Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze the accounting treatment of Torchlight Mining Corp.'s ("TMC" or the "Company") environmental remediation obligations, civil penalties, supplemental environmental project ("SEP") commitments, and related costs arising from the multi-site enforcement action brought by the United States Environmental Protection Agency ("EPA") and the United States Departm

II. Background and Scope A. The Enforcement Action On January 18, 2024, the EPA and the DOJ, joined by three co-plaintiff state environmental agencies, commenced the Enforcement Action by filing a complaint in the United States District Court for the District of Montana, Missoula Division, docketed as Civil Action No. 9:24-cv-00087-DWM, and assigned to the Honorable Donald W. Molloy, United States District Judge. The

1. Torchlight Mining Corp. — the Canadian parent corporation and ultimate owner of all site-operating entities;

2. Torchlight Mining (U.S.) Inc. (EIN: 83-2047156) — the principal U.S. holding company through which TMC conducts its domestic operations;

3. Torchlight Specialty Chemicals, Inc. (EIN: 47-3819204) — the subsidiary operating the Gallatin Chemical Works and Kanawha Bend Chemical Plant;

4. Ridgecrest Mine Holdings, LLC (Montana Secretary of State ID: E1042738) — the entity holding the Ridgecrest Copper-Molybdenum Mine; and

5. Bonanza Creek Mining, LLC (Nevada Secretary of State Entity No.: E0518294731) — the entity operating the Bonanza Creek Gold Mine. The co-plaintiffs joining the federal action are: • The State of Montana, acting through the Montana Department of Environmental Quality ("MT DEQ"), with lead counsel Annika Hedstrom; • The State of Nevada, acting through the Nevada Division of Environmental Protection ("NV DEP"), with

1. Ridgecrest Copper-Molybdenum Mine Located at 14200 Ridgecrest Mine Road, Drummond, Granite County, Montana 59832. The Ridgecrest Mine was operated from 1978 through 2019 and is currently in the closure and reclamation phase. The site has been proposed for listing on the National Priorities List ("NPL") under CERCLA, and EPA Region 8 has issued an Administrative Order on Consent ("AOC") under Docket No. CERCLA-08-2

2. Gallatin Chemical Works Located at 8800 Industrial Park Lane, Belgrade, Gallatin County, Montana 59714. This specialty chemicals manufacturing facility has been operational since 1993 and remains active. The facility is subject to RCRA Corrective Action requirements under Permit No. MTD098712456. The principal environmental issue is carbon disulfide (CS₂) contamination of groundwater emanating from historical solv

3. Bonanza Creek Gold Mine Located at County Road 447, Mile Marker 12, Lander County, Nevada 89820. The Bonanza Creek Mine has been operational since 2001 and remains an active open-pit gold mining operation. The environmental issues at this site include cyanide releases from heap leach pad liner failures and mercury contamination of soils and sediments in the Bonanza Creek drainage. Additionally, the cyanide release

4. Kanawha Bend Chemical Plant Located at 2200 Chemical Valley Road, Institute, Kanawha County, West Virginia 25112. This chemical manufacturing facility has been operational since 1985 and remains active. The facility is subject to RCRA Corrective Action requirements under Permit No. WVD048823915. The environmental concerns include sulfuric acid releases and dense non-aqueous phase liquid ("DNAPL") contamination of

1. Recognition requirements: Analysis of when and under what conditions TMC must recognize (i.e., record on its balance sheet) the various categories of obligations arising from the Consent Decree, under both ASC 450 (U.S. GAAP) and IAS 37 (IFRS).

2. Measurement requirements: Analysis of the appropriate measurement basis for each category of obligation, including site-by-site remediation cost estimates, civil penalty amounts, EPA past-costs reimbursement, SEP commitments, and independent monitor costs. 3. discounting methodology: Assessment of whether and how discounting to present value should be applied under each accounting framework, and the impact of disc

4. Insurance recovery offsets: Analysis of the recognition and presentation of potential insurance recoveries from Meridian Environmental Insurance Company, including the impact of the pending coverage dispute.

5. Timing of recognition: Identification of the appropriate timing for recognition of the various components of the Consent Decree obligation, with reference to the negotiation timeline and the expected dates of Consent Decree lodging and entry.

6. Reserve adjustment: Quantification of the reserve adjustment required under each framework.

7. Coordination recommendations: Recommendations for coordination with Ridgeline Accounting Partners LLP, Northspire Capital Markets, Inc., and TMC's tax advisors. This memorandum does not address in detail the SEC disclosure analysis (which will be the subject of a separate memorandum to be prepared in March 2025), the Canadian securities law continuous disclosure requirements (which are being addressed by TMC's Can

III. Applicable Accounting Standards — Overview A. ASC 450 — Contingencies (U.S. GAAP) The principal U.S. GAAP standard governing the recognition and measurement of TMC's environmental liabilities is Accounting Standards Codification ("ASC") Topic 450, Contingencies, and specifically ASC 450-20, Loss Contingencies. In addition, ASC 410-30, Environmental Obligations — Asset Retirement Obligations, provides supplementa

IV. Analysis by Category of Obligation A. Remediation Costs — All Four Sites

1. Recognition. The Consent Decree, once entered by the Court, will create a legally binding and enforceable obligation requiring TMC and its subsidiary defendants to perform and fund specified remediation activities at all four sites. Even prior to the formal entry of the Consent Decree, however, the recognition criteria under both accounting frameworks are satisfied at the present time, for the following reasons: F

2. Measurement — Site-by-Site Breakdown. The measurement of the remediation cost obligation is based on the negotiated remediation cost figures reflected in the current draft of the Consent Decree, informed by the independent cost estimates prepared by TMC's environmental consultant (Pinnacle Creek Environmental, Dr. Astrid Bergmann) and the government's technical expert (Cascade Geosciences, Inc., Dr. Patricia Voss)

3. Discounting Considerations. The question of whether to accrue the remediation obligation on a discounted or undiscounted basis is one of the most consequential accounting judgments TMC faces, given the significant difference between the nominal and NPV amounts (US$343.5 million versus US$245.1 million, a differential of US$98.4 million). Under IAS 37: Discounting is mandatory. IAS 37.45 states: "Where the effect o

1. Flint Creek Watershed Restoration Project (Montana): US$5.5 million, to fund riparian habitat restoration, fish passage improvement, and water quality monitoring in the Flint Creek watershed downstream of the Ridgecrest Mine. Implementation period: 5 years from the Effective Date.

2. Battle Mountain Community Drinking Water Improvement Project (Nevada): US$3.5 million, to fund the construction of a new community drinking water treatment system and distribution infrastructure for the unincorporated community of Battle Mountain, Lander County, Nevada, located approximately 25 miles from the Bonanza Creek Mine. Implementation period: 3 years from the Effective Date.

3. Institute Community Air Quality Monitoring Network (West Virginia): US$3.0 million, to fund the installation and operation of a network of ambient air quality monitoring stations in the Institute community, Kanawha County, West Virginia, near the Kanawha Bend Chemical Plant. The project includes installation of monitoring stations (approximately US$1.2 million) and ten years of operation and maintenance (approxima

V. Comparison to Existing Reserve and Reserve Adjustment Analysis A. Current Reserve As of the end of the third quarter of 2024, TMC's environmental remediation reserve as reported on its consolidated balance sheet is C$340.0 million. This reserve was established and adjusted over time to reflect TMC's estimated remediation obligations across its portfolio of operating and legacy sites, including the four sites that

1. Whether the existing reserve of C$340.0 million is measured on a discounted or undiscounted basis, and whether the current reserve already reflects any portion of the Consent Decree obligations beyond remediation (e.g., penalties, SEPs);

2. The appropriate discount rate for IFRS purposes, including validation of the 3% rate used in Pinnacle Creek's estimates;

3. The timing of the reserve adjustment — specifically, whether the adjustment should be recorded in the Q4 2024 interim financial statements or deferred to the annual financial statements for the year ending December 31, 2024;

4. The presentation of the insurance receivable as a separate asset; and

5. The disclosure language required under IAS 37 and SEC Regulation S-K. The reserve adjustment will need to be reflected in TMC's annual financial statements for the fiscal year ending December 31, 2024. Depending on the timing of the adjustment and the materiality of the charge, it may also trigger interim reporting obligations under Canadian securities regulations (material change reporting) and SEC rules (Form 6-

VI. Financial Assurance Obligations — Accounting Treatment The Consent Decree requires TMC to establish and maintain financial assurance in the aggregate amount of US$245.0 million to guarantee the performance of its remediation obligations. The financial assurance is structured through two instruments:

1. Surety Bond TMC has arranged for the issuance of a surety bond in the amount of US$165.0 million by Ironbark Surety of America, Inc. (Bond No. ISA-ENV-2025-08934). The annual premium for the bond is 1.85% of the face amount, equating to US$3.0525 million per year. The bond will be issued upon entry of the Consent Decree and maintained throughout the remediation period. Accounting treatment: The surety bond itself

2. Remediation Trust Fund TMC is required to establish and fund a remediation trust fund in the amount of US$80.0 million, to be held by Larchfield Trust Company, N.A. (Trust Agreement No. LTC-REM-2025-1177). The initial deposit of US$80.0 million is due within 90 days of the Effective Date of the Consent Decree. The trust fund will be used exclusively to fund remediation activities at the four Consent Decree sites,