1039-00001 · Torchlight Mining Corp · documents

audit-committee-briefing-memo.docx DOCUMENT Litigation

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

October 18, 2022

FROM: Elaine Forsythe, Partner Calderwood & Harkness LLP 555 California Street, 40th Floor San Francisco, CA 94104

TO: Janet Moreau-Shaw, Chair Audit Committee, Board of Directors Torchlight Mining Corp. 200 Bay Street, Suite 3400 Toronto, ON M5J 2J2, Canada

CC: Margaret Caldwell, Chair of the Board of Directors Søren Dalmqvist, Chief Executive Officer Priya Anand, General Counsel Richard Fong, Chief Financial Officer

RE: Torchlight Mining Corp. — DOJ Antitrust Division Grand Jury Investigation (Grand Jury No. GJ-22-0194, U.S. District Court, Northern District of California) — Audit Committee Briefing on Investigation Status, Document Production, Financial-Reserve Analysis, and D&O Insurance Coverage

C&H Matter No.: 1039-00001

I. PURPOSE AND SCOPE OF THIS MEMORANDUM

This privileged memorandum is submitted to the Audit Committee of the Board of Directors of Torchlight Mining Corp. ("TMC" or the "Company") for the purpose of providing a comprehensive status update on the pending United States Department of Justice ("DOJ") Antitrust Division grand jury investigation captioned Grand Jury No. GJ-22-0194, pending in the United States District Court for the Northern District of California, San Francisco Division. Calderwood & Harkness LLP ("C&H") serves as outside defense counsel to TMC in connection with this investigation, and this briefing memorandum has been prepared at the express request of the Audit Committee in connection with its oversight responsibilities for the financial-reporting implications of the investigation.

This memorandum addresses the following principal topics:

(a) the procedural history and current posture of the DOJ investigation;

(b) the status and progress of document production in response to the grand jury subpoena;

(d) a financial-reserve analysis under applicable accounting standards, including the adequacy of the Company's current litigation reserve, estimated penalty range, accrued professional fees, and disclosure considerations; and

(e) the status of the Company's directors-and-officers ("D&O") insurance coverage, including the pending reservation-of-rights dispute with the lead carrier.

This memorandum is prepared solely for the benefit of the Audit Committee and the individuals copied above in connection with the exercise of the Audit Committee's fiduciary and oversight responsibilities regarding the Company's financial reporting obligations. It reflects facts, analysis, and preliminary legal assessments known to C&H as of the date hereof and is necessarily subject to revision as additional information becomes available through the ongoing internal investigation and the continuing DOJ proceedings.

Privilege Notice. This memorandum constitutes a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. It should not be disclosed outside the Audit Committee, the individuals identified on the distribution list above, and their authorized advisors — including, solely as necessary for audit-related discussions, Daniel Moreau, the TMC engagement partner at Calvert & Associates LLP — without prior written authorization from Calderwood & Harkness LLP. Any unauthorized disclosure may result in a waiver of the attorney-client privilege and work-product protections that attach to this communication and to the underlying investigation materials.

II. EXECUTIVE SUMMARY

On February 10, 2022, the Antitrust Division of the United States Department of Justice formally opened a grand jury investigation — Grand Jury No. GJ-22-0194, empaneled in the United States District Court for the Northern District of California, San Francisco Division — into suspected price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector. The investigation focuses principally on three product categories: high-purity feldspar, industrial talc, and rare-earth concentrates. The investigation encompasses multiple corporate targets and individual subjects, and it represents a significant enforcement action in the specialty-minerals industry.

TMC received Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 on February 14, 2022. The Company engaged Calderwood & Harkness LLP on February 18, 2022, and C&H immediately commenced its review of the subpoena, issued a company-wide litigation hold, and initiated discussions with the DOJ regarding the scope and schedule of document production. C&H's engagement letter was signed by the undersigned as responsible partner and Howard Bellamy as billing partner.

On May 20, 2022, TMC received a target letter from the DOJ Antitrust Division, signed by supervising Deputy Assistant Attorney General Julia Stafford-Hayes and the lead prosecutors, Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, thereby formally elevating TMC's status from a recipient of a subpoena to a target of the grand jury investigation. The receipt of the target letter represents a material escalation in TMC's legal exposure and has significant implications for the Company's financial-reserve analysis and disclosure obligations, as discussed in detail below.

The investigation focuses on alleged coordination between senior commercial personnel at three companies during the period approximately January 2017 through August 2021. The principal individuals under scrutiny are Gavin Holt, former Vice President of U.S. Specialty Minerals Sales at TMC; Carl Edgerton, Vice President of Sales at Ridgecrest Minerals Inc.; and Kevin Tsang, former Senior Vice President of Commercial Operations at Pinnacle Earth Resources Ltd. The alleged conduct encompasses pricing agreements, customer-allocation arrangements, and bid-rigging in connection with sales of the three target product categories across North American markets.

The investigation was triggered by the cooperation agreement entered into approximately September 2021 by Cascade Chemical Supply Co., a downstream distributor and processor of specialty minerals headquartered in Spokane, Washington. Cascade is represented by Whitfield, Strauss & Tully LLP (Rebecca Ostrander, lead partner) and has been providing documents and testimony to the DOJ pursuant to its cooperation agreement. Cascade's cooperation has furnished the DOJ with substantial evidence regarding the alleged conspiracy, including records of communications and transactions between Cascade and the target companies.

As of the date of this memorandum, C&H has produced approximately 310,000 documents to the DOJ across multiple rolling productions, with cumulative rolling productions expected to reach approximately 487,000 documents (representing approximately 3.2 million pages) by mid-December 2022. The internal investigation is approximately 60% complete, with 14 of 23 targeted witness interviews conducted and forensic economic analysis by Hargrove Forensic Advisory LLC in progress. C&H is actively assessing defense strategy, including the viability of seeking a non-prosecution agreement ("NPA") as the optimal resolution pathway for the Company.

The key financial-exposure items requiring Audit Committee attention at this time are as follows:

(i) the current litigation reserve of USD 30 million established in March 2022, which C&H believes may be inadequate in light of the target letter and evolving penalty-range estimates;

(ii) the estimated penalty range of approximately USD 48 million to USD 57 million (after estimated cooperation credits), based on C&H's preliminary assessment of TMC's share of affected commerce;

(iii) accrued professional fees totaling approximately USD 10.5 million through the date of this memorandum, with projected total professional fees through resolution estimated at USD 18–20 million or more; and

(iv) the pending D&O insurance coverage dispute with Northland Mutual Insurance Co. regarding entity-level defense-cost coverage, which, if resolved adversely, would require TMC to bear its own defense costs.

Each of these items is discussed in detail in the sections that follow.

III. PROCEDURAL HISTORY AND CURRENT POSTURE

A. Timeline of Key Events

The following timeline sets forth the principal events in the investigation from its inception through the date of this memorandum. C&H has verified these dates through its own records, correspondence with the DOJ, and the Company's internal records.

Approximately September 15, 2021 — Cascade Chemical Supply Co. Cooperation Agreement. Cascade Chemical Supply Co., a Washington corporation headquartered in Spokane, Washington, entered into a cooperation agreement with the DOJ Antitrust Division. Cascade's president is Leonard Massey, and the company is represented by Whitfield, Strauss & Tully LLP (Rebecca Ostrander, lead partner), based in Seattle. Pursuant to its cooperation agreement, Cascade has provided documents and testimony to the DOJ regarding transactions and communications between Cascade and the specialty-minerals producers that are the targets of the investigation. Cascade's cooperation provided the evidentiary foundation that triggered the broader grand jury probe into the conduct of TMC, Ridgecrest, and Pinnacle.

September 30, 2021 — Gavin Holt Resignation. Gavin Holt's resignation from TMC became effective on this date. Holt had served as Vice President of U.S. Specialty Minerals Sales within TMC's U.S. Specialty Minerals Division and is the individual most directly implicated in the alleged anticompetitive conduct. His departure preceded the formal commencement of the grand jury investigation by approximately four months. At the time of his resignation, there was no indication in the Company's records that TMC management was aware of the DOJ's investigation or of Holt's alleged conduct. The circumstances of Holt's departure are the subject of further analysis by C&H.

January 12, 2022 — Ridgecrest Target Letter. Ridgecrest Minerals Inc. received a target letter from the DOJ Antitrust Division. Ridgecrest is a Delaware corporation headquartered in Denver, Colorado, with fiscal year 2021 revenue of approximately USD 1.92 billion. Ridgecrest is a portfolio company of Marlowe Asset Management Peak Capital Partners LP. Ridgecrest's Chief Executive Officer is Brian Novotny, and the key individual under scrutiny is Carl Edgerton, Vice President of Sales. Ridgecrest is separately represented by Davenport, Kline & Archer LLP (Helen Marchetti, lead partner), Denver. The fact that Ridgecrest received a target letter before TMC suggests that Ridgecrest may have been the initial focus of the investigation among the producer targets, though the precise sequence of the DOJ's investigative activities is not fully known to C&H.

February 10, 2022 — Grand Jury Formally Opened. The DOJ Antitrust Division formally opened Grand Jury Investigation No. GJ-22-0194 in the United States District Court for the Northern District of California, San Francisco Division. The investigation is being conducted through the DOJ Antitrust Division's San Francisco Field Office, with supervisory oversight from the Deputy Assistant Attorney General's office in Washington, D.C.

February 14, 2022 — TMC Receives Grand Jury Subpoena. TMC received Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003, calling for the production of documents in 27 specified categories. The subpoena was served on TMC through its registered agent for service of process in the Northern District of California. The scope and substance of the subpoena are discussed in detail in Section IV below.

February 18, 2022 — TMC Engages Calderwood & Harkness LLP. TMC formally retained Calderwood & Harkness LLP as outside defense counsel for the investigation. The engagement letter was executed by the undersigned as responsible partner and Howard Bellamy as billing partner. C&H immediately commenced its review of the subpoena, initiated discussions with the Company's General Counsel regarding the scope of the document-preservation obligation, and began planning the internal investigation.

February 22, 2022 — Acknowledgment and Extension Request. C&H transmitted an acknowledgment of the subpoena to the DOJ, directed to Trial Attorney Denise Kowalski at the San Francisco Field Office, and requested a 60-day extension of the initial return date to permit the Company to implement appropriate collection and review protocols. The DOJ granted the extension request.

March 1, 2022 — Litigation Hold. C&H issued a company-wide litigation hold to all TMC personnel, together with a targeted supplemental litigation hold directed to personnel in the U.S. Specialty Minerals Division, including Sandra Chu (Director, Pricing Analytics) and Thomas Eriksen (Regional Sales Manager, Western Region). Both hold notices were issued under the signature of Priya Anand, TMC's General Counsel, and included detailed instructions regarding the preservation of electronic and hard-copy documents, including email, instant-messaging communications, shared-drive files, personal-device data, and cloud-storage data. C&H has maintained a hold-compliance tracking system and has conducted periodic reminders and certifications.

March 4, 2022 — D&O Insurance Notice. C&H, on behalf of TMC and its individual directors and officers, tendered notice of the investigation to Northland Mutual Insurance Co. under the Company's directors-and-officers liability insurance policy. The insurance-coverage status is discussed in detail in Section VII below.

March 15, 2022 — E-discovery Vendor Retained. C&H retained Redstone Digital Forensics Inc. (Neil Ashworth, project director), based in McLean, Virginia, to conduct forensic data collection, processing, hosting, and managed review of documents responsive to the grand jury subpoena. Redstone was selected based on its extensive experience with DOJ antitrust investigations and its capabilities in processing and hosting large-scale document populations.

March 28, 2022 — FY 2021 Annual Report Filed; Initial Public Disclosure; Litigation Reserve Established. TMC filed its fiscal year 2021 annual report on SEDAR+ (the Canadian securities regulatory filing system) and with the United States Securities and Exchange Commission on Form 40-F. This filing contained the Company's first public disclosure of the DOJ investigation and the establishment of a litigation reserve of USD 30 million. The disclosure language was prepared in coordination among C&H, TMC's General Counsel, TMC's CFO, Calvert & Associates LLP (the Company's external auditor), and Ironbridge Capital Markets Inc. (the Company's financial advisor). The reserve amount was established under applicable accounting standards, as discussed in Section VI below.

April 4, 2022 — First Rolling Production. C&H delivered the first rolling production of documents to the DOJ, comprising approximately 42,000 documents produced in native and load-file formats with Bates numbering, in accordance with DOJ specifications. A corresponding privilege log was delivered concurrently with this initial production.

May 20, 2022 — TMC Receives Target Letter. TMC received a target letter from the DOJ Antitrust Division, formally identifying the Company as a target — as distinguished from a subject or witness — of the grand jury investigation. The target letter was signed by supervising Deputy Assistant Attorney General Julia Stafford-Hayes and by the lead prosecutors, Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves. Receipt of the target letter signifies that the DOJ has substantial evidence linking TMC to the alleged criminal conduct and is considering seeking an indictment. This was a material escalation of the Company's legal exposure and has informed C&H's subsequent defense strategy and financial-reserve analysis.

June 8, 2022 — Cooperation Communication. Following consultation with the Company's General Counsel and CEO, and with the authorization of the Audit Committee, C&H communicated TMC's willingness to cooperate with the DOJ investigation to the lead prosecutors. This communication was an important initial step in TMC's cooperation posture, which C&H views as essential to obtaining maximum penalty mitigation in any eventual resolution.

June 10, 2022 — Gavin Holt Retains Personal Counsel. Gavin Holt retained personal counsel — Briarcliff Law Group PLLC (Patrick Dunleavy, lead attorney), San Francisco. The retention of personal counsel by Holt was expected, given the significant individual criminal exposure he faces based on the evidence reviewed to date.

June 14, 2022 — Holt Asserts Fifth Amendment Privilege. Gavin Holt appeared before the grand jury and asserted his Fifth Amendment privilege against self-incrimination, declining to testify. Holt's assertion of the privilege is consistent with the defense posture being adopted by his personal counsel and reflects the substantial individual criminal liability that Holt faces.

July 1, 2022 — Forensic Economic Expert Retained. C&H retained Hargrove Forensic Advisory LLC (Dr. Vanessa Tremblay, engagement partner), based in Chicago, to conduct economic analysis of pricing patterns and affected-commerce volume assessment. Hargrove's work is essential to both the internal investigation and the development of C&H's penalty-range estimates for purposes of the financial-reserve analysis. Dr. Tremblay's team possesses significant experience in antitrust damages and penalty analysis, including prior engagements involving DOJ Antitrust Division investigations.

August 1, 2022 – Present (Ongoing Through At Least December 15, 2022) — Continued Rolling Document Productions. C&H has continued to make rolling productions of documents to the DOJ on a bi-weekly to monthly cadence. As of the date of this memorandum, cumulative productions total approximately 310,000 documents. C&H anticipates that the cumulative total will reach approximately 487,000 documents, representing approximately 3.2 million pages, by mid-December 2022. The remaining productions consist principally of documents from custodians whose collections were completed later in the process and documents that required additional privilege and responsiveness review.

B. Parties to the Investigation

The following is a summary of the entities and individuals known to be parties to, targets of, or participants in the investigation as of the date of this memorandum.

Subjects and Targets:

Torchlight Mining Corp. — The Company is a target of the investigation as of the May 20, 2022 target letter. TMC is a Canadian corporation headquartered in Toronto, Ontario, with significant U.S. operations conducted through its wholly owned subsidiary, Torchlight Mining (U.S.) Inc. The key individual associated with TMC in the investigation is Gavin Holt, former Vice President, U.S. Specialty Minerals Sales. TMC is represented by Calderwood & Harkness LLP (Elaine Forsythe, responsible partner).

Ridgecrest Minerals Inc. — Ridgecrest is a target of the investigation, having received a target letter on or about January 12, 2022. Ridgecrest is a Delaware corporation headquartered in Denver, Colorado. Its fiscal year 2021 revenue was approximately USD 1.92 billion. Ridgecrest is a portfolio company of Marlowe Asset Management Peak Capital Partners LP. Its Chief Executive Officer is Brian Novotny. The key individual associated with Ridgecrest in the investigation is Carl Edgerton, Vice President of Sales. Ridgecrest is separately represented by Davenport, Kline & Archer LLP (Helen Marchetti, lead partner), Denver.

Pinnacle Earth Resources Ltd. — Pinnacle is a subject and believed target of the investigation. Pinnacle is an Ontario corporation headquartered in Sudbury, Ontario, with U.S. operations based in Salt Lake City, Utah. Its fiscal year 2021 revenue was approximately CAD 1.45 billion (approximately USD 1.15 billion). Its Chief Executive Officer is Douglas Harlowe. The key individual associated with Pinnacle in the investigation is Kevin Tsang, former Senior Vice President, Commercial Operations. Pinnacle is separately represented by Ashford Whitmore LLP (George Nakamura, lead partner).

Cooperating Witness Entity:

Cascade Chemical Supply Co. — Cascade is a Washington corporation headquartered in Spokane, Washington. Cascade operates as a downstream distributor and processor of specialty minerals. Its president is Leonard Massey. Cascade entered into a cooperation agreement with the DOJ in approximately September 2021 and has been providing documents and testimony to the DOJ pursuant to that agreement. Cascade is represented by Whitfield, Strauss & Tully LLP (Rebecca Ostrander, lead partner), Seattle.

DOJ Personnel:

The investigation is being conducted by Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves of the DOJ Antitrust Division's San Francisco Field Office, under the supervision of Deputy Assistant Attorney General Julia Stafford-Hayes in Washington, D.C.

C. Current Posture

As of the date of this memorandum, the investigation remains active and the current posture may be summarized as follows:

TMC is classified as a "target" of the grand jury investigation, a designation that indicates the DOJ has substantial evidence linking the Company to the alleged criminal conduct and is considering seeking an indictment. C&H has communicated TMC's willingness to cooperate with the investigation, and discussions regarding the scope and terms of that cooperation are ongoing with the DOJ prosecution team.

The grand jury remains empaneled and active. No indictment has been returned against TMC or any individual as of the date of this memorandum. However, the Audit Committee should understand that the absence of an indictment at this stage does not preclude the possibility that one may be sought in the future, particularly if cooperation negotiations do not result in a satisfactory resolution.

C&H is actively evaluating the viability of seeking a non-prosecution agreement as the optimal resolution pathway for the Company. An NPA would permit TMC to resolve the investigation without a criminal conviction, subject to the payment of a monetary penalty, the implementation of compliance reforms, and ongoing cooperation obligations. C&H's assessment of the NPA pathway will be refined as the internal investigation is completed and the affected-commerce analysis is finalized.

IV. DOCUMENT PRODUCTION PROGRESS

A. First Subpoena (GJ-22-0194-SD-003)

Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 was served on TMC on February 14, 2022. As noted above, C&H acknowledged receipt of the subpoena and obtained from the DOJ a 60-day extension of the initial return date to permit the Company to implement appropriate data-collection and review protocols.

The subpoena calls for the production of documents in 27 categories, encompassing a broad range of business records relevant to the alleged conspiracy. The document categories include, without limitation, the following:

• pricing data, pricing memoranda, pricing approval records, and pricing-change communications for high-purity feldspar, industrial talc, and rare-earth concentrates;

• customer contract files, customer proposal documents, and bid-submission records;

• internal and external communications — including email, instant messages, text messages, and encrypted-messaging platform communications — referencing or relating to pricing, market conditions, market share, customer allocation, or bid activity for the three target product categories;

• documents relating to TMC's participation in trade associations, including the North American Specialty Minerals Conference ("NASMC"), including conference agendas, attendance records, meeting notes, and expense reports;

• records of contacts and communications with personnel of competitor companies, including Ridgecrest Minerals Inc., Pinnacle Earth Resources Ltd., and any other specialty-minerals producers;

• organizational charts, personnel rosters, and job descriptions for the U.S. Specialty Minerals Division;

• market-intelligence reports, competitor-analysis documents, and industry-survey data; and

• antitrust compliance program records, training records, and policy documents.

Data Collection. Following issuance of the litigation hold on March 1, 2022, Redstone Digital Forensics Inc. conducted forensic data collections commencing in mid-March 2022, pursuant to C&H's data-collection protocol dated March 18, 2022. Collections were performed from 34 identified custodians, selected by C&H based on their positions, responsibilities, and potential relevance to the investigation. The data sources collected included email systems (Strathmore Data Systems / Outlook), shared network drives, VaultChat encrypted-messaging archives, personal mobile devices (where consent was obtained), and cloud-storage accounts at both TMC (the parent company in Toronto) and Torchlight Mining (U.S.) Inc. (the U.S. subsidiary). The collected data was processed through Redstone's e-discovery platform, de-duplicated, and subjected to search-term filtering and technology-assisted review protocols to identify potentially responsive documents for human review.

First Rolling Production — April 4, 2022. The first rolling production was delivered to the DOJ on April 4, 2022, comprising approximately 42,000 documents. These documents represented the highest-priority custodians and the most clearly responsive document categories. The production was accompanied by a corresponding privilege log.

Subsequent Rolling Productions — August 1, 2022 Through Present (Ongoing). Following the initial production, C&H has delivered additional rolling productions on a bi-weekly to monthly cadence, as review of the remaining collected data has progressed. As of the date of this memorandum, approximately 310,000 documents have been produced cumulatively across all rolling productions. C&H anticipates that the cumulative total will reach approximately 487,000 documents, representing approximately 3.2 million pages, by mid-December 2022. The remaining productions consist of documents from later-collected custodians, documents requiring more extensive privilege and responsiveness review, and documents from supplemental data sources identified during the collection process.

Production Format. All documents have been produced in native and load-file formats in accordance with DOJ specifications, with sequential Bates numbering applied by Redstone. The production format is consistent with the standard requirements of the DOJ Antitrust Division for grand jury productions.

B. Privilege Review

C&H established a comprehensive privilege-review protocol, dated March 10, 2022, governing the review of documents for attorney-client privilege and work-product doctrine protections prior to production to the DOJ. The protocol includes detailed criteria for identifying privileged communications, escalation procedures for close or ambiguous privilege calls (requiring review by a senior associate or partner), and provisions for quality-control sampling to verify the accuracy of privilege determinations.

In addition, C&H negotiated and obtained from the DOJ a clawback agreement pursuant to Federal Rule of Evidence 502(d), which provides that the inadvertent production of privileged documents does not constitute a waiver of the privilege. The Rule 502(d) order was entered by the court, providing additional protection against inadvertent disclosure. This is a standard protective measure in grand jury document productions of this magnitude.

Privilege logs have been maintained on a rolling basis and produced concurrently with each rolling document production. The first privilege log was delivered to the DOJ on April 4, 2022, together with the initial production. Subsequent privilege logs have been updated and supplemented with each additional production. As of the date of this memorandum, no privilege challenges or disputes have been raised by the DOJ prosecution team, and the DOJ has not challenged any privilege designations reflected in the logs. C&H will continue to monitor for any privilege challenges and will address them promptly if they arise.

C. Vendor Costs — E-discovery

Redstone Digital Forensics Inc. has incurred total fees through the date of this memorandum estimated at approximately USD 1.4 million, covering data collection, processing, hosting, managed-review staffing support, and production formatting. Based on the remaining volume of documents to be reviewed and produced in connection with the first subpoena, C&H estimates that Redstone's total fees through completion of all first-subpoena productions will be approximately USD 2.0 million to USD 2.3 million. This estimate does not include costs that may be incurred in connection with any supplemental subpoena or additional DOJ requests, which cannot be predicted at this time.

V. INTERNAL INVESTIGATION UPDATE

A. Scope and Methodology

C&H's internal investigation plan was established on March 5, 2022, in consultation with TMC's General Counsel, and approved by the Audit Committee. The investigation encompasses four principal workstreams:

(i) a comprehensive review of documents collected in connection with the grand jury subpoena, with a particular focus on communications and records that bear on the existence, scope, and duration of the alleged conspiracy and the involvement of TMC personnel;

(ii) interviews of current and former TMC employees who may have knowledge relevant to the alleged conduct, the operations of the U.S. Specialty Minerals Division, pricing practices, and trade-association interactions;

(iii) forensic economic analysis of TMC's pricing data for the three target product categories, conducted by Hargrove Forensic Advisory LLC, to assess the extent and pattern of price correlations between TMC and its alleged co-conspirators and to estimate the volume of affected commerce; and

(iv) analysis of TMC's participation in trade-association activities, particularly NASMC quarterly conferences, to identify the nature and extent of contacts between TMC personnel and competitor personnel and to evaluate whether anticompetitive discussions occurred in connection with those events.

The investigation is focused on the U.S. Specialty Minerals Division and the alleged conspiracy period of approximately January 2017 through August 2021. The investigation also encompasses a limited review of conduct outside the conspiracy period (from 2015 forward) for purposes of establishing baseline pricing patterns and identifying any precursor or post-conspiracy conduct.

B. Witness Interviews — Completed to Date

As of the date of this memorandum, C&H has conducted interviews of 14 of the 23 current and former TMC employees identified as witnesses in the internal investigation plan. The remaining nine interviews are expected to be completed by year-end 2022 or early in the first quarter of 2023. The following summarizes the key interviews completed to date and the principal information obtained from each.

Sandra Chu, Director, Pricing Analytics, U.S. Specialty Minerals Division — Interviewed July 18, 2022. Ms. Chu has served as Director of Pricing Analytics within the U.S. Specialty Minerals Division since 2016 and reported directly to Gavin Holt during the alleged conspiracy period. During her interview, Chu reported that she received pricing-adjustment instructions from Holt on at least 12 occasions during the conspiracy period that, upon review, correlated with competitor price movements in the same product categories. Chu stated that Holt would direct her to implement specific price increases or adjustments, often with relatively short lead times, and that she observed the adjustments appeared to be synchronized with similar price changes by Ridgecrest and Pinnacle, though she attributed this at the time to general market dynamics. However, Chu stated that she had no direct knowledge of communications between Holt and personnel at competitor companies and that she believed the pricing adjustments were based on market-intelligence reports and Holt's assessment of competitive conditions. Chu did not recall Holt ever disclosing the source of his pricing information beyond general references to "market conditions" and "industry trends." C&H's assessment is that Chu is a credible witness whose testimony is consistent with the documentary evidence and who may be a useful cooperation witness in any proffer to the DOJ.

Thomas Eriksen, Regional Sales Manager, Western Region, U.S. Specialty Minerals Division — Interviewed July 22, 2022. Eriksen has served as Regional Sales Manager for the Western Region since 2015. During his interview, Eriksen acknowledged attending four NASMC quarterly conferences during the alleged conspiracy period, held at venues including Arlington, Virginia; Scottsdale, Arizona; and Orlando, Florida. Eriksen stated that he attended these conferences in the ordinary course of his responsibilities and participated in panel discussions, networking events, and social functions. Eriksen denied any knowledge of pricing agreements, customer-allocation arrangements, or bid-coordination activities, and he denied any awareness of side meetings or private discussions between Holt and competitor personnel at NASMC events. However, Eriksen acknowledged that he observed Holt in conversation with Carl Edgerton (Ridgecrest) on at least one occasion at the Scottsdale conference, though he did not hear the substance of the conversation and did not consider it unusual at the time. The evidence of Eriksen's direct participation in the alleged conduct remains ambiguous, and C&H's assessment is that additional document review and analysis will be necessary to fully evaluate his exposure.

Gavin Holt, Former Vice President, U.S. Specialty Minerals Sales — Interview Attempted August 5, 2022. C&H attempted to conduct an interview of Holt in connection with the internal investigation. Holt declined to participate in the interview on the advice of his personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC, San Francisco. Holt's refusal to participate was not unexpected, given that he has separately asserted his Fifth Amendment privilege before the grand jury (June 14, 2022) and faces significant individual criminal liability. Holt is the individual most directly implicated in the alleged pricing communications with counterparts at Ridgecrest and Pinnacle, and his refusal to cooperate with the internal investigation limits C&H's ability to obtain his account of the relevant events. C&H's assessment of Holt's conduct is therefore based primarily on documentary evidence, the accounts of other witnesses, and the results of the forensic economic analysis.

Priya Anand, General Counsel — Interviewed August 12, 2022. Ms. Anand was interviewed in her capacity as TMC's General Counsel. Anand stated that she had no prior knowledge of the alleged anticompetitive conduct and that the first she learned of the investigation was upon receipt of the grand jury subpoena on February 14, 2022. Anand confirmed that she oversaw the initial steps to preserve documents and data prior to C&H's engagement, including directing the information-technology department to suspend automatic-deletion protocols for email and electronic records across the Company. Anand also provided a history of TMC's antitrust compliance program, which was adopted in approximately 2014. Her account was consistent with the documentary record, and no evidence was identified suggesting that Anand was aware of or involved in the alleged conduct.

Richard Fong, Chief Financial Officer — Interviewed August 19, 2022. Mr. Fong was interviewed in his capacity as TMC's CFO. Fong stated that he had no knowledge of the alleged anticompetitive conduct and that pricing authority for the U.S. Specialty Minerals Division was delegated to the division vice-president level — i.e., to Gavin Holt's position — without routine C-suite review or approval of individual pricing decisions. Fong confirmed that no financial irregularities, unusual pricing patterns, or unexplained revenue fluctuations had come to his attention during the conspiracy period that would have suggested awareness of the alleged conduct at the C-suite level. Fong's account was consistent with the documentary record reviewed to date.

C. Key Documentary Evidence — Preliminary Findings

C&H has identified several categories of documentary evidence that bear significantly on the investigation. The following summarizes the most significant preliminary findings as of the date of this memorandum.

VaultChat Message Analysis. On September 15, 2022, C&H circulated an internal privileged memorandum summarizing the results of C&H's analysis, conducted in conjunction with Redstone Digital Forensics, of VaultChat encrypted-messaging communications recovered from Gavin Holt's devices and TMC's VaultChat archives. The analysis revealed that Holt exchanged pricing information and related communications with Carl Edgerton of Ridgecrest and Kevin Tsang of Pinnacle on at least 37 documented occasions during the period from March 14, 2017 (the date of the first documented VaultChat exchange between Holt and Edgerton) through July 2021. The substance of these communications encompasses direct discussions of pricing for high-purity feldspar, industrial talc, and rare-earth concentrates; proposals for the allocation of specific customers between the conspirators; and signals and confirmations regarding coordinated bid submissions. The VaultChat evidence is the most significant body of direct evidence of the alleged conspiracy identified to date and, in C&H's assessment, represents substantial proof of the core allegations under investigation by the DOJ. The VaultChat communications will be a central element of any cooperation proffer that C&H submits to the DOJ on TMC's behalf.

Pricing Data Analysis. C&H retained Hargrove Forensic Advisory LLC on July 1, 2022 to conduct a comprehensive forensic economic analysis of TMC's pricing data in comparison to competitor pricing data for the three target product categories for the period 2015 through 2022. Dr. Vanessa Tremblay and her team are analyzing TMC's price movements versus competitor price movements, using statistical econometric techniques to test for the existence and degree of price correlations during the alleged conspiracy period (2017–2021) as compared to the pre-conspiracy and post-conspiracy baseline periods. Preliminary results received from Hargrove indicate statistically significant price correlations among TMC, Ridgecrest, and Pinnacle during the alleged conspiracy period that are not present to the same degree in the baseline periods, which is consistent with coordinated pricing behavior. The full analysis is expected to be completed by approximately November 2022 and will provide a refined estimate of the volume of affected commerce and the overcharge attributable to the alleged conspiracy, both of which are critical inputs to C&H's penalty-range analysis and reserve recommendation.

Trade Association Meeting Analysis. On October 10, 2022, C&H circulated an internal privileged memorandum summarizing its analysis of TMC personnel attendance at NASMC quarterly conferences from 2017 to 2021. C&H reviewed conference registration records, travel and expense reports, hotel booking confirmations, and calendar entries for TMC attendees, and cross-referenced this data with available information regarding the attendance of personnel from Ridgecrest and Pinnacle. The analysis indicates that several of the alleged anticompetitive meetings are suspected to have occurred on the margins of NASMC conferences — that is, in informal settings outside the official conference program, such as dinners, cocktail receptions, and private meetings in hotel rooms or nearby restaurants. Gavin Holt attended numerous NASMC conferences during the relevant period, and his attendance overlapped with the attendance of Carl Edgerton (Ridgecrest) and Kevin Tsang (Pinnacle) at multiple conferences. Thomas Eriksen attended four NASMC conferences during the relevant period. The NASMC-related evidence is corroborative of the VaultChat communications and the pricing-data analysis, though C&H has not identified direct evidence of anticompetitive discussions at NASMC events beyond the VaultChat records.

D. Preliminary Assessment of C-Suite and Board Exposure

Based on the internal investigation conducted to date — acknowledging that the investigation is approximately 60% complete and that the remaining witness interviews and document review may yield additional relevant information — no evidence has emerged that TMC's C-suite executives (including CEO Søren Dalmqvist, General Counsel Priya Anand, and CFO Richard Fong) or any member of the Board of Directors had knowledge of, authorized, directed, or participated in the alleged anticompetitive conduct.

The evidence reviewed to date indicates that the alleged conduct was confined to the commercial-pricing function within the U.S. Specialty Minerals Division and was orchestrated by Gavin Holt in his capacity as Vice President of U.S. Specialty Minerals Sales. Holt appears to have acted without the knowledge or authorization of his superiors, and no evidence has been identified suggesting that information about the alleged conspiracy was communicated upward to the C-suite or the Board. While C&H's assessment on this point is preliminary and subject to revision as the investigation continues, the absence of evidence of C-suite or Board involvement is a significant factor in C&H's assessment of TMC's overall exposure and cooperation strategy.

E. Compliance Program Deficiencies

TMC's existing antitrust compliance program was adopted in approximately 2014, during a period when the Company expanded its U.S. operations and increased its exposure to U.S. antitrust law. The program, as originally designed, included written antitrust policies, periodic training sessions for sales and marketing personnel, and general guidance regarding interactions with competitors and at trade-association events. However, C&H's review has identified significant deficiencies in the implementation and maintenance of the program during the period relevant to the investigation:

• Training Lapse: No annual antitrust training was conducted for TMC personnel — including U.S. Specialty Minerals Division personnel — since approximately 2018. The last documented training session was held in the fourth quarter of 2017 or the first quarter of 2018. This four-year gap in training is a significant deficiency that is likely to be noted by the DOJ and that undermines any argument that TMC maintained an effective compliance program during the conspiracy period.

• No Trade-Association Monitoring: The compliance program did not include any mechanism for monitoring, reviewing, or auditing TMC personnel's interactions at trade-association events. There was no pre-clearance or post-attendance reporting requirement for attendance at NASMC conferences or other industry events at which competitor personnel were present.

• No Competitor-Contact Audit: The compliance program did not include any system for logging, reviewing, or auditing contacts between TMC personnel and personnel of competitor companies, whether at trade-association events or otherwise. There was no requirement that such contacts be reported to the legal department or any other compliance function.

These deficiencies are significant in two respects. First, they may have facilitated the alleged conduct by permitting Holt and other TMC personnel to interact with competitor personnel without oversight or accountability. Second, the DOJ will likely view the deficiencies as evidence that TMC's compliance culture was inadequate, which may affect the level of cooperation credit and penalty mitigation that the DOJ is willing to extend. C&H anticipates that the remediation of these deficiencies will be a critical component of any cooperation-based resolution with the DOJ, and C&H recommends that the Company begin the process of designing and implementing an enhanced antitrust compliance program as soon as practicable. C&H's specific recommendations on this point are set forth in Section IX below.

F. Timeline to Completion

C&H expects the internal investigation to be substantially complete by January 2023, at which time C&H intends to present its final findings and recommendations to the full TMC Board of Directors. The current target date for the Board presentation is on or about January 20, 2023. The remaining work to be completed prior to that date includes: (i) the nine remaining witness interviews; (ii) finalization of the Hargrove Forensic Advisory economic analysis; (iii) completion of the trade-association meeting analysis; and (iv) synthesis of all evidence and preparation of the final investigation report and recommendations.

VI. FINANCIAL-RESERVE ANALYSIS

A. Current Reserve

TMC established a litigation reserve of USD 30 million in connection with the DOJ investigation. The reserve was first established and publicly disclosed in TMC's fiscal year 2021 annual report, filed on March 28, 2022 on SEDAR+ and with the SEC on Form 40-F. The reserve was established under the applicable accounting standards, specifically ASC 450 (Contingencies) under U.S. Generally Accepted Accounting Principles and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) under International Financial Reporting Standards. At the time the reserve was established, TMC had received the grand jury subpoena but had not yet received the target letter, and the internal investigation was in its earliest stages. The reserve reflected management's assessment, based on the information then available and the advice of C&H, that a loss in connection with the investigation was probable and that USD 30 million represented a reasonable estimate of the low end of the range of probable loss.

B. Estimated Penalty Range

C&H has conducted a preliminary analysis of TMC's potential financial exposure in the form of a criminal penalty (fine) in the event that the investigation is resolved through either an NPA or a plea agreement. The following sets forth the principal components of that analysis.

Under the DOJ Antitrust Division's established practice for calculating corporate penalties in Sherman Act Section 1 conspiracies — including price-fixing, market allocation, and bid-rigging — the standard starting point for the penalty calculation is 20% of the volume of affected commerce attributable to the defendant during the conspiracy period. This starting point is derived from the Sentencing Guidelines methodology and the DOJ's internal practices for antitrust penalty calculations.

The DOJ has estimated the total volume of affected commerce across all participants in the alleged conspiracy — TMC, Ridgecrest, and Pinnacle — at approximately USD 1.34 billion for the period January 2017 through August 2021. This estimate is based on the combined U.S. sales of high-purity feldspar, industrial talc, and rare-earth concentrates by the three companies during the conspiracy period, as calculated from publicly available financial data and information provided by Cascade Chemical Supply Co. pursuant to its cooperation agreement.

TMC's share of the total affected commerce is estimated at approximately USD 478 million, representing approximately 35.7% of the total. This figure is based on TMC's U.S. sales of the three target product categories through Torchlight Mining (U.S.) Inc. during the conspiracy period. The Hargrove Forensic Advisory analysis currently in progress will provide a more precise and independently verified calculation of TMC's affected-commerce volume, which may refine this estimate.

Based on these figures, the starting-point penalty calculation for TMC is as follows:

USD 478 million × 20% = USD 95.6 million

This starting-point figure is subject to adjustment based on various mitigating and aggravating factors. C&H has assessed the following mitigating factors that may apply to TMC and reduce the ultimate penalty below the starting point:

• Cooperation credit: TMC has communicated its willingness to cooperate with the investigation, and C&H intends to submit a cooperation proffer following completion of the internal investigation. Full and timely cooperation typically warrants a significant reduction in the penalty.

• Voluntary self-disclosure elements: While TMC did not self-report the alleged conduct prior to receipt of the subpoena, certain elements of TMC's cooperation — including the production of VaultChat communications and the provision of witness testimony — may be credited as voluntary disclosures of specific evidence that enhanced the DOJ's investigation.

• Remediation efforts: C&H recommends that TMC commence design and implementation of an enhanced antitrust compliance program, which would serve as evidence of the Company's commitment to remediation and reform.

• Compliance-program enhancements: Related to the remediation point, the implementation of a robust compliance program with training, monitoring, and auditing components would be viewed favorably by the DOJ.

• No prior criminal history: TMC has no prior criminal history in the United States or Canada, which is a mitigating factor under the applicable guidelines and practices.

C&H's preliminary assessment is that TMC may obtain a combined cooperation and remediation credit in the range of 40% to 50% off the starting-point penalty. Applied to the starting-point penalty of USD 95.6 million, this yields an estimated penalty range of approximately USD 48 million to USD 57 million. C&H emphasizes that this is a preliminary estimate based on currently available information and that the ultimate penalty will depend on multiple factors, including the final affected-commerce calculation (pending the Hargrove analysis), the scope and quality of TMC's cooperation as assessed by the DOJ, the effectiveness of TMC's remediation efforts, and the outcome of negotiations with the DOJ.

C. Adequacy of Current Reserve

In light of the target letter received on May 20, 2022 and the evolving penalty-range estimates discussed above, C&H's assessment is that the current litigation reserve of USD 30 million is below the preliminary estimate of the likely penalty range. The current reserve was established at a time when TMC's exposure was assessed at the lower end of the range of probable loss, before the receipt of the target letter and before the internal investigation had progressed to its current state.

C&H recommends that the Audit Committee consider whether the reserve should be increased to reflect the current assessment of TMC's financial exposure. Based on the preliminary penalty-range analysis, C&H's preliminary recommendation is that an increase to approximately USD 50 million may be warranted. This recommendation takes into account the mid-range of the estimated penalty (approximately USD 48–57 million) as well as the possibility that the final penalty may fall below the mid-range if TMC's cooperation and remediation efforts are favorably assessed by the DOJ. However, C&H cautions that this recommendation is preliminary and should be revisited after: (i) the Hargrove affected-commerce analysis is finalized (expected approximately November 2022); and (ii) the internal investigation findings are completed and synthesized (expected January 2023).

C&H will provide the Audit Committee with an updated and more definitive reserve recommendation in connection with the appropriate reporting cycle, which is expected to be the third quarter 2023 financial-reporting cycle, or earlier if material developments in the investigation occur that warrant an immediate reassessment.

C&H is coordinating with Daniel Moreau, the TMC engagement partner at Calvert & Associates LLP (the Company's external auditor), regarding the adequacy of the reserve for purposes of Calvert's audit and review procedures. This coordination is conducted on a need-to-know basis and within the scope of the privilege protections discussed in Section I of this memorandum.

D. Accrued Professional Fees

The following summarizes the professional fees and disbursements incurred to date by the principal legal and advisory firms engaged in connection with the investigation.

Calderwood & Harkness LLP. Total fees and disbursements invoiced through approximately October 2022 are estimated at approximately USD 8.5 million. This figure is measured against the initial budget estimate of USD 12 million that was provided to TMC at the outset of the engagement. C&H projects that total fees for the internal investigation and grand jury defense phase — encompassing all work through completion of the internal investigation, preparation and submission of the cooperation proffer, witness proffer sessions, and initial NPA negotiation discussions — will exceed the initial USD 12 million estimate. An updated budget will be provided to TMC's General Counsel when the scope of the remaining work is clearer, which C&H anticipates will be in the first quarter of 2023, after the internal investigation is completed. C&H's applicable billing rates are: Partners — USD 1,450 per hour; Senior Associates — USD 950 per hour; Associates — USD 725 per hour.

Redstone Digital Forensics Inc. Approximately USD 1.4 million has been incurred to date for forensic data collection, processing, hosting, managed-review support, and production formatting. The projected total through completion of all first-subpoena productions is estimated at approximately USD 2.0 million to USD 2.3 million, as discussed in Section IV.C above.

Hargrove Forensic Advisory LLC. Approximately USD 600,000 has been incurred since Hargrove's engagement on July 1, 2022. The projected total will depend on the scope of Hargrove's analysis and any additional support required in connection with DOJ negotiations. C&H estimates that Hargrove's total fees through resolution will be in the range of USD 1.5 million to USD 2.0 million.

Total Accrued Professional Fees to Date (All Vendors and C&H). The aggregate professional fees incurred through the date of this memorandum, across all vendors and C&H, total approximately USD 10.5 million. C&H estimates that total professional fees through resolution of the investigation will be in the range of USD 18 million to USD 20 million or more, depending on the complexity and duration of the DOJ negotiations and any additional subpoena compliance requirements.

E. Disclosure Considerations

TMC's initial public disclosure of the DOJ investigation was made in the Company's fiscal year 2021 annual report, filed on SEDAR+ and with the SEC on Form 40-F on March 28, 2022. The disclosure language described the receipt of the grand jury subpoena, the establishment of the litigation reserve, and the Company's commitment to cooperating with the investigation. The initial disclosure was prepared in coordination among C&H, TMC's General Counsel, TMC's CFO, Calvert & Associates LLP, and Ironbridge Capital Markets Inc. (Alan Kirkwood, TMC relationship partner and financial advisor). The disclosure was assessed as consistent with applicable securities-law requirements under Canadian continuous-disclosure obligations and SEC reporting obligations applicable to foreign private issuers filing on Form 40-F.

C&H will continue to coordinate with TMC's General Counsel, CFO, Calvert & Associates (auditor), and Ironbridge Capital Markets (financial advisor) regarding any required updates to the investigation-related disclosure language in the Company's subsequent periodic filings, including quarterly filings and any interim material-change reports. Key developments that may trigger disclosure updates include, without limitation: any material change in the litigation reserve; the return of an indictment; the commencement of formal NPA or plea negotiations; the filing of charges against individual TMC personnel; or any other development that materially affects TMC's financial exposure or the status of the investigation. Any material change in the reserve amount will require corresponding updated disclosure.

VII. D&O INSURANCE COVERAGE STATUS

A. Policy Details and Notice

TMC maintains directors-and-officers liability insurance through the following carriers:

Lead Policy. The lead D&O policy is written by Northland Mutual Insurance Co. (Toronto), Policy No. NMI-DO-2021-5547. The policy period is July 1, 2021 through July 1, 2022, and the policy is renewed annually. The policy provides an aggregate limit of liability of USD 50 million, subject to a retention (self-insured amount) of USD 2.5 million. The policy provides coverage for both individual directors and officers and for the corporate entity, subject to the terms, conditions, and exclusions of the policy.

C&H, on behalf of TMC and its individual directors and officers, tendered notice of the DOJ investigation to Northland on March 4, 2022. The notice was submitted within the applicable notice period and included the information required under the policy's notice provisions, including a description of the investigation, the grand jury subpoena, and the potential claims against TMC and its directors and officers.

B. Northland's Response — Reservation of Rights

Northland acknowledged receipt of the notice of the investigation and acknowledged that the investigation constitutes a covered "claim" or "proceeding" under the policy for purposes of individual-director-and-officer coverage, including coverage for defense costs incurred by individual directors and officers in connection with the investigation.

However, on or about April 15, 2022, Northland issued a reservation-of-rights letter reserving its rights with respect to two specific coverage issues:

(i) Entity-level coverage: Northland reserved its rights regarding whether the policy provides coverage for defense costs incurred by TMC as a corporate entity (as distinguished from defense costs incurred by individual directors and officers). Northland's position, as stated in the reservation-of-rights letter, is that entity-level coverage may be limited or excluded under the policy's terms in the context of a criminal investigation in which the entity is a target.

(ii) Regulatory/criminal-act exclusion: Northland reserved its rights regarding the potential applicability of the policy's regulatory/criminal-act exclusion, which excludes coverage for loss arising from conduct that constitutes a violation of law if established by final adjudication. Northland's position is that, depending on the outcome of the investigation, the exclusion may apply to preclude coverage for some or all of TMC's defense costs and any resulting liability.

C&H responded to Northland's reservation-of-rights letter on April 28, 2022. C&H's response contested the applicability of the criminal-act exclusion at the pre-adjudication stage on multiple grounds, including that: (a) no conviction or guilty plea has occurred; (b) no indictment has been returned; (c) the criminal-act exclusion, by its terms, requires "final adjudication" before it can be invoked to deny coverage; and (d) the prevailing judicial authority in the relevant jurisdictions supports the position that D&O insurers must advance defense costs pending final adjudication, even where a criminal-act exclusion exists in the policy. C&H's response also preserved TMC's coverage rights for entity-level defense costs, citing the policy's entity-coverage provisions and arguing that Northland's attempt to limit entity-level coverage is inconsistent with the policy language and

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
October 18, 2022
FROM: Elaine Forsythe, Partner Calderwood & Harkness LLP 555 California Street, 40th Floor San Francisco, CA 94104
TO: Janet Moreau-Shaw, Chair Audit Committee, Board of Directors Torchlight Mining Corp. 200 Bay Street, Suite 3400 Toronto, ON M5J 2J2, Canada
CC: Margaret Caldwell, Chair of the Board of Directors Søren Dalmqvist, Chief Executive Officer Priya Anand, General Counsel Richard Fong, Chief Financial Officer
RE: Torchlight Mining Corp. — DOJ Antitrust Division Grand Jury Investigation (Grand Jury No. GJ-22-0194, U.S. District Court, Northern District of California) — Audit Committee Briefing on Investigation Status, Document Production, Financial-Reserve Analysis, and D&O Insurance Coverage
C&H Matter No.: 1039-00001
I. PURPOSE AND SCOPE OF THIS MEMORANDUM
This privileged memorandum is submitted to the Audit Committee of the Board of Directors of Torchlight Mining Corp. ("TMC" or the "Company") for the purpose of providing a comprehensive status update on the pending United States Department of Justice ("DOJ") Antitrust Division grand jury investigation captioned Grand Jury No. GJ-22-0194, pending in the United States District Court for the Northern District of California, San Francisco Division. Calderwood & Harkness LLP ("C&H") serves as outside defense counsel to TMC in connection with this investigation, and this briefing memorandum has been prepared at the express request of the Audit Committee in connection with its oversight responsibilities for the financial-reporting implications of the investigation.
This memorandum addresses the following principal topics:
(a) the procedural history and current posture of the DOJ investigation;
(b) the status and progress of document production in response to the grand jury subpoena;
(c) the status and preliminary findings of C&H's internal investigation conducted on behalf of the Company;
(d) a financial-reserve analysis under applicable accounting standards, including the adequacy of the Company's current litigation reserve, estimated penalty range, accrued professional fees, and disclosure considerations; and
(e) the status of the Company's directors-and-officers ("D&O") insurance coverage, including the pending reservation-of-rights dispute with the lead carrier.
This memorandum is prepared solely for the benefit of the Audit Committee and the individuals copied above in connection with the exercise of the Audit Committee's fiduciary and oversight responsibilities regarding the Company's financial reporting obligations. It reflects facts, analysis, and preliminary legal assessments known to C&H as of the date hereof and is necessarily subject to revision as additional information becomes available through the ongoing internal investigation and the continuing DOJ proceedings.
Privilege Notice. This memorandum constitutes a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. It should not be disclosed outside the Audit Committee, the individuals identified on the distribution list above, and their authorized advisors — including, solely as necessary for audit-related discussions, Daniel Moreau, the TMC engagement partner at Calvert & Associates LLP — without prior written authorization from Calderwood & Harkness LLP. Any unauthorized disclosure may result in a waiver of the attorney-client privilege and work-product protections that attach to this communication and to the underlying investigation materials.
II. EXECUTIVE SUMMARY
On February 10, 2022, the Antitrust Division of the United States Department of Justice formally opened a grand jury investigation — Grand Jury No. GJ-22-0194, empaneled in the United States District Court for the Northern District of California, San Francisco Division — into suspected price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector. The investigation focuses principally on three product categories: high-purity feldspar, industrial talc, and rare-earth concentrates. The investigation encompasses multiple corporate targets and individual subjects, and it represents a significant enforcement action in the specialty-minerals industry.
TMC received Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 on February 14, 2022. The Company engaged Calderwood & Harkness LLP on February 18, 2022, and C&H immediately commenced its review of the subpoena, issued a company-wide litigation hold, and initiated discussions with the DOJ regarding the scope and schedule of document production. C&H's engagement letter was signed by the undersigned as responsible partner and Howard Bellamy as billing partner.
On May 20, 2022, TMC received a target letter from the DOJ Antitrust Division, signed by supervising Deputy Assistant Attorney General Julia Stafford-Hayes and the lead prosecutors, Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, thereby formally elevating TMC's status from a recipient of a subpoena to a target of the grand jury investigation. The receipt of the target letter represents a material escalation in TMC's legal exposure and has significant implications for the Company's financial-reserve analysis and disclosure obligations, as discussed in detail below.
The investigation focuses on alleged coordination between senior commercial personnel at three companies during the period approximately January 2017 through August 2021. The principal individuals under scrutiny are Gavin Holt, former Vice President of U.S. Specialty Minerals Sales at TMC; Carl Edgerton, Vice President of Sales at Ridgecrest Minerals Inc.; and Kevin Tsang, former Senior Vice President of Commercial Operations at Pinnacle Earth Resources Ltd. The alleged conduct encompasses pricing agreements, customer-allocation arrangements, and bid-rigging in connection with sales of the three target product categories across North American markets.
The investigation was triggered by the cooperation agreement entered into approximately September 2021 by Cascade Chemical Supply Co., a downstream distributor and processor of specialty minerals headquartered in Spokane, Washington. Cascade is represented by Whitfield, Strauss & Tully LLP (Rebecca Ostrander, lead partner) and has been providing documents and testimony to the DOJ pursuant to its cooperation agreement. Cascade's cooperation has furnished the DOJ with substantial evidence regarding the alleged conspiracy, including records of communications and transactions between Cascade and the target companies.
As of the date of this memorandum, C&H has produced approximately 310,000 documents to the DOJ across multiple rolling productions, with cumulative rolling productions expected to reach approximately 487,000 documents (representing approximately 3.2 million pages) by mid-December 2022. The internal investigation is approximately 60% complete, with 14 of 23 targeted witness interviews conducted and forensic economic analysis by Hargrove Forensic Advisory LLC in progress. C&H is actively assessing defense strategy, including the viability of seeking a non-prosecution agreement ("NPA") as the optimal resolution pathway for the Company.
The key financial-exposure items requiring Audit Committee attention at this time are as follows:
(i) the current litigation reserve of USD 30 million established in March 2022, which C&H believes may be inadequate in light of the target letter and evolving penalty-range estimates;
(ii) the estimated penalty range of approximately USD 48 million to USD 57 million (after estimated cooperation credits), based on C&H's preliminary assessment of TMC's share of affected commerce;
(iii) accrued professional fees totaling approximately USD 10.5 million through the date of this memorandum, with projected total professional fees through resolution estimated at USD 18–20 million or more; and
(iv) the pending D&O insurance coverage dispute with Northland Mutual Insurance Co. regarding entity-level defense-cost coverage, which, if resolved adversely, would require TMC to bear its own defense costs.
Each of these items is discussed in detail in the sections that follow.
III. PROCEDURAL HISTORY AND CURRENT POSTURE
A. Timeline of Key Events
The following timeline sets forth the principal events in the investigation from its inception through the date of this memorandum. C&H has verified these dates through its own records, correspondence with the DOJ, and the Company's internal records.
Approximately September 15, 2021 — Cascade Chemical Supply Co. Cooperation Agreement. Cascade Chemical Supply Co., a Washington corporation headquartered in Spokane, Washington, entered into a cooperation agreement with the DOJ Antitrust Division. Cascade's president is Leonard Massey, and the company is represented by Whitfield, Strauss & Tully LLP (Rebecca Ostrander, lead partner), based in Seattle. Pursuant to its cooperation agreement, Cascade has provided documents and testimony to the DOJ regarding transactions and communications between Cascade and the specialty-minerals producers that are the targets of the investigation. Cascade's cooperation provided the evidentiary foundation that triggered the broader grand jury probe into the conduct of TMC, Ridgecrest, and Pinnacle.
September 30, 2021 — Gavin Holt Resignation. Gavin Holt's resignation from TMC became effective on this date. Holt had served as Vice President of U.S. Specialty Minerals Sales within TMC's U.S. Specialty Minerals Division and is the individual most directly implicated in the alleged anticompetitive conduct. His departure preceded the formal commencement of the grand jury investigation by approximately four months. At the time of his resignation, there was no indication in the Company's records that TMC management was aware of the DOJ's investigation or of Holt's alleged conduct. The circumstances of Holt's departure are the subject of further analysis by C&H.
January 12, 2022 — Ridgecrest Target Letter. Ridgecrest Minerals Inc. received a target letter from the DOJ Antitrust Division. Ridgecrest is a Delaware corporation headquartered in Denver, Colorado, with fiscal year 2021 revenue of approximately USD 1.92 billion. Ridgecrest is a portfolio company of Marlowe Asset Management Peak Capital Partners LP. Ridgecrest's Chief Executive Officer is Brian Novotny, and the key individual under scrutiny is Carl Edgerton, Vice President of Sales. Ridgecrest is separately represented by Davenport, Kline & Archer LLP (Helen Marchetti, lead partner), Denver. The fact that Ridgecrest received a target letter before TMC suggests that Ridgecrest may have been the initial focus of the investigation among the producer targets, though the precise sequence of the DOJ's investigative activities is not fully known to C&H.
February 10, 2022 — Grand Jury Formally Opened. The DOJ Antitrust Division formally opened Grand Jury Investigation No. GJ-22-0194 in the United States District Court for the Northern District of California, San Francisco Division. The investigation is being conducted through the DOJ Antitrust Division's San Francisco Field Office, with supervisory oversight from the Deputy Assistant Attorney General's office in Washington, D.C.
February 14, 2022 — TMC Receives Grand Jury Subpoena. TMC received Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003, calling for the production of documents in 27 specified categories. The subpoena was served on TMC through its registered agent for service of process in the Northern District of California. The scope and substance of the subpoena are discussed in detail in Section IV below.
February 18, 2022 — TMC Engages Calderwood & Harkness LLP. TMC formally retained Calderwood & Harkness LLP as outside defense counsel for the investigation. The engagement letter was executed by the undersigned as responsible partner and Howard Bellamy as billing partner. C&H immediately commenced its review of the subpoena, initiated discussions with the Company's General Counsel regarding the scope of the document-preservation obligation, and began planning the internal investigation.
February 22, 2022 — Acknowledgment and Extension Request. C&H transmitted an acknowledgment of the subpoena to the DOJ, directed to Trial Attorney Denise Kowalski at the San Francisco Field Office, and requested a 60-day extension of the initial return date to permit the Company to implement appropriate collection and review protocols. The DOJ granted the extension request.
March 1, 2022 — Litigation Hold. C&H issued a company-wide litigation hold to all TMC personnel, together with a targeted supplemental litigation hold directed to personnel in the U.S. Specialty Minerals Division, including Sandra Chu (Director, Pricing Analytics) and Thomas Eriksen (Regional Sales Manager, Western Region). Both hold notices were issued under the signature of Priya Anand, TMC's General Counsel, and included detailed instructions regarding the preservation of electronic and hard-copy documents, including email, instant-messaging communications, shared-drive files, personal-device data, and cloud-storage data. C&H has maintained a hold-compliance tracking system and has conducted periodic reminders and certifications.
March 4, 2022 — D&O Insurance Notice. C&H, on behalf of TMC and its individual directors and officers, tendered notice of the investigation to Northland Mutual Insurance Co. under the Company's directors-and-officers liability insurance policy. The insurance-coverage status is discussed in detail in Section VII below.
March 15, 2022 — E-discovery Vendor Retained. C&H retained Redstone Digital Forensics Inc. (Neil Ashworth, project director), based in McLean, Virginia, to conduct forensic data collection, processing, hosting, and managed review of documents responsive to the grand jury subpoena. Redstone was selected based on its extensive experience with DOJ antitrust investigations and its capabilities in processing and hosting large-scale document populations.
March 28, 2022 — FY 2021 Annual Report Filed; Initial Public Disclosure; Litigation Reserve Established. TMC filed its fiscal year 2021 annual report on SEDAR+ (the Canadian securities regulatory filing system) and with the United States Securities and Exchange Commission on Form 40-F. This filing contained the Company's first public disclosure of the DOJ investigation and the establishment of a litigation reserve of USD 30 million. The disclosure language was prepared in coordination among C&H, TMC's General Counsel, TMC's CFO, Calvert & Associates LLP (the Company's external auditor), and Ironbridge Capital Markets Inc. (the Company's financial advisor). The reserve amount was established under applicable accounting standards, as discussed in Section VI below.
April 4, 2022 — First Rolling Production. C&H delivered the first rolling production of documents to the DOJ, comprising approximately 42,000 documents produced in native and load-file formats with Bates numbering, in accordance with DOJ specifications. A corresponding privilege log was delivered concurrently with this initial production.
May 20, 2022 — TMC Receives Target Letter. TMC received a target letter from the DOJ Antitrust Division, formally identifying the Company as a target — as distinguished from a subject or witness — of the grand jury investigation. The target letter was signed by supervising Deputy Assistant Attorney General Julia Stafford-Hayes and by the lead prosecutors, Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves. Receipt of the target letter signifies that the DOJ has substantial evidence linking TMC to the alleged criminal conduct and is considering seeking an indictment. This was a material escalation of the Company's legal exposure and has informed C&H's subsequent defense strategy and financial-reserve analysis.
June 8, 2022 — Cooperation Communication. Following consultation with the Company's General Counsel and CEO, and with the authorization of the Audit Committee, C&H communicated TMC's willingness to cooperate with the DOJ investigation to the lead prosecutors. This communication was an important initial step in TMC's cooperation posture, which C&H views as essential to obtaining maximum penalty mitigation in any eventual resolution.
June 10, 2022 — Gavin Holt Retains Personal Counsel. Gavin Holt retained personal counsel — Briarcliff Law Group PLLC (Patrick Dunleavy, lead attorney), San Francisco. The retention of personal counsel by Holt was expected, given the significant individual criminal exposure he faces based on the evidence reviewed to date.
June 14, 2022 — Holt Asserts Fifth Amendment Privilege. Gavin Holt appeared before the grand jury and asserted his Fifth Amendment privilege against self-incrimination, declining to testify. Holt's assertion of the privilege is consistent with the defense posture being adopted by his personal counsel and reflects the substantial individual criminal liability that Holt faces.
July 1, 2022 — Forensic Economic Expert Retained. C&H retained Hargrove Forensic Advisory LLC (Dr. Vanessa Tremblay, engagement partner), based in Chicago, to conduct economic analysis of pricing patterns and affected-commerce volume assessment. Hargrove's work is essential to both the internal investigation and the development of C&H's penalty-range estimates for purposes of the financial-reserve analysis. Dr. Tremblay's team possesses significant experience in antitrust damages and penalty analysis, including prior engagements involving DOJ Antitrust Division investigations.
August 1, 2022 – Present (Ongoing Through At Least December 15, 2022) — Continued Rolling Document Productions. C&H has continued to make rolling productions of documents to the DOJ on a bi-weekly to monthly cadence. As of the date of this memorandum, cumulative productions total approximately 310,000 documents. C&H anticipates that the cumulative total will reach approximately 487,000 documents, representing approximately 3.2 million pages, by mid-December 2022. The remaining productions consist principally of documents from custodians whose collections were completed later in the process and documents that required additional privilege and responsiveness review.
B. Parties to the Investigation
The following is a summary of the entities and individuals known to be parties to, targets of, or participants in the investigation as of the date of this memorandum.
Subjects and Targets:
Torchlight Mining Corp. — The Company is a target of the investigation as of the May 20, 2022 target letter. TMC is a Canadian corporation headquartered in Toronto, Ontario, with significant U.S. operations conducted through its wholly owned subsidiary, Torchlight Mining (U.S.) Inc. The key individual associated with TMC in the investigation is Gavin Holt, former Vice President, U.S. Specialty Minerals Sales. TMC is represented by Calderwood & Harkness LLP (Elaine Forsythe, responsible partner).
Ridgecrest Minerals Inc. — Ridgecrest is a target of the investigation, having received a target letter on or about January 12, 2022. Ridgecrest is a Delaware corporation headquartered in Denver, Colorado. Its fiscal year 2021 revenue was approximately USD 1.92 billion. Ridgecrest is a portfolio company of Marlowe Asset Management Peak Capital Partners LP. Its Chief Executive Officer is Brian Novotny. The key individual associated with Ridgecrest in the investigation is Carl Edgerton, Vice President of Sales. Ridgecrest is separately represented by Davenport, Kline & Archer LLP (Helen Marchetti, lead partner), Denver.
Pinnacle Earth Resources Ltd. — Pinnacle is a subject and believed target of the investigation. Pinnacle is an Ontario corporation headquartered in Sudbury, Ontario, with U.S. operations based in Salt Lake City, Utah. Its fiscal year 2021 revenue was approximately CAD 1.45 billion (approximately USD 1.15 billion). Its Chief Executive Officer is Douglas Harlowe. The key individual associated with Pinnacle in the investigation is Kevin Tsang, former Senior Vice President, Commercial Operations. Pinnacle is separately represented by Ashford Whitmore LLP (George Nakamura, lead partner).
Cooperating Witness Entity:
Cascade Chemical Supply Co. — Cascade is a Washington corporation headquartered in Spokane, Washington. Cascade operates as a downstream distributor and processor of specialty minerals. Its president is Leonard Massey. Cascade entered into a cooperation agreement with the DOJ in approximately September 2021 and has been providing documents and testimony to the DOJ pursuant to that agreement. Cascade is represented by Whitfield, Strauss & Tully LLP (Rebecca Ostrander, lead partner), Seattle.
DOJ Personnel:
The investigation is being conducted by Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves of the DOJ Antitrust Division's San Francisco Field Office, under the supervision of Deputy Assistant Attorney General Julia Stafford-Hayes in Washington, D.C.
C. Current Posture
As of the date of this memorandum, the investigation remains active and the current posture may be summarized as follows:
TMC is classified as a "target" of the grand jury investigation, a designation that indicates the DOJ has substantial evidence linking the Company to the alleged criminal conduct and is considering seeking an indictment. C&H has communicated TMC's willingness to cooperate with the investigation, and discussions regarding the scope and terms of that cooperation are ongoing with the DOJ prosecution team.
The grand jury remains empaneled and active. No indictment has been returned against TMC or any individual as of the date of this memorandum. However, the Audit Committee should understand that the absence of an indictment at this stage does not preclude the possibility that one may be sought in the future, particularly if cooperation negotiations do not result in a satisfactory resolution.
C&H is actively evaluating the viability of seeking a non-prosecution agreement as the optimal resolution pathway for the Company. An NPA would permit TMC to resolve the investigation without a criminal conviction, subject to the payment of a monetary penalty, the implementation of compliance reforms, and ongoing cooperation obligations. C&H's assessment of the NPA pathway will be refined as the internal investigation is completed and the affected-commerce analysis is finalized.
IV. DOCUMENT PRODUCTION PROGRESS
A. First Subpoena (GJ-22-0194-SD-003)
Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 was served on TMC on February 14, 2022. As noted above, C&H acknowledged receipt of the subpoena and obtained from the DOJ a 60-day extension of the initial return date to permit the Company to implement appropriate data-collection and review protocols.
The subpoena calls for the production of documents in 27 categories, encompassing a broad range of business records relevant to the alleged conspiracy. The document categories include, without limitation, the following:
• pricing data, pricing memoranda, pricing approval records, and pricing-change communications for high-purity feldspar, industrial talc, and rare-earth concentrates;
• customer contract files, customer proposal documents, and bid-submission records;
• internal and external communications — including email, instant messages, text messages, and encrypted-messaging platform communications — referencing or relating to pricing, market conditions, market share, customer allocation, or bid activity for the three target product categories;
• documents relating to TMC's participation in trade associations, including the North American Specialty Minerals Conference ("NASMC"), including conference agendas, attendance records, meeting notes, and expense reports;
• records of contacts and communications with personnel of competitor companies, including Ridgecrest Minerals Inc., Pinnacle Earth Resources Ltd., and any other specialty-minerals producers;
• organizational charts, personnel rosters, and job descriptions for the U.S. Specialty Minerals Division;
• market-intelligence reports, competitor-analysis documents, and industry-survey data; and
• antitrust compliance program records, training records, and policy documents.
Data Collection. Following issuance of the litigation hold on March 1, 2022, Redstone Digital Forensics Inc. conducted forensic data collections commencing in mid-March 2022, pursuant to C&H's data-collection protocol dated March 18, 2022. Collections were performed from 34 identified custodians, selected by C&H based on their positions, responsibilities, and potential relevance to the investigation. The data sources collected included email systems (Strathmore Data Systems / Outlook), shared network drives, VaultChat encrypted-messaging archives, personal mobile devices (where consent was obtained), and cloud-storage accounts at both TMC (the parent company in Toronto) and Torchlight Mining (U.S.) Inc. (the U.S. subsidiary). The collected data was processed through Redstone's e-discovery platform, de-duplicated, and subjected to search-term filtering and technology-assisted review protocols to identify potentially responsive documents for human review.
First Rolling Production — April 4, 2022. The first rolling production was delivered to the DOJ on April 4, 2022, comprising approximately 42,000 documents. These documents represented the highest-priority custodians and the most clearly responsive document categories. The production was accompanied by a corresponding privilege log.
Subsequent Rolling Productions — August 1, 2022 Through Present (Ongoing). Following the initial production, C&H has delivered additional rolling productions on a bi-weekly to monthly cadence, as review of the remaining collected data has progressed. As of the date of this memorandum, approximately 310,000 documents have been produced cumulatively across all rolling productions. C&H anticipates that the cumulative total will reach approximately 487,000 documents, representing approximately 3.2 million pages, by mid-December 2022. The remaining productions consist of documents from later-collected custodians, documents requiring more extensive privilege and responsiveness review, and documents from supplemental data sources identified during the collection process.
Production Format. All documents have been produced in native and load-file formats in accordance with DOJ specifications, with sequential Bates numbering applied by Redstone. The production format is consistent with the standard requirements of the DOJ Antitrust Division for grand jury productions.
B. Privilege Review
C&H established a comprehensive privilege-review protocol, dated March 10, 2022, governing the review of documents for attorney-client privilege and work-product doctrine protections prior to production to the DOJ. The protocol includes detailed criteria for identifying privileged communications, escalation procedures for close or ambiguous privilege calls (requiring review by a senior associate or partner), and provisions for quality-control sampling to verify the accuracy of privilege determinations.
In addition, C&H negotiated and obtained from the DOJ a clawback agreement pursuant to Federal Rule of Evidence 502(d), which provides that the inadvertent production of privileged documents does not constitute a waiver of the privilege. The Rule 502(d) order was entered by the court, providing additional protection against inadvertent disclosure. This is a standard protective measure in grand jury document productions of this magnitude.
Privilege logs have been maintained on a rolling basis and produced concurrently with each rolling document production. The first privilege log was delivered to the DOJ on April 4, 2022, together with the initial production. Subsequent privilege logs have been updated and supplemented with each additional production. As of the date of this memorandum, no privilege challenges or disputes have been raised by the DOJ prosecution team, and the DOJ has not challenged any privilege designations reflected in the logs. C&H will continue to monitor for any privilege challenges and will address them promptly if they arise.
C. Vendor Costs — E-discovery
Redstone Digital Forensics Inc. has incurred total fees through the date of this memorandum estimated at approximately USD 1.4 million, covering data collection, processing, hosting, managed-review staffing support, and production formatting. Based on the remaining volume of documents to be reviewed and produced in connection with the first subpoena, C&H estimates that Redstone's total fees through completion of all first-subpoena productions will be approximately USD 2.0 million to USD 2.3 million. This estimate does not include costs that may be incurred in connection with any supplemental subpoena or additional DOJ requests, which cannot be predicted at this time.
V. INTERNAL INVESTIGATION UPDATE
A. Scope and Methodology
C&H's internal investigation plan was established on March 5, 2022, in consultation with TMC's General Counsel, and approved by the Audit Committee. The investigation encompasses four principal workstreams:
(i) a comprehensive review of documents collected in connection with the grand jury subpoena, with a particular focus on communications and records that bear on the existence, scope, and duration of the alleged conspiracy and the involvement of TMC personnel;
(ii) interviews of current and former TMC employees who may have knowledge relevant to the alleged conduct, the operations of the U.S. Specialty Minerals Division, pricing practices, and trade-association interactions;
(iii) forensic economic analysis of TMC's pricing data for the three target product categories, conducted by Hargrove Forensic Advisory LLC, to assess the extent and pattern of price correlations between TMC and its alleged co-conspirators and to estimate the volume of affected commerce; and
(iv) analysis of TMC's participation in trade-association activities, particularly NASMC quarterly conferences, to identify the nature and extent of contacts between TMC personnel and competitor personnel and to evaluate whether anticompetitive discussions occurred in connection with those events.
The investigation is focused on the U.S. Specialty Minerals Division and the alleged conspiracy period of approximately January 2017 through August 2021. The investigation also encompasses a limited review of conduct outside the conspiracy period (from 2015 forward) for purposes of establishing baseline pricing patterns and identifying any precursor or post-conspiracy conduct.
B. Witness Interviews — Completed to Date
As of the date of this memorandum, C&H has conducted interviews of 14 of the 23 current and former TMC employees identified as witnesses in the internal investigation plan. The remaining nine interviews are expected to be completed by year-end 2022 or early in the first quarter of 2023. The following summarizes the key interviews completed to date and the principal information obtained from each.
Sandra Chu, Director, Pricing Analytics, U.S. Specialty Minerals Division — Interviewed July 18, 2022. Ms. Chu has served as Director of Pricing Analytics within the U.S. Specialty Minerals Division since 2016 and reported directly to Gavin Holt during the alleged conspiracy period. During her interview, Chu reported that she received pricing-adjustment instructions from Holt on at least 12 occasions during the conspiracy period that, upon review, correlated with competitor price movements in the same product categories. Chu stated that Holt would direct her to implement specific price increases or adjustments, often with relatively short lead times, and that she observed the adjustments appeared to be synchronized with similar price changes by Ridgecrest and Pinnacle, though she attributed this at the time to general market dynamics. However, Chu stated that she had no direct knowledge of communications between Holt and personnel at competitor companies and that she believed the pricing adjustments were based on market-intelligence reports and Holt's assessment of competitive conditions. Chu did not recall Holt ever disclosing the source of his pricing information beyond general references to "market conditions" and "industry trends." C&H's assessment is that Chu is a credible witness whose testimony is consistent with the documentary evidence and who may be a useful cooperation witness in any proffer to the DOJ.
Thomas Eriksen, Regional Sales Manager, Western Region, U.S. Specialty Minerals Division — Interviewed July 22, 2022. Eriksen has served as Regional Sales Manager for the Western Region since 2015. During his interview, Eriksen acknowledged attending four NASMC quarterly conferences during the alleged conspiracy period, held at venues including Arlington, Virginia; Scottsdale, Arizona; and Orlando, Florida. Eriksen stated that he attended these conferences in the ordinary course of his responsibilities and participated in panel discussions, networking events, and social functions. Eriksen denied any knowledge of pricing agreements, customer-allocation arrangements, or bid-coordination activities, and he denied any awareness of side meetings or private discussions between Holt and competitor personnel at NASMC events. However, Eriksen acknowledged that he observed Holt in conversation with Carl Edgerton (Ridgecrest) on at least one occasion at the Scottsdale conference, though he did not hear the substance of the conversation and did not consider it unusual at the time. The evidence of Eriksen's direct participation in the alleged conduct remains ambiguous, and C&H's assessment is that additional document review and analysis will be necessary to fully evaluate his exposure.
Gavin Holt, Former Vice President, U.S. Specialty Minerals Sales — Interview Attempted August 5, 2022. C&H attempted to conduct an interview of Holt in connection with the internal investigation. Holt declined to participate in the interview on the advice of his personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC, San Francisco. Holt's refusal to participate was not unexpected, given that he has separately asserted his Fifth Amendment privilege before the grand jury (June 14, 2022) and faces significant individual criminal liability. Holt is the individual most directly implicated in the alleged pricing communications with counterparts at Ridgecrest and Pinnacle, and his refusal to cooperate with the internal investigation limits C&H's ability to obtain his account of the relevant events. C&H's assessment of Holt's conduct is therefore based primarily on documentary evidence, the accounts of other witnesses, and the results of the forensic economic analysis.
Priya Anand, General Counsel — Interviewed August 12, 2022. Ms. Anand was interviewed in her capacity as TMC's General Counsel. Anand stated that she had no prior knowledge of the alleged anticompetitive conduct and that the first she learned of the investigation was upon receipt of the grand jury subpoena on February 14, 2022. Anand confirmed that she oversaw the initial steps to preserve documents and data prior to C&H's engagement, including directing the information-technology department to suspend automatic-deletion protocols for email and electronic records across the Company. Anand also provided a history of TMC's antitrust compliance program, which was adopted in approximately 2014. Her account was consistent with the documentary record, and no evidence was identified suggesting that Anand was aware of or involved in the alleged conduct.
Richard Fong, Chief Financial Officer — Interviewed August 19, 2022. Mr. Fong was interviewed in his capacity as TMC's CFO. Fong stated that he had no knowledge of the alleged anticompetitive conduct and that pricing authority for the U.S. Specialty Minerals Division was delegated to the division vice-president level — i.e., to Gavin Holt's position — without routine C-suite review or approval of individual pricing decisions. Fong confirmed that no financial irregularities, unusual pricing patterns, or unexplained revenue fluctuations had come to his attention during the conspiracy period that would have suggested awareness of the alleged conduct at the C-suite level. Fong's account was consistent with the documentary record reviewed to date.
C. Key Documentary Evidence — Preliminary Findings
C&H has identified several categories of documentary evidence that bear significantly on the investigation. The following summarizes the most significant preliminary findings as of the date of this memorandum.
VaultChat Message Analysis. On September 15, 2022, C&H circulated an internal privileged memorandum summarizing the results of C&H's analysis, conducted in conjunction with Redstone Digital Forensics, of VaultChat encrypted-messaging communications recovered from Gavin Holt's devices and TMC's VaultChat archives. The analysis revealed that Holt exchanged pricing information and related communications with Carl Edgerton of Ridgecrest and Kevin Tsang of Pinnacle on at least 37 documented occasions during the period from March 14, 2017 (the date of the first documented VaultChat exchange between Holt and Edgerton) through July 2021. The substance of these communications encompasses direct discussions of pricing for high-purity feldspar, industrial talc, and rare-earth concentrates; proposals for the allocation of specific customers between the conspirators; and signals and confirmations regarding coordinated bid submissions. The VaultChat evidence is the most significant body of direct evidence of the alleged conspiracy identified to date and, in C&H's assessment, represents substantial proof of the core allegations under investigation by the DOJ. The VaultChat communications will be a central element of any cooperation proffer that C&H submits to the DOJ on TMC's behalf.
Pricing Data Analysis. C&H retained Hargrove Forensic Advisory LLC on July 1, 2022 to conduct a comprehensive forensic economic analysis of TMC's pricing data in comparison to competitor pricing data for the three target product categories for the period 2015 through 2022. Dr. Vanessa Tremblay and her team are analyzing TMC's price movements versus competitor price movements, using statistical econometric techniques to test for the existence and degree of price correlations during the alleged conspiracy period (2017–2021) as compared to the pre-conspiracy and post-conspiracy baseline periods. Preliminary results received from Hargrove indicate statistically significant price correlations among TMC, Ridgecrest, and Pinnacle during the alleged conspiracy period that are not present to the same degree in the baseline periods, which is consistent with coordinated pricing behavior. The full analysis is expected to be completed by approximately November 2022 and will provide a refined estimate of the volume of affected commerce and the overcharge attributable to the alleged conspiracy, both of which are critical inputs to C&H's penalty-range analysis and reserve recommendation.
Trade Association Meeting Analysis. On October 10, 2022, C&H circulated an internal privileged memorandum summarizing its analysis of TMC personnel attendance at NASMC quarterly conferences from 2017 to 2021. C&H reviewed conference registration records, travel and expense reports, hotel booking confirmations, and calendar entries for TMC attendees, and cross-referenced this data with available information regarding the attendance of personnel from Ridgecrest and Pinnacle. The analysis indicates that several of the alleged anticompetitive meetings are suspected to have occurred on the margins of NASMC conferences — that is, in informal settings outside the official conference program, such as dinners, cocktail receptions, and private meetings in hotel rooms or nearby restaurants. Gavin Holt attended numerous NASMC conferences during the relevant period, and his attendance overlapped with the attendance of Carl Edgerton (Ridgecrest) and Kevin Tsang (Pinnacle) at multiple conferences. Thomas Eriksen attended four NASMC conferences during the relevant period. The NASMC-related evidence is corroborative of the VaultChat communications and the pricing-data analysis, though C&H has not identified direct evidence of anticompetitive discussions at NASMC events beyond the VaultChat records.
D. Preliminary Assessment of C-Suite and Board Exposure
Based on the internal investigation conducted to date — acknowledging that the investigation is approximately 60% complete and that the remaining witness interviews and document review may yield additional relevant information — no evidence has emerged that TMC's C-suite executives (including CEO Søren Dalmqvist, General Counsel Priya Anand, and CFO Richard Fong) or any member of the Board of Directors had knowledge of, authorized, directed, or participated in the alleged anticompetitive conduct.
The evidence reviewed to date indicates that the alleged conduct was confined to the commercial-pricing function within the U.S. Specialty Minerals Division and was orchestrated by Gavin Holt in his capacity as Vice President of U.S. Specialty Minerals Sales. Holt appears to have acted without the knowledge or authorization of his superiors, and no evidence has been identified suggesting that information about the alleged conspiracy was communicated upward to the C-suite or the Board. While C&H's assessment on this point is preliminary and subject to revision as the investigation continues, the absence of evidence of C-suite or Board involvement is a significant factor in C&H's assessment of TMC's overall exposure and cooperation strategy.
E. Compliance Program Deficiencies
TMC's existing antitrust compliance program was adopted in approximately 2014, during a period when the Company expanded its U.S. operations and increased its exposure to U.S. antitrust law. The program, as originally designed, included written antitrust policies, periodic training sessions for sales and marketing personnel, and general guidance regarding interactions with competitors and at trade-association events. However, C&H's review has identified significant deficiencies in the implementation and maintenance of the program during the period relevant to the investigation:
• Training Lapse: No annual antitrust training was conducted for TMC personnel — including U.S. Specialty Minerals Division personnel — since approximately 2018. The last documented training session was held in the fourth quarter of 2017 or the first quarter of 2018. This four-year gap in training is a significant deficiency that is likely to be noted by the DOJ and that undermines any argument that TMC maintained an effective compliance program during the conspiracy period.
• No Trade-Association Monitoring: The compliance program did not include any mechanism for monitoring, reviewing, or auditing TMC personnel's interactions at trade-association events. There was no pre-clearance or post-attendance reporting requirement for attendance at NASMC conferences or other industry events at which competitor personnel were present.
• No Competitor-Contact Audit: The compliance program did not include any system for logging, reviewing, or auditing contacts between TMC personnel and personnel of competitor companies, whether at trade-association events or otherwise. There was no requirement that such contacts be reported to the legal department or any other compliance function.
These deficiencies are significant in two respects. First, they may have facilitated the alleged conduct by permitting Holt and other TMC personnel to interact with competitor personnel without oversight or accountability. Second, the DOJ will likely view the deficiencies as evidence that TMC's compliance culture was inadequate, which may affect the level of cooperation credit and penalty mitigation that the DOJ is willing to extend. C&H anticipates that the remediation of these deficiencies will be a critical component of any cooperation-based resolution with the DOJ, and C&H recommends that the Company begin the process of designing and implementing an enhanced antitrust compliance program as soon as practicable. C&H's specific recommendations on this point are set forth in Section IX below.
F. Timeline to Completion
C&H expects the internal investigation to be substantially complete by January 2023, at which time C&H intends to present its final findings and recommendations to the full TMC Board of Directors. The current target date for the Board presentation is on or about January 20, 2023. The remaining work to be completed prior to that date includes: (i) the nine remaining witness interviews; (ii) finalization of the Hargrove Forensic Advisory economic analysis; (iii) completion of the trade-association meeting analysis; and (iv) synthesis of all evidence and preparation of the final investigation report and recommendations.
VI. FINANCIAL-RESERVE ANALYSIS
A. Current Reserve
TMC established a litigation reserve of USD 30 million in connection with the DOJ investigation. The reserve was first established and publicly disclosed in TMC's fiscal year 2021 annual report, filed on March 28, 2022 on SEDAR+ and with the SEC on Form 40-F. The reserve was established under the applicable accounting standards, specifically ASC 450 (Contingencies) under U.S. Generally Accepted Accounting Principles and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) under International Financial Reporting Standards. At the time the reserve was established, TMC had received the grand jury subpoena but had not yet received the target letter, and the internal investigation was in its earliest stages. The reserve reflected management's assessment, based on the information then available and the advice of C&H, that a loss in connection with the investigation was probable and that USD 30 million represented a reasonable estimate of the low end of the range of probable loss.
B. Estimated Penalty Range
C&H has conducted a preliminary analysis of TMC's potential financial exposure in the form of a criminal penalty (fine) in the event that the investigation is resolved through either an NPA or a plea agreement. The following sets forth the principal components of that analysis.
Under the DOJ Antitrust Division's established practice for calculating corporate penalties in Sherman Act Section 1 conspiracies — including price-fixing, market allocation, and bid-rigging — the standard starting point for the penalty calculation is 20% of the volume of affected commerce attributable to the defendant during the conspiracy period. This starting point is derived from the Sentencing Guidelines methodology and the DOJ's internal practices for antitrust penalty calculations.
The DOJ has estimated the total volume of affected commerce across all participants in the alleged conspiracy — TMC, Ridgecrest, and Pinnacle — at approximately USD 1.34 billion for the period January 2017 through August 2021. This estimate is based on the combined U.S. sales of high-purity feldspar, industrial talc, and rare-earth concentrates by the three companies during the conspiracy period, as calculated from publicly available financial data and information provided by Cascade Chemical Supply Co. pursuant to its cooperation agreement.
TMC's share of the total affected commerce is estimated at approximately USD 478 million, representing approximately 35.7% of the total. This figure is based on TMC's U.S. sales of the three target product categories through Torchlight Mining (U.S.) Inc. during the conspiracy period. The Hargrove Forensic Advisory analysis currently in progress will provide a more precise and independently verified calculation of TMC's affected-commerce volume, which may refine this estimate.
Based on these figures, the starting-point penalty calculation for TMC is as follows:
USD 478 million × 20% = USD 95.6 million
This starting-point figure is subject to adjustment based on various mitigating and aggravating factors. C&H has assessed the following mitigating factors that may apply to TMC and reduce the ultimate penalty below the starting point:
• Cooperation credit: TMC has communicated its willingness to cooperate with the investigation, and C&H intends to submit a cooperation proffer following completion of the internal investigation. Full and timely cooperation typically warrants a significant reduction in the penalty.
• Voluntary self-disclosure elements: While TMC did not self-report the alleged conduct prior to receipt of the subpoena, certain elements of TMC's cooperation — including the production of VaultChat communications and the provision of witness testimony — may be credited as voluntary disclosures of specific evidence that enhanced the DOJ's investigation.
• Remediation efforts: C&H recommends that TMC commence design and implementation of an enhanced antitrust compliance program, which would serve as evidence of the Company's commitment to remediation and reform.
• Compliance-program enhancements: Related to the remediation point, the implementation of a robust compliance program with training, monitoring, and auditing components would be viewed favorably by the DOJ.
• No prior criminal history: TMC has no prior criminal history in the United States or Canada, which is a mitigating factor under the applicable guidelines and practices.
C&H's preliminary assessment is that TMC may obtain a combined cooperation and remediation credit in the range of 40% to 50% off the starting-point penalty. Applied to the starting-point penalty of USD 95.6 million, this yields an estimated penalty range of approximately USD 48 million to USD 57 million. C&H emphasizes that this is a preliminary estimate based on currently available information and that the ultimate penalty will depend on multiple factors, including the final affected-commerce calculation (pending the Hargrove analysis), the scope and quality of TMC's cooperation as assessed by the DOJ, the effectiveness of TMC's remediation efforts, and the outcome of negotiations with the DOJ.
C. Adequacy of Current Reserve
In light of the target letter received on May 20, 2022 and the evolving penalty-range estimates discussed above, C&H's assessment is that the current litigation reserve of USD 30 million is below the preliminary estimate of the likely penalty range. The current reserve was established at a time when TMC's exposure was assessed at the lower end of the range of probable loss, before the receipt of the target letter and before the internal investigation had progressed to its current state.
C&H recommends that the Audit Committee consider whether the reserve should be increased to reflect the current assessment of TMC's financial exposure. Based on the preliminary penalty-range analysis, C&H's preliminary recommendation is that an increase to approximately USD 50 million may be warranted. This recommendation takes into account the mid-range of the estimated penalty (approximately USD 48–57 million) as well as the possibility that the final penalty may fall below the mid-range if TMC's cooperation and remediation efforts are favorably assessed by the DOJ. However, C&H cautions that this recommendation is preliminary and should be revisited after: (i) the Hargrove affected-commerce analysis is finalized (expected approximately November 2022); and (ii) the internal investigation findings are completed and synthesized (expected January 2023).
C&H will provide the Audit Committee with an updated and more definitive reserve recommendation in connection with the appropriate reporting cycle, which is expected to be the third quarter 2023 financial-reporting cycle, or earlier if material developments in the investigation occur that warrant an immediate reassessment.
C&H is coordinating with Daniel Moreau, the TMC engagement partner at Calvert & Associates LLP (the Company's external auditor), regarding the adequacy of the reserve for purposes of Calvert's audit and review procedures. This coordination is conducted on a need-to-know basis and within the scope of the privilege protections discussed in Section I of this memorandum.
D. Accrued Professional Fees
The following summarizes the professional fees and disbursements incurred to date by the principal legal and advisory firms engaged in connection with the investigation.
Calderwood & Harkness LLP. Total fees and disbursements invoiced through approximately October 2022 are estimated at approximately USD 8.5 million. This figure is measured against the initial budget estimate of USD 12 million that was provided to TMC at the outset of the engagement. C&H projects that total fees for the internal investigation and grand jury defense phase — encompassing all work through completion of the internal investigation, preparation and submission of the cooperation proffer, witness proffer sessions, and initial NPA negotiation discussions — will exceed the initial USD 12 million estimate. An updated budget will be provided to TMC's General Counsel when the scope of the remaining work is clearer, which C&H anticipates will be in the first quarter of 2023, after the internal investigation is completed. C&H's applicable billing rates are: Partners — USD 1,450 per hour; Senior Associates — USD 950 per hour; Associates — USD 725 per hour.
Redstone Digital Forensics Inc. Approximately USD 1.4 million has been incurred to date for forensic data collection, processing, hosting, managed-review support, and production formatting. The projected total through completion of all first-subpoena productions is estimated at approximately USD 2.0 million to USD 2.3 million, as discussed in Section IV.C above.
Hargrove Forensic Advisory LLC. Approximately USD 600,000 has been incurred since Hargrove's engagement on July 1, 2022. The projected total will depend on the scope of Hargrove's analysis and any additional support required in connection with DOJ negotiations. C&H estimates that Hargrove's total fees through resolution will be in the range of USD 1.5 million to USD 2.0 million.
Total Accrued Professional Fees to Date (All Vendors and C&H). The aggregate professional fees incurred through the date of this memorandum, across all vendors and C&H, total approximately USD 10.5 million. C&H estimates that total professional fees through resolution of the investigation will be in the range of USD 18 million to USD 20 million or more, depending on the complexity and duration of the DOJ negotiations and any additional subpoena compliance requirements.
E. Disclosure Considerations
TMC's initial public disclosure of the DOJ investigation was made in the Company's fiscal year 2021 annual report, filed on SEDAR+ and with the SEC on Form 40-F on March 28, 2022. The disclosure language described the receipt of the grand jury subpoena, the establishment of the litigation reserve, and the Company's commitment to cooperating with the investigation. The initial disclosure was prepared in coordination among C&H, TMC's General Counsel, TMC's CFO, Calvert & Associates LLP, and Ironbridge Capital Markets Inc. (Alan Kirkwood, TMC relationship partner and financial advisor). The disclosure was assessed as consistent with applicable securities-law requirements under Canadian continuous-disclosure obligations and SEC reporting obligations applicable to foreign private issuers filing on Form 40-F.
C&H will continue to coordinate with TMC's General Counsel, CFO, Calvert & Associates (auditor), and Ironbridge Capital Markets (financial advisor) regarding any required updates to the investigation-related disclosure language in the Company's subsequent periodic filings, including quarterly filings and any interim material-change reports. Key developments that may trigger disclosure updates include, without limitation: any material change in the litigation reserve; the return of an indictment; the commencement of formal NPA or plea negotiations; the filing of charges against individual TMC personnel; or any other development that materially affects TMC's financial exposure or the status of the investigation. Any material change in the reserve amount will require corresponding updated disclosure.
VII. D&O INSURANCE COVERAGE STATUS
A. Policy Details and Notice
TMC maintains directors-and-officers liability insurance through the following carriers:
Lead Policy. The lead D&O policy is written by Northland Mutual Insurance Co. (Toronto), Policy No. NMI-DO-2021-5547. The policy period is July 1, 2021 through July 1, 2022, and the policy is renewed annually. The policy provides an aggregate limit of liability of USD 50 million, subject to a retention (self-insured amount) of USD 2.5 million. The policy provides coverage for both individual directors and officers and for the corporate entity, subject to the terms, conditions, and exclusions of the policy.
C&H, on behalf of TMC and its individual directors and officers, tendered notice of the DOJ investigation to Northland on March 4, 2022. The notice was submitted within the applicable notice period and included the information required under the policy's notice provisions, including a description of the investigation, the grand jury subpoena, and the potential claims against TMC and its directors and officers.
B. Northland's Response — Reservation of Rights
Northland acknowledged receipt of the notice of the investigation and acknowledged that the investigation constitutes a covered "claim" or "proceeding" under the policy for purposes of individual-director-and-officer coverage, including coverage for defense costs incurred by individual directors and officers in connection with the investigation.
However, on or about April 15, 2022, Northland issued a reservation-of-rights letter reserving its rights with respect to two specific coverage issues:
(i) Entity-level coverage: Northland reserved its rights regarding whether the policy provides coverage for defense costs incurred by TMC as a corporate entity (as distinguished from defense costs incurred by individual directors and officers). Northland's position, as stated in the reservation-of-rights letter, is that entity-level coverage may be limited or excluded under the policy's terms in the context of a criminal investigation in which the entity is a target.
(ii) Regulatory/criminal-act exclusion: Northland reserved its rights regarding the potential applicability of the policy's regulatory/criminal-act exclusion, which excludes coverage for loss arising from conduct that constitutes a violation of law if established by final adjudication. Northland's position is that, depending on the outcome of the investigation, the exclusion may apply to preclude coverage for some or all of TMC's defense costs and any resulting liability.
C&H responded to Northland's reservation-of-rights letter on April 28, 2022. C&H's response contested the applicability of the criminal-act exclusion at the pre-adjudication stage on multiple grounds, including that: (a) no conviction or guilty plea has occurred; (b) no indictment has been returned; (c) the criminal-act exclusion, by its terms, requires "final adjudication" before it can be invoked to deny coverage; and (d) the prevailing judicial authority in the relevant jurisdictions supports the position that D&O insurers must advance defense costs pending final adjudication, even where a criminal-act exclusion exists in the policy. C&H's response also preserved TMC's coverage rights for entity-level defense costs, citing the policy's entity-coverage provisions and arguing that Northland's attempt to limit entity-level coverage is inconsistent with the policy language and

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

I. PURPOSE AND SCOPE OF THIS MEMORANDUM

II. EXECUTIVE SUMMARY

III. PROCEDURAL HISTORY AND CURRENT POSTURE

IV. DOCUMENT PRODUCTION PROGRESS

V. INTERNAL INVESTIGATION UPDATE

VI. FINANCIAL-RESERVE ANALYSIS

VII. D&O INSURANCE COVERAGE STATUS

Record

Parties

Dates

Amounts