying carrying value and therefore resulted in a $6.5 million gross profit being recognized.
VRB’s energy storage system revenue represented 8.4% of our revenue for the year ended December 31, 2022 ($0.7 million) and 3.0% for the year ended December 31, 2021 ($0.1 million). During the year ended December 31, 2022, VRB delivered, installed and commissioned a 125kW/500kWh energy storage system to a customer which resulted in $0.3 million of revenue being recognized. In addition, VRB also recognized $0.3 million in revenue from the sale of electrolyte.
VRB had a gross loss for the year ended December 31, 2022 of $1.8 million largely due to an inventory impairment of $1.9 million being recognized in relation to the termination of a tolling agreement with a producer of ammonium metavanadate.
Research and development expenses for the year ended December 31, 2022 were $5.0 million, an increase of $1.2 million from the same period in 2021 attributable to a $0.7 million an increase in research and development activity at CGI and a $0.4 million an increase at VRB. Research and development activities increased in 2022 at CGI as CGI has been focused on developing its services to generate new business after completing the $6.5 million software licensing agreement.
Stock-Based Compensation
In November 2022, we granted 2,760,509 stock options at an exercise price of $11.75 per share to certain directors, officers and employees. The fair value of the option grant was determined using the Black-Scholes option-pricing model as $5.08 per share. Also in November 2022, we granted 750,000 RSU’s to our incoming CEO which had a fair value on the grant date of $9.98 per share.
95
Table of Contents
Liquidity, Capital Resources and Capital Requirements
Cash Resources
We have recurring net losses and negative operating cash flows and we expect that we will continue to operate at a loss for the foreseeable future.
We generate revenue from our technology businesses. We have not generated any revenue from our mining projects and do not expect to generate any revenue from our mining projects for the foreseeable future.
We have funded our operations primarily through the sale of our equity and convertible securities.
We raised funds between August 3, 2021 and November 17, 2021 by selling shares and unsecured convertible promissory notes (the “Series 1 Convertible Notes”) for gross proceeds of $60.0 million. In addition, on April 5, 2022, we raised funds by selling $86.2 million aggregate principal amount of unsecured convertible promissory notes (the “Series 2 Convertible Notes”) for gross proceeds of $86.2 million.
On June 30, 2022, we closed our initial public offering of 14,388,000 shares of our common stock at a price of $11.75 per share. The gross proceeds from the offering were approximately $169.1 million, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.
At December 31, 2022, and 2021, we had cash and cash equivalents of $139.7 million and $49.9 million, respectively, and a working capital of $133.6 million and $17.7 million, respectively. Of the total cash and cash equivalents at December 31, 2022, and December 31, 2021, $20.7 million and $28.5 million, respectively, was not available for the general corporate purposes of the Company as these amounts were held by non-wholly-owned subsidiaries.
We believe that we will have sufficient cash resources to carry out our business plans, including our currently planned exploration activities at our mineral projects, for at least the next 12 months. We have based these estimates on our current assumptions which may require future adjustments based on our ongoing business decisions as well as, in particular, exploration success at our mineral projects. Accordingly, we may require additional cash resources earlier than we currently expect or we may need to curtail currently planned exploration activities.
Our significant operational expenses include the payments that we anticipate making under the various earn-in and option agreements to which we are a party. These agreements are structured to provide us with flexibility whereby our ability to continue to explore on a mineral project is contingent on funding agreed specified levels over specified time intervals. See Item 1. Business — Mineral Project Obligations and Payments.
Cash Balances as of December 31, 2022
The table below discloses the amounts of cash disaggregated by currency denomination as of December 31, 2022 in each jurisdiction that our affiliated entities are domiciled.
| Currency by Denomination (in USD Equivalents) | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| US dollars | Canadiandollars | ChineseRenminbi | Colombian Pesos | Other | Total | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| Jurisdiction of Entity: | ||||||||||||||||||||||
| USA | $ | 117,827 | $ | 536 | $ | — | $ | — | $ | — | $ | 118,363 | ||||||||||
| Colombia | — | — | — | 7,524 | — | 7,524 | ||||||||||||||||
| Cayman Islands | 7,606 | 4 | — | — | — | 7,609 | ||||||||||||||||
| Canada | 3,425 | 2,033 | — | — | — | 5,458 | ||||||||||||||||
| China | — | — | 231 | — | — | 231 | ||||||||||||||||
| British Virgin Islands | 422 | 1 | — | — | — | 424 | ||||||||||||||||
| Other | 16 | 1 | — | — | 33 | 51 | ||||||||||||||||
| Total | $ | 129,297 | $ | 2,575 | $ | 231 | $ | 7,524 | $ | 33 | $ | 139,660 |
Our subsidiary VRB, domiciled in the Cayman Islands, is subject to certain foreign exchange restrictions with respect to its PRC subsidiaries. There are foreign exchange policies in the PRC that limit the amount of capital that can be directly transmitted offshore from VRB’s PRC subsidiaries to VRB. Since their incorporation, these PRC subsidiaries have had accumulated losses and have not declared or paid any dividends or made any distribution of earnings.
96
Table of Contents
There were no cash transfers to or from our PRC subsidiaries in the form of intercompany loans during the years ended December 31, 2022 and 2021.
Refer to Note 18 of our consolidated and combined carve-out financial statements which outlines other restrictions on transfers of net assets from our consolidated subsidiaries to the Company.
Convertible Bond — VRB.
On July 8, 2021, VRB issued a convertible bond for gross proceeds of $24.0 million. The bond has a five-year term and interest accrues at a rate of 8% per annum. Prior to the maturity date, the convertible bond will be automatically converted into equity of VRB upon an equity financing or sale event, at a price per share equal to the lower of (A) the transaction price of the equity financing or sale event, and (B) the valuation cap price of $158.0 million divided by the total shares outstanding at the time of the event. If no equity financing or sale event occurs, VRB must repay the outstanding principal and interest on maturity.
Bridge Loan — Cordoba Minerals.
In December 2022, JCHX advanced a bridge loan of $10 million to Cordoba Minerals in connection with the strategic arrangement for the joint development of Cordoba Mineral’s Alacran Project. The bridge loan is for an 18-month term and bears interest at 12% per annum during the first 12 months of the term and 14% per annum during the remaining six months, calculated on the basis of a 365-day year. Upon closing the strategic arrangement, all of the principal and interest outstanding on the bridge loan will be applied towards the first installment as a payment in kind. The transaction agreements do not become effective until JCHX obtains shareholder approval, which is expected to be completed in the second quarter of 2023.
Cash Flows
The following table presents our sources and uses of cash for the periods indicated:
| (In thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||
|---|---|---|---|---|---|---|
| Net cash (used in) provided by: | ||||||
| Operating activities | (115,734) | $ | (47,832) | |||
| Investing activities | (48,384) | (22,632) | ||||
| Financing activities | 254,410 | 110,976 | ||||
| Effect of foreign exchange on cash | (482) | (3) | ||||
| Total change in cash | $ | 89,810 | $ | 40,509 |
Operating activities.
Net cash used in operating activities for all periods presented largely was spent on our exploration expenses and our general and administrative costs. We do not generate adequate cash from operations to cover our operating expenses and therefore rely on our financing activities to provide the cash resources to fund our operating and investing activities.
Net cash used in operating activities for the year ended December 31, 2022 was $115.7 million, a decrease of $67.9 million from the $47.8 million of net cash used for the year ended December 31, 2021.
Investing activities.
Our investing activities generally relate to acquisitions of mineral property interests, purchases of public company shares in companies that we may partner with and capital expenditures at our projects. To date, due to our mining projects being in the exploration stage we have not incurred material capital expenditures.
Net cash used in investing activities for the year ended December 31, 2022 of $48.4 million was mainly attributable to $35.9 million for payments for mineral interests and $8.5 million for payments for property, plant and equipment. The $35.9 million of cash used for purchases of mineral interests related to $28.0 million for the Santa Cruz Project and $7.6 million of payments for the Tintic Project. The $8.5 million for payments for property, plant and equipment largely relates to a $7.1 million deposit made to I-Pulse for the purchase of six Typhoon™ transmitters to be delivered in stages over approximately the next three years.
Net cash used in investing activities for the year ended December 31, 2021 of $22.6 million was largely attributable to $14.4 million for payments for mineral interests, $3.1 million of payments for intangible assets and $1.6 million for shares
97
Table of Contents
of Brixton Metals. The $14.4 million of cash used for purchases of mineral interests related to $8.5 million of payments related to the Santa Cruz Project and $5.7 million of payments for the Tintic Project.
Financing activities.
During the year ended December 31, 2022, there was $254.4 million of net cash provided by financing activities representing the $159.3 million of net cash raised upon the closing of our initial public offering on June 30, 2022, and $86.2 million raised from the sale of the Series 2 Convertible Notes. In addition, Cordoba Minerals, received a $10.0 million bridge loan from JCHX in connection with the strategic arrangement for the joint development of the Alacran Project.
During the year ended December 31, 2021, cash provided by financing activities was $111.0 million. The sources of cash included $60.0 million that the Company raised from the sale of shares of common stock and Series 1 Convertible Notes. Our subsidiaries also raised funds during the period. VRB raised $24 million through the issuance of a convertible bond and Cordoba and Kaizen completed equity financings and raised external funds totaling $5.3 million. From January to April 2021, the Company’s activities were funded by HPX as they were prior to the April 2021 reorganization.
Contractual Obligations
As of December 31, 2022, we had the following material contractual obligations in addition to our discretionary mineral project obligations described above:
| Payments due by period (in thousands) | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than1 year | 1-3 years | 4-5 years | More than5 years | ||||||||||||||
| Long-term debt obligations(1) | $ | 34,010 | $ | — | $ | 10,010 | $ | 24,000 | ||||||||||
| Leases | 1,223 | 783 | 440 | — | — | |||||||||||||
| Mineral property obligations (non-discretionary) | 5,245 | 4,325 | 920 | — | — | |||||||||||||
| Typhoon purchase obligations | 6,731 | 691 | 6,040 | — | — | |||||||||||||
| Other long-term contractual liabilities(2) | 363 | — | 363 | — | — | |||||||||||||
| Total contractual obligations | $ | 47,572 | $ | 5,799 | $ | 17,773 | $ | 24,000 | $ | — |
___________
(1)Long-term obligations include the $10.0 million bridge loan provided by JCHX to Cordoba Minerals and the $24.0 million convertible bond issued by VRB that matures in 2026 if not converted to common shares of VRB prior to such date. As of December 31, 2022, the value of the convertible bond including accrued interest was $25.9 million.
(2)Includes all other long-term financial liabilities reflected on our balance sheet that are contractually fixed as to timing and amount.
Off Balance Sheet Arrangements
As of December 31, 2022, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity.
Related Party Transactions
See Note 20 of our consolidated and combined carve-out financial statements for the years ended December 31, 2022 and 2021.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated and combined carve-out financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities as of the date of our financial statements.
Below are the accounting matters that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue, expense, gain or loss being reported. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting estimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that
98
Table of Contents
reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our financial statements.
We base our assumptions and estimates on historical experience and various other sources that we believe to be reasonable under the circumstances. Actual results may differ from the estimates we calculate due to changes in circumstances, global economics and politics and general business conditions. A summary of our significant accounting policies is detailed in Note 3 to our consolidated and combined carve-out financial statements included in this Annual Report. We have outlined below those policies identified as being critical to the understanding of our business and results of operations and that require the application of significant management judgment in developing estimates.
Recoverable value of exploration mineral interests
We review and evaluate exploration mineral interests for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of our exploration mineral interests and intangible assets did not involve significant estimation in the periods presented as circumstances did not indicate the carrying amount of our assets may not be recoverable. However, the recoverability of our recorded mineral interests is subject to market factors that could significantly affect the recoverability of our assets, such as commodity prices, results of exploration activities that may affect our intentions to continue under option or earn-in agreements and geopolitical circumstances, particularly in Colombia. By nature, significant changes in these factors are reasonably possible to occur periodically, which could materially impact our financial statements.
Stock-based compensation
Compensation expense for options granted to employees, directors and certain service providers is determined based on estimated fair values of the options at the time of grant using the Black-Scholes option pricing model, which takes into account, as of the grant date, the fair market value of the shares, expected volatility, expected life, expected dividend yield and the risk-free interest rate over the expected life of the option. The use of the Black-Scholes option pricing model requires input estimation of the expected life of the option and volatility, which can have a significant impact on the valuation model and resulting expense recorded.
In November 2022, we granted 2,760,509 stock options at an exercise price of $11.75 per share to certain officers and employees. The fair value of the option grant was determined using the Black-Scholes option-pricing model as $5.08 per share.
The following assumptions were used to compute the fair value of the options granted:
| Grant Date | |
|---|---|
| Risk-free interest rate | 4.2% |
| Dividend yield | nil |
| Estimated volatility | 69.5% |
| Expected option life | 4 years |
The risk-free interest rate assumption was based on the U.S. treasury constant maturity yield at the date of the grant over the expected life of the option. No dividends are expected to be paid. We calculated the estimated volatility based on the historical volatility of a group of peer companies’ common stock and a group of relevant stock market indices over the expected option life as we only commenced publicly trading in June 2022. The computation of expected option life was determined based on a reasonable expectation of the option life prior to the option being exercised or forfeited.
Income taxes
We make estimates and judgments in determining the provision for income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits, including interest and penalties. We are subject to income tax laws in many jurisdictions, including the United States, Canada, Colombia, Peru, Australia, the Ivory Coast and the PRC.
We report income tax in accordance with U.S. GAAP, which requires the establishment of deferred tax accounts for all temporary differences between the financial reporting and tax bases of assets and liabilities, using currently enacted tax rates. In addition, deferred tax accounts must be adjusted to reflect new rates if enacted into law.
Realization of deferred tax assets is contingent on the generation of future taxable income. As a result, we consider whether it is more likely than not that all or a portion of such assets will be realized during periods when they are available, and if not, we provide a valuation allowance for amounts not likely to be recognized. In determining our valuation
99
Table of Contents
allowance, we have not assumed future taxable income from sources other than the reversal of existing temporary differences. The extent to which a valuation allowance is warranted may vary as a result of changes in our estimates of future taxable income. In addition to the potential generation of future taxable income through the establishment of economic feasibility, development and operation of mines on our exploration assets, estimates of future taxable income could change in the event of disposal of assets, the identification of tax-planning strategies or changes in tax laws that would allow the benefits of future deductible temporary differences in certain entities or jurisdictions to be offset against future taxable temporary differences in other entities or jurisdictions.
We recognize the effect of uncertain income tax positions if those positions are more likely than not of being sustained. The amount recognized is subject to estimates and our judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately incurred for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. We had no uncertain tax positions as of December 31, 2022.
Emerging Growth Company Status
We are an “emerging growth company”, as defined in the JOBS Act. The JOBS Act exempts emerging growth companies from being required to comply with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated and combined carve-out financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
The accounting policies applied in our consolidated and combined carve-out financial statements included elsewhere in this Annual Report reflect the early adoption of certain accounting standards as the JOBS Act does not preclude an emerging growth company from early adopting a new or revised accounting standard to the extent early adoption is allowed by the accounting standard.